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TZeport
X*^
7995
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 6, 1996
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-Second Annual Report of the Board of Governors
of the Federal Reserve System.
This report covers operations of the Board during calendar year 1995.
Sincerely,
Contents
Part 1
3
7
7
10
12
14
16
Monetary Policy and
the U.S. Economy in 1995
INTRODUCTION
THE ECONOMY IN 1995
The household sector
The business sector
The government sector
Labor markets
Prices
19 MONETARY POLICY AND FINANCIAL MARKETS IN 1995
21 The course of policy and interest rates
23 Credit and money flows
27
28
30
32
33
INTERNATIONAL DEVELOPMENTS
Foreign economies
U.S. international transactions
Foreign exchange developments
Foreign exchange operations
35 MONETARY POLICY REPORTS TO THE CONGRESS
35 Report on February 21, 1995
67 Report on July 19, 1995
Part 2
Records, Operations,
and Organization
93 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS
93 Regulation D (Reserve Requirements of Depository Institutions)
94 Regulation E (Electronic Fund Transfers)
99
100
100
100
102
RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS—Continued
Regulation H (Membership of State Banking Institutions in the Federal
Reserve System)
Regulation H and Regulation Y (Bank Holding Companies and Change
in Bank Control)
Regulation H and Rules of Practice
Regulation K (International Operations of United States Banking Organizations)
Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders
of Member Banks; Loans to Holding Companies)
Regulation Y
Regulation Z (Truth in Lending)
Regulation BB (Community Reinvestment) and Regulation C (Home Mortgage
Disclosure)
Regulation DD (Truth in Savings)
Rules Regarding Access to Personal Information under the Privacy Act
Rules Regarding Delegation of Authority
Rules Regarding Equal Opportunity
1995 discount rates
105
105
107
107
109
110
110
126
140
149
161
169
178
188
MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS
Authorization for Domestic Open Market Operations
Domestic Policy Directive
Authorization for Foreign Currency Operations
Foreign Currency Directive
Procedural Instructions with Respect to Foreign Currency Operations
Meeting held on January 31-February 1, 1995
Meeting held on March 28, 1995
Meeting held on May 23, 1995
Meeting held on July 5-6, 1995
Meeting held on August 22, 1995
Meeting held on September 26, 1995
Meeting held on November 15, 1995
Meeting held on December 19, 1995
199
199
200
202
204
207
CONSUMER AND COMMUNITY AFFAIRS
CRA reform
Fair lending
HMDA data and lending patterns
Community development
Other regulatory matters
94
94
96
96
97
97
98
98
CONSUMER AND COMMUNITY AFFAIRS—Continued
209 Economic effects of the Electronic Fund Transfer Act
211 Compliance examinations
211 Agency reports on compliance with consumer regulations
215 Applications
216 Consumer complaints
219 Consumer policies
219 Consumer Advisory Council
221 Testimony and legislative recommendations
221 Recommendations of other agencies
223 LITIGATION
223 Bank Holding Company Act—review of Board actions
224 Litigation under the Financial Institutions Supervisory Act
225 Other actions
227 LEGISLATION ENACTED
227 Truth in Lending Act Amendments of 1995
228 Mexican Debt Disclosure Act of 1995
228 Paperwork Reduction Act of 1995
231
231
238
247
250
251
254
254
BANKING SUPERVISION AND REGULATION
Scope of responsibilities for supervision and regulation
Supervisory policy
Regulation of the U.S. banking structure
International activities of U.S. banking organizations
Enforcement of other laws and regulations
Loans to executive officers
Federal Reserve membership
255
255
256
256
256
256
257
257
257
REGULATORY SIMPLIFICATION
Comprehensive reviews
Recordkeeping requirements for certain financial records
ATM transaction receipts
Exception to anti-tying restrictions
CRA
Safety and soundness guidelines
Capital treatment of certain small business obligations
De novo investments in foreign companies
259
260
264
264
268
FEDERAL RESERVE BANKS
Developments in Federal Reserve services
Developments in currency and coin
Developments in fiscal agency securities and government depository services
Examinations
268
269
270
270
271
FEDERAL RESERVE BANKS—Continued
Income and expenses
Holdings of securities and loans
Volume of operations
Federal Reserve Bank premises
Pro forma financial statements for Federal Reserve priced services
277
BOARD OF GOVERNORS FINANCIAL STATEMENTS
283
284
STATISTICAL TABLES
1. Detailed statement of condition of all Federal Reserve Banks combined,
December 31, 1995
2. Statement of condition of each Federal Reserve Bank,
December 31, 1995 and 1994
3. Federal Reserve open market transactions, 1995
4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities,
December 31, 1993-95
5. Number and salaries of officers and employees of Federal Reserve Banks,
December 31, 1995
6. Income and expenses of Federal Reserve Banks, 1995
7. Income and expenses of Federal Reserve Banks, 1914-95
8. Acquisition costs and net book value of premises of Federal Reserve
Banks and Branches, December 31, 1995
9. Operations in principal departments of Federal Reserve Banks, 1992-95
10. Federal Reserve Bank interest rates, December 31, 1995
11. Reserve requirements of depository institutions, December 31, 1995
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, 1995 and 1994
14. Reserves of depository institutions, Federal Reserve Bank credit,
and related items—year-end 1918-95, and month-end 1995
15. Number of banking offices in the United States, December 31, 1994 and 1995
16. Mergers, consolidations, and acquisitions of assets or assumptions
of liabilities approved by the Board of Governors, 1995
286
290
292
293
294
298
302
303
304
305
306
307
308
314
315
331
332
334
335
336
337
338
340
340
FEDERAL RESERVE DIRECTORIES AND MEETINGS
Board of Governors of the Federal Reserve System
Federal Open Market Committee
Federal Advisory Council
Consumer Advisory Council
Thrift Institutions Advisory Council
Officers of Federal Reserve Banks and Branches
Conferences of chairmen, presidents, and first vice presidents
Directors
361
MAPS OF THE FEDERAL RESERVE SYSTEM
365
INDEX
Parti
Monetary Policy and
the US. Economy in 1995
Introduction
The economy performed reasonably
well in 1995. Sustained economic
expansion kept the unemployment rate
at a relatively low level, and inflation, as
measured by the four-quarter change in
the consumer price index, was less than
3 percent for the third consecutive year,
the first such occurrence in thirty years.
The combination of low inflation and
low unemployment provided further
substantiation of a fundamental point
that the Board has made on past
occasions—namely, that there is no
trade-off in the long run between the
monetary policy goals of maximum
employment and stable prices set in the
Federal Reserve Act. Indeed, it is by
fostering price stability that a central
bank can make its greatest contribution
to the efficient operation and overall
ability of the nation's economy to create
jobs and advance living standards over
time.
As economic prospects changed over
the course of 1995, the Federal Reserve
found that promoting full employment
and price stability required adjustments
in its policy settings. In February, the
economy still seemed to be pressing
against its potential, and prices were
tending to accelerate. To reduce the risk
that inflation might mount, with the
attendant threat to continued economic
expansion, the Federal Open Market
Committee raised the federal funds rate
an additional Vi percentage point, to
NOTE. The discussion here and in the next 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 1996). Data cited here and in the
next three chapters are those available as of midMarch 1996.
6 percent. Inflation did, in fact, pick up
in the first part of 1995, but data
released during the spring indicated that
price pressures were receding, and the
Committee reduced the federal funds
rate VA percentage point at its July meeting. Through the remainder of the year,
inflation was even more favorable than
had been anticipated in July, and inflation expectations decreased. In addition,
an apparent slowing of economic activity late in the year further reduced
the potential for inflationary pressures
going forward. To forestall an undue
increase in real interest rates as inflation
slowed, and to guard against the possibility of unnecessary slack developing
in the economy, the Committee eased
reserve conditions in December, reducing the federal funds rate lA percentage
point.
The monetary policy easings after
mid-1995 contributed to declines in
short-term market interest rates, which
by year-end were about 1 percentage
point to 2 percentage points down from
the highs reached early in 1995.
Intermediate- and long-term rates also
moved sharply lower last year, as the
risks of rising inflation receded and as
prospects for substantial progress in
reducing the federal budget deficit
seemed to improve. By the end of 1995,
these rates were 2 to 2!/2 percentage
points below their levels at the beginning of 1995. Helped by lower interest
rates and favorable earnings, major
equity price indexes rose 30 percent
to 40 percent in 1995. These financial
developments reduced the cost to businesses of financing investment and to
households of buying homes and consumer durables; households were also
4
82nd Annual Report, 1995
aided by substantial additions to financial wealth from rising bond and equity
prices.
The foreign exchange value of the
U.S. dollar, measured in terms of the
currencies of the other G-10 countries,
fell about 5 percent, on net, during 1995.
The dollar appreciated substantially
from the summer onward but not
enough to offset a sharp decline that
took place in the first four months of
1995. Interest rates fell in most other
foreign industrial countries, which also
were experiencing slower economic
growth, but the decline in rates abroad
was less than that in the United States.
Early in 1995, the dollar also was pulled
down by the reactions to the crisis in
Mexico, but the negative influence on
the dollar from this source appeared
to lessen as Mexican financial markets
stabilized over the balance of the year.
Inflation rates in major industrial countries held fairly steady in 1995 at levels
somewhat lower than those prevailing
in this country; thus, depreciation of
the dollar in real terms against other
G-10 currencies was less than the depreciation in nominal terms. Against the
currencies of a broader group of U.S.
trading partners, the dollar's real depreciation was even smaller.
Borrowing and spending in the United
States was facilitated not only by lower
interest rates but also by favorable supply conditions in credit markets. Spreads
between interest rates on securities
issued by private firms and those issued
by the Treasury generally remained narrow, and banks continued to ease terms
and qualifying standards on loans to
businesses and households through most
of the year. The total debt of domestic
nonfinancial sectors grew 5Vi percent
last year, a little above the midpoint of
the Committee's 3 percent to 7 percent
monitoring range. Rapid growth of business spending on inventories and fixed
capital early in the year boosted the
credit demands of firms, despite strong
corporate profits. Borrowing was also
lifted by the financing of heavy net
retirements of equity shares in connection with mergers and share repurchase
programs. Growth of household debt
remained brisk as consumer credit continued to grow quite rapidly. Federal
debt grew relatively slowly for a second
year; the federal deficit declined further,
and toward year-end, normal seasonal
borrowing was constrained by the
federal debt ceiling. Outstanding state
and local government debt ran off a bit
more rapidly than in 1994.
Commercial banks and thrift institutions again financed a large portion of
the borrowing last year; their share of
total outstanding debt of nonfederal sectors edged up in 1994 and 1995 after
having declined for more than fifteen
years. The growth in depository credit
was funded primarily with deposits,
boosting the expansion of the broad
monetary aggregates.
M3 grew 6 percent, at the top of its
2 percent to 6 percent annual range
established by the Committee at midyear. Depositories relied heavily on
large-denomination time deposits for
funding, but retail deposits also showed
gains as declining market interest rates
made these deposits more attractive to
retail customers.
M2 advanced AlA percent, putting it
in the upper portion of its 1 percent to
5 percent annual range. The expansion
of M2 was the largest in six years, and
its velocity was little changed after
having increased substantially during
the previous three years. Nonetheless,
growth of the aggregate was erratic
through the year, and the stability of its
relationship to nominal spending
remained in doubt.
Ml declined last year for the first
time since the beginning of the official
Introduction
series, in 1959. An increasing number of
banks introduced retail sweep accounts,
which shift money from interest-bearing
checkable accounts to savings accounts
to reduce banks' reserve requirements.
Without these shifts, Ml would have
risen in 1995, although slowly.
•
The Economy in 1995
According to estimates that were available as of mid-March 1996, real gross
domestic product increased slightly less
than 1V2 percent over the four quarters
of 1995 after a gain of 2>Vi percent in
1994. The 1995 rise in aggregate output
was accompanied by an increase in payroll employment of \3A million, and the
unemployment rate, after having fallen
sharply in 1994, held fairly steady over
the course of 1995, keeping to a range
of about 5Vi percent to 53/4 percent.
Consumer prices, as measured by the
CPI for all items, rose 23A percent over
the four quarters of 1995, an increase
that was virtually the same as those of
the two previous years.
Growth of output during the past year
was slowed in part by the actions of
businesses to reduce the pace of inventory accumulation after a burst of stockpiling in 1994. Final sales—a measure
of current output that does not end up in
inventories—rose at an average rate of
about 2 percent over the four quarters of
1995 after an increase of 3 percent during 1994. The slowing of final sales was
largely a reflection of a downshifting in
Change in Real GDP
Percent. Q4 to Q4
1991
1993
1995
NOTE. The data are derived from chained (1992)
dollars and come from the Department of Commerce.
growth of the real outlays of households
and businesses, from elevated rates of
increase in 1994 to rates that are more
sustainable. Real government outlays
for consumption and investment fell
about VA percent during the year.
Increases in exports and imports of
goods and services were smaller in real
terms than the increases of 1994, and
their combined effect on GDP growth
was slightly positive.
The Household Sector
Real personal consumption expenditures
rose about 2 percent during 1995 after
having risen 3 percent over the four
quarters of 1994. The reduced rate of
rise in consumption spending this past
year came against the backdrop of moderate gains in employment and income.
The financial wealth of households
surged, but the impetus to spending
from this source evidently was countered by other influences, such as
increases in debt burdens among some
households and a rise, according to survey data, in consumers' concerns about
job security.
Real consumer expenditures for durable goods increased 2 percent during
1995, a slower rate of rise than in other
recent years. Consumer expenditures for
motor vehicles declined about 3 percent
after having moved up nearly 20 percent
over the three previous years. A variety
of price concessions to motor vehicle
buyers probably gave some lift to sales
in 1995; however, pent-up demand,
which had helped to boost sales earlier
in the expansion, probably was no
longer an important factor.
8
82nd Annual Report, 1995
Real outlays for durable goods other
than motor vehicles continued to rise at
a brisk pace in 1995 but not so rapidly
as in other recent years. Spending for
furniture and household equipment hit a
temporary lull in the first part of 1995
but picked up again over the next three
quarters, lifted in part by a rebound in
the construction of new houses. Spending for home computers and other electronic gear, which has been surging in
recent years, continued to move up rapidly in 1995.
Consumer expenditures for nondurables increased less than 1 percent, in
real terms, during 1995 after a largerthan-average gain in 1994. The growth
of real expenditures on apparel slowed
sharply after three years of sizable
advances, and outlays for food registered only a small gain in real terms.
Real expenditures for services—
which account for more than half of
total consumer outlays—increased
2V6 percent during 1995, a moderately
faster pace than in either 1993 or 1994.
After declining in 1994, outlays for
energy services increased sharply in
1995. Spending gains for other categories of services proceeded at an average
rate of slightly less than 2Vi percent
over the four quarters of 1995, just a
touch faster than the rate of rise in the
two previous years.
Real disposable personal income
grew nearly 3 percent during 1995, a
slightly larger gain than in the previous
year. Nominal personal
income
increased slightly faster in 1995 than it
did in 1994, and growth of nominal disposable income, which excludes income
taxes, held close to its 1994 pace. Inflation continued to take only a moderate
bite from increases in nominal receipts.
After little change during 1994, the
real value of household wealth surged in
1995. The value of assets was boosted
substantially by huge increases in the
prices of stocks and bonds. Liabilities
continued to rise fairly rapidly but at
a rate well below the rate of increase
in household assets; the rapid growth
of consumer credit was again the most
notable feature on the liability side.
Behind these aggregate measures of
household assets and liabilities was
some wide variation in the circumstances of individual households. Appreciation of share prices and the rally in
the bond market provided a substantial
boost to the wealth of households holding large amounts of those assets, but
households holding few such assets
benefited little from the rally in securities prices. Some households also began
to experience greater financial pressure
in 1995. Overall, however, the incidence
of financial stress appears to have been
limited, as sustained increases in personal income helped to facilitate timely
repayment of obligations.
Consumers maintained relatively
upbeat perceptions of current and future
economic conditions during 1995. The
measure of consumer confidence that
is prepared by the Conference Board
held fairly steady at a high level. The
index of consumer sentiment compiled
by the University of Michigan Survey
Research Center edged down a little, on
net, from the end of 1994 to the end of
1995, but its level also remained relatively high. By contrast, some survey
questions dealing specifically with perceptions of labor market conditions
pointed to increased concerns about
job prospects during the year; although
employment continued to rise in the
aggregate, announcements of job cuts
by some major corporations may have
rekindled consumers' anxieties about
job security.
Consumers tended to save a slightly
higher proportion of their income in
1995 than they had in 1994. Large
increases in financial wealth usually
The Economy in 1995
cause households to spend a greater
share of their current income, thereby
reducing the share of income that is
saved. However, rising debt burdens and
increased nervousness about job prospects would work in the opposite direction, and these influences may have offset the effect of increases in wealth.
Some households also may have started
focusing more intently on saving for
retirement, especially in light of
increased political debate about curbing
the growth of entitlements provided
under government programs. Nonetheless, the personal saving rate for all of
1995, while moving up a little, remained
in a range that was relatively low by
historical standards.
Residential investment fell in the first
half of 1995 but turned up in the second
half. Both the downswing in the first
half and the subsequent rebound after
midyear appear to have been shaped, at
least in a rough way, by swings in mortgage interest rates. Although housing
activity had been slow to respond to
increases in mortgage interest rates
through much of 1994, sizable declines
in sales of new and existing homes
started to show up toward the end of that
year, and by early 1995, permits and
starts also were dropping. However, the
Change in Real Income and Consumption
Percent, Q4 to Q4
decline in activity proved to be relatively short and mild. By March, mortgage interest rates already were down
appreciably from the peaks of late 1994,
and midway through the second quarter,
most indicators of housing activity were
starting to rebound. Sales of new homes
surged to especially high levels during
the summer, and permits and starts of
single-family units rose appreciably. In
the autumn, sales retreated from their
midyear peaks. Starts also slipped back
somewhat during the autumn, but permits continued to firm, climbing to a
yearly high in December.
The intra-year swings in the various
housing indicators left the annual totals
for these indicators at fairly elevated
levels. Sales of existing homes in 1995
were well above the annual average for
the 1980s, even after adjusting for
increases in the stock of houses. Starts
and sales of new single-family dwellings in 1995 were about one-tenth
higher than their averages for the 1980s.
So far in the 1990s, demographic influences have been less supportive of housing activity than in the 1980s; the rate of
household formation has lagged, in part
because many young adults have delayed setting up their own domiciles.
However, offsetting impetus to demand
has come from the improved affordabilPrivate Housing Starts
Millions of units, annual rate
Disposable personal income
Personal consumption expenditures
Single-family
illi
1993
1991
1995
NOTE. The data are derived from chained (1992)
dollars and come from the Department of Commerce.
0.5
1989
1991
,995
NOTE. The data are seasonally adjusted and come from
the Department of Commerce.
10
82nd Annual Report, 1995
ity of housing, brought about in particular by declines in mortgage interest
rates.
The construction of multifamily units,
after taking a notable step toward recovery in 1994, exhibited little momentum in 1995. For the year as a whole,
starts of multifamily units amounted to
about 280,000, compared with a tally
of about 260,000 in 1994 and a low of
about 160,000 in 1993. Financing for
the construction of new multifamily
projects appeared to be readily available
in 1995. However, the national vacancy
rate for multifamily rental units, while
down from the peaks of a few years ago,
remained relatively high, and increases
in rents apparently were not sufficient to
stimulate a significant gain in the construction of new units.
The Business Sector
Most indicators of business activity
remained favorable in 1995, but strength
was less widespread than it had been
in 1994, and growth overall was less
robust. The output of all nonfarm businesses rose slightly less than 2 percent
over the four quarters of 1995 after a
gain of 4 percent in 1994—the latter
Change in Real Business Fixed Investment
Percent, Q4 to Q4
Structures
Producer's durable equipment
20
UJb
10
LJ
1991
10
1993
1995
NOTE. The data are derived from chained (1992)
dollars and come from the Department of Commerce.
pace of growth could not have been
sustained given already high operating
levels. Inventory problems cropped up
in some lines of manufacturing and trade
in 1995 and prompted production adjustments. Scattered structural problems
were apparent as well, especially in
parts of retail trade in which intense
competition for market share caused
financial losses and eventual bankruptcy
for some enterprises. More generally,
however, businesses continued to profit
from strategies that have served them
well throughout the 1990s—most notably, tight control over costs and the rapid
adoption of new technologies achieved
through heavy investment in high-tech
equipment.
In total, real business fixed investment increased IV2 percent during 1995
after a gain of 10 percent in 1994.
Growth in business spending for equipment continued to outpace the growth
of investment in structures even though
the latter scored its largest gain of the
past several years. On a quarterly basis,
investment remained very strong
through the first quarter of 1995. After
slowing sharply in the spring, it then
picked up again in the third and fourth
quarters but did not reach the pace seen
early in the year.
Businesses continued to invest
heavily in computers in 1995. In real
terms, these expenditures rose nearly
40 percent over the year, an increase
that was even larger than those of other
recent years.
Excluding computers, real investment
outlays increased less rapidly, on balance, than in 1994, and growth after
the first quarter was quite small. In
the equipment category, outlays for
information-processing equipment other
than computers moved up at an annual
rate of about 13 percent in the first half
of 1995, fell back a little in the third
quarter, and turned back up again in the
The Economy in 1995
year's final quarter. Spending for industrial equipment also rose sharply in the
first half of the year; it then fell moderately in the second half. Real outlays
for transportation equipment followed a
choppy pattern that resulted in little net
gain over the year as a whole. Real
investment in nonresidential structures
moved up in each quarter, with gains
cumulating to an annual rise of 6 percent; 1995 brought increased construction of most types of nonresidential
buildings.
In the industrial sector, elevated levels of investment in equipment and
structures led to a gain of about 4 percent in industrial capacity. However, in
a turnabout from the outcome of the
previous year, output of the industrial
sector rose considerably less rapidly
than capacity: A gain of VA percent in
total industrial production over the four
quarters of 1995 was a sharp slowdown
from a 1994 rise of more than 6V2 percent. Production of consumer goods followed an up-and-down pattern during
1995 and rose less than Vi percent over
the year as a whole, the smallest annual
increase of the current expansion. The
output of business equipment advanced
in each quarter, but a cumulative gain of
4l/2 percent for this category was smaller
than the increases of other recent years.
Production of materials faltered tempo-
11
rarily in the second quarter, but production gains resumed thereafter, leading to
a rise of about 2Vi percent over the four
quarters of the year.
With capacity expanding rapidly and
production growth slowing, the rate of
capacity utilization in industry turned
down sharply in 1995, backing away
from the high operating rates of late
1994. As of December 1995, the utilization rate in manufacturing was about
V2 percentage point above its long-term
average.
After rising rapidly during 1994, business inventories continued to build at a
substantial pace in the early part of
1995. By the end of the first quarter, real
inventories of nonfarm businesses were
about 5!/2 percent above the level of a
year earlier. Meanwhile, strength that
had been evident in final sales during
1994 gave way to more subdued growth
in the first quarter of 1995, and the ratio
of inventories to sales rose. In the
second and third quarters, the growth
of inventories slowed appreciably, and
another sharp downward step in the rate
of inventory accumulation took place in
the fourth quarter. At year-end, significant imbalances probably were present
in only a few industries. The potential
for wider inventory problems appears to
Change in Real Business Inventories
Percent, annual rate
Industrial Production
Index, 1987 = 100
• • • i l lI
120
1 \5
/
1 10
105
i
i
1991
I
i
1993
1
1995
1
•1
1991
1993
1995
NOTE. Total nonfarm sector. The data are seasonally
adjusted, derived from chained (1992) dollars, and come
from the Department of Commerce.
12
82nd Annual Report, 1995
have been contained through a combination of production restraint late in
1995, caution in ordering merchandise
from abroad, and discounting by some
retailers during the holiday shopping
season.
Business profits rose further over the
first three quarters of 1995. Economic
profits of all U.S. corporations increased
at an annual rate of nearly 11 percent, a
pace similar to that seen over the four
quarters of 1994. The profits of corporations from their operations in the rest of
the world moved up sharply, on net, and
earnings from domestic operations also
continued to advance. The strongest
gains in domestic profits came at financial corporations and reflected, in part,
an increased volume of lending by
financial institutions, reduced premiums
on deposit insurance at commercial
banks, and rising profits of securities
dealers.
The economic profits earned by nonfinancial corporations from their domestic operations rose at an annual rate of
about 3Vi percent over the first three
quarters of 1995 after three years in
which the annual increases were 15 percent or more. A moderation of output
growth and a flattening of the rise in
profits per unit of output both worked to
reduce the rate of growth in nominal
earnings at nonfinancial corporations in
1995. Nonetheless, with unit costs also
moving up at a moderate pace, the share
of the value of nonfinancial corporate
output that ended up as profits changed
little, on net, in the first three quarters,
holding in a range that was relatively
high in comparison to the average profit
share over the past couple of decades.
of 1995, dropping by the fourth quarter
to a level about 15 percent below the
level in 1990. Both investment and consumption were cut back. Outlays for
defense continued to contract, and nondefense expenditures turned down, more
than reversing their moderate increase
over the four quarters of 1994.
Federal outlays in the unified budget,
which covers transfers and grants as
well as consumption and investment
expenditures other than the consumption of fixed capital, rose 33A percent in
nominal terms in fiscal 1995, matching
almost exactly the percentage rise of the
previous fiscal year. Nominal outlays for
defense declined 3VA percent in both
fiscal 1995 and fiscal 1994. Outlays for
social security increased about 5 percent
in both years. Spending for Medicare
and Medicaid continued to rise at rates
appreciably faster than the growth of
nominal GDP. Net interest payments
jumped in fiscal 1995 after three years
of relatively little change, but working
in the other direction, net outlays for
deposit insurance were more negative
than in 1994 (that is, revenues from
premiums and other sources exceeded
the payout for losses by a larger
amount). Proceeds from auctions of
spectrum rights also helped to hold
down expenditures; like the premiums
Change in Real Federal Expenditures on
Consumption and Investment
Percert, Q4 to Q4
The Government Sector
At the federal level, combined real outlays for investment and consumption fell
nearly 6l/2 percent over the four quarters
1991
1993
1995
NOTE. The data are derived from chained (1992)
dollars and come from the Department of Commerce.
The Economy in 1995
for deposit insurance, these proceeds
enter the budget as a negative outlay. In
the first three months of fiscal 1996—
that is, the three-month period ended in
December 1995—federal outlays were
about 1 percent lower in nominal terms
than in the comparable period of fiscal
1995. Nominal outlays for defense
continued to trend down, and the spending restraint embodied in continuing
budget resolutions translated into sharp
cuts in some nondefense outlays.
Federal receipts rose IV2 percent in
fiscal 1995 after having increased 9 percent in fiscal 1994. In both years, categories of receipts that are most closely
related to the state of the economy
showed sizable increases. With receipts
moving up more rapidly than spending
in fiscal 1995, the federal budget deficit
fell for a third consecutive year, to
$164 billion. Progress in reducing the
deficit in recent years has come from
cyclical expansion of the economy, tax
increases, nonrecurring factors such as
the sale of spectrum rights, and adherence to the budgetary restraints embodied in the Budget Enforcement Act of
1990 and the Omnibus Budgetary Reconciliation Act of 1993.
The economic expansion also has
helped to relieve budgetary pressures
that many state and local governments
Change in Real State and Local
Expenditures on
Consumption and Investment
Percent, Q4 to Q4
Lilu
1991
1993
1995
NOTE. The data are derived from chained (1992)
dollars and come from the Department of Commerce.
13
were experiencing earlier in the 1990s.
Excluding social insurance funds, surpluses in the combined current accounts
of state and local governments were
equal to about Vi percent of nominal
GDP in the first three quarters of 1995;
this figure was more than double the
average for 1991 and 1992, when budgetary pressures were most severe.
Even so, state and local budgets
remain at the center of strongly competing pressures, with the demand for many
of the services that these governments
typically provide continuing to rise at a
time when the public also is pressing for
tax relief. Although states and localities
have responded to these pressures in
different ways, the aggregate picture is
one in which expenditures and revenues
have continued to rise faster than nominal GDP—but by smaller margins than
in the early part of the 1990s. In total,
the current expenditures of state and
local governments, made up mainly of
transfers and consumption expenditures,
were equal to about HV2 percent of
nominal GDP in 1995, up slightly from
the percentages of the two previous
years and about \3A percentage points
higher than the comparable figure for
1989. Total receipts of state and local
governments were equal to about
133/4 percent of nominal GDP in the first
three quarters of 1995, a little above the
comparable percentages of the two previous years and about VA percentage
points higher than the percentage in
1989.
State and local outlays for consumption and investment—the expenditures
that are included in GDP—have been
rising less rapidly than the current expenditures of these jurisdictions because
GDP excludes transfer payments, which
have been growing faster than other
outlays. In real terms, combined state
and local outlays for consumption and
investment increased about 2!/4 percent
14
82nd Annual Report, 1995
over the four quarters of 1995. Real
investment expenditures, which consist
mainly of outlays for construction,
moved up almost 6 percent. By contrast,
consumption expenditures, which are
about four times the size of investment
outlays, rose less than V/i percent in
real terms.
Labor Markets
The number of jobs on nonfarm payrolls
increased VA million, or 1.6 percent,
over the twelve months ended in
December 1995. After a sharp rise during 1994, gains in employment began
to slow in the first quarter of 1995, and
the second-quarter gain was relatively
small. Thereafter, increases picked up
somewhat. Nearly 450,000 jobs were
added in the final three months of the
year, a rate of gain that was about equal
to that for the year as a whole.
As in 1994, increases in payroll
employment in 1995 came mainly in the
private sector of the economy, but gains
there were more mixed than those of
1994. In manufacturing, employment
fell about 165,000 over the twelve
months ended in December, reversing
almost half of the previous year's gain.
Losses were concentrated in industries
that produce nondurables. A decline this
past year in the number of jobs at
apparel manufacturers was one of the
largest ever in that industry. Sizable
reductions in employment also were
reported by manufacturers of textiles,
tobacco, leather products, and petroleum
and coal. In many of these industries,
cyclical deceleration of the economy in
1995 compounded the effects of adjustments stemming from longer-run structural changes. In contrast to the widespread contraction in employment
among producers of nondurables, employment at the manufacturers of durable goods increased slightly during
1995. Hiring continued to expand
briskly at firms that produce business
equipment. Metal fabricators also sustained growth in employment but at a
slower pace than in 1994. The number
of jobs in transportation equipment
declined, on net.
In most other sectors of the economy,
employment rose moderately last year.
The number of jobs in construction
increased 130,000 over the twelve
months ended in December, a rise of
more than 3 percent. In the private
service-producing sector, which now
accounts for about three-fourths of all
jobs in the private sector, employment
increased 1.7 million in 1995 after having advanced 2.6 million in 1994. Establishments that are involved in wholesale
trade continued to boost payrolls at a
Labor Market Conditions
Millions of jobs
Net change in payroll employment
Total nonfarm
J
L
L_
L
Percent
Civilian unemployment rate
1989
1991
1993
1995
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
not directly comparable with those of earlier periods.
The Economy in 1995
relatively brisk pace in 1995. Retailers
also added to employment but at a
considerably slower rate than in 1994;
within retail trade, employment at
apparel outlets fell substantially last
year, and payrolls at stores selling general merchandise dropped moderately
after a large increase in 1994. Providers
of health services added slightly more
jobs than in other recent years. At firms
that supply services to other businesses,
employment growth was sizable again
in 1995 but less rapid than in either
of the two previous years; in this category, providers of computer services
expanded their job counts at an accelerated pace in 1995, but suppliers of
personnel—a category that includes
temporary help agencies—added jobs at
a much slower rate than in other recent
years.
Results from the monthly survey of
households showed the civilian unemployment rate holding in a narrow range
throughout 1995, and the December
rate—5.6 percent of the labor force—
was near the midpoint of the range.
The proportion of working-age persons choosing to participate in the labor
force edged down slightly, on net, over
the course of 1995. It has changed little,
on balance, since the start of the 1990s.
By contrast, the two previous decades
had brought substantial net increases in
labor force participation, although
longer-term trends during that period
were interrupted at times by spells of
cyclical sluggishness in the economy.
Two or three years ago, cyclical influences also seemed to be a plausible
explanation for the lack of growth in the
participation rate in the current business
expansion. But with the sluggishness
persisting as job opportunities have continued to expand, the evidence is pointing increasingly toward a slower rate of
rise in the trend of labor force participation. Slower growth in participation will
15
tend to limit the growth of potential
output, unless an offsetting rise is forthcoming in the trend of productivity
growth. So far in the current expansion,
measured increases in productivity seem
to have followed a fairly typical cyclical
pattern, with larger increases early in
the expansion and smaller gains, on
average, in subsequent years. Overall,
however, this pattern has not yielded
evidence of a significant pickup in the
longer-term trend of productivity
growth.
The average unemployment rate for
all of 1995 was about Vi percentage
point below the average for 1994, and
it was only a little above the levels to
which the unemployment rate fell in the
latter stages of the long business expansion of the 1980s. The low unemployment rates reached then proved to be
unsustainable, as they eventually were
accompanied by a significant step-up in
the rate of inflation, brought on in part
by faster rates of rise in hourly compensation and unit labor costs.
Similar inflation pressures have not
emerged in the current expansion. The
employment cost index for hourly compensation of workers in private nonfarm
industries rose only 2.8 percent over the
twelve months ended in December, the
smallest annual increase on record in a
series that goes back to 1980. Hourly
wages increased 2.8 percent during the
past year, the same relatively low rate of
increase as in 1994. The cost of fringe
benefits, prorated to an hourly basis,
rose only 2.7 percent last year, the
smallest annual rise on record. With
many firms still undergoing restructurings and reorganizations, many of which
have involved permanent job losses,
workers probably have been more reluctant to press for wage increases than
they normally would have been during a
period of tight labor markets. Also,
firms have been making unprecedented
16
82nd Annual Report, 1995
efforts to gain better control over the
rate of rise in the cost of benefits provided to employees, especially those
related to health care. Although some
of these efforts may have only a onetime effect on the level of benefit
costs, groundwork also seems to have
been laid for slower growth of benefits
over time than would otherwise have
prevailed.
Prices
Early in 1995, inflation pressures that
had started building in 1994 seemed to
be gaining intensity. Indexes of spot
commodity prices continued to surge in
the early part of last year, and in the
producer price index, materials prices
recorded some exceptionally large
increases. Consumer prices also began
to exhibit some upward pressure, with
the index for items other than food and
energy moving up fairly rapidly over the
first four months of the year.
The surge in inflation proved to be
relatively short-lived, however. The spot
prices of industrial commodities turned
down in the spring of the year and fell
further, on net, after midyear. Price
increases for intermediate materials
slowed in the second and third quarters
of 1995, and by the final quarter of the
year these prices also were declining.
Monthly increases in the CPI excluding
food and energy slowed in May;
increases in this indicator of core inflation generally were small over the
remainder of the year. The slowing of
the economy after the start of the year
appears to have cut short the buildup of
inflationary pressures before they could
have much effect on the underlying processes of wage and price determination.
In the end, the rise in the core CPI from
the final quarter of 1994 to the final
quarter of 1995 amounted to 3 percent,
an increase that differed little from those
of the two previous years. The increase
in the total CPI in 1995 came in at
23/4 percent, the third consecutive year
in which it has been less than 3 percent.
In the aggregate, rates of price
increase held fairly steady for both
goods and services this past year. The
CPI for commodities other than food
and energy rose PA percent over the
four quarters of 1995 after increases of
V/2 percent in both 1993 and 1994. The
last three-year period in which prices of
these goods rose by such small amounts
came in the middle part of the 1960s.
Apparel prices continued to decline last
year but not so rapidly as in the previous
year. Price increases for vehicles moderated. The 1995 rise in the CPI for services other than energy was 33A percent;
although this increase exceeded the
1994 rise by a slight amount, the results
for both years were among the smallest
Change in Prices
Percent, Q4 to Q4
Consumer
Consumer excluding food and energy
1989
1991
1993
1995
NOTE. Consumer price index for all urban consumers.
Based on data from the Department of Labor.
The Economy in 1995
increases for this category in the last
three decades.
Trends in food prices and energy
prices remained favorable to consumers
in 1995. The rise in food prices from the
final quarter of 1994 to the final quarter
of 1995 was slightly more than 2Vi percent, almost exactly the same as the
increases of the two previous years. The
last yearly increase in food prices in
excess of 3 percent came in 1990. In
1995, weather problems led to a decline
in crop production and to a surge in the
prices of some crops, but this surge did
not bring about widespread increases in
food prices at the retail level. Livestock
production continued to advance, helping to restrain price increases for meats
and dairy products. Also, moderate rates
of increase in the costs of nonfarm
inputs that contribute heavily to value
added continued to be an important
anchor in the setting of food prices at
the consumer level.
In the energy area, prices at the consumer level fell 13A percent, on net, over
the four quarters of 1995, more than
reversing a moderate 1994 increase.
Gasoline prices dropped nearly 5 percent, on net, over the four quarters of the
year, and consumer prices of natural gas
also declined appreciably. However,
some upward pressures developed late
in 1995, partly in response to unexpectedly cold temperatures that boosted fuel
requirements for winter heating.
All told, the price developments of
1995 appear to have left a favorable
imprint on expectations of future rates
of inflation, if results from various
surveys of consumers and forecasters
are an accurate reflection of the views
held by the broader public. Monthly
responses to the surveys tend to bounce
around somewhat, but over 1995 as a
whole, average readings of anticipated
price increases one year into the future
were slightly lower than those of 1994,
17
and survey responses about inflation
prospects over the longer term came
down more substantially. Although the
responses regarding expected inflation
still tended, on balance, to run to the
high side of actual rates of price
increase, the easing of inflation expectations this past year provided another
encouraging sign that inflation processes
that helped to undermine other recent
business expansions were in check as
1995 drew to a close.
•
19
Monetary Policy and Financial Markets in 1995
In 1995 the Federal Reserve had to
adjust its policy stance several times to
promote credit market conditions supportive of sustained growth with low
inflation. At the beginning of 1995,
some risk remained that inflation might
rise. To provide additional insurance
against that development, the Federal
Open Market Committee (FOMC) tightened reserve conditions in February,
raising the intended federal funds rate
V2 percentage point, to 6 percent,
thereby extending the episode of policy
firming that had begun one year earlier.
As time passed, it became clear that
these policy tightenings had been successful in containing inflationary pressures, and the System initiated XA point
reductions in the federal funds rate in
July and December.
Most market interest rates had peaked
before the policy tightening of February.
During the spring, interest rates declined
appreciably, as market participants
increasingly came to believe that no
additional policy restraint would be
forthcoming, and, indeed, that easing
might be in the cards. Mounting evidence that the growth of spending had
downshifted and that price pressures
were muted, along with greater hopes
that substantial progress would be made
toward reducing the federal budget deficit, contributed to the change in attitudes
and to the drop in interest rates, especially longer-term rates. On balance,
interest rates dropped 1 to 2!/2 percentage points during 1995, with the largest
declines registered on intermediate- and
long-term securities.
The course of interest rates during the
year influenced overall credit flows and
their composition. The expansion of the
total debt of domestic nonfinancial sectors was relatively strong during the first
half of the year but moderated later in
1995. For the year, debt grew 5!/2 percent, somewhat above the midpoint of
its monitoring range. Initially, household and nonfinancial business credit
demands were concentrated in floating
rate or short-term debt instruments. As
the yield curve flattened, credit demands
U.S. Interest Rates
Percent
Short-term
}
I
\
\
1
1
1
1
1
i
{
i
Long-term
15
Conventional mortgages
12
U.S. government bonds
1
1983
1 1
I 1
1987
I
1
I I
1991
1
1 1
1995
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.
20
82nd Annual Report, 1995
Annual Rate of Change in Reserves, Money Stock, and Debt Aggregates
Percent
1995
Item
Depository institution reserves '
Total
Nonborrowed plus extended credit .
Required
Monetary base 2
1992
1993
1994
Year
Ql
Q2
Q3
Q4
-3.7
-2.4
-4.0
6.0
-8.0
-8.6
-7.0
5.7
-1.2
-2.2
-2.3
1.7
-7.2
-6.7
-8.0
2.7
20.1
20.3
20.3
10.4
12.2
12.2
12.5
10.5
-1.3
-1.5
8.4
-A.9
-4.9
-5.2
4.1
14.3
9.2
17.8
15.6
10.5
10.3
13.3
8.5
2.4
10.3
A
-1.9
-1.8
5.4
1.4
-11.2
-.1
7.7
-.1
-7.0
-.5
7.7
.4
-9.0
-1.5
2.1
5.7
-11.7
-5.1
3.8
-.4
-18.8
M2
Non-Mi components
Savings (including MMDAs)
Small denomination time deposits .
Retail money market mutual funds
1.8
-2.6
14.5
-18.4
-3.9
1.4
-2.4
2.9
-10.3
-.5
.6
-.3
-4.3
2.5
7.5
4.2
7.2
-3.4
14.9
22.6
1.4
2.2
-15.2
22.6
11.7
4.3
6.6
-9.2
21.6
19.0
7.0
11.0
3.5
8.4
36.5
4.0
8.1
7.8
4.2
16.9
M3
Non-M2 components
Large-denomination time deposits
Institution-only money market mutual
funds
Repurchase agreements
Eurodollars
.6
-4.9
-15.5
1.0
-.5
-6.5
1.6
6.2
7.2
6.1
14.4
15.7
4.9
19.9
13.7
6.7
16.9
14.2
8.0
12.2
13.3
4.3
5.7
18.0
18.5
5.5
-15.0
-A3
23.3
-6.8
13.3
23.6
22.9
4.7
10.3
17.5
32.3
25.9
30.4
7.6
18.4
27.7
-5.0
9.2
9.3
-15.1
-12.9
4.7
10.7
2.8
5.2
8.4
4.1
5.2
5.7
5.0
5.5
4.4
5.9
5.4
5.1
5.5
7.0
5.4
7.6
4.6
4.6
4.7
4.5
2.3
5.3
3
Concepts of money
Ml
Currency
Demand deposits
Other checkable deposits.
Domestic nonfinancial sector debt .
Federal
Nonfederal
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.
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.
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; and balances in taxable and
tax-exempt retail money market mutual funds (money
funds with minimum initial investments of less than
$50,000), excluding IRAs and Keogh accounts.
M3 is M2 plus large-denomination time deposits at all
depository institutions other than those due to money
stock issuers; balances in institution-only money market
mutual funds (money funds with minimum initial investments of $50,000 or more); wholesale RP liabilities (overnight and term) issued by all depository institutions, net
of money fund holdings; and Eurodollars (overnight and
term) 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
shifted to fixed rate, long-term debt
instruments.
Because depository institutions are
important sources of short-term and
floating rate credit to households and
businesses, depository assets grew rapidly early on and then backed off. The
need to fund the increase in assets, along
with declines in market interest rates
relative to yields on retail deposits, led
to the fastest growth in M2 and M3
since the late 1980s; M2 ended the year
in the top of its annual range, and M3
was at the upper end of its range. In
contrast, Ml declined for the first time
since 1959, the beginning of the official
series, as many banks introduced retail
sweep accounts that shift deposits from
interest-bearing checking accounts to
savings-type accounts to reduce reserve
requirements.
The Course of Policy and
Interest Rates
The Federal Reserve entered 1995 having tightened policy appreciably during
the previous year. Short-term interest
rates had risen more than 2l/z percentage
points from the end of 1993, and longterm rates were up 2 percentage points.
Policy tightening had been necessitated
by the threat of rising inflation posed by
unusually low real short-term interest
rates earlier in the 1990s. Rates had
been kept low to counter the effects of
impediments to credit flows and economic growth. But as these impediments
were reduced, the economy expanded
at an unsustainable pace and margins of
underutilized labor and capital began
to erode. Ultimately, a continuation
of excessive demands on productive
resources and the resulting higher
inflation would have produced strains,
threatening economic expansion.
In early February the policy actions
taken in 1994 did not appear to be suffi
21
cient to head off inflationary pressures.
The growth of economic activity had
not shown convincing signs of slowing
to a more sustainable pace, and available information, including a marked
rise in materials prices during the last
half of 1994, seemed indicative of
emerging resource constraints and
building inflationary pressures. In these
circumstances, the FOMC agreed on a
Vi percentage point increase in the federal funds rate, and the Board of Governors approved an equal increase in the
discount rate.
During the remainder of the winter
and through the spring, incoming data
signaled that economic growth was
finally moderating. At first, it was
unclear if the slowdown was temporary
or if it was a lasting shift toward a
sustainable rate of economic expansion.
Adding to the uncertainty was a pickup
of consumer price inflation and a
pronounced weakening in the foreign
exchange value of the dollar. At the
March meeting, the FOMC determined
that it would be prudent to await further information before taking any additional policy actions, but it alerted the
Manager of the System Open Market
Account that, if intermeeting action
were to be required, the step would more
likely be to firm than to ease.
By the May meeting, the accumulating evidence indicated that the threat of
rising inflation might be lessening. Economic growth was being slowed by the
efforts of businesses to correct inventory
imbalances that had developed earlier in
the year. However, the underlying trajectory of final sales was still uncertain.
The FOMC determined that the existing
stance of policy was appropriate and
expressed no presumption as to the
direction of potential policy action over
the intermeeting period.
Intermediate- and long-term interest
rates had fallen throughout the winter
22
82nd Annual Report, 1995
and spring, as evidence accumulated
that the expansion of economic activity
was slowing and that inflationary pressures were ebbing. Furthermore, budget
discussions in the Congress seemed to
foreshadow significant fiscal restraint
over the balance of the decade, putting
additional downward pressure on these
rates. Short-term rates had declined less,
but in late spring, financial market participants had begun to anticipate an easing of monetary policy. By midyear, the
three-month Treasury bill rate was down
slightly from its level at the beginning
of the year, and rates on securities
with maturities greater than one year
had dropped as much as 2 percentage
points.
Employment data released shortly
after the May FOMC meeting were surprisingly weak, and by the July meeting
it appeared that the growth of aggregate
output had sagged markedly during the
second quarter as businesses sought to
keep inventories from rising to undesirable levels. This deceleration of output
growth was accompanied by a softening
of industrial prices and a marked reduction in the pace at which materials prices
were rising. With the economy growing
more slowly than had been anticipated
and potential inflationary pressures receding, the FOMC voted to ease reserve
pressures slightly with a lA percentage
point decline in the intended federal
funds rate.
Although financial market participants had anticipated a decline in the
federal funds rate at some point, bond
and equity markets rallied strongly
immediately after the change in policy
was announced. However, a pickup in
economic growth during the summer
made further reductions in the funds rate
appear less likely, and interest rates
backed up for a time.
The Committee did keep rates unchanged at the August and September
meetings. Although inflation had
improved, the slowdown had been
anticipated to a considerable extent.
Moreover, uncertainties about federal
budget policies and their effects on the
economy remained substantial.
At the November meeting, the economic signals were mixed. Anecdotal
information tended to suggest a softening in spending after the third quarter,
but the extent of any slowing of
spending and inflation was unclear.
Although short-term rates remained
above long-term averages on an
inflation-adjusted basis, substantial
rallies in bond and stock markets were
thought likely to buoy spending. Against
this backdrop, the FOMC voted to
maintain the existing stance of monetary
policy.
The generally positive news about
inflation and hopes for a budget agreement had helped propel the bond market higher throughout the fall. By the
December meeting, intermediate- and
long-term interest rates were \3A to
2Vi percentage points below their
levels at the beginning of the year. The
bond market rally, along with strong
earnings reports, pushed equity prices
higher during the year, and by midDecember, equity price indexes were
up about 35 percent from levels at the
beginning of the year. Since the last
easing in July, inflation had been
somewhat more favorable than anticipated, and the expansion of economic
activity had moderated substantially
after posting a strong third quarter.
With both inflation and inflation expectations more subdued than expected,
and with the slowing in economic
growth suggesting that price pressures
would continue to be contained, the
FOMC decided to reduce the intended
federal funds rate an additional
l
A percentage point, bringing it to
5 V2 percent.
Monetary Policy and Financial Markets
23
In 1995 the debt of the domestic nonfinancial sectors grew only a bit faster
than it had in the previous year, although
debt growth in the first half of 1995 was
stronger than in the second. Credit supplies remained plentiful: Banks continued to be willing lenders, and in securities markets most interest rate spreads
remained quite narrow. Debt burdens
for households increased, but except for
a few types of consumer credit obligations, delinquency rates remained at
low levels. Rising equity prices bolstered the overall financial condition of
households.
Federal debt rose about 4l/i percent in
1995, slightly less than in 1994. The
government's demands for credit were
restrained by shrinkage of about 20 percent in the deficit for the calendar year.
Debt growth also was slowed toward
year-end by a Treasury drawdown of its
cash balance to keep borrowing within
the $4.9 trillion debt ceiling.
State and local government debt fell
41/2 percent—more than in 1994. A few
years earlier, municipalities had taken
advantage of low long-term rates to prerefund a substantial volume of issues,
many of which were eligible to be called
in 1995. As those securities were called,
and with gross issuance light, the stock
of municipal securities contracted for a
second consecutive year. Despite the
overall reduction in debt outstanding,
the ratios of tax-exempt yields to taxable yields jumped in the first half of the
year and, for long-term debt, held at an
elevated level during the remainder of
the year. This increase was associated
with concerns about the demand for taxfree municipal debt in light of proposals
for changes in federal taxation that
would sharply reduce the tax advantages
of holding municipal bonds.
Household borrowing remained robust in 1995, and the ratio of household
debt to disposable personal income rose
further. Even so, the financial condition
of this sector remained good on balance,
although some signs of deterioration
emerged. The rally in the domestic
equity markets supported household
balance sheets by boosting net worth
sharply. In addition, delinquency rates
on home mortgages and closed-end
consumer loans at banks, while rising,
remained at low levels. Other indicators,
however, provided evidence that some
households were likely beginning to
Total Domestic Nonfinancial Debt
Delinquency Rates on Household Loans
Credit and Money Flows
Trillions of dollars
Percent
Closed-end consumer
loans at banks
Actual
14.0
3%
1.5
Monitoring range
13.0
1994
1095
NOTE. The range was adopted by the FOMC for the
period from 1994:Q4 to 1995:Q4.
Mortgages
Auto loans at
finance companies
I M I 1111111ill 111i M 1i 1I 1
1975
1985
1995
NOTE. The data for closed-end consumer loans are
from the American Bankers Association; for auto loans,
from the Federal Reserve; and for mortgages, from the
Mortgage Bankers Association.
24
82nd Annual Report, 1995
experience increased financial pressures.
For instance, delinquency rates on credit
card debt held by banks and on auto
loans booked at captive finance companies rose sharply. Furthermore, the average household debt service burden—
calculated as the share of disposable
income needed to meet required payments on mortgage and consumer
debt—continued to rise last year. By
year-end, this measure of debt burden
had reversed about one-half of the
decline it posted earlier in the decade.
The average debt service burden of
nonfinancial corporations—the ratio of
net interest payments to cash flow—also
rose last year, but it remained well
beneath the most recent peak, reached in
1990. The increase in debt burden was
in part associated with the relatively
strong growth of the debt of nonfinancial businesses. This sector's debt
growth was especially robust early in
the year, when business fixed investment picked up further and inventory
accumulation was rapid. Debt issuance
was also boosted by the rising wave
of mergers, although a good number
involved stock swaps. Financing needs
fell back later on as investment growth
slowed and profits increased. Funding
patterns also shifted as bond yields fell,
and firms relied more heavily on longer-
-term debt. Despite the increase in credit
demands, interest rate spreads of private
investment-grade securities over comparable Treasuries widened only slightly
and remained narrow by historical standards, suggesting that lenders continued
to view balance sheets of nonfinancial
corporations as remaining healthy on the
whole. Spreads on below-investmentgrade debt rose more sharply but stayed
well beneath levels reached early in the
decade.
Commercial banks met a significant
portion of the increase in business credit
demands last year, which, in turn, contributed to the rapid expansion of bank
balance sheets. Banks funded a portion
of the loan increase by reducing their
securities holdings, although higher
market prices of securities and offbalance-sheet contracts left reported
securities holdings slightly higher for
the year. In fact, bank security holdings
relative to the size of their balance
sheets remained elevated and, together
with banks' strong capital positions,
indicated that late in the year banks were
well positioned to continue accommodating the credit demands of households
and businesses. Although qualitative
information suggested that banks were
no longer reducing the standards they
applied to businesses seeking loans,
Stock of M3
Stock of M2
Billions of dollars
Billions of dollars
Actual
6%
+**
5%
4600
3700
Actual
4500
******
^
3600
.
2%
i
1994
it
\
\
\
\ \
1995
\
\
*m£?-~
\
1
NOTE. The range was adopted by the FOMC for the
period from 1994:Q4 to 1995:Q4.
7
4300
i
Range
t
4400
" i%
3500
1
Range
i
i
1994
1
i
i
i
i
i
J
i
i
j
i
i
1995
NOTE. The range was adopted by the FOMC for the
period from 1994:Q4 to 1995:Q4.
Monetary Policy and Financial Markets
some easing of credit terms continued,
with interest rate spreads on business
loans narrowing further. Growth of real
estate loans held by banks slowed over
the year as the share of fixed rate mortgages in total originations rose with the
decline in long-term rates. Banks tend to
securitize fixed rate mortgages more
than adjustable rate loans. Consumer
loans on the books of banks began the
year growing at very high rates; this
growth decelerated throughout 1995 as
the volume of securitization increased.
In response to rising delinquency rates,
some banks tightened terms and standards for consumer loans toward the end
of 1995.
Total assets of thrift institutions are
estimated to have risen slightly last year.
Growth at healthy thrifts more than offset a substantial transfer of thrift assets
to commercial banks through mergers.
The revival of growth in thrift assets,
along with the strong showing of bank
credit, helped to nudge up depository
credit as a share of domestic nonfinancial debt for the second straight year
after fifteen years of declines. Banks and
thrifts still account for more than onethird of all credit to nonfinancial sectors.
Banks and thrifts funded a large share
of their asset growth with deposits, and
M3 grew 6 percent. The non-M2 portion
of M3 was especially strong, in part
because depository institutions substituted large time deposits for nondeposit
sources of funds. The sharp reduction in
Stock of Ml
Billions of dollars
1994
1995
25
deposit insurance premiums, which
made large time deposits a more attractive source of funds, probably contributed to this shift. Late in the year,
branches and agencies of Japanese
banks, facing some resistance in U.S.
funding markets, ran off time deposits
while continuing to increase their funding from overseas offices.
M2 rose as lower market interest rates
and a flatter yield curve increased the
relative attractiveness of retail deposits.1
As is typical, deposit interest rates, and
to a lesser extent returns on money market mutual funds, adjusted slowly to
declines in market rates last year. However, falling interest rates for comparable maturity market instruments were
not the whole story for the growth of
M2. As the yield curve flattened, the
relative gains from holding longer-term
assets with less certain price behavior
fell and probably strengthened household demand for components of M2.
The velocity of M2 was little changed
last year after having increased substantially during the previous three years.
Ml fell almost 2 percent in 1995, the
first annual decline in the Board's official series, which dates back to 1959.
1. In February 1996 M2 was redefined to
exclude overnight RPs and overnight Eurodollars
(they remain in M3); the historical M2 data presented here exclude those instruments.
The instruments were first included in M2
in 1980 because they were being substituted for
demand deposits as businesses were in the process
of managing their cash holdings more closely.
Since then, other uses of overnight RPs and Eurodollars have become more dominant. Moreover,
while RPs and Eurodollars are only 3 percent of
M2, they contribute substantially to the short-run
volatility of that aggregate. Removing these components from M2 should make the weekly levels
of the aggregate less volatile and reduce the reporting burden on banks that have had to distinguish
between overnight and term RPs and Eurodollars.
On a monthly and quarterly basis, the relationships of the two measures of M2 to income and
interest rates are almost indistinguishable.
26
82nd Annual Report, 1995
Sweeps of deposits from reservable
checking accounts, a component of Ml,
to nonreservable money market deposit
accounts were a major influence. Without these sweeps, Ml would have risen
1 percent. By the end of last year,
sweeps had spread to thirty-two bank
holding companies, and the initial
amounts swept by these programs totaled $54 billion. The corresponding
decline of more than $5 billion in
required reserves largely showed
through to reserve balances maintained
at Federal Reserve Banks. As banks
continue to introduce retail sweep programs in the future, the aggregate level
of required reserve balances will tend to
fall further. Although it has not happened yet, one possible consequence of
the declining required reserve balances
is greater instability in the aggregate
demand for reserves and in overnight
interest rates. As a case in point, a cut
in reserve requirements at the end of
1990 produced unusually low levels of
required reserve balances in 1991; in
turn, as banks' volatile clearing needs
began to dominate the demand for
reserves, the federal funds rate began
exhibiting much greater variability,
thereby making daily reserve demand
more difficult to estimate.
The runoff in reserve balances held
the growth of the monetary base to
4 percent in 1995. In addition, currency
growth slowed, primarily because of
reduced shipments abroad. Foreign
demand moderated with the stabilization of financial conditions in some
countries where dollars circulate widely.
Indeed, reduced demands from abroad
contributed to a rare decline in the currency component of Ml this past summer, the first decrease since the early
1960s. The demand for existing Federal
Reserve notes also slackened in anticipation of the introduction of a newly
designed $100 bill that will be more
difficult to counterfeit.
•
27
International Developments
Economic activity in most major foreign
industrial countries decelerated sharply
in 1995 from the robust growth recorded
in 1994. By contrast, Japan evidenced
some provisional signs of recovery as
1995 progressed, after registering
almost no growth during the previous
three years.
With slack in the slowing European
and Canadian economies and with
Japan's recovery still tentative, inflation
remained low in 1995. On average, consumer prices rose about P/4 percent over
the year in the six major foreign industrial countries, roughly the same rate as
in 1994.1
1. The six countries are Canada, France, Germany, Italy, Japan, and the United Kingdom.
Exchange Value of the Dollar
and Interest Rate Differential
Percentage points
Ratio scale, December 1973 = 100
Price adjusted
exchange value
of the dollar
80
interest rate differential
U.S. minus foreign
1980
1985
1990
1995
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 of 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 consumer price inflation using staff forecasts of inflation where needed.
The data are monthly.
Among developing countries, economic growth remained robust in most
of those in Asia, in line with the experience of the last several years. In Latin
America, gains in output were more
subdued in 1995 than in recent years.
Mexico's economy contracted sharply
in response to policies adopted after the
collapse of the peso late in 1994; the
developments in Mexico dampened
confidence throughout Latin America.
Output accelerated in much of Eastern
Europe; in most parts of the former
Soviet Union, the prolonged shrinkage
in activity abated somewhat. Economic
growth in African countries was mixed,
but the region as a whole maintained the
moderate rate achieved in 1994. Growth
continued to be slow in the Middle East.
The U.S. trade deficit in goods and
services amounted to $111 billion in
1995, close to the 1994 level of
$106 billion. U.S. income growth in
1995 was similar to the average for the
country's major trading partners, but
as is typically the case, comparable
increases in income stimulated U.S.
imports more than U.S. exports. The dollar's depreciation during 1994 and early
1995 worked in the opposite direction,
tending to boost exports and hold down
imports. Overall, the result of these offsetting tendencies was that the value of
exports grew somewhat faster than the
value of imports. However, with imports
significantly exceeding exports at the
start of the year, these growth rates
translated into a slightly larger deficit.
The current account deficit was
$153 billion in 1995, about the same as
in 1994. In contrast to 1994, a large
portion of the concomitant net capital
inflows in 1995 represented accumula-
28
82nd Annual Report, 1995
tions of foreign official assets in the
United States. Substantial amounts of
private capital moved in both directions,
but the resulting net inflow was smaller
than in 1994.
The foreign exchange value of the
dollar declined about 5 percent on
balance in 1995 in terms of a tradeweighted average of the other G-10 currencies.2 The dollar's value fell sharply
over the first four months of the year,
declining almost 10 percent. Some indications that U.S. growth might be slowing contributed to expectations that further increases in U.S. interest rates were
less likely as the year progressed; in
addition, increasingly acrimonious trade
disputes between the United States and
Japan clouded prospects for an early and
harmonious resolution of those problems. The crisis in Mexico also weighed
on the dollar's value, partly because of
its negative effects on U.S. trade with
Mexico. The improvement in the dollar's value later in the year developed
when weaknesses in the economies of
other major industrial countries began to
emerge and interest rates there declined
relative to those in the United States.
half of the year as currency appreciation
earlier in 1995 slowed exports and
declining business and consumer confidence curtailed spending. By contrast,
the economic situation in Japan
appeared to improve late in the year.
A firming in the growth of domestic
demand stimulated by easier monetary
and fiscal policies over the course of the
year was only partly offset by a welcome ongoing adjustment in the external surplus in response to the appreciation of the yen.
Unemployment rates continued to
decline during 1995 in the United KingChanges in GDP, Demand, and Prices
Percent, from previous year
Gross domestic product
6
Foreign G-10
4
2
+
0
U.S.
\y
Total domestic demand
Foreign Economies
Other than in Japan, economic activity
in the major foreign industrial countries
slowed in 1995. In Canada, where economic activity had been particularly
vigorous through 1994, the slowing in
growth in part reflected weaker U.S..
growth; but it also resulted from domestic macroeconomic policies designed to
prevent the reemergence of inflationary
pressures. In Germany and France,
growth dropped markedly in the second
2. The Group of Ten consists of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom,
and the United States.
_L
Consumer price index
1991
1993
1995
NOTE. Data for the foreign G-10 countries are from
national sources. The data are weighted by the countries'
1987-89 GDP as valued after adjusting for differences in
the purchasing power of their currencies; GDP and
domestic demand are in constant prices.
Data for the United States are from the Departments of
Commerce and Labor. GDP and domestic demand are
derived from chained (1992) dollars.
For GDP and domestic demand, the data are quarterly;
for consumer prices, the data are monthly.
International Developments
dom and Canada, where recoveries have
been under way for several years. In
continental Europe, labor market conditions were mixed, with the rate of unemployment increasing in some countries.
Rising unemployment refocused attention on a vexing problem of the last ten
years in Europe—structural unemployment or unemployment related to causes
other than the business cycle. The slight
acceleration of activity in Japan did not
prevent the unemployment rate there
from rising to a post-war high of 3.4 percent. Under persistent weakness in the
economic situation, further erosion in
Japan's lifetime employment system
was apparent.
The slowdown in 1995 sustained or
increased gaps between actual output
and estimated potential in most major
foreign industrial countries. The robust
pace of foreign economic growth in
1994 had reduced but not eliminated
these differentials. Diminishing pressure
on output gaps helped contain inflation;
on average, consumer prices in the
foreign G-10 economies rose slightly
less than 2 percent over the year, as in
1994. In Japan, where the appreciation
of the yen damped any upward pressure
on prices, consumer prices declined
about Vi percent.
General government budget deficits
narrowed further in Canada and in
Europe, except Germany, despite the
slowing pace of economic growth in
1995. A number of countries pursued
policies aimed at reducing their deficits. Much of the impetus to fiscal consolidation in Europe was provided by
the deficit criterion specified in the
Maastricht Treaty. Countries wishing to
participate fully in the proposed European Monetary Union—now scheduled
for early 1999—must reduce their general government deficits to 3 percent
of gross domestic product by 1997. In
Japan, expansionary policy measures
29
took forms that boosted the deficit
significantly.
Long-term interest rates declined in
all foreign G-10 industrial countries in
1995, after increasing sharply in 1994.
On average, rates on government instruments with a maturity of ten years
dropped nearly 150 basis points. This
development was due in large part to
weakening economic growth, which
also motivated foreign monetary
authorities to ease short-term interest
rates about 90 basis points on average.
In Japan, short-term rates were cut
more—almost 200 basis points—in
order to support the flagging recovery.
By contrast, authorities in the United
Kingdom and Italy tightened monetary
policy to counter inflation pressures.
Current account positions improved
in a number of foreign industrial countries in 1995. Canada's deficit narrowed
substantially because exports remained
strong despite slower U.S. activity. With
the yen stronger on average during the
year and economic activity improving,
Japan's large external surplus declined
to about $110 billion, well below the
level of $130 billion registered in both
1993 and 1994. The surpluses in Italy
and Sweden rose further under the influence of earlier currency depreciations,
which boosted the competitiveness of
traded goods for these countries.
Economic growth in the major developing countries in 1995 was also more
moderate on average than the strong
pace recorded in 1994. Mexico's economy contracted substantially, with
important effects on its trade with the
United States. In response to the December 1994 collapse of the peso, Mexican
authorities adopted policies to counter
inflation and significantly reduce the
large current account deficit. Under
these restraints, output fell 7 percent,
declining even more sharply early in the
year but recovering a bit in the fall. The
30
82nd Annual Report, 1995
merchandise trade balance improved
from a substantial deficit in 1994 to
moderate surplus in 1995, and the current account moved nearly into balance.
The financial turbulence in Mexico
helped impose downward pressure on
exchange rates in Argentina and Brazil,
inducing authorities there to tighten
macroeconomic policies. These developments led to a recession in Argentina,
which had had several years of rapid
growth, and caused a pronounced deceleration of economic activity in Brazil.
Economies in Asia on average continued their rapid 1994 pace of growth.
Although the expansion was driven
largely by strong internal demand, especially for investment, most countries
also benefited from very fast export
growth. The marked acceleration in
exports was attributable at least in part
to depreciation of the currencies of these
countries in terms of the yen and European currencies early in the year. Activity again expanded more than 10 percent
in China in 1995, but tight credit conditions dampened investment demand and
slowed growth.
conductors rose sharply, but imports of
other machinery, consumer goods, and
industrial supplies slowed. Import prices
increased about IVi percent. Together
with low inflation in most U.S. trading
partners, a leveling off of world non-oil
commodity prices after a rapid rise in
1994 helped restrain the rise in import
prices that might otherwise have been
associated with the dollar's weakness.
Foreign official holdings of financial
assets in the United States rose a record
$110 billion in 1995, the result of both
intervention by some industrial countries and substantial reserve accumulation by several developing countries in
Asia and Latin America.
U.S. International Trade
Billions of dollars
Balances
Ratio scale, billions of chained (1992) dollars
U.S. International Transactions
Real exports of U.S. goods and services
grew 61/2 percent over the four quarters
of 1995. Agricultural exports remained
high, and the volume of computer exports continued to rise sharply. Exports
of machinery and industrial supplies
also were robust. While exports to
Mexico were declining in response to
the economic crisis there, shipments to
developing countries in Asia were growing rapidly, and exports to Western
Europe, Canada, and Japan were also
increasing.
Imports of goods and services
increased 414 percent in real terms during 1995, a slower rate of advance than
in 1994. Imports of computers and semi
Trade in goods and services
800
Imports
600
Ratio scale. 1992 = 100
GDP price index (chain-type)
Non-oil merchandise imports
J
1989
L
1991
}
i
1
1993
I
1995
NOTE. The data are from the Department of Commerce; they are quarterly and seasonally adjusted. Data
for trade are at annual rates.
International Developments
Foreign private assets in the United
States also rose rapidly in 1995, in
keeping with a continuing trend toward
internationalization of securities markets. Net purchases of nearly $100 billion of U.S. Treasury securities by
private foreigners far exceeded such
purchases in previous years. As in
1994, much of this activity was channeled through Caribbean financial centers and was probably associated with
the transactions of hedge funds. Net purchases of U.S. government agency and
corporate bonds also reached record
31
levels. However, despite the rapid rise
in U.S. stock prices in 1995, foreign net
purchases of U.S. corporate stocks were
not nearly as strong as at times in the
past.
U.S. net purchases of foreign securities in 1995 rebounded strongly after a
very weak first quarter. For the year as a
whole, net purchases of stocks in Japan
accounted for almost 40 percent of total
U.S. purchases of foreign stocks. U.S.
investors showed little interest in adding
to their holdings of stocks or bonds from
emerging markets in Latin America, at
U.S. International Transactions
Billions of dollars, seasonally adjusted
Quarter
Year
Transaction
1994
1995
1994
1995 P
Q4
Ql
Q2
Q3
Q4P
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
-106
701
502
199
807
669
139
-9
45
-54
-36
-111
784
575
209
895
749
146
-11
59
-71
-30
-27
185
134
51
212
177
35
-5
11
-16
-11
-29
189
138
51
218
183
36
-2
14
-16
-33
194
143
52
228
191
36
-3
15
-17
-7
-27
198
145
53
225
188
37
-5
13
-18
-22
202
149
53
224
187
37
-2
17
-19
Current account balance
-151
-153
-43
-38
-43
-40
-31
121
115
-50
92
34
56
3
-49
49
-37
46
-39
-94
194
99
82
13
-97
75
29
18
-15
36
26
13
-3
-12
20
-18
3
-30
-7
46
30
20
-4
-23
17
-1
-11
-28
-22
51
30
19
2
-17
13
3
25
-31
29
2
17
10
-41
21
n.a.
Private capital flows, net
Bank-related capital, net (outflows, - )
U.S. net purchases (-) of foreign securities
Foreign net purchases (+) of U.S. securities
Treasury securities
Corporate and other non-Treasury bonds
Corporate stocks
U.S. direct investment abroad
Foreign direct investment in United States
Other corporate capital flows, net
Foreign official assets in United States (increase, +)
U.S. official reserve assets, net (increase, - )
39
5
n.a.
110
-10
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.
22
38
51
_7
-34
68
37
26
5
-16
24
17
39
-5
-3
-2
11
-1
-14
0
-14
7
0
7
14
1
13
n.a. Not available.
19
6
13
19
-49
-1
*
-42
19
p Preliminary.
17
1
17
S O U R C E . Department of Commerce, Bureau of Eco-
nomic Analysis.
32
82nd Annual Report, 1995
least in part because of heightened caution brought on by financial conditions
in Mexico.
Mergers and acquisitions added substantially to the inflow of funds from
foreign direct investors and also to direct
investment outflows. Inflows reached
$75 billion, surpassing the record pace
of 1989. U.S. direct investment abroad
of $97 billion was even larger than foreign direct investment in the United
States and also surpassed the previous
peak. This outflow was stimulated in
part by sales of government-owned entities to the private sector in some foreign
countries.
Foreign Exchange Developments
One factor behind the dollar's weakness
may have been the ongoing large U.S.
current account deficit. Two other developments that appeared to contribute to
downward pressure on the dollar early
in the year were the possibility of a
spillover from the Mexican financial
crisis and uncertainty about U.S. government action to reduce the federal budget
deficit. The dollar's partial recovery
later in the year may have been aided by
the apparent containment of the Mexican financial situation and some signs of
movement toward a balanced U.S. budget over the medium term. The dollar's
depreciation is also consistent with the
decline in long-term interest rates in the
United States relative to those abroad
during 1995; over the full year, the U.S.
rate declined about Vi percentage point
more than the average of foreign G-10
rates.
The dollar appreciated slightly versus
the pound and yen but declined in value
when measured against other foreign
G-10 currencies. The dollar fell about
8 percent in terms of the mark and the
other major currencies that are linked by
the European exchange rate mechanism,
the Dutch guilder and the Belgian and
French francs. The French currency
moved with the mark on balance, but at
times it came under severe downward
pressure relative to the mark, particularly during two periods of intense
political activity in France—the presidential election in the spring and the
labor unrest that developed near the end
of the year. The Canadian dollar, which
showed little net change versus the U.S.
dollar for the year as a whole, also came
under considerable pressure at the time
of the referendum on Quebec independence in October.
The exchange rate between the dollar
and the yen fluctuated over a very wide
range in 1995. Early in the year the
dollar fell sharply, to an historically low
level of 83 yen in May. This development was doubtless the product of a
number of factors, but the ongoing huge
trade imbalance between the United
States and Japan probably played an
important role. Market participants
might have been concerned that any
breakdown in trade negotiations between the two countries could lead to
an appreciation of the yen as a way to
reduce this imbalance. After a trade
agreement between the United States
and Japan was reached at the end of
June, the dollar began to move up
Exchange Value of the Dollar
versus Selected Currencies
December 1993= 100
Canadian dollar
100
90
Japanese yen
\
\
i
i
i
\
i
\
\
i
i
1995
NOTE. Foreign currency units per dollar. The data are
monthly.
International Developments
strongly and eventually reversed all its
earlier losses. The appreciation was
encouraged by U.S. statements favoring
a strong dollar and occasional U.S. intervention sales of yen, sometimes in conjunction with Japanese authorities. Further moves to ease Japanese monetary
policy also helped the dollar's rebound.
Adjusted for relative changes in consumer prices, the dollar also depreciated
in terms of nearly all the currencies of
the major US. trading partners in Latin
America and East Asia. However, in by
far the largest movement of 1995, the
dollar appreciated sharply relative to
the Mexican peso—over 90 percent in
nominal terms and about 30 percent
after adjusting for the high Mexican
inflation rate. This shift balanced the
losses elsewhere and left the dollar
about 1 percent stronger in terms of the
average price-adjusted value of major
developing countries' currencies.
Foreign Exchange Operations
U.S. authorities intervened to support
the dollar on several occasions in 1995,
sometimes in conjunction with other
central banks. The largest operations
took place in the spring when the dollar
was under heavy downward pressure
relative to the yen. For the year as a
whole, U.S. authorities sold a total of
$3,303 million of yen and $3,250 million of marks. Intervention in dollars by
fifteen foreign central banks amounted
to net purchases of $66 billion.
At year-end, the System held
$21,099 million of foreign currencies
valued at current exchange rates. No
Treasury balances were warehoused
with the System during 1995. The System realized $964 million in profits
on sales of foreign currency during
1995 and recorded a translation gain
of $41 million on foreign currency
balances.
33
During January and February 1995,
the Bank of Mexico drew a total of
$V/2 billion on its swap line with the
Federal Reserve, of which $650 million was outstanding at the end of the
year (and was repaid in full the next
month).
•
35
Monetary Policy Reports to the Congress
Given below are reports submitted to
the Congress on February 21 and July
19, 1995, pursuant to the Full Employment and Balanced Growth Act of 1978.
Report on February 21, 1995
Monetary Policy and the
Economic Outlook for 1995
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 the rise during 1993. Signs that
growth is moderating have emerged in
the past month or so, but the bulk of the
evidence suggests that the economy continues to advance at an appreciable pace.
Federal Reserve policy during 1994
and early 1995 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 eco
nomic 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 Federal Reserve began to
firm money market conditions last February. The Federal Reserve continued to
tighten policy over the course of the
year and into 1995, as economic growth
remained unexpectedly strong, eroding
remaining margins of unused resources
and intensifying price increases at early
stages of production. Developments in
financial markets—for example, easier
credit availability through banks and a
decline in the foreign exchange value of
the dollar—may have muted the effects
of the tightening of monetary policy.
Short-term interest rates have
increased about 3 percentage points
since the start of 1994, with the federal
funds rate rising from 3 percent to 6 percent. Other market interest rates have
risen between 1 Vz percentage points and
3 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 some tentative signs of moderation in economic activity around yearend and in early 1995 appeared to
reduce market concerns about increased
inflation pressures and additional Fed-
36
82nd Annual Report, 1995
eral Reserve policy actions. As a result,
long-term rates declined, on net, from
mid-November through mid-February.
The foreign exchange value of the
dollar in terms of other Group of Ten
(G-10) currencies declined almost
6V2 percent last year, even as the economy picked up and interest rates rose.
The positive effects on the dollar that
would 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, owing to much more
rapid than expected growth abroad,
especially in Europe. Concerns about
US inflation may have contributed to
the weakness in the dollar in the middle
part of last year; late in the year, the
dollar rallied for a time, as tighter monetary policy apparently reduced investors' inflation fears. The dollar weakened again, however, in early 1995,
perhaps reflecting the emerging indicators of moderating growth in the United
States. In addition, financial markets
were roiled early this year by severe
financial difficulties in Mexico. A sharp
depreciation of the peso had adverse
effects not only in Mexico but also in a
number of other countries, and these
developments also may have contributed to the weakness of the dollar.
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.
Businesses shifted toward short-term
funding sources as bond yields rose,
increasing their bank borrowing and
commercial paper issuance, while cut
ting 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. By
contrast, 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 5Vi percent, about the
same as the increase of a year earlier
and a figure 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. M3
expanded about 1 Vi percent, well within
its 0 percent to 4 percent target range
and slightly more than its increase in
1993. M3 was buoyed by growth of
more than 7 percent in large time deposits, as banks turned to wholesale markets to fund credit expansion. For the
year, M2 rose only 1 percent, an
increase that was at the lower bound of
its 1 percent to 5 percent target 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 shortterm 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
Monetary Policy Reports, February
effect on Ml because yields on its
components either cannot adjust or
adjust quite slowly to shifts in market
rates. Ml growth last year was 2lA percent; it had been lO1/^ percent in
1993. Only continued strong growth
in currency, much of which likely reflected increased use abroad, supported
Ml.
Money and Debt Ranges for 1995
At its most recent meeting, the Federal
Open Market Committee (FOMC)
reaffirmed the 1995 growth ranges for
money and debt that were chosen on a
provisional basis last July. The money
ranges—1 percent to 5 percent for M2
and 0 percent to 4 percent for M3—are
consistent with the Committee members' expectations of a slowing of nominal income growth as the expansion
moves to a more sustainable pace but
also rest on the anticipation of further
increases in the velocities of these
aggregates. The velocity of M2 is likely
to be boosted by lagged effects of the
increases in short-term interest rates
during 1994 and early 1995 and possibly by increased flows from M2 deposits into long-term mutual funds, as investor concerns about capital market
volatility recede. The M2 range also
provides an indication of the longer-run
growth that could be expected under
Ranges for Growth of Monetary
and Debt Aggregates
Percent
Aggregate
M2
M3
Debt
1993
1994
1995
1-5
0_4
4-8
1-5
0_4
4-8
1-5
0-4
3-7
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.
37
conditions of reasonable price stability
if that aggregate's velocity resumes its
historical pattern of no long-term trend.
M3 velocity has been on a steep upward
path in recent years, but the rate of
increase might be expected to slow in
the near term. Part of the increase in M3
velocity in the early 1990s resulted from
weak growth of bank credit, in part
reflecting substantial loan losses and
consequent capital impairment, and the
contraction of the thrift sector as failed
institutions were liquidated. However,
the recent strength in bank credit and the
end of the contraction in thrift sector
credit suggest that M3 growth could
pick up, perhaps appreciably, and its
velocity could begin to level out. The
resumption of a more normal relationship between M3 and nominal income
might call for a technical adjustment of
the target range for M3 at mid-year or in
1996.
The monitoring range for growth in
the debt aggregate in 1995 is 3 percent
to 7 percent. This range is 1 percentage
point lower than the monitoring range in
1994, reflecting the more moderate path
anticipated for expansion in nominal
spending and borrowing. Private-sector
debt growth will likely remain fairly
strong in the coming year, boosted by
substantial capital investment as well as
merger and acquisition activity. Credit
availability is unlikely to constrain
private-sector borrowing, as banks continue to be eager to lend and as quality
spreads in financial markets remain
relatively narrow. The outlook for the
federal deficit suggests that Treasury
borrowing will be comparable to that in
1994.
The monetary and debt aggregates
will continue to be among the variables
monitored by the Committee to inform
its policy deliberations. Given the uncertainties about the behavior of the velocities of the aggregates, however, the
38
82nd Annual Report, 1995
Committee will also need to continue
assessing a wide variety of other financial and economic indicators.
Economic Projections for 1995
The members of the Board of Governors
and the Reserve Bank presidents, all of
whom participate in the deliberations of
the Federal Open Market Committee,
expect the economy to settle into a pattern of more moderate expansion in
1995, after a burst of growth that has
brought rates of resource utilization to
the highest levels since the latter part of
the 1980s. Most of the Board members
and Reserve Bank presidents expect the
rise in real GDP over the four quarters
of 1995 to be in a range of 2 percent to
3 percent.
Effects of the past year's increases
in interest rates probably will show
through more strongly in the coming
year, reflecting the typical lags between
Federal Reserve policy actions and
changes in the pace of economic growth.
Residential building, especially of
single-family units, is the part of the
economy in which those effects are
likely to emerge earliest and stand out
most clearly, but reactions to the higher
rates probably will be showing up in
other interest-sensitive sectors as well.
Other influences also will be working
to moderate the rate of growth. For
example, large increases in real outlays
for consumer durables over the past
three years, partly financed in recent
quarters by unsustainably rapid growth
in the volume of consumer credit, probably have exhausted most of the pent-up
demand that had accumulated when the
economy was sluggish early in the
1990s. Similarly, business investment
in new equipment has been rising
extremely rapidly for some time and has
moved to quite a high level; businesses
likely will be shifting to more moderate
rates of spending growth before too
long. Inventory investment seems likely
to moderate as well, as sustained additions to stocks at the pace of recent
quarters would almost surely generate
an unwanted backup of inventories at
some point.
In other areas, however, increased
strength may be forthcoming. Nonresidential construction, which often tends
to lag other sectors of the economy over
the course of the business cycle, now
appears to be picking up steam. In
addition, net exports may be a less
Economic Projections for 1995
Percent
Federal Reserve governors
and Reserve Bank presidents
Administration
Measure
Range
Change, fourth quarter
to fourth quarter'
Nominal GDP
Real GDP
Consumer price index2
43/4-6'/2
2-3 VA
23/4-33/4
Average level,
fourth quarter
Unemployment rate 3
5'/4-6
1. Change from average for fourth quarter of preceding year to average for fourth quarter of 1995.
2. All urban consumers.
Central
tendency
5-6
2-3
3-3 Vi
About 5'/2
5.4
2.4
3.2
5.5-5.8
3. Civilian labor force. Figures for the Administration
are annual averages.
Monetary Policy Reports, February
negative factor in coming quarters than
they were in 1994. Many foreign industrial economies entered the new year
with considerable forward momentum; that should keep real exports of
goods and services on a solid uptrend,
even allowing for lower exports to
Mexico as a consequence of the peso's
devaluation and the likelihood of little
or no growth in that country in 1995.
Imports, meanwhile, should begin to
slow as growth of demand in this country eases.
The Board members and Reserve
Bank presidents expect that output
growth of the magnitude they anticipate
will be accompanied by moderate
increases in employment and little
change in the unemployment rate. Forecasts of the unemployment rate for the
fourth quarter of 1995 are tightly clustered around 5Vi percent.
An especially encouraging development in 1994 was that inflation remained
relatively quiescent even as the economy moved to high rates of resource
utilization. However, the costs of materials and components have been rising
rapidly, squeezing profit margins in
some sectors, and anecdotal reports of
pressures on wages and finished goods
prices have proliferated in recent
months; increases in average hourly
earnings and consumer prices picked up
in January. Assessing the prospects,
members of the Board of Governors and
the Reserve Bank presidents think that
the most likely outcome for this year is
that inflation will run somewhat higher
than in 1994. Such an outcome would
be consistent with patterns of price
change during earlier periods when the
economy was operating at levels of
resource utilization like those seen
recently. The central tendency of the
Federal Reserve officials' CPI forecasts,
measured in terms of the change from
the final quarter of 1994 to the final
39
quarter of 1995, spans a range of 3 percent to 3 V2 percent.
The economic prospects anticipated
by the governors and Reserve Bank
presidents for 1995 appear to be closely
in line with those of the Administration.
The Administration's forecasts of real
GDP growth and inflation are in the
middle of the Federal Reserve's central
tendency ranges, and the Federal
Reserve forecasts of the unemployment
rate are centered near the low end of the
annual range that was published in the
Economic Report of the President.
Over the coming year, the Federal
Reserve will seek to foster continued
economic expansion while avoiding the
provision of so much liquidity that the
expected near-term step-up in inflation
develops sustained momentum. 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 ahead, the challenge
will be to preserve and extend this
progress, given that the Federal Reserve
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.
40
82nd Annual Report, 1995
The Performance of the Economy
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 nearly
6 percent, and the number of jobs on
nonfarm payrolls increased about
3V2 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 has provided states
and localities with a stronger revenue
base, many of these jurisdictions are
striving to hold spending in check; a
number of states have chosen 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 15 percent in real terms during the
year. Meanwhile, growth of real exports
of goods and services picked up noticeably, with gains cumulating to about
10 percent over the year. Foreign economies strengthened in 1994, and the price
competitiveness of this country's products in world markets was aided by a
subdued rate of rise in production costs
and a somewhat lower exchange value
of the U.S. dollar.
Labor and product markets tightened
in 1994. After ticking up in January of
last year in conjunction with the introduction of a new labor market survey,
the civilian unemployment rate fell
sharply over the remainder of the year,
to 5.4 percent in December. The level of
the unemployment rate in January of this
year—5.7 percent—was a full percentage point below that of a year earlier.
In manufacturing, gains in production
exceeded the growth of capacity by a
sizable margin during 1994, and the rate
of capacity utilization climbed nearly
3 percentage points. Its level in re recent
months has been essentially in line with
the highest level achieved during the
economic expansion of the 1980s.
Monetary Policy Reports, February
Inflation pressures picked up in some
markets in 1994. Prices of raw industrial
commodities rose even more rapidly
than in 1993, and price increases for
intermediate materials
accelerated
sharply, especially after midyear. However, the inflation impulse in these
markets did not carry through with any
visible force to the consumer level,
probably because unit labor costs, which
make up by far the largest part of value
added in production and marketing,
continued to rise at a modest rate. The
employment cost index of hourly compensation in private nonfarm industries
actually slowed noticeably from the
pace of 1993, and productivity gains in
1994 held close to the pace of the previous year. As for retail prices, 1994 was
the fourth year in a row in which the
rise in the total CPI has been around
3 percent. The CPI excluding food and
energy rose just 2.8 percent over the
four quarters of 1994, after an increase
of 3.1 percent in 1993; the rate of rise in
this index, which is widely used as an
indicator of underlying inflation trends,
fell almost half from 1990 to 1994.
The Household Sector
Real personal consumption expenditures
advanced nearly 3V2 percent over the
four quarters of 1994, about in line with
the average pace of the two previous
years. Support for the rise in spending
came from rapid income growth, and,
according to surveys, sharp increases in
consumer confidence. Outlays for durable goods continued to rise especially
rapidly, seemingly little affected by
rising interest rates. Nor did spending
appear to be much affected, in the aggregate, by poor performance of the stock
and bond markets, which cut into the
real value of household assets. Credit
generally was readily available during
1994, and growth of consumer install
41
ment debt picked up substantially, to a
pace comparable with some of the larger
increases that were observed during the
expansions of the 1970s and 1980s.
Real consumer expenditures for
durable goods increased about 8 percent
in 1994, bringing the cumulative rise in
these outlays over the past three years to
nearly 30 percent. The stock of durable
goods that households wish to hold
apparently continued to rise quite rapidly in 1994, and at least some households probably were still making up for
purchases that had been put off earlier in
the 1990s when the economy was sluggish and concerns about job prospects
were widespread. Real expenditures for
motor vehicles moved up an additional
3 percent over the four quarters of 1994,
after gains of about 9 percent in each of
the two preceding years; increases in
sales of vehicles in 1994 might have
been a bit stronger still but for capacity
constraints and various supply disruptions that sometimes limited the availability of certain models. Real outlays
for durable goods other than motor
vehicles rose about W/i percent over
the four quarters of 1994, a pickup 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 3 percent over
the year, a pickup from the subdued rate
of growth recorded in the previous year
and, for this category, a larger-thanaverage advance by historical standards.
By contrast, real expenditures for services increased roughly 2lA percent, a
slightly smaller gain than that of 1993;
growth of outlays for services was held
down, to some degree, by a decline in
42
82nd Annual Report, 1995
real outlays for energy, as warm weather
late in 1994 reduced the amount of fuel
needed for heating.
Real disposable personal income rose
4lA percent during 1994. Except for a
couple of occasions in previous years
when income growth was boosted temporarily by special factors, the rise 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
to both current and 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. Surveys taken early this year indicate that confidence remains high.
In contrast to most other indicators
for the household sector of the economy,
household balance sheets—which had
strengthened appreciably in previous
years—showed no further improvement
in 1994. According to preliminary data,
the aggregate net worth of households
appears to have recorded a relatively
small increase in nominal terms over
the year, and, in real terms, net worth
probably declined slightly. Household
assets rose only moderately in nominal terms, and the growth of nominal
liabilities picked up somewhat, as a
result of the sharp increase in use of
consumer credit. Early this year, stock
and bond prices have risen, on net, giving some renewed lift to household
wealth.
With personal income growing faster
than net worth during 1994, the ratio of
wealth to income fell over the course of
the year. In the past, declines in this
ratio sometimes have prompted households to boost the proportion of current
income that is saved, in an attempt
to restore wealth to more desirable
levels, and this same tendency may
have been at work, to some extent, in
1994. After dipping in the first quarter
of the year to the lowest level of the
current expansion, the personal saving
rate rose a full percentage point over
the remainder of the year, to a fourthquarter level of 4.6 percent. Even then,
however, the saving rate remained quite
low by historical standards. Rising levels of income and employment and
increased confidence in the outlook apparently convinced consumers to push
ahead with increases in outlays, most
notably those on consumer durables.
In addition, although improvement in
household balance sheets apparently
flagged, signs of outright stress in
household financial conditions were
not much in evidence: Delinquency
rates on mortgages and other house-
Monetary Policy Reports, February
hold loans generally remained quite
low relative to their historical ranges.
Residential investment held up
remarkably well in 1994 in the face of
sharp increases in mortgage interest
rates. Preliminary data indicate that, in
real terms, these investment outlays
were up about 2 percent, on net, over the
four quarters of the year, after gains of
17 percent and 8 percent, respectively,
in 1992 and 1993. Although starts and
sales of single-family houses fell back
from the exceptionally high peaks that
were reached briefly in late 1993, they
remained at elevated levels. In total,
1.20 million single-family units were
started in 1994, topping, very slightly,
the highest annual total of the 1980s.
Sales of existing homes were about the
same as the previous annual peak, set in
1978, and although sales of new homes
remained well short of previous highs,
their annual total was closely in line
with the brisk pace of 1993. Only in the
past month or so have indications of a
weakening in housing activity started to
show up more consistently in the incoming data.
Declines in the starts and sales of
single-family houses in early 1994 basically reversed the huge gains of late
1993. Whatever tendency there may
have been for these indicators to exhibit
at least a temporary setback after a
period of unusual strength was probably
reinforced by the initial reactions of
builders and homebuyers to increases
in mortgage interest rates that had begun
in the final quarter of 1993. Exceptionally severe winter weather in the
Northeast and Midwest early in 1994,
coming on the heels of favorable conditions in late 1993, probably also helped
to account for the sharpness of the
downturn. In any event, starts of singlefamily homes ticked back up a bit in
the second quarter of the year, sales of
existing homes flattened out, and the
43
rate of decline in sales of new homes
slowed.
In the second half of the year, the
signals were mixed: Sales of existing
homes trended down at a moderate pace
during this period; however, singlefamily starts and sales of new singlefamily homes changed little, on net,
from the second quarter to the fourth
quarter. 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 the second half
of the year. 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.
Late in 1994 and in early 1995, a
softer tone seems to have taken hold in
key indicators of single-family housing
activity. Sales of new homes tailed off
toward the end of last year, and the ratio
of the number of unsold homes to the
number of sales, which had turned up
early in 1994, continued to rise. The
ratio in December was slightly to the
high side of the long-run average for
this series. Starts of new single-family
houses, which had increased in November and December, fell sharply in January, to a level noticeably below the
lower bound of the range of monthly
readings reported during 1994.
Various measures of house prices
showed small-to-moderate increases in
1994. The median transaction prices of
new and existing homes that were sold
in the first half of the year were roughly
3!/2 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.
44
82nd Annual Report, 1995
After mid-year, the four-quarter changes
in 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 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. Reauthorization
in August 1993 of a tax credit on lowincome 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 1994
in most of the economic indicators for
the business sector of the economy. Real
output of nonfarm businesses increased
about 414 percent over the four quarters of the year, nearly matching the
large gain of 1993. 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: Investment expenditures continued to be financed predominantly with internal funds, and
signs of financial stress were largely
absent.
Industry entered 1994 with considerable momentum, and expansion was
maintained at a rapid pace throughout
the year. Industrial production rose
nearly 6 percent over the four quarters
of 1994, a rate of expansion 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 industrial sector also appears
to have had a strong start in 1995, as
industrial production rose 0.4 percent in
January.
The rate of capacity utilization in
industry increased about 2 V2 percentage
points over the twelve months of 1994.
In manufacturing, the operating rate rose
about 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 small
margins, the peaks of the late 1970s and
late 1980s.
After rising 23 V2 percent over the four
quarters of 1993, corporate profits
increased another 4 percent over the first
three quarters of 1994. The profits
earned by nonfinancial corporations
from their domestic operations increased
Monetary Policy Reports, February
about IV2 percent over the first three
quarters of 1994, after a gain of
21 Vi percent in 1993. Although the 1994
gain in these profits was 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 that
this measure of the profit share has been
since the late 1970s. A shift in the
capital structure of corporations toward
reduced reliance on debt, as well as
cyclical recovery of the economy, has
helped to push the profit share to this
high level. In contrast to the experience
of nonfinancial corporations, the profits
of private financial institutions from
their domestic operations fell about
7 percent on net 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
13 percent in real terms over the four
quarters of 1994, after a gain of 16 percent during 1993. Outlays 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 18V2 percent over the
four quarters of 1994. With the gains
of 1994 coming on the heels of big
increases in each of the two previous
years, annual business outlays for vehicles reached a level about 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
45
terms. Business purchases of industrial
equipment advanced about 13 percent
during 1994, one of the larger gains of
the past two decades. By contrast, commercial aircraft once again was a notable
area of weakness; the investment cycle
in that sector has been sharply out of
phase with those of most other industries, owing to persistent excess capacity
and poor profitability in the airline
business.
Business investment in nonresidential
structures rose about 4 percent during
1994, after an increase of IV2 percent in
1993 and declines in each of the three
years preceding 1993. Investment in
industrial structures rose for the first
time since 1990, more than likely a
response to high—and rising—rates of
capacity utilization. Investment in office
buildings also turned 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.
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
46
82nd Annual Report, 1995
substantial. Still unclear is the degree to
which these increases in the capital
stock will ultimately translate into
higher rates of increase in output per
worker and faster rates of increase 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
picked up 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
usually were able to obtain goods
quickly 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 larger
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 supplies became
more difficult to obtain on a timely
basis. 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
quarter-century.
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 Government Sector
Federal purchases of goods and services, the part of federal spending that is
included in GDP, fell 6.2 percent in real
terms over the four quarters of 1994.
Real outlays for defense remained on a
sharp downtrend, and nondefense outlays, which had risen rapidly early in the
1990s, declined moderately for a second
year.
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 per-
Monetary Policy Reports, February
centage point less than that of nominal
GDP. Outlays for Medicaid slowed as
well, but the rate of rise in those expenditures continued to exceed the growth
of nominal GDP by a large margin.
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 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
governments have responded to these
developments by cutting taxes, in most
cases by small amounts. Effective tax
rates of state and local governments
47
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.
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
1Vi percent in real terms over the four
quarters of 1994, a gain that was roughly
in line with the growth of state and local
employment over that period. Construction outlays declined slightly in real
terms during 1994, as gains over the
final three quarters of the year were not
sufficient to offset a first-quarter 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
48
82nd Annual Report, 1995
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.
terms against the currencies of the G-10
countries, but it has moved up in terms
of the Mexican peso.
Growth of real GDP in the major
foreign industrial countries rebounded
sharply during 1994, significantly
exceeding the pace of recovery widely
expected at the start of the year. In the
United Kingdom and Canada, where
recovery was already well established,
growth continued to be vigorous. In
Germany, France, and other continental
European countries, where activity had
been sluggish during 1993, strong
expansion of real GDP resumed and
strengthened as the year progressed.
Recovery was evident in Japan as
well, but the pace of expansion there
remained somewhat subdued relative to
that of the other industrial countries.
Although most of these economies
clearly had moved past the troughs of
their recessions, considerable slack
remained. As a result, consumer price
inflation remained low and, in some
cases, fell further. On average, in the ten
major foreign industrial countries, consumer prices rose 2 percent during the
year, even less than the price increase in
The External Sector
the United States.
When adjusted for differing rates of
Economic growth in the major develincrease in consumer prices, the trade- oping countries in 1994 continued at
weighted average foreign exchange about the strong pace of 1993. In Asia,
value of the U.S. dollar declined 5Vi per- the newly industrializing economies
cent against the currencies of the other grew rapidly, as external demand was
G-10 countries in 1994. This deprecia- sustained by lagged effects of depreciation was slightly smaller than the almost tion of their currencies against the yen
6V2 percent nominal depreciation of the and by recovery in the industrial coundollar, as U.S. inflation exceeded foreign tries. Growth in China, although still
inflation by a small amount. An index quite rapid, was somewhat slower than
of exchange rates that also includes the that in 1992-93, as credit conditions
currencies of several of the major U.S. were tightened somewhat further and
trading partners in Latin America and various controls were imposed to damp
East Asia showed about the same degree demand.
of real depreciation as did the index for
In Mexico, real GDP growth rose
the currencies of the G-10 countries. In markedly during the second and third
the first few weeks of 1995, the dollar quarters of 1994 from its near-zero rate
has weakened, on balance, in nominal in 1993, in part because of fiscal stimu-
Monetary Policy Reports, February
lus. However, the economic policy program put in place at the end of the year
in response to the peso crisis is likely to
restrain growth once again in the coming year. The Mexican macroeconomic
stabilization program is designed to
maintain wage restraint, reduce government spending and development bank
lending, and result in significant improvement in the current account deficit
in 1995. The program includes guidelines on increases in wages, guidelines
on increases in final energy product
prices to consumers and to industry, net
cuts in public expenditures, and a reduction of lending by development banks.
Mexico has committed to maintain the
current floating exchange rate regime,
and the Bank of Mexico has agreed to
restrain the growth of money. Structural
reform measures include continued
privatization and lessened restrictions
on foreign investment. Further measures could be required if inflation and
the exchange rate do not respond as
projected.
The nominal U.S. trade deficit in
goods and services increased to about
$110 billion in 1994, compared with
$75 billion in 1993. Imports grew
noticeably faster than exports, as U.S.
growth about equaled that of U.S. trading partners and as the lagged effects
of dollar appreciation during 1993 continued to be felt. The current account
deficit averaged about $150 billion at an
annual rate over the first three quarters.
Net investment income moved from a
small positive to a moderately negative
figure in 1994, reflecting recovery of
foreign earnings on direct investment in
the United States and the effects of
higher interest rates on high and rising
U.S. net external indebtedness.
Based on initial estimates for the
fourth quarter, exports of goods and services grew 10 percent in real terms during 1994. Computer exports continued
49
to rise rapidly in real terms, about
30 percent for the year; this gain contributed significantly to the double-digit
growth in total exports. After declining
in 1993, agricultural exports bounced
back last year; the much-improved harvest of 1994 eased supply constraints
that previously had been limiting shipments of farm products. Other categories of merchandise exports averaged
more than 8 percent real growth during
the year, as the pace of activity in the
economies of U.S. trading partners
improved significantly. Geographically,
the increase in U.S. merchandise exports
was accounted for by increased shipments both to developing countries in
Latin America and Asia and to Canada
and Japan.
Imports of goods and services rose
about 15 percent in real terms over the
four quarters of 1994, reflecting the vigorous growth of U.S. income during the
year. Imports of computers continued to
expand extremely rapidly in real terms.
Of the other import categories, imports
of machinery and automotive products
were particularly buoyant. Import prices
rose about 4 percent in 1994, influenced
by depreciation of the U.S. dollar,
increases in world commodity prices,
and a rebound in oil prices, which had
declined in 1993 and early 1994.
In the first three quarters of 1994,
recorded net capital inflows were substantially larger than those of 1993, an
increase that coincided not only with
the growing current account deficit, but
also with a sharp swing in unrecorded
transactions in the U.S. international
accounts, from a positive figure in 1993
to a negative one in the first three quarters of 1994.l
1. In effect, recorded net capital inflows in the
first three quarters of 1994 were larger than necessary to balance the rising current account deficit.
Moreover, outflows of currency to foreigners, an
item that is not reflected in recorded transactions
50
82nd Annual Report, 1995
Among the recorded capital flows,
increases in foreign official assets in the
United States were substantial in 1994
but were somewhat smaller than in
1993. In particular, the large reserve
accumulations in 1993 by certain developing countries in Latin America experiencing massive private capital inflows
were not repeated in 1994.
U.S. net purchases of foreign securities, particularly bonds, fell sharply from
record 1993 levels. Private foreign net
purchases of U.S. securities also fell, but
only slightly. Rising interest rates on
bonds denominated in dollars and many
other major currencies produced capital
losses for U.S. holders of long-term
bonds and resulted in flows out of U.S.
global bond funds. In the first three
quarters of 1994, U.S. investors made
heavy net purchases of stocks in Japan;
Japan alone accounted for more than
one-third of all U.S. net foreign stock
purchases. In developing countries,
those that received the largest net equity
inflows from U.S. investors in 1993
(Hong Kong, Mexico, Argentina, Brazil, and Singapore) were less favored by
investors in 1994, while interest picked
up in a wide assortment of other developing countries, including South Korea,
Chile, Indonesia, China, India, and Peru.
The first three quarters of 1994 also
witnessed a revival of foreign direct
investment in the United States while
U.S. direct investment abroad remained
at near-record levels. The direct investment inflow was swelled by takeovers
of U.S. companies and by the revival of
profits and reinvested earnings reported
by affiliates of foreign companies in the
United States.
Labor Markets
Employment rose substantially in 1994.
The total number of jobs in the nonfarm
sector of the economy increased 3.5 million over the twelve months ended in
December, after a gain of 2.3 million
during 1993.2 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 3.2 million,
the largest gain since 1984. Increases in
employment at nonfarm establishments
were sizable in each quarter of 1994. A
further gain in payroll employment,
smaller than the average increase of the
past year, was reported in January of
this year; however, total labor input rose
considerably faster than employment in
January as the workweek lengthened.
Producers of goods boosted employment more than half a million in 1994.
The job count in construction increased
about 300,000 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 275,000 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
and, therefore, is a part of unrecorded net inflows
in the international accounts, increased substantially in 1994, suggesting that the other unrecorded outflows of capital may have been even
larger than the published data on errors and omissions indicate.
2. 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 this summer.
The revision may lead to larger estimates of job
growth in both 1993 and 1994.
Monetary Policy Reports, February
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' 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 23A million
during 1994, after a gain of 2 million in
1993. The number of jobs in retail trade
increased about 800,000 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 house
51
holds. 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 increased last month,
to 5.7 percent, but was still a full percentage point below that of a year earlier.3 Appreciable net declines in unemployment rates have been reported over
the past year for nearly all occupational
and demographic groups.
Data on the reasons why individuals
are unemployed seem to be 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
has declined sharply, on net, over the
past year. 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, has moved back toward the
lows of the late 1980s. Much of the
decline in the number of job losers this
past year has been 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
3. Research undertaken 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 last 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.
52
82nd Annual Report, 1995
unable to find work) has also declined
over the past year. 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
employment but have not yet found it—
picked up a bit in the second half of
1994 and in early 1995. However, even
with these increases, 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.4
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
4. Whether even this small degree of improvement in the productivity trend will stand up
through future revisions of the data is not clear.
For example, among the many difficult issues that
are involved in the measurement of productivity is
the choice of an appropriate set of prices to be
used in 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 a 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 less weight being given to office and
computing equipment and, in turn, a smaller contribution from this rapidly growing category to
growth of real output. All else equal, the growth of
productivity would also be negatively affected by
switching to the prices of a more recent year.
Monetary Policy Reports, February
moved up for a time to around 5 percent
a year.
Unit labor costs in the nonfarm business sector rose 2.0 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
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 23A percent over the four quarters
of 1994, after increasing slightly more
than 3 percent in 1993. The producer
price index for finished goods increased
1 lA percent during 1994, after edging up
just lA 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.
Price data for January of this year were
less favorable than those of 1994: The
total CPI moved up 0.3 percent last
month, and the CPI excluding food and
energy jumped 0.4 percent, the largest
monthly rise in that measure since late
1992.
The pickup of price increases last year
was confined largely to markets for
53
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. Prices of imports also picked
up somewhat, 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.
Early this year, materials prices continued to surge. The producer price
index for crude materials other than food
and energy jumped 3 percent in January,
to a level about \ll/i percent above that
of a year earlier. Further along in the
production chain, the PPI for intermediate materials other than food and energy
rose 1 percent last month; the index has
moved up 6 percent during the past
twelve months, the largest such rise
since the late 1980s, when the twelvemonth rate of increase in intermediate
materials prices topped out at slightly
more than 7 percent. By contrast, the
PPI for finished goods other than food
and energy again showed only a modest
increase in January. Since mid-January,
the prices of a number of industrial commodities have backed away from earlier
highs, but, given the volatility that these
prices sometimes exhibit, the experience
of a few weeks may not signal the emergence of a new trend.
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
54
82nd Annual Report, 1995
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 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. In January
1995, the CPI for goods other than food
and energy jumped 0.4 percent; this rise
followed a string of months in which the
index had increased very slowly.
The CPI for non-energy services, a
category that accounts for about half of
the total CPI, rose slightly less than
3l/i percent over the four quarters of
1994, after an increase of about 33A 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. Like
the prices of goods, the CPI for nonenergy services accelerated sharply in
January of this year.
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 2l/z 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 domesti
cally 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 snowed only small
to moderate advances in 1994: The
increase in the CPI for prepared foods
amounted to about 2Vi 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. Fresh vegetable prices, which
tend to be especially sensitive to
short-run supply developments, took a
jump toward year-end after Hurricane
Gordon had damaged crops in Florida,
but the run-up was partly reversed last
month.
The CPI for energy rose about
IV2 percent during 1994, after edging
down V2 percent in 1993. Gasoline
prices increased 4V2 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
Monetary Policy Reports, February
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
2lA percent lower than that of a year
earlier. Electricity prices rose only
slightly during the year. In January of
this year, energy prices were up moderately in the CPI.
With the favorable inflation performance of the past year, the average rate
of rise in the total CPI since the business
cycle trough in early 1991 has been
2.9 percent at an annual rate. Excluding
food and energy, the rate of rise has
been 3.3 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.
55
Monetary and Financial
Developments
With the economy generally strong,
financial markets in 1994 and early 1995
have been 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 seven occasions. 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
by a cumulative 3 percentage points
between early February 1994 and early
February 1995. Other short-term rates
rose by similar amounts. Over this span,
the Board of Governors hiked the discount rate on four occasions by a total of
2lA percentage points.
Longer-term rates increased \Vi percentage points to 3 percentage points on
balance since January 1994, with the
largest increases posted at intermediate
maturities. In addition to the policy
actions, these rates were boosted
through much of 1994 by greater-thanexpected 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. Since late last
fall, however, the extent of Federal
Reserve actions, along with incoming
data suggesting some moderation in the
pace of expansion, have calmed inflation fears and trimmed estimates of the
eventual rise in short-term interest rates.
As a consequence, longer-term rates
56
82nd Annual Report, 1995
have retraced 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, the tax-exempt securities market
dipped following the bankruptcy of
Orange County that resulted from
mounting losses in its investment fund,
but the effects, beyond those on the
fund's investors, 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
likely held down household mortgage
debt growth, in that the resulting decline
in refinancing activity limited the ability
of households to "cash out" some of
the equity in their homes. Higher rates
also encouraged households to shift to
adjustable-rate mortgages, which offered
lower initial interest costs. The debt
of all nonfinancial sectors increased
5lA percent in 1994, about the same
increase as in 1993, as the pickup in
business and 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 taxexempt 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 doubling of
loan growth was not reflected in significantly stronger expansion of the monetary aggregates. M3, which was boosted
by relatively heavy issuance of large
CDs, rose \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 1 percent over the year,
somewhat below its 13A percent pace in
1993. The increase in market interest
rates relative to rates on transaction
deposits slowed the growth of Ml to
just 2lA percent from the double-digit
increases posted in 1992 and 1993.
The foreign exchange value of the
dollar declined in terms of the other
G-10 currencies last year, even as the
U.S. economy expanded briskly and
interest rates rose. In part, the weakness
was the result of unexpectedly strong
growth abroad, especially in Europe,
where the recovery in many countries
was more rapid than had been anticipated. As a result, long-term interest
rates in many of the other G-10 countries increased by amounts similar to
rates in the United States. Heightened
concerns about inflation prospects in the
United States may also have contributed
to the weakness of the dollar. Indeed,
the dollar rebounded late in the fall
when tighter monetary policy evidently
eased those concerns. The dollar
declined, however, in early 1995 amid
the signs of slower U.S. growth and
Monetary Policy Reports, February
concerns about the implications for the
United States of turmoil in Mexican
financial markets.
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 policy stance throughout 1993. This stance was unusual so far
into the expansion phase of a business
cycle, but it was believed to be necessary because of a number of extraordinary factors that seemed to be inhibiting growth. These factors included
efforts by households, firms, and financial intermediaries to repair strained
balance sheets, business 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 last year suggested that much
of that momentum had likely carried
over into 1994. In the circumstances,
continued accommodative policy risked
pushing the demands on productive
resources to levels that ultimately would
be associated with increased inflation.
Consequently, the FOMC, 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 in policy stance would
minimize the risk of allowing inflation
57
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 lA percentage points. The May policy action was
accompanied by an increase of Vi percentage point in the discount rate, voted
by the Board of Governors.
Other interest rates moved up
between 1 percentage point and 2 percentage points as a result of these policy
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
58
82nd Annual Report, 1995
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 continued to expand significantly,
led by 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 Vi percentage point
in the discount rate, voted by the Board
of Governors, was allowed to show
through fully to the federal funds rate.
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 meeting in late September, 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
intermeeting period was 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, as
well as expectations of future policy
tightenings. Consequently, most market
interest rates rose appreciably between
Monetary Policy Reports, February
the September and November meetings,
with the largest increases occurring at
intermediate maturities. 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 Federal Reserve Board.
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. Long-term rates increased
initially, but in late November and
early December these rates more than
reversed the 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 additional tightenings might be required to slow growth to
a more sustainable pace. By the time of
the December meeting, rates on twoyear Treasury notes were only a little
below those on thirty-year Treasury
bonds, although both yields 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
59
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. Over the following
days and weeks, 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, owing to the lags in the
effects of monetary policy on the economy. As a result, the Committee decided
to take no further policy action at the
meeting, and to await 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
owing both to the usual year-end adjustments and to uncertainty about the
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
asymmetric directive pointing toward
further restraint.
In advance of the Committee meeting
at the end of January, broad measures of
inflation remained modest, although
anecdotal reports suggested that some
firms intended to raise prices early in the
new year. Incoming data on production
and employment continued to be upbeat,
with healthy growth reported in virtually all industries and regions. Some
indicators, however, raised the possibility of a slowing in the pace of the expansion. Nonetheless, output growth in the
fourth quarter was the fastest of the year,
60
82nd Annual Report, 1995
and the Committee felt that, with output
and employment at or even beyond estimates of their sustainable levels, the
risks of rising inflation were still considerable. As a result, the Board of Governors voted an increase of Vi percentage
point in the discount rate, and the Committee agreed to allow the increase to be
fully reflected in the federal funds rate.
Because it had been widely anticipated
in the financial markets, other interest
rates and the foreign exchange value of
the dollar were little affected by the
policy action. Interest rates turned down
subsequently, as additional information
on the economy seemed to reinforce
the possibility that a slowdown was in
process.
At the same meeting, the Committee
also formally adopted two practices that
had been followed on a provisional basis
during 1994. First, the Committee voted
to continue to announce any change in
the stance of policy on the day the decision is made. These announcements,
which had followed each of the policy
tightenings agreed to in 1994, are intended to minimize any confusion and
uncertainty about the stance of policy. In
addition, a public announcement ensures
that all financial market participants
have the same access to information
regarding changes in monetary policy.
Second, the Committee agreed to continue releasing the transcripts of Committee meetings with a five-year delay.
The published minutes of Committee
meetings, which are available soon after
the subsequent meeting, provide a relatively complete summary of the arguments presented and the reasons for a
policy choice. The transcripts provide
additional information, however, that
may be of use to those interested in the
details of the policy process. The Committee decided that a five-year delay
struck an appropriate balance between
the right of interested members of the
public to obtain this added detail and
the Committee's need to debate policy
issues openly and without the sort of
restraint that more rapid disclosure
might generate.
Credit and Money Flows in 1994
The debt of all nonfinancial sectors grew
5VA percent in 1994, somewhat below
the middle of its monitoring range of
4 percent to 8 percent, and about the
same increase as that of a ye^r earlier.
More rapid growth of private-sector debt
was offset by slower growth of publicsector debt. As long-term rates rose well
above their late 1993 lows, privatesector borrowing shifted toward shorterterm sources of funds. In part as a result
of this shift, financial intermediaries
Growth of Money and Debt
Percent
Measurement
period
Domestic
nonfinancial
debt
Ml
M2
M3
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
11.8
14.4
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
14.1
13.5
10.2
9.0
8.0
1990
1991
1992
1993
1994
4.2
7.9
14.3
10.5
2.3
4.0
2.9
2.0
1.7
1.0
1.7
1.2
.5
1.0
1.4
6.5
4.6
4.7
5.2
5.3
Quarter
(annual rate)3
1994:Q1
Q2
Q3
Q4
5.5
2.6
2.4
-1.2
1.8
1.7
.8
-.4
.6
1.3
2.0
1.7
5.3
5.6
4.4
5.5
Year1
1980
1981
1. From average for fourth quarter of preceding year to
average for fourth quarter of year indicated.
2. Adjusted for shift to NOW accounts in 1981.
3. From average for preceding quarter to average for
quarter indicated.
Monetary Policy Reports, February
supplied a larger share of new debt than
they had for several years. Much of the
depository credit growth 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 and in
the state and local government sectors
slowed last year. Growth of federal government debt was smaller because of the
narrowing of the federal budget deficit.
The outstanding volume 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.
Household debt growth increased
modestly 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 last
year, which may have led them to ease
terms and standards on consumer loans.
Indeed, spreads between consumer loan
rates and market rates narrowed significantly last year, 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
61
in mortgage debt because some households had taken the opportunity afforded
by refinancing to cash out a portion
of the equity in their properties. Higher
rates on fixed-rate mortgages also
induced many borrowers to shift to
adjustable-rate mortgages that 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
were of the adjustable-rate variety. The
shift to adjustable-rate mortgages and
the sluggish adjustment of consumer
loan rates mitigated the effect of higher
market interest rates on household debtservice 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 its peak five years
earlier. A decline in equity issuance, perhaps resulting from the lackluster performance of the stock market, may also
have boosted business borrowing. Business financing needs were strengthened
by increased spending on capital and
inventories, as well as merger and
acquisition activity. The total value of
mergers and acquisitions increased
substantially last year, and 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.
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
62
82nd Annual Report, 1995
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 posture 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 levels of other
securities holdings were boosted by
an accounting change.5 Much of this
growth was reversed later in the year,
however, as banks used sales of securities to fund loan growth. Reported securities growth was also damped by
declining securities prices.6
5. New Financial Accounting Standards Board
rules, effective at the start of the year, 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.
6. A Financial Accounting Standards Board
rule implemented at the start of the year required
each bank to divide its investment account securi
In 1994, thrift sector credit 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 thrift sector credit also likely
reflected the shift by households toward
adjustable-rate mortgages. Thrift institutions and banks find holding adjustablerate mortgages less risky than holding
fixed-rate mortgages, and so adjustablerate loans are less likely to be securitized and sold.
With bank credit growth picking up
and thrift sector credit rising, growth
of depository credit in 1994 nearly
matched that of total nonfinancial debt.
Thus, the share of credit provided by
these intermediaries stabilized last year
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 non-deposit 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 turned, in part, to large time
deposits to fund asset growth. M3
expanded about V/z percent, well above
the lower bound of its 0 percent to 4 percent annual range and a somewhat larger
increase than that in 1993. Growth in
large time deposits topped 7 percent for
the year, marking the first annual
increase in this component since 1989.
Much of the increase in large time
deposits was in senior bank notes, which
ties 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.
Monetary Policy Reports, February
are not subject to deposit insurance
premiums.
M2 grew 1 percent in 1994—the
lower bound of its annual range. The
slow growth reflected, in part, 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 higher retail
rates would have to be paid on existing
liquid deposits and on time deposits as
they were rolled over, as well as on any
new deposits. Increasing retail deposits
would also require higher advertising,
administrative, and deposit insurance
costs.
In contrast to the previous several
years, M2 behavior in 1994 was roughly
consistent with its long-run historical
relation with movements in nominal
income and opportunity costs as traditionally defined—that is, the difference
between rates on short-term instruments
(for example, Treasury bills) and those
Monthly Average Net 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
23,445
9,674
3,821
7,268
11,832
11,073
7,000
9,576
11,634
-1,399
Quarter
1994:Q1
Q2
Q3
Q4
17,438
10,128
9,826
1,306
13,744
10,935
11,166
8,447
3,694
-808
-1,340
-7,141
Measurement
period
NOTE. Gross sales of shares less redemptions.
SOURCE. Investment Company Institute.
63
offered on retail balances. This consistency suggests that, unlike the past few
years, the slow growth in M2 last year
was not the result of portfolio shifts
toward bond and equity mutual funds.
Indeed, the growth in M2 plus long-term
mutual funds ran slightly below the
1 percent pace of M2 growth. Net sales
of equity mutual funds continued at a
high level in 1994, although the pace of
sales slowed somewhat late in the year.
Equity fund sales 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, 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 last year,
and net noncompetitive tenders for Treasury notes also increased substantially.7
Consistent with its historical behavior, Ml growth slowed sharply last
year in response to widening differentials between market interest rates and
those offered on transaction deposits.
Ml expanded only 2lA percent—down
substantially from the double-digit
7. 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.
64
82nd Annual Report, 1995
increases recorded the previous two
years. Following the typical pattern,
demand deposits and OCDs were especially responsive to the rise in shortterm interest rates. On balance, demand
deposits edged up only x/i percent, compared with growth of YbxM percent in
1993, as higher market rates encouraged
deposit holders to economize on these
non-interest-earning assets. In addition,
the turnaround reflected the decline in
home mortgage refinancing activity last
year: Demand deposits had been boosted
in 1993 because prepayments of securitized mortgages were held primarily in
such deposits for a time before they
were distributed. The rates offered on
OCD accounts adjusted slowly to higher
market rates last year, encouraging
households to shift funds into higheryielding assets. OCD growth also was
depressed by the introduction of sweep
account programs 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.
In contrast to transaction deposits, the
currency component of Ml continued
to register strong growth last year.
Currency increased 10V4 percent, the
same rise as 1993 and close to the record increase in 1990. As has been the
case since 1990, much of the currency
growth appeared to reflect rapid expansion in U.S. currency circulating abroad.
Informal reports suggest that foreign
demand was particularly strong in 1994
in Russia and the other former Soviet
republics.
Foreign Exchange Developments
The trade-weighted foreign exchange
value of the dollar in terms of the other
G-10 currencies declined nearly 6!/2 percent on balance from December 1993
to December 1994. After displaying
some strength at the start of 1994, the
weighted-average foreign exchange
value of the dollar fell about 10 percent
from February through early November.
Although U.S. growth continued to be
stronger than expected, market perceptions about the strength of economic
activity in the other industrial countries
were also revised sharply higher as the
year progressed. These changed perceptions led market participants to raise
their expectations of market interest
rates abroad, which, together with
increased concerns over potential inflation pressures in the U.S. economy,
put downward pressure on the dollar
against most foreign currencies. The
dollar rebounded somewhat at the
end of the year as the greater-thanexpected tightening action by the Federal Reserve in November reassured
market participants that U.S. inflation
risks were being addressed. In early
1995, however, with U.S. growth
appearing to moderate and the turmoil
in Mexican financial markets raising
concerns about possible implications for
the United States, the dollar declined on
balance, nearly reaching its fall 1994
low.
Long-term interest rates in major foreign industrial countries generally rose
during the year. On average, yields on
foreign government issues with maturities of ten years increased 200 basis
points in the twelve months to December, about the same as in the United
States. In Japan, where the evidence for
a buoyant recovery remained somewhat
mixed, long-term rates rose less. In contrast to long-term rates, 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
about 300 basis points, and the United
Monetary Policy Reports, February
Kingdom, where they rose 100 basis
points. In both countries, official lending
rates were increased during the year to
contain inflation risks in the face of vigorous economic growth. During the first
few weeks of this year, foreign longterm rates on average rose slightly further, but they have since retraced most
of that rise.
During 1994 the dollar depreciated
8 percent in terms of the mark and
declined by similar amounts in terms of
the other currencies in the exchange rate
mechanism (ERM) of the European
Monetary System. The German economy expanded over the year, and the
growth of the targeted monetary aggregate, M3, remained above target until
the very end of the year. Market participants trimmed their expectations of
further declines in official Bundesbank
lending rates, and German long-term
interest rates rose. The dollar depreciated by lesser amounts in terms of sterling and the lira, both of which had been
withdrawn from the ERM in 1992. The
persistent strength of the U.K. recovery
raised concerns of renewed inflation
pressures there, and the political uncertainties in Italy and, to a lesser extent, in
the United Kingdom held back market
enthusiasm for the two currencies.
The dollar also depreciated about
8 percent in terms of the yen during the
year. At times, the dollar-yen rate fluctuated in response to developments in
U.S.-Japanese trade talks. The dollar
reached a historic low of 96.11 yen in
November and was very weak against
the German mark as well, and the Federal Reserve joined the U.S. Treasury in
intervention purchases of dollars against
yen and marks at that time. Subsequently, the dollar rebounded somewhat
in terms of the yen and European currencies. In early 1995 the dollar weakened further, especially against the
mark, in part because that currency
65
attracted funds from markets upset by
the peso crisis.
In contrast to its experience in terms
of the ERM currencies and the yen, the
dollar appreciated in terms of the Canadian dollar nearly 4lA percent during
1994. The relative weakness of the
Canadian currency appeared to reflect
pressures arising from the increases in
U.S. short-term rates, concerns over
the large fiscal deficits of the central
government and the provinces, and, at
times, perceived risks associated with
possible secession by Quebec. In the
first few weeks of 1995, the Canadian
dollar weakened further, as markets
apparently became more concerned
about the large outstanding Canadian
federal and provincial debt and the persistent federal government deficit. As a
result, market interest rates have risen
further, and the Bank of Canada has
moved up overnight rates several times,
including an increase to match the
upward shift in the U.S. federal funds
rate following the most recent FOMC
meeting. In response, the Canadian dollar strengthened but, more recently, has
given up some of these gains.
The dollar depreciated nearly 5 percent in 1994 against the currencies of
major U.S. trading partners in Latin
America and East Asia when adjusted
for relative changes in consumer prices.
The dollar appreciated sharply against
the Mexican peso, however, first in
March and more significantly during the
final two weeks of the year and in early
1995.
In response to continuing downward
pressures on the peso and sizable losses
of international reserves over the course
of 1994, the Bank of Mexico announced
on December 20 a 13 percent change in
the lower bound of the range that it
unilaterally had set for the peso-dollar
exchange rate. The peso immediately
fell to the new lower limit, from about
66
82nd Annual Report, 1995
3.5 to 4 pesos per dollar, and reserve
losses continued. As a consequence, the
Bank of Mexico on December 22 permitted the peso to float and activated the
North American Swap Facility, which
provides up to $6 billion of short-term
funds to the Bank of Mexico, evenly
split between the Federal Reserve and
the Treasury, and an additional C$1 billion from the Bank of Canada.
During the following days the peso
remained volatile on exchange markets,
fluctuating in a range between 5 and
nearly 6 pesos to the dollar. On January 2 a package was announced totaling
$18 billion in international financial support for Mexico, including an increase
from $6 billion to $9 billion in the swap
facilities extended by the United States
(again split between the Federal Reserve
and the Treasury), an additional
C$500 million in the swap facility of the
Bank of Canada, $5 billion in credit
supported by other central banks acting
through the Bank for International
Settlements (BIS), and $3 billion in
credit from commercial banks. On January 6 the IMF began talks with Mexico
on a standby arrangement in support
of Mexico's economic reform program,
and on January 12, against the background of increased turbulence in international capital markets, the Clinton
Administration, with the support of the
bipartisan leadership of the Congress,
announced a proposal to provide
$40 billion in guarantees on securities to
be issued by Mexico in an effort to
restore investor confidence.
Subsequently, the peso weakened
further as support within the Congress
for the guarantee proposal appeared to
decline. The Mexican stock market also
continued to slide, and short-term peso
interest rates rose sharply. In late January the peso reached a new low of
6.55 pesos to the dollar amid signs that
problems in Mexico were having effects
on financial markets in other countries.
In particular, equity markets in Argentina and Brazil had declined in volatile trading. More generally, investors
appeared to be retreating from investments in a variety of emerging market
economies, some of which have substantial current account deficits, while
others maintain fixed exchange rates that
pose the risk of becoming overvalued.
On January 31 the Administration withdrew the request for approval of the
guarantee program and, with the support
of the bipartisan leadership of the Congress, announced a new plan to provide
$20 billion to support financial stabilization in Mexico using the resources of
the Exchange Stabilization Fund (ESF)
and, in the short run, the Federal
Reserve. On February 1 the Federal
Reserve's swap line with the Bank of
Mexico was increased further, to $6 billion, as part of this package. The package will consist of short-term swaps,
which will be provided by the Federal
Reserve and the ESF, and swaps with
maturities of three to five years and
securities guarantees with maturities of
five to ten years provided by the ESF.
Repayment will be assured from the proceeds of exports of Mexican oil. Additional multilateral support for Mexico
included an increase from $7.8 billion to
$17.8 billion in the funds provided by
the International Monetary Fund under a
standby arrangement that was approved
on February 1 and an increase from
$5 billion to $10 billion in the shortterm credit supported by the central
banks of a number of major industrial
countries acting through the BIS.
The peso rebounded during the week
following the announcement of the
January 31 program and, on net, has
since held most of that gain in volatile trading. Through mid-February, the
dollar on balance has appreciated
substantially against the peso since
Monetary Policy Reports, July
December 19, the day before the peso's
devaluation.
Report on July 19, 1995
Monetary Policy and
the Economic Outlook
for 1995 and 1996
During 1994, spending by U.S. households and businesses grew at an exceptionally rapid pace, and by the end of
the year, demands clearly were taxing
the productive capacity of the economy.
Pressures on resources were particularly
intense in sectors of manufacturing that
provide inputs for other producers, and
sharp increases in the prices of materials
and supplies signaled what could have
been the first stage of a broader inflationary process. A weakening of the dollar on foreign exchange markets as 1995
began heightened that risk. To damp
these inflationary pressures and foster
a sustainable economic expansion, the
Federal Open Market Committee in
February tightened policy somewhat,
extending the series of actions undertaken during 1994, and the Board of
Governors approved a V2 percentage
point increase in the discount rate.
The economy's growth began to moderate in the first quarter of 1995. Among
the factors contributing to the slowing
were the lagged effects of 1994's
increases in interest rates on housing
and other rate-sensitive sectors and the
impact on U.S. exports of the sharp contraction in Mexico's economy and fall
in the foreign exchange value of the
peso. As final sales moderated, businesses scaled back their desired inventory accumulation. In some key sectors,
the slackening in sales was greater than
anticipated, leaving firms with excess
inventories. As businesses took steps to
trim stocks, aggregate production decel
67
erated further in the second quarter and
was probably about flat, as measured
by real gross domestic product. The
inventory adjustment was especially
large in the motor vehicle sector, which
accounted for much of the downswing
in manufacturing activity in the spring.
Homebuilding also showed marked
weakness, in part because builders hesitated to start new projects until they
could work down stocks of unsold new
homes.
While output growth was stalling in
the first half of this year, the still-high
level of resource utilization of the
economy, as well as the effects of rapid
increases in materials prices, contributed to a pickup in inflation from
its 1994 pace. Nonetheless, by July it
appeared likely that pressures on
resources and hence on prices were in
the process of easing. Materials prices
were showing signs of softening, and
a period of greater stability in the
exchange value of the dollar suggested
that the rise of import prices might soon
slow. With the threat of future inflation
thus reduced, the FOMC elected to ease
the stance of policy slightly at its meeting in July.
The moderation in economic growth
and improvement in inflation prospects
over the first half of 1995 sparked a
considerable decline in market interest
rates. The greater likelihood of significant progress toward a balanced federal
budget also seemed to contribute to the
decrease in longer-term interest rates.
Intermediate- and long-term yields have
fallen 1 lA to PA percentage points since
year-end 1994, with the decline in
thirty-year fixed mortgage rates this year
reversing most of the increases registered since early 1994. Lower interest
rates, solid earnings growth, and prospects for sustained economic expansion
helped push most broad stock price
indexes to record highs.
68
82nd Annual Report, 1995
The drop in longer-term interest rates
in the United States contributed to
downward pressure on the foreign
exchange value of the dollar in 1995.
In terms of the currencies of the other
G-10 countries, the dollar has declined
IV2 percent on balance. Over the past
half-year, foreign long-term interest
rates have fallen significantly as growth
prospects abroad have weakened, but by
less than U.S. long-term interest rates. In
addition, the Mexican crisis was seen by
market participants as having adverse
implications for U.S. growth, especially exports, and it contributed to the
dollar's decline in terms of currencies
other than the peso in early 1995. With
the dollar at times under greater downward pressure than seemed justified
by fundamentals, the Federal Reserve,
acting on behalf of the Treasury and for
its own account, joined other central
banks in concerted intervention in
support of the currency on several
occasions in 1995. In recent weeks, the
dollar has fluctuated in a range somewhat above the lows reached in the
spring.
Despite the slower expansion of
nominal spending this year, net borrowing by households and businesses
remained substantial. In fact, total private credit flows strengthened, offsetting
slower growth of federal debt and an
outright decline in state and local government debt; as a result, total domestic
nonfinancial debt expanded at a 5l/i percent pace from the fourth quarter of
1994 through May, a little faster than in
1994. Credit supply conditions remained
quite favorable, with banks continuing
to ease terms and conditions of lending and with risk spreads in securities
markets persisting at quite low levels.
Household borrowing this year has been
a bit more subdued than in 1994 but still
appreciable. Nonfinancial businesses
have stepped up their borrowing consid
erably, a move reflecting a widening gap
between capital expenditures (including
inventory investment) and internally
generated funds, and also reflecting the
balance sheet restructuring associated
with stock repurchases and a surge
in merger and acquisition activity.
Although the decline in long-term interest rates this year has spurred a significant pickup in bond issuance and fixed
rate mortgage borrowing very recently,
the increase in credit this year has been
concentrated in short-term or floatingrate debt.
Depository institutions, as traditional
providers of short-term and floating-rate
credit, have enjoyed a sharp increase in
loan demand. To fund the growth of
their loan portfolios, banks and thrift
institutions pulled in more deposits,
providing a lift to growth of the broad
monetary aggregates. Indeed, M3 expanded at a 6VA percent pace from the
fourth quarter through June, slightly
exceeding the upper bound of its revised
annual range. In their usual fashion,
yields on small time deposits and money
market mutual funds have adjusted with
a lag to the declines in market interest
rates this year. Investors have responded
by shifting their portfolios toward these
assets, boosting M2 growth from the
fourth quarter through June to 3Vi percent at an annual rate. M2 velocity over
the first half of 1995 is estimated to have
held about steady, in marked contrast to
the rise in M2 velocity over the previous
five years.
Unlike the broad monetary aggregates, Ml has grown quite sluggishly
this year. Low interest returns on transaction deposits have encouraged households and businesses to move excess
balances into higher-yielding M2 assets
and also into market instruments. This
process has been amplified by the
expansion of retail sweep accounts
offered by a few banks that allow
Monetary Policy Reports, July
customers to hold a lower average
level of transaction balances. Currency
growth—although slower than the
double-digit pace of the last two years—
has remained strong, boosted again by
heavy foreign demands.
Money and Debt Ranges
for 1995 and 1996
In setting ranges for money and debt in
1995 and 1996, the Committee noted
that the velocities of the monetary
aggregates have been behaving more
in line with historical patterns than was
the case earlier in the decade. However, financial innovation, technological
change, and deregulation have blurred
distinctions among various financial
instruments that can serve as savings
vehicles and sources of credit. As a
consequence, considerable uncertainty
remains about the future relationships of
money and debt to the fundamental
objectives of monetary policy; the
Committee will thus continue to rely
primarily on a wide range of other information in determining the stance of
policy.
The Committee retained its current
range of 1 to 5 percent for M2 for 1995
and chose the same range for 1996. If
M2 velocity continues on a more normal
Ranges for Growth of Monetary
and Debt Aggregates
Percent
Aggregate
M2
M3
Debt
1994
1995
Provisional
for
1996
1-5
0-4
4-8
1-5
2-6'
3-7
1-5
2-6
3-7
NOTE. Change from average for fourth quarter of
preceding year to average for fourth quarter of year
indicated. Figures for debt of the domestic nonfinancial
sector are monitoring ranges.
1. As revised at the July 1995 FOMC meeting.
69
track, growth of M2 in the upper half of
this range in 1995 and near the upper
bound of the provisional range in 1996
would be consistent with the Committee's expectations for nominal income
growth. The existing range was retained
for next year in view of the lingering
uncertainties about the money-income
relationship and to serve as a benchmark
for the rate of growth of M2 that would
be expected under conditions of reasonable price stability and historical
velocity behavior. The Committee also
reaffirmed the 3-to-7 percent range for
the debt aggregate and carried this range
forward on a provisional basis for 1996,
concluding that debt growth within this
range would be expected to accompany
the moderate economic expansion it was
seeking to foster.
With regard to M3, the Committee
had noted in its February 1995 report
to the Congress that the depressed
growth of this aggregate in recent years
reflected the balance sheet adjustments
of banks and thrift institutions in response to the extraordinary strains they
experienced in the early 1990s. The
Committee observed that, as these institutions returned to health and intermediation resumed more normal patterns,
M3 growth could pick up appreciably
and the velocity of M3 might begin to
stabilize or even decline, as it had on
average over several decades before
1990. In the event, M3 has strengthened
considerably so far in 1995, apparently
for the reasons noted by the Committee in February. As a consequence, the
Committee made a technical adjustment
in its M3 range at the July meeting—to
2 to 6 percent for 1995—and carried
that range forward on a provisional basis
into 1996. The Committee stressed that
this change simply recognized the return
of historical financing patterns and bore
no implications for the underlying thrust
of monetary policy.
70
82nd Annual Report, 1995
Economic Projections
for 1995 and 1996
The members of the Board of Governors
and the Reserve Bank presidents, all of
whom participate in the deliberations of
the Federal Open Market Committee,
generally anticipate that, after a weak
second quarter, the economy will experience moderate growth in the second half
of 1995 and in 1996. For all of 1995,
this would produce growth that was
somewhat below forecasts made for the
February meeting. In line with these
expectations, the unemployment rate in
the second half of 1995 may move up
somewhat from its recent relatively low
level.
A number of factors should contribute to a pickup in demand and production over coming months. Lower
interest rates, in particular, likely will
directly stimulate spending on housing,
motor vehicles and consumer durables,
and business investment. Moreover,
increases in the value of bond and
stock portfolios that have accompanied
the decline in interest rates should
strengthen aggregate demand more generally. The strong competitive position
of the United States likely will bolster
net export growth on balance over the
remainder of 1995. To be sure, the level
of U.S. exports to Mexico probably
will remain depressed for some time,
but Mexico's external adjustment has
already been substantial and further
declines in U.S. export demands from
this source are likely to be less severe
than in the first half of 1995. Finally, the
anticipated pickup in spending will help
businesses work off excess inventories
more rapidly and reduce the need for
further production cutbacks to bring
inventories back in line with final sales.
The Board members and the Reserve
Bank presidents generally expect the
rise in the consumer price index over
the four quarters of 1995 to end up at
Economic Projections for 1995 and 1996
Percent
Federal Reserve governors
and Reserve Bank presidents
Administration
Measure
Range
Central
tendency
1995
Change, fourth quarter to fourth quarter'
Nominal GDP
Real GDP
Consumer price index2
33/4-5'/4
P/8-3
3-3 V*
4»/4-43/4
11/2-2
3'/8-33/8
5.4
2.4
3.2
Average level, fourth quarter
Unemployment rate 3
5'/2-6'/4
53/4-6'/8
5.5-5.8
1996
Change, fourth quarter to fourth quarterx
Nominal GDP
Real GDP
Consumer price index2
45/8-5'/2
2Vfe-3
2I/2-31/2
43/4-53/s
2'/4-23/4
2 7 / 8 -3'/ 4
5.5
2.5
3.2
Average level, fourth quarter
Unemployment rate 3
5'/2-6'/4
53/4-6'/8
5.5-5.8
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. Figures for the Administration
are annual averages.
Monetary Policy Reports, July
around VA percent, the same as in the
first half of the year. For 1996, inflation
is projected to edge down, to the neighborhood of 3 percent. The first-half
slowdown in the industrial sector has
reduced pressure on materials prices;
moreover, wage trends have been stable,
suggesting that labor costs are unlikely
to provide an impetus to inflation.
The Administration has not released
an update of the economic projections
contained in the February Economic
Report of the President. Those earlier
forecasts pointed to real GDP growth of
2.4 percent for 1995, well within the
central tendency range in the Federal
Reserve's February report. Given the
slow start this year, that growth pace for
the year appears less likely, and the
average unemployment rate for the year
probably will be around the upper end
of the 5.5 to 5.8 percent range in the
Administration's February report. The
Administration's 3.2 percent CPI forecast is in line with the Federal Reserve's
central tendency.
The inflation rates anticipated by the
FOMC are marginally above those prevailing in 1993 and 1994 but are considerably below rates of only a few years
ago—and lower than many observers
seemed to anticipate for the current
economic expansion only a few months
ago. Nonetheless, they should be regarded as only a milepost along the path
toward the long-term goal of price stability. The Federal Reserve recognizes
that eliminating the economic distortions associated with inflation is the
most important long-run contribution it
can make to the economic growth and
welfare of the nation.
The Performance of the Economy
At the end of 1994, resource utilization
in the U.S. economy was high: Manufacturing capacity utilization equaled its
71
1989 peak, and the unemployment rate
was close to the low point of the late
1980s. Moreover, economic expansion
was still brisk, with real gross domestic
product growing at a 5 percent annual
rate in the fourth quarter. Although
inflation for 1994 as a whole remained
moderate, commodity prices, which can
signal the onset of inflationary pressures, were rising rapidly at the end of
last year.
A deceleration in activity was widely
anticipated, and growth in real GDP did
moderate to a 23A percent annual pace in
the first quarter of 1995. But the slowing
did not stop there: Spending in several
sectors of the economy softened in the
spring, industrial production fell, and
employment grew relatively little. The
level of real GDP appears to have been
essentially flat in the second quarter.
A slackening in household demand
for big-ticket items was a significant
element in the drop-off in economic
growth in the first half. After registering
sizable gains last year, spending on consumer durables weakened considerably
early this year. And residential construction, which continued to grow in the
face of rising mortgage rates last year,
began to fall this winter and was off
sharply in the second quarter. These
domestic drags were reinforced by the
effects of the plunge in net exports to
Mexico, which came in the wake of that
nation's financial crisis.
With domestic sales and exports softening, businesses cut orders and production. However, in some cases, the
adjustments were not quick enough to
avoid an unwanted accumulation of
inventories—especially for cars and
light trucks, but for some other goods as
well. Efforts to trim stocks reinforced
the contractionary forces in the manufacturing sector of the economy.
Despite the falloff in growth in the
first half, the unemployment rate edged
72
82nd Annual Report, 1995
up only slightly, and although manufacturing capacity utilization fell considerably, it remained above historical averages. Under the circumstances, it is not
surprising that the mounting inflationary
pressures of the latter part of 1994 carried over into the first part of this year
and that materials prices surged further.
Rising import prices, related to the
depreciation of the dollar, also contributed to domestic inflation. Reflecting
these and other factors, the consumer
price index increased at a 3VA percent
annual rate in the first half of this year,
up from a 23/4 percent increase for 1994
as a whole.
Nonetheless, increases in hourly
wages and benefits remained moderate,
holding down unit labor costs. Furthermore, the drop in manufacturing activity
in the first half of the year contributed
to a flattening in industrial commodity
prices, suggesting some lessening of
inflationary pressures "in the pipeline."
These favorable factors were reflected
in some moderation of price increases
toward midyear.
The Household Sector
After advancing at more than a 4 percent annual rate in the second half of
1994, growth in consumer spending
slowed appreciably on average in the
first half of this year. Real personal consumption expenditures increased at just
a W2 percent annual rate in the first
quarter, before picking up moderately in
the second.
Outlays for consumer durables moved
up sharply in 1994, and by the end of
the year, the level of spending was high
relative to income. Many households
may have brought their stocks of
durables up to desired levels, limiting
further purchases this year. In addition,
by early this year, the stimulus to consumer spending from the massive mort
gage refinancing wave of 1993 and early
1994 likely had been exhausted. The
downturn in interest rates this year has
led to a comparatively modest rebound
in refinancings recently, which may free
up some income for additional spending
in coming months.
The slackening in consumer demand
in the first quarter was concentrated in
motor vehicles, where sales fell off after
surging in the fourth quarter of 1994.
However, real spending on goods other
than motor vehicles also grew less rapidly in the first quarter than in the second half of 1994. Some of the deceleration in other consumer durables may
have reflected the weakness in home
sales because families often purchase
new furnishings and appliances when
they change houses. Among nondurable
goods, outlays for apparel were especially weak, following rapid growth in
spending in the second half of 1994.
The slowing of consumer spending
growth so far this year has been about in
line with the slowing in income growth.
Through the first quarter, wage and
salary income posted solid gains, bolstered by a healthy pace of hiring. But
increases in wage and salary income
faded in the spring, reflecting slow
growth in employment and a drop in the
workweek. The deceleration in labor
income was only partially offset by rapid
growth in interest and dividend income
in the first half of 1995. Dividend
income benefited from the improvement
in corporate profits. Growth in interest
income was strong in the first quarter,
reflecting the lagged effects of increases
in market interest rates in 1994, but
began to flag in the second quarter as the
decline in market interest rates this year
showed through to interest earnings.
Surveys suggest that consumer confidence remained high through the first
half of 1995. Movements in both of the
major surveys—from the Michigan Sur-
Monetary Policy Reports, July
vey Research Center and the Conference Board—were similar in the first
half of 1995: Both spent part of the first
half above their 1994 average values,
but by June, both had moved back down
to their 1994 averages.
Early this year, residential construction activity weakened significantly, and
single-family housing starts in the first
quarter were 14 percent (not an annual
rate) below their fourth-quarter average.
Sales of new and existing homes also
fell in the first quarter, although not
quite so steeply. Single-family starts
edged up in April but more than
reversed this gain in May; however,
building permits, a more reliable indicator, moved up in May. New home
sales jumped 20 percent in May, to the
highest level since late 1993. Although
reported new home sales are volatile,
and the initial readings are often revised
substantially, other indicators of housing
activity also point in a favorable direction: Applications for mortgages to purchase homes rose sharply in May and
remained elevated in June, and attitudes
of households and builders toward the
housing market became more positive in
the second quarter.
Like single-family homebuilding,
multifamily construction fell early this
year, with starts off 11 percent in the
first quarter. The drop this year follows
a two-year period of recovery, during
which starts doubled from their thirtyfive-year low reached at the beginning
of 1993. Multifamily starts turned back
up in April and May. Prospects for a
continued gradual increase in multifamily starts appear good, as newly built
apartments were quickly filled last year
and vacancy rates for apartments continued to move down in the first quarter
of this year. However, continuing overhangs of empty apartments in some markets are likely to keep total multifamily
starts well below the levels of the 1980s.
73
The Business Sector
In the second half of 1994, nonfarm
inventories increased nearly 5 percent at
an annual rate, about keeping pace with
growth in final sales, as firms built
stocks to ensure adequate supplies—or,
in some instances, to beat anticipated
price increases. In the first quarter,
inventory growth continued at about its
late 1994 pace, but growth in final sales
moved down to a 2Vi percent annual
rate, leaving many firms with stocks
they did not want.
The first-quarter inventory run-up was
disproportionately in motor vehicles, as
production increased while sales were
falling. To bring inventories back in line,
manufacturers cut production sharply;
between February and May, output
dropped 10 percent. The decline in output of motor vehicles, parts, and related
inputs was the most important factor in
the 1 percent drop in overall industrial
production in this period. Motor vehicle
inventories accumulated further in April
when sales fell sharply, but there was
some progress in trimming excess stocks
in May and June. Nonetheless, much of
the overhang of vehicles that developed
earlier this year remains.
The inventory buildup outside the
motor-vehicle sector was also quite
large in the first quarter, and it continued
at a rapid pace in April. The available
data for May suggest a somewhat
smaller rate of increase. Although stocks
of most goods remained in better alignment with sales than in the motorvehicle sector, inventory accumulation
has been running ahead of sales in a few
sectors, particularly in apparel, furniture, and appliances. In response, manufacturers have cut production in these
areas. The accumulation of furniture and
appliances is likely related to the dropoff in home sales in early 1995, and
the revival in home sales that appears
74
82nd Annual Report, 1995
to be under way should boost sales in
these areas, helping to trim inventories
further.
Business fixed investment rose at an
extraordinary pace in the first quarter,
with strong gains in both the equipment
and structures components. Real spending on equipment increased at a 25 percent annual rate. With the exception of
motor vehicles, the growth in equipment
spending was widespread in the first
quarter. For structures, real outlays
increased at a 12 percent annual rate
in the first quarter, following a AV2 percent gain over the four quarters of 1994.
The first-quarter increase in construction was also widespread across
components.
Indicators for the second quarter suggest that growth in capital spending continued to be brisk although not quite as
fast as in the first quarter. Shipments of
capital goods by domestic manufacturers in April and May were up moderately from their first-quarter average.
And permits for nonresidential structures, which tend to lead construction
by a few months, indicate that construction should continue to trend upward
although at a slower pace than in the
early part of this year.
The surge in capital spending in
recent years has pushed growth of the
capital stock to its fastest pace since
the late 1970s. This improvement in
the rate of capital accumulation may
lead to a pickup in productivity growth,
but there is as yet little indication of
a significant break with past trends.
Indeed, when output is measured
using the new chain-type alternative
index—which will become the official
measure later this year—trends in
productivity growth in the nonfarm
business sector in the 1990s are little
changed from those of the 1970s and
1980s.
Corporate operating profits increased
at a 7 percent annual rate in the first
quarter, a somewhat faster pace than in
the second half of 1994. However, firstquarter profits were boosted by an
increase in earnings of U.S. corporations
on foreign operations; profits on private domestic operations were about
unchanged. The increase in profits on
foreign operations resulted in part from
the decline in the exchange value of the
dollar, which pushed up the value of
profits earned abroad. Private domestic
financial profits improved in the first
quarter, in part because of a surge in
bank earnings, which were boosted by
strong loan growth. First-quarter earnings on domestic operations of U.S. nonfinancial corporations declined slightly,
following solid gains in 1994. Profits
were 10.6 percent of the output of nonfinancial corporate businesses in the first
quarter, about the same as in 1994 as a
whole, when the profit share was the
highest since the late 1970s.
In the farm sector, indications are
that production will fall well short of
last year's exceptionally high levels.
Weather conditions have been less
favorable than those of 1994, with
unusually heavy rains keeping plantings
behind schedule across large parts of the
Midwest. Also, with stocks relatively
high after last year's large harvests, the
U.S. Department of Agriculture reduced
the amount of acreage that farmers
contracting for subsidy payments were
allowed to plant. However, livestock
production has remained strong so far
in 1995, which will help cushion the
effects of smaller harvests on total agricultural production. Because of the likelihood that production will fall this year,
farm inventory investment will probably
be smaller this year than in 1994, and
stocks of some crops will likely be
drawn down appreciably.
Monetary Policy Reports, July
The Government Sector
The federal government deficit has continued to shrink in the current fiscal
year. For the first eight months of the
1995 fiscal year, the budget deficit was
19 percent below the same period a year
earlier. Nominal expenditures over this
period were 4 percent higher than a year
earlier, while receipts were up 8!/2 percent. In addition to the strong economic
growth of 1994, receipts were boosted
by changes in rules that allowed some
individuals to defer until 1995 certain
tax payments that would have been due
in 1994 under previous rules.
Higher interest outlays contributed to
the increase in federal spending in the
first part of the 1995 fiscal year. Excluding interest outlays, nominal federal
spending in the first eight months of this
fiscal year increased about 2 percent,
compared with the year-earlier period.
Defense expenditures continued to
decline in nominal terms; they have
been the main factor holding down federal spending in recent years. Spending
on income security programs, such as
unemployment insurance and welfare
benefits, also edged down, mostly reflecting the economic expansion. Spending on Medicare and other health programs was up 9 percent in the first eight
months of the fiscal year; while still
quite rapid, this growth is slower than
that of the early 1990s, when these
expenditures were rising 10 to 20 percent per year. Spending on social security and on other nondefense functions
increased less than the recent trend in
nominal GDP.
In real terms, federal purchases of
goods and services—the part of federal
spending included in gross domestic
product—fell at an annual rate of 4 percent in the first quarter of 1995. Falling
defense spending more than accounted
75
for the decline. As of the first quarter,
the level of real federal purchases was
17 percent below the peak reached four
years ago.
State and local government deficits
on combined capital and operating
accounts (that is, excluding social insurance funds) totaled $37 billion in the
first quarter of 1995, a small improvement from the deficit a year earlier.
Excluding social insurance, tax receipts
increased 7 percent between the first
quarter of 1994 and the first quarter
of 1995, while expenditures were up
6!/4 percent. Transfer payments continue
to grow faster than other spending,
although the rate of increase is well
below that earlier in the 1990s.
Real purchases of goods and services
by state and local governments have
been rising only moderately for some
time; in the first quarter of 1995, they
were little changed. The slowing in the
first quarter was concentrated in construction spending, which fell after three
quarters of solid increases. Purchases
of other goods and services remained
on the gradual uptrend that has been
evident over the past few years. State
and local employment increased about
14,000 per month, on average, over the
first six months of 1995, considerably
below the pace of the 1992-94 period.
The small improvement in the budget
situation for the state and local sector as
a whole masks important differences
across levels of government. Available
evidence suggests that while state budgets are in relatively good shape, budgets at the local level remain under pressure. State aid to localities, particularly
to school districts, has been eroding
relative to expenses for several years.
Also, local governments rely more
heavily than state governments on property taxes, and while sales and incomes
have rebounded in the current business
76
82nd Annual Report, 1995
cycle expansion, property values have
lagged behind, limiting property tax
receipts.
The External Sector
The nominal trade deficit on goods and
services widened somewhat in the first
quarter, to $120 billion at an annual
rate. However, net investment income
improved in the first quarter, as did net
transfers, and as a consequence, there
was a narrowing of the current account
deficit in the first quarter from its fourthquarter level, to $162 billion at an
annual rate. Nonetheless, the firstquarter current account deficit exceeded
the 1994 average of $151 billion. In
April, the trade deficit increased further
from the first-quarter average.
The quantity of U.S. imports of goods
and services expanded 10 percent at an
annual rate during the first quarter,
somewhat less rapidly than in 1994. The
slower pace of U.S. income growth contributed to the lower import growth;
increased imports from Mexico were a
partial offset. In April, real imports continued to grow at about the first-quarter
pace. The increases in imports in the
first four months of the year were widespread across major trade categories.
Non-oil import prices rose at a
3V2 percent annual rate in the first
quarter, somewhat less than during the
second half of 1994, when they were
pushed up by large increases in world
commodity prices, especially for coffee.
In April and May, non-oil import prices
rose at a nearly 6 percent annual rate,
with increases for most major trade categories. The pickup in price increases for
imported goods reflected, in part, the
recent dollar depreciation.
The quantity of U.S. exports of goods
and services rose at a 5 percent annual
rate in the first quarter, more slowly
than the double-digit rate of growth over
the four quarters of 1994. In large part,
the weaker export performance was the
result of the macroeconomic adjustments taking place in Mexico and the
reduced Mexican demand for U.S. exports. Preliminary data for April indicated that the quantity of exports
expanded a bit further from the firstquarter average. For the first four
months of the year, exports to Mexico
fell while they increased moderately to
most other areas of the world.
Real output in Mexico declined
sharply in the first quarter as instability
in the financial markets weakened confidence and the government implemented a program of fiscal and monetary restraint. The Mexican economy
apparently continued to contract in the
second quarter. The crisis and ensuing
policy responses induced a dramatic
reduction in Mexico's current account
deficit during the first quarter of the
year. In the wake of the Mexican crisis,
the Argentine authorities chose to
tighten macroeconomic policies, which
has led to a weakening of economic
activity in Argentina. In contrast, Brazil
experienced very strong growth of real
output in the first quarter as consumption spending surged; available indicators suggest some slowing of growth in
the second quarter.
In Japan, recovery from the recent
recession remains tentative. First-quarter
real GDP growth was only 0.3 percent
at an annual rate; data for the second
quarter also suggest that the recovery
may be stalling. Asset prices have
continued to fall, adding to concerns
about the lack of progress in improving
banks' balance sheets and limiting
the capacity of banks to extend credit
in support of the recovery. In May,
the Japanese government announced
another package of structural reforms
and measures to boost domestic demand. The sluggish pace of activity in
Monetary Policy Reports, July
Japan and the rise in the value of the yen
have eliminated inflation: Consumer
prices were unchanged over the twelve
months through June.
In other industrial countries, the rate
of economic expansion appears to have
slowed from its rapid 1994 pace. In Canada, real GDP growth slowed to less
than 1 percent at an annual rate in the
first quarter; second-quarter indicators
suggest continued sluggishness. In the
United Kingdom, where the expansion
has been vigorous over the past three
years, real GDP continued to grow
strongly in the first quarter, although at
less than the 1994 pace. In most continental European countries, the rate of
real output growth in the first half of
1995 was somewhat lower than the rapid
pace during the second half of 1994. In
Canada and several major European
countries, measures intended to reduce
government deficits as a share of GDP
have been announced.
Inflation rates in the industrial countries generally remain low. However, in
the United Kingdom and Italy, currency
depreciation has added upward pressure on prices, and consumer prices
in the twelve months through June
rose 3J/2 percent in the United Kingdom
and nearly 6 percent in Italy. In western
Germany, exchange rate appreciation
helped offset domestic inflationary pressures, and consumer prices rose only
2lA percent in the twelve months
through June.
Among our Asian trading partners
other than Japan, real GDP growth has
remained near the rapid 1994 pace, in
part because substantial depreciations of
those countries' currencies against the
Japanese yen and the German mark
stimulated exports. However, economic
activity decelerated somewhat in China
and Singapore, reflecting past tightening
of monetary policy and the reduction of
spare capacity in these economies.
77
Net capital flows into the United
States were large in the first quarter of
1995. Foreign official holdings in the
United States rose more than $20 billion, as foreign governments made large
intervention purchases of dollars in
March in response to strong upward
pressure on the foreign exchange value
of their currencies. Sizable official
inflows continued in April and May. In
addition, net private foreign purchases
of U.S. securities were considerable in
the first quarter, particularly purchases
of Treasury bonds and notes and new
Eurobond issues by U.S. corporations.
Private foreign net purchases of U.S.
securities moderated a bit in April and
May. In contrast, U.S. net purchases of
foreign securities, which had fallen substantially last year from their 1993 peak,
continued to decline on balance over the
first five months of 1995.
U.S. direct investment abroad was
considerable in the first quarter, at
$18 billion. Investment in Western
Europe was particularly strong. Foreign
direct investment in the United States, at
$10 billion, remained substantial. On
net, there was a large outflow of direct
investment in the first quarter, after netting to about zero in 1994.
Labor Markets
Employment grew rapidly in 1994, and
labor markets tightened considerably.
Although job growth slowed in the first
quarter of this year, it was still large
enough—at 226,000 per month—to
keep the unemployment rate at about the
same level as in the fourth quarter of
1994. In the second quarter, growth of
nonfarm payroll employment slowed to
only 60,000 per month and the quarterly
average unemployment rate edged up,
from 5.5 percent to 5.7 percent.
The deceleration in employment was
particularly marked in the goods-
78
82nd Annual Report, 1995
producing sector, where payrolls fell
during the second quarter after posting
strong gains in the early months of the
year. In construction, payroll growth
averaged 30,000 per month in 1994 and
through the first quarter of 1995, but
employment then fell 8,000 per month
in the second quarter. Manufacturing
job growth also averaged 30,000 per
month in 1994. Factory hiring slowed
in the first quarter, and in the second
quarter, 35,000 jobs per month were
lost. The decline in manufacturing
employment was widespread across
industries. Employers have also trimmed
the factory workweek, which in 1994
had reached the highest level since
1945.
Although employment continued to
rise in most service-producing industries in the first half of 1995, the rate of
growth slowed by the second quarter. In
wholesale and retail trade, where 75,000
jobs per month were added in the second half of 1994, the pace of job gains
fell in the first quarter, and only 12,000
jobs per month were added in the second quarter. Similarly, in business services, where 46,000 jobs per month
were added in 1994, employment decelerated in the first quarter and was about
flat in the second. Among sectors showing employment gains in the first half of
this year, entertainment industries posted
considerable growth, and increases in
employment in the health sector continued to run at about the same pace as in
the second half of 1994.
The rate of increase in hourly compensation moved down further early this
year. The employment cost index for
private industry workers, a measure of
hourly labor costs that includes both
wages and benefits, rose 2.9 percent
over the twelve months ended in March
1995, down from a 3.3 percent increase
over the preceding twelve-month period.
The increase in wages and salaries was
the same in both periods, but the pace of
benefits gains declined significantly.
The largest contribution to the deceleration in benefits costs in recent years
has come from health insurance. Among
the factors restraining the increase in
health insurance costs are slower
medical-sector inflation, increased use
of managed-care plans, and efforts by
employers to shift a greater proportion
of health care costs to employees. Costs
of workers' compensation programs
have also contributed to the deceleration
in benefits costs; these costs, too, have
been affected by lower medical inflation, although regulatory reform has
played a role as well. Unemployment
insurance costs decelerated sharply over
the past two years; firms pay into the
unemployment insurance program on
the basis of their recent layoff experience, and the improved economy
through the first part of this year lowered these payments.
Output per hour in the nonfarm
business sector—measured in 1987
dollars—increased at an annual rate of
2.7 percent in the first quarter of 1995.
Output per hour increased 2.0 percent
over the four quarters ended in the first
quarter, down slightly from the rate of
growth over the preceding four-quarter
period.
Price Developments
The pickup in consumer price inflation
so far this year was a bit larger for the
index that excludes food and energy
than for overall prices: The CPI excluding food and energy increased at a
3.6 percent annual rate over the first six
months of 1995, up from a 2.6 percent
increase in 1994. The acceleration in
the first half was mostly in non-energy
services prices, which increased at a
4Vi percent annual rate over the first six
months of 1995, up from a 3lA percent
Monetary Policy Reports, July
increase over the twelve months of
1994. Airfares increased sharply in the
first half of 1995, rising at more than a
40 percent annual rate after falling
10 percent in 1994; this acceleration
accounted for two-thirds of the pickup
in services inflation in the first half.
Auto finance rates also increased rapidly
early in 1995—rising at a 38 percent
annual rate in the first four months
the year—following a large increase in
the second half of 1994. However, the
CPI for auto finance declined sharply in
May and June as interest rates on auto
loans began to reflect the declines in
market rates in the first half of 1995.
Price increases for other services were,
on balance, roughly in line with their
rate of increase in 1994.
As a result of the brisk expansion of
the industrial sector in 1994 and the
consequent rapid increases in prices
of basic manufactured products, the
producer price index for intermediate
materials other than food and energy
increased at a 11A percent annual rate
over the second half of 1994. In the first
quarter of this year, these materials
prices rose even faster—nearly 10 percent at an annual rate. The rapid
increases in materials prices began to
affect finished goods prices in early
1995, and the PPI for finished goods
other than food and energy, which covers domestically produced consumer
goods and capital equipment, increased
at a 3 percent annual rate over the first
six months of 1995, up from a IV2 percent rate of increase over the twelve
months of 1994.
The consumer price index for commodities other than food and energy
increased at a ll/2 percent annual rate
over the first six months of 1995, about
the same as in 1994. Prices accelerated
at the retail level for some items for
which producer prices have been rising
rapidly, such as household paper prod
79
ucts. But this pickup was partly offset
by declines in prices where there have
been large inventory buildups. Notably,
apparel prices continued to decline in
the first half, and prices of appliances,
which had increased in 1994, fell in the
first half of 1995.
The slowdown in the industrial sector
has begun to relieve pressure on materials prices, and the PPI for intermediate
materials other than food and energy
increased just 0.2 percent per month
in May and again in June, suggesting
reduced pressures on finished goods
prices in the near term.
Consumer food prices increased at a
PA percent annual rate over the first six
months of 1995, down about a percentage point from 1994. Coffee prices,
which had increased 64 percent in 1994,
fell 12 percent over the first six months
of this year. The swing in coffee prices
can more than account for the deceleration in food prices. Prices of meats continued to fall in the first half of 1995, as
production remained strong.
Energy prices increased at a 2 percent
annual rate in the first half of 1995,
about the same as last year. Natural gas
prices have continued to decline. Regulatory changes have led to increased
competition among suppliers of natural
gas; in addition, natural gas prices were
depressed early this year by the relatively warm winter, which held down
demand. Gasoline prices increased at a
12 percent annual rate in the second
quarter, reflecting the run-up in crude oil
prices that occurred between December
and April. Since April, crude oil prices
have reversed nearly all of their earlier
run-up, indicating that gasoline prices
will move down in coming months.
Survey data suggest that expectations
of inflation have changed little since the
end of 1994. According to the survey of
households conducted by the Survey
Research Center of the University of
80
82nd Annual Report, 1995
Michigan, as of the first half of 1995,
the expected increase in consumer prices
over the coming twelve months was the
same as it was in the fourth quarter of
1994. In the Conference Board survey
of households, the expected rate of inflation over the coming year remained at
41/4 percent in the first half of 1995, the
same as in each of the four quarters
of 1994. Expectations of inflation over
longer periods also have not changed
much on balance this year. In the University of Michigan survey, the expectation in the second quarter of 1995 for
the rate of consumer price inflation over
the next five to ten years was the same
as it was in the fourth quarter of 1994.
Similarly, in the May 1995 survey of
professional forecasters conducted by
the Federal Reserve Bank of Philadelphia, expectations of inflation over the
coming ten years were about 3V2 percent, the same as in the survey taken at
the end of 1994.
out, at least temporarily, considerably
reducing pressures on resources. In early
July, with the risks of a prolonged
upturn in inflation fading, the FOMC
decided to ease reserve pressures
slightly, resulting in a decline in the
federal funds rate of lA percentage point.
As incoming data in 1995 increasingly suggested slower economic
growth and an attendant relief of inflation pressures, intermediate- and longterm interest rates moved down substantially. Additional downward pressures
seemed also to arise from the growing conviction of market participants
of the commitment of the Congress and
Administration to making progress
toward a balanced budget. On balance,
most longer-term interest rates have
declined 120 to 180 basis points since
the end of last year, with the sharpest
drops at intermediate maturities. The
trade-weighted exchange value of the
dollar has depreciated about IV2 percent
against the other G-10 currencies—in
large part reflecting the decline in U.S.
Financial, Credit, and
long-term interest rates relative to those
Monetary Developments
in the other G-10 countries. In addition,
In charting the course of monetary pol- the fall in interest rates, coupled with
icy this year, the Federal Reserve has continued strong corporate earnings,
sought to promote sustainable economic fueled a run-up in equity prices; most
growth and continued progress toward major stock price indexes have climbed
price stability. Despite the tightening 15 to 35 percent since the beginning of
actions undertaken during 1994, eco- the year.
nomic data at the beginning of 1995
Despite slower economic expansion
suggested that the economy was operat- this year, growth rates of broad money
ing beyond its long-run potential and and credit have picked up, and the
might continue to do so for some decline in intermediate- and long-term
time—a situation that would no doubt interest rates has only recently begun to
lead to a significant pickup in inflation if leave an imprint on the composition of
allowed to persist. Against this back- borrowing. Total domestic nonfinancial
drop, the Federal Open Market Commit- debt increased 5!/2 percent from the
tee voted in February to tighten reserve fourth quarter of 1994 through May—a
conditions somewhat further, resulting little above last year's pace—as stronger
in a V2 percentage point increase in the private sector borrowing more than offfederal funds rate. In the months follow- set slower growth of the federal debt
ing the February FOMC meeting, eco- and a decline in state and local governnomic activity seemed to be leveling ment debt. Borrowing in the nonfinan-
Monetary Policy Reports, July
cial business sector has been largely
concentrated in short-term or floatingrate debt such as bank loans and
commercial paper. Recently, however,
declines in longer-term interest rates
have stimulated a sharp jump in corporate bond issuance. Household borrowing this year has been considerable,
although below the pace of 1994. Taxexempt debt is estimated to have
declined outright again this year as
many state and local units have called
securities that had been advance refunded. Federal debt growth has edged
down a bit this year, extending the trend
toward slower expansion of federal debt
that began in 1991.
Depository institutions have been
especially important suppliers of credit
to both businesses and households this
year. Borrowers' demands were concentrated in the types of credit in which
depositories are traditional lenders and,
on the supply side, commercial banks
continued to pursue new lending opportunities aggressively. The health and
profitability of depositories have remained solid to date, although federal
regulators have cautioned depositories
that their lending standards should take
account of the potential for deterioration
of loan performance in a less favorable
economic climate.
The surge in bank lending and the
flattening of the yield curve this year
have provided a significant impetus for
growth of the broad monetary aggregates. M3 advanced 6lA percent at an
annual rate from the fourth quarter of
1994 through June—slightly above the
upper bound of its revised 2 to 6 percent
annual range set at the July FOMC
meeting—as banks pulled in deposits to
fund loans. The drop in market interest
rates has enhanced the attractiveness of
M2, which increased at a 33A percent
rate over the same period—a little above
the midpoint of its annual range. In
81
contrast to the expansion of the broad
monetary aggregates, Ml growth has
been quite weak, reflecting the low
yields on these assets and the implementation by a few banks of retail sweep
accounts, which move funds out of
NOW accounts and into nontransaction
balances.
The Course of Policy and Interest Rates
The Federal Reserve entered 1995 having tightened policy appreciably during
1994, thereby boosting short-term rates
2V2 percentage points. Nonetheless, data
reviewed at the FOMC meeting in
December 1994 suggested that pressures
on resources were intensifying and that
inflation threatened to move higher.
Although the Committee took no action
to increase rates further at this meeting,
it did adopt a directive indicating a bias
toward additional tightening in the intermeeting period.
Information reviewed at the February
meeting suggested that despite some
fragmentary evidence of slowing, the
economic expansion remained brisk in
an economy already operating at or
beyond its long-run potential. The
demand for consumer durables and
homes was softening, but output and
employment had posted substantial
gains near year-end, and capacity utilization had moved up from already high
levels. In addition, a marked rise in
materials prices during the second half
of 1994 posed a threat of increased
consumer price inflation in coming
months. In these circumstances, the
Board of Governors approved the pending requests of several Reserve Banks
for a V2 percentage point increase in the
discount rate, and the Committee agreed
to allow this increase to show through
fully to the federal funds rate. In light of
the tightening of policy called for at this
meeting and the anticipated lagged
82
82nd Annual Report, 1995
effects of previous tightenings, the Committee viewed the odds of a need for
further policy action developing over
the intermeeting period as relatively
small and evenly balanced, and therefore issued a symmetric directive to
guide any intermeeting changes in
reserve conditions.
In subsequent weeks, evidence suggested that economic activity was
moderating, especially in the interestsensitive sectors. Financial markets
appeared to view these signs as indicating that the previous policy actions of
the Federal Reserve had substantially
reduced the odds of rising inflation and
thus also the need for additional monetary restraint. Indeed, yields on Treasury
securities at maturities ranging from one
to ten years fell 60 to 70 basis points
between the February and March FOMC
meetings.
At its meeting in late March, it was
not clear to the Committee whether the
deceleration in economic activity was
only temporary or was a lasting shift
toward a sustainable rate of economic
expansion. On balance, the Committee
viewed the economy as retaining considerable upward momentum and observed
that the decline in longer-term interest
rates, the rise in stock prices, and the
sharp depreciation of the exchange value
of the dollar could be expected to buoy
aggregate demand in the months ahead.
Moreover, consumer prices, as anticipated, had risen more rapidly in 1995.
In these circumstances, the Committee
determined that it would be prudent to
await further information before taking
any additional policy actions, but the
Committee's directive included a bias
toward additional monetary restraint
over the intermeeting period. The asymmetric directive was considered appropriate to emphasize the Committee's
commitment to containing and ulti
mately reducing inflation, in a period
when it seemed to be moving higher.
Following the March meeting, incoming data signaled a further deceleration
of economic activity. In addition, financial markets appeared to view budget
discussions in the Congress as foreshadowing significant fiscal restraint over the
balance of the decade. Shorter-term
interest rates began to incorporate the
possibility of an easing of monetary
policy, and yields on longer-term
securities—especially those at intermediate maturities—moved down sharply
as well.
Information reviewed at the May
FOMC meeting provided persuasive
evidence that the pace of the economic
expansion had slowed, relieving pressures on resources and reducing the
threat of a pickup in inflation. The Committee observed that an adjustment to
inventory imbalances that had developed earlier in the year was contributing
to the slowdown and that the underlying
trajectory of final sales was still unclear.
The Committee determined that the
existing stance of policy was appropriate in these circumstances and adopted a
symmetric directive regarding potential
policy adjustments during the intermeeting period.
Employment data released shortly
after the May FOMC meeting were surprisingly weak, prompting considerable
speculation in financial markets of an
imminent monetary policy easing. The
sharpness of the downward movement
in longer-term rates seemed to reflect,
in addition to economic fundamentals,
trading dynamics associated with the
attempts of investors to rebalance their
portfolios in light of the substantial
change in interest rates. At one point in
late June, the spread between the thirtyyear Treasury bond yield and the federal
funds rate reached a low of 48 basis
Monetary Policy Reports, July
points but edged higher in subsequent
weeks.
From the information reviewed at the
July meeting of the FOMC, it appeared
that the economy flattened out during
the second quarter as businesses sought
to pare inventories to desired levels.
This pause in the expansion, in turn,
had alleviated the inflation pressures
that had loomed large earlier in the
year. In these circumstances, the Committee voted to ease reserve pressures
slightly, resulting in a lA percentage
point decline in the federal funds
rate. Although financial markets had
anticipated a decline in the federal funds
rate at some point, both bond and
equity markets rallied strongly after
the change in policy was announced.
At the close on July 7, the thirty-year
bond rate was down about 165 basis
points from its recent high of last
November.
Credit and Money Flows
The debt of domestic nonflnancial sectors grew 5V2 percent at an annual rate
from the fourth quarter of 1994 through
May of this year—a modest pickup over
the pace of recent years but well within
its annual range of 3 to 7 percent.
Slower growth of federal debt and a
decline in the debt of state and local
governments in 1995 were more than
offset by strength in business and household borrowing. Although declines in
longer-term interest rates and the flattening of the yield curve have stimulated
long-term, fixed rate borrowing of late,
both households and businesses continued during much of the year to
favor borrowing that was short-term or
floating-rate. In part, the reliance on
such debt contributed to the larger share
of private debt intermediated through
the depository sector. In meeting
83
increased credit demands, depositories
turned more heavily to time deposits
and other liabilities included in M2
and M3. Stronger funding needs and
increased reliance on deposits provided
a considerable lift to growth of the broad
monetary aggregates.
Slower growth of federal debt this
year relative to 1994 reflects stronger
tax revenues and diminished growth of
expenditures, especially defense-related
outlays. In the state and local sector,
debt outstanding has continued to
decline, largely driven by calls of
higher-cost debt issued during the
Growth of Money and Debt
Percent
Ml
M2
M3
Domestic
nonfinancial
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
11.8
14.4
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
14.1
13.5
10.2
9.0
7.9
1990
1991
1992
1993
1994
4.2
7.9
14.3
10.5
2.3
4.0
2.9
2.0
1.7
1.0
1.7
1.2
.5
1.0
1.4
6.5
4.6
4.7
5.2
5.1
Quarter
(annual rate)3
1994:Q1
Q2
Q3
Q4
5.5
2.7
2.4
-1.2
1.8
1.7
.9
-.3
.6
1.3
2.1
1.7
5.2
5.4
4.2
5.2
.0
-.9
1.6
4.2
4.3
6.7
5.5
5.44
Measurement
period
Year1
1980
1981
1995:Q1
Q2
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.
4. Based on data through May.
84
82nd Annual Report, 1995
1980s.8 Yields on municipal bonds relative to Treasuries had moved up considerably after Orange County defaulted on
its debt late in 1994 but reversed much
of this increase early in 1995. The ratio
of municipal yields to Treasury bond
yields has climbed again more recently
as various budget proposals before the
Congress raised the prospect of reduced
federal tax advantages for municipal
debt. In addition, the recent decision
by Orange County voters not to raise
taxes to cover the county's losses has
tended to boost risk premiums for the
obligations of many municipalities in
California and, to a lesser extent, for
other borrowers in the municipal bond
market.
Borrowing by households—although
off a bit from last year's pace—has generally remained strong this year. Weaker
auto sales and the associated slower
growth of auto loans resulted in a
modest deceleration of consumer credit.
Growth of revolving credit—principally
credit card debt—trended higher from
the already brisk pace recorded last year.
The proliferation of incentive programs
offered with many credit cards has likely
encouraged greater convenience use for
transactions in recent quarters.
Growth of home mortgage debt moderated somewhat in the first quarter, a
pattern consistent with the overall sluggish demand for housing. As long-term
rates moved down this year, the pronounced shift toward adjustable rate
mortgages (ARMs) evident last year dissipated. As of May, 60 percent of new
mortgage originations were fixed rate
mortgages (FRMs). In addition, the
8. Many state and local units took advantage of
historically low long-term interest rates in 1993 to
issue bonds that were targeted to replace existing
high-cost debt issued during the 1980s as the call
dates on those bonds arrived. Calls on previously
issued debt likely will continue to depress net state
and local borrowing for some time.
decline in long-term rates in recent
months has sparked renewed interest in
refinancing. Households carrying ARMs
with rates that are (or soon will be)
above rates offered on FRMs have reportedly begun to refinance with FRMs.
Household debt-service burdens—
measured as the ratio of scheduled principal and interest payments on debt relative to income—have risen in 1995 but
remain well below levels reached in the
late 1980s and early 1990s. Mortgage
refinancings undertaken at lower interest rates in recent years have helped to
keep the level of debt-service burdens
relatively low despite the growth of
household debt relative to income. In
fact, some measures of delinquency
rates on home mortgages have edged
down this year to the lowest levels in
more than twenty years. The picture for
delinquency rates on consumer credit is
less clear: Some measures such as the
delinquency rates on consumer installment credit remain quite low, while
others—especially auto loans booked at
finance companies—have moved up
considerably.
Borrowing by nonfinancial businesses
has increased in 1995, propelled in large
part by a rise in capital expenditures in
excess of internal sources of funds and a
jump in merger activity. In addition, a
number of firms have initiated stock
repurchases financed in part with debt.
As in 1994, the composition of business
borrowing this year has been heavily
weighted toward short-term commercial
paper and bank loans. Lower long-term
interest rates, however, have stimulated
a flurry of new bond issues very
recently.
Various unsettling developments in
financial markets, including the Orange
County debacle, losses associated with
complex derivatives and cash instruments, the failure of Barings Brothers,
and the financial crisis in Mexico, have
Monetary Policy Reports, July
had some limited effects on the specific
companies or sectors involved. They
have not, however, had a large impact
on broad market perceptions of credit
risks; spreads of yields on short- and
long-term corporate debt over Treasuries have widened only a bit this year, a
situation that likely reflects the elevated
supply of new corporate debt and perhaps a small uptick in risk premiums.
The gap between the capital expenditures and internal cash flow of nonfinancial corporations (the financing gap)
began widening in mid-1994 and has
grown even larger in 1995. In part, the
bulge in the financing gap is the result of
the large buildup of inventories earlier
in the year. Most external funding for
the purpose of carrying inventories
apparently has taken the form of commercial paper or bank loans.
A surge in merger activity beginning
in late 1994 has also spurred business
borrowing. Many of the largest mergers
have been strategic, intra-industry combinations, concentrated especially in
areas such as defense, pharmaceuticals,
telecommunications, and (most recently)
banking. In contrast to the merger and
acquisition wave during the late 1980s,
the current acquisition boom has not
entailed highly leveraged takeovers
financed heavily with junk bonds. Indeed, until quite recently, junk bond
issuance this year had been anemic.
Merger activity in recent quarters h&s
involved substantial use of stock swaps
coupled with reductions in financial
assets and new investment-grade debt
issuance (often in the form of commercial paper). Survey evidence indicates
that banks have played only a modest
role in directly funding recent mergers,
although they have facilitated transactions by providing backup lines for
merger-related commercial paper.
Equity retirements associated with
mergers have accounted for a sizable
85
portion of the decline in net equity
shares outstanding. In addition, gross
issuance of new equity has ebbed as
price-earnings ratios have fallen and
many firms have repurchased their stock
with both accumulated cash and the proceeds of new debt.
The shift to short-term funding in the
business sector has been a boon to intermediaries that tend to specialize in
short-term lending. Finance companies
and commercial banks, in particular,
have enjoyed a prominent role as suppliers of credit over the past year. To date,
there are few indications that the health
of these institutions has deteriorated.
Credit ratings for finance companies
have been stable, and bank profitability
and capital ratios have been solid.
An important factor contributing to
the overall strength of depository credit
has been the stabilization of the thrift
industry, especially savings and loan
associations. After several years of
sharp contraction, thrift assets expanded
slightly over the second half of 1994
and continued a modest recovery in
1995. The number of thrift institutions
continues to decline, however, with
many filing for bank charters or being
acquired by banks.
The growth of bank credit picked up
appreciably during the first half of 1995,
with strength especially evident in bank
loans. Indeed, over the past twelve
months, the share of the increase in nonfederal domestic debt funded by bank
loans climbed to record levels. Surveys
of bank lending officers have indicated
banks' increased willingness to extend
consumer credit as well as continued
easing of terms and standards applied to
business loans. Data from the Federal
Reserve's Survey of Terms of Bank
Lending to Business show that spreads
of loan rates over the federal funds rate
for large commercial loans have been
about the same as last year but well
86
82nd Annual Report, 1995
below those prevailing through much
of the late 1980s and early 1990s. Comparable spreads for smaller commercial
loans are wider than in the late 1980s
but have continued the narrowing trend
of recent years. The strength of bank
lending has been viewed favorably in
financial markets—bank stock prices
have risen this year about in line with or
faster than the climb in broad stock price
indexes, while spreads on bank debt
relative to Treasuries have widened only
slightly.
The continued easing of bank lending
standards after more than a year of
monetary policy restraint has attracted
the attention of federal regulators. The
Office of the Comptroller of the Currency warned banks against allowing
their standards to fall to a point that
could expose them to heavy losses in an
economic downturn. In the same spirit,
the Federal Reserve issued a supervisory letter cautioning banks that loan
terms and standards should be set with a
long-term view that takes loan performance in less favorable economic conditions into account.
Banks have funded the bulge in their
loan portfolios this year in part by liquidating a portion of the large holdings
of securities they had accumulated
earlier in the 1990s.9 In addition, banks
have increased their liabilities. Last
year, banks relied heavily on borrowings
from their non-U.S. offices to fund
growth of their domestic assets. Deposit
9. Published data on changes in securities portfolios at banks may not accurately portray funding
strategies because recent accounting changes have
increased the share of securities and off-balancesheet contracts that must be marked to market
on banks' balance sheets. Estimates suggest that
changes in the market valuation of securities and
off-balance-sheet contracts under these accounting
rules have added about 1 percentage point at an
annual rate to the growth of bank credit from the
fourth quarter of 1994 through June of this year.
growth at the foreign offices of U.S.
banks has slowed considerably this
year. Consistent with this development,
borrowing by domestically chartered
banks from their foreign offices has
increased in 1995 but not at the pace of
last year.
Depositories' shift back into funding
with domestic liabilities has helped spur
the growth of the broad monetary aggregates this year. From the fourth quarter
of 1994 through June, growth of M3 has
averaged 6lA percent, placing the level
of M3 above the upper bound of its
annual range. Over the same period, M2
growth has averaged 33A percent, placing the level of M2 in the upper half of
its annual range.
The pickup in M3 growth this year
reflects stronger expansion in both its
M2 and non-M2 components. The acceleration of "wholesale" funding sources,
especially large time deposits, has been
quite marked this year. Banks' heavier
reliance on wholesale funds is typical
during periods in which bank loan
portfolios are expanding swiftly. The
non-M2 portion of M3 has also been
boosted by a sharp jump in institutiononly money funds. The yields on these
funds tend to lag movements in shortterm market interest rates and, as a
result, became especially attractive to
investors when short-term market interest rates began falling on expectations of a near-term easing of monetary
policy.
The acceleration of M2 this year
results chiefly from the waning influence of previous increases in short-term
interest rates and a marked flattening of
the yield curve. On balance this year, the
returns on assets in M2 have become
more attractive relative to both shortand long-term market instruments. Sizable inflows to stock mutual funds have
continued, but theflatteryield curve has
damped the demand for other long-term
Monetary Policy Reports, July
investments. Inflows to bond mutual
funds—while stronger than during the
bond market rout last year—have been
much smaller than inflows earlier in
the 1990s. Also, judging from noncompetitive tenders at recent Treasury auctions, households' direct investments
in Treasury securities have dwindled
sharply this year. At least a portion of
the flows that previously had been
directed to mutual funds and direct
investments in securities appears to have
boosted M2 growth. Growth of money
market mutual funds and small time
deposits, in particular, has been especially brisk. Indeed, more than half of
the increase in M2 since April is attributable to a steep climb in M2 money
funds.
In contrast to the marked expansion
of the broader aggregates, Ml growth
has weakened this year, primarily as
a result of wide opportunity costs on
transaction deposits and the introduction
and expansion of retail sweep accounts
at some large banks. Interest rates
offered on other checkable deposits
(OCDs) have edged up only slightly
since the beginning of 1994 despite
the sharp rise in short-term market
interest rates. Households have responded by reducing balances in these
accounts in favor of higher-yielding
assets.
The development of sweep accounts
by a few large banks for their retail
customers has facilitated the shift away
from transaction balances. Sweep
accounts transfer a customer's OCD
account balances in excess of a certain
threshold into a money market deposit
account (MMDA). Automatic transfers
from the customer's MMDA account
back to the OCD account are initiated as
checks and other withdrawals deplete
OCD balances. Such sweep accounts
may allow customers to earn more interest and benefit the bank by reducing its
87
required reserves.10 Estimates suggest
that retail sweep accounts have reduced
Ml by about $12 billion so far this year.
These programs affect the composition
but not the level of M2 because balances
are swept from transaction deposits into
other accounts included in M2.
The expansion of retail sweep
accounts poses some potential problems
for the implementation of monetary policy by the Federal Reserve. To date,
such accounts have been offered by
large banks that must maintain a balance
at a Federal Reserve Bank to meet their
reserve requirements. As a result, the
reduction in required reserves associated with sweep accounts has implied a
nearly equivalent reduction in aggregate
required reserve balances; estimates
suggest that the $12 billion dollar
decline in OCDs this year translates to a
reduction in required reserve balances
of nearly $1.2 billion.11 In early 1991,
following the cut in reserve requirements at the end of 1990, unusually low
levels of aggregate reserve balances
were associated with greater variability
in the federal funds rate as banks' volatile clearing needs began to dominate
the demand for reserves. If many banks
begin to offer retail sweep programs
in the future, the aggregate level of
10. Under the current structure of reserve requirements, OCD accounts are subject to a 10 percent reserve requirement at banks with more than
$54 million of net transaction deposits. By law,
personal MMDAs are exempt from reserve
requirements.
11. The reduction in required reserve balances
is not necessarily identical to the reduction in
required reserves because banks typically use vault
cash in addition to reserve balances to satisfy
reserve requirements. The level of vault cash held
by banks is primarily determined by their customers' needs. Required reserves for some banks are
nearly or even completely satisfied by vault cash.
In these cases, a reduction in required reserves due
to sweeps would not show through to a decline in
required reserve balances on a one-for-one basis.
88
82nd Annual Report, 1995
required reserve balances would likely
The dollar was supported only briefly
fall substantially, potentially leading to by the increase in the discount rate and
instability in the aggregate demand for the federal funds rate at the February
reserves.
FOMC meeting. With the U.S. economic
The monetary base expanded at a expansion softening, market participants
5Vi percent rate from the fourth quarter came to expect that no further increases
of 1994 through June. Currency growth in these rates were likely in the near
this year—at 1XA percent from 1994:Q4 term. Downward pressure on the dollar
through June—is off a bit from last intensified in late February, and on
year's pace but still quite robust. For- March 2, in somewhat thin and disoreign demands for U.S. currency have derly market conditions, the dollar fell
generally remained strong this year. In sharply further against the mark and the
concert with the decline in transaction yen. The foreign exchange Trading
deposits, total reserves contracted at a Desk at the New York Federal Reserve
6 percent rate from 1994:Q4 through Bank entered the market, selling both
June. In the absence of the increase in marks and yen on behalf of the Treasury
sweep accounts, the decline in total and the Federal Reserve System. The
reserves over this period would have next day several other central banks
joined the Desk in concerted intervenbeen 2J/2 percent at an annual rate.
tion in support of the dollar. Intervention by the Desk on behalf of the
International Financial Developments
Treasury and the Federal Reserve SysAt the turn of the year, the foreign tem totaled $1.42 billion. In a statement
exchange value of the dollar was under confirming the intervention, Secretary
downward pressure, and that pressure Rubin highlighted official concern about
continued through the first months of the dollar's exchange value. Downward
1995. On balance, the multilateral trade- pressure on the dollar continued, parweighted value of the dollar in terms of ticularly against the yen, and on April 3
the other G-10 currencies has depreci- and 5 the Desk, acting on behalf of the
ated about IV2 percent since the end of Treasury and Federal Reserve System,
December 1994. The dollar declined as again joined several other central banks
economic indicators began to suggest in intervention to support the dollar.
that economic growth in the United Secretary Rubin issued a statement that
States was slowing, lowering the likeli- these actions were in response to recent
hood of further increases in U.S. market movement on exchange markets and that
interest rates. In addition, the Mexi- the Administration was committed to a
can crisis appeared to weigh on the strong dollar.
The dollar fell further through middollar in early 1995. External adjustment by Mexico was rightly expected April, particularly against the yen, and
to involve, to an important extent, a on April 19 it touched a record low of
corresponding decrease in U.S. net less than 80 yen per dollar. After recovexports. Primarily for that reason, finan- ering slightly and remaining fairly stable
cial turmoil in Mexico and depre- through mid-May, the dollar rebounded
ciation of the peso were seen as hav- sharply but subsequently relinquished
ing possible adverse implications for some of those gains. On May 31, the
U.S. growth and external accounts and, Desk—on behalf of the Treasury and
in general, as negative for dollar- the Federal Reserve—joined the central
banks of the other G-10 countries in
denominated assets.
Monetary Policy Reports, July
intervention purchases of dollars. Secretary Rubin stated that the intervention
was in keeping with the objectives of
the April 28 communique of the G-7
finance ministers and central bank governors, which endorsed the orderly
reversal of the decline in the dollar in
terms of other G-7 currencies. Through
May and June, the dollar fluctuated in a
range somewhat above its lows of midApril and early May. On July 7, following moves by both the Federal Reserve
and the Bank of Japan to ease monetary
conditions, the Desk joined the Japanese
monetary authorities in intervention purchases of dollars; the dollar moved up a
bit in response.
Long-term (ten-year) interest rates in
the major foreign industrial countries
have, on average, declined about 100
basis points since December as economic indicators have suggested some
slowing of real output growth abroad as
well as in the United States. With U.S.
long-term rates falling much more,
about 170 basis points on balance, the
change in the long-term interest differential is consistent with some decline in
the exchange value of the dollar. Longterm rates have dropped about 150 basis
points in Japan, nearly as much as the
decline in U.S. long-term rates. Rates
in Germany are down about 90 basis
points. Three-month market interest
rates in these countries have declined
about 90 basis points on average since
year-end 1994; central bank official
lending rates were lowered in 1995 in
several countries, including Japan, Germany, and Canada. Following the Federal Reserve easing on July 6, the central banks of Canada and Japan lowered
overnight lending rates.
Since December 1994, the dollar has
depreciated about 12 percent on balance
against the Japanese yen, despite
declines in Japanese long-term rates
that nearly matched the decline in U.S.
89
rates. The yen fluctuated in response to
progress, or lack of progress, in the resolution of trade disputes with the United
States. Persistent strength in the yen
appears to reflect the large Japanese
current account surplus and market perceptions that some adjustment of that
surplus, through yen appreciation, is
inevitable, especially given the slow
growth of the Japanese economy. Japanese financial markets more broadly
have reflected the weak state of the
Japanese economy. Stock prices have
fallen considerably so far this year, with
the Nikkei down about 16 percent since
the end of December, and land prices
have fallen further. These declines in
asset prices have added to the perceived
risks in the Japanese banking system
and concerns that the recovery in economic activity is stalling.
Net depreciation of the dollar in terms
of the German mark over this period has
been about 10 percent. Some of the
upward pressure on the mark over the
past several months resulted from shifts
within the Exchange Rate Mechanism
(ERM) of the European Monetary System, as political uncertainties and fiscal
problems in Italy, Sweden, Spain, and
later France, led at times to the selling
of their respective currencies for marks.
Realignment within the ERM on
March 5 that lowered the values of the
Spanish peseta and the Portuguese
escudo contributed to the upward movement of the mark. In contrast to the
dollar's movement against the yen and
the mark since December, the dollar is
down only 3 percent in terms of the
Canadian dollar. Early in the year, the
U.S. dollar appreciated against the Canadian dollar; uncertainty about whether
fiscal problems in Canada would be
addressed and spillover from the Mexican crisis caused the Canadian dollar to
fall. Since then, the Canadian dollar has
regained those losses.
90
82nd Annual Report, 1995
Over the past several months, the
Mexican peso has recovered somewhat
in terms of the U.S. dollar from the lows
reached during the height of the crisis.
On balance, the peso has depreciated
40 percent in nominal terms from
December 19, 1994, before the crisis
broke out. Mexican officials have drawn
on the Treasury Department's Exchange
Stabilization Fund facility and the Federal Reserve's swap line in addressing
Mexico's international liquidity problems. Outstanding net drawings to date
total $12.5 billion. The outstanding total
of tesebonos, the government's dollardenominated short-term obligations, has
been reduced below $10 billion.
•
Part 2
Records, Operations,
and Organization
93
Record of Policy Actions
of the Board of Governors
Regulation D
Reserve Requirements of
Depository Institutions
November 14, 1995—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
Lindsey and Mses.
Phillips and Yellen.1
Under the Monetary Control Act of
1980, depository institutions, Edge Act
corporations, Agreement corporations,
and U.S. agencies and branches of
foreign banks are subject to reserve
requirements set by the Board. Initially,
the Board set reserve requirements
at 3 percent of an institution's first
$25 million in transaction balances and
at 12 percent of balances above that
amount. Subsequently, the Board lowered the maximum reserve requirement
to 10 percent. The act directs the Board
to adjust annually the amount subject
to the lower reserve requirement to
reflect changes in transaction balances
nationwide. By the beginning of 1995,
that amount was $54 million. Recent
decreases in transaction balances warranted a decrease to $52 million, and
1. Throughout this chapter, note 1 indicates that
one vacancy existed on the Board when the action
was taken.
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
amount based on deposit growth nationwide. By the beginning of 1995, that
amount had been increased to $4.2 million. Recent growth in deposits warranted an increase to $4.3 million, and
the Board amended Regulation D
accordingly.
The amendments are effective with
the reserve computation period beginning December 19, 1995, for institutions
reporting weekly or quarterly.
To reduce the reporting burden for
small institutions, the Board allows
depository institutions with total deposits below specified levels to report their
deposits and reservable liabilities quarterly or less frequently; larger institutions must report weekly. The growth
rate of total deposits at all depository
institutions increased from June 30,
1994, to June 30, 1995. To reflect that
increase, the Board raised the deposit
cutoff levels that, used in conjunction
with the exemption level, determine the
frequency and detail of deposit reporting required for each institution; the cutoff was raised from $55.4 million to
$57 million for nonexempt depository
institutions and from $45.1 million to
$46.4 million for exempt depository
institutions, beginning in September
1996.
94
82nd Annual Report, 1995
Regulation E
Electronic Fund Transfers
March 16, 1995—Amendment
The Board approved an amendment to
Regulation E to revise the requirements
for receipts at automated teller machines, effective April 24, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen.
The amendment gives financial institutions flexibility in the amount of identifying information that they include 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
access device. The amendment makes
final an interim amendment that had
been in effect since December 1, 1994.
Regulation H
Membership of State Banking
Institutions in the Federal Reserve
System
March 28, 1995—Interpretation
The Board approved an interpretation of
Regulation H concerning the establishment of loan-production offices and
back-office facilities by state member
banks, effective April 6, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen.
Under the interpretation, a back-office
facility established by a state member
bank is not considered a branch of the
bank. The interpretation also provides
that loans originated by a loanproduction office may be approved at a
back-office location if the proceeds of
the loan are received by the customer at
a location other than a loan-production
office or back-office facility.
June 19, 1995—Amendment
The Board approved an amendment to
Regulation H to require that state member banks use the standard flood hazard determination form developed by
the Federal Emergency Management
Agency, effective January 2, 1996.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, and Lindsey and
Ms. Yellen. Absent and not voting:
Ms. Phillips.1
The rule requires that banks use a
standard form for determining whether
collateral is located in a special flood
hazard area. The form also was adopted
by the other federal banking agencies,
the Farm Credit Administration, and the
National Credit Union Administration.
Regulation H
Membership of State Banking
Institutions in the Federal Reserve
System and
Regulation Y
Bank Holding Companies and
Change in Bank Control
February 2, 1995—Amendments
The Board approved amendments to
Regulations H and Y to revise its riskbased capital guidelines for state member banks and bank holding companies
to limit the amount of capital they are
required to hold against certain assets
transferred with recourse, effective
March 22, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey
and Ms. Yellen. Absent and not voting:
Ms. Phillips.
Board Policy Actions
To implement section 350 of the
Riegle Community Development and
Regulatory Improvement Act of 1994,
the Board revised its risk-based capital
guidelines to limit the amount of capital
that banking organizations are required
to hold against assets sold with low levels of recourse to the maximum amount
of loss possible under the contractual
terms of the obligation.
June 30, 1995—Amendments
The Board approved amendments to
Regulations H and Y to revise its riskbased capital guidelines for state member banks to incorporate interest rate
risk, effective September 1, 1995.
Votes for this action: Messrs. Greenspan
and Blinder and Mses. Phillips and Yellen.
Absent and not voting: Messrs. Kelley and
Lindsey.'
To implement section 305 of the Federal Deposit Insurance Corporation
Improvement Act, the Board stated that
in determining a bank's capital needs,
the Board will consider a bank's exposure to declines in the economic value
of its capital due to changes in interest
rates. The other federal banking agencies also adopted the new standard.
July 14, 1995—Interim
Amendments
The Board approved amendments to
Regulations H and Y to revise its riskbased capital guidelines for state member banks and bank holding companies
to afford the same treatment to originated mortgage-servicing rights and purchased mortgage-servicing rights for
regulatory capital purposes, effective
August 1, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, and
Lindsey and Mses.
Phillips and Yellen.1
95
The Board, along with the other federal banking agencies, eliminated the
accounting distinction between originated mortgage-servicing rights and purchased mortgage-servicing rights and
included both in regulatory capital when
determining tier 1, or core, capital; thus,
originated mortgage-servicing rights
become subject to the regulatory capital
limitations that had previously applied
only to purchased mortgage-servicing
rights. In connection with this action,
the agencies also sought public comment on the interim amendments.
August 21, 1995—Amendments
The Board approved amendments to
Regulation H to revise the risk-based
and leveraged-capital guidelines for
state member banks. The Board
approved amendments to Regulation Y
to revise the risk-based capital guidelines for bank holding companies to
change the regulatory treatment of certain transfers of assets with recourse that
involve small business obligations. The
amendments became effective September 1, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, and
Lindsey and Mses.
Phillips and Yellen.1
The Board specified that a qualifying
insured banking organization that transfers small business loans and leases on
personal property with recourse needs to
include only the amount of the retained
recourse in risk-weighted assets when
calculating its risk-based capital ratios,
provided certain conditions are met. The
revision implements section 208 of the
Riegle Community Development and
Regulatory Improvement Act of 1994,
and it lowers the capital requirement for
small business loans on leases on personal property that have been transferred
with recourse.
96
82nd Annual Report, 1995
November 1, 1995—Amendments
The Board approved amendments to
Regulations H and Y to revise its riskbased capital guidelines for state member banks and bank holding companies
to modify the criteria used to define the
OECD-based group of countries, effective January 1, 1996.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, and
Lindsey and Mses.
Phillips and Yellen.1
Under the risk-based capital guidelines and the Basle Accord, claims on
governments of countries in the Organisation for Economic Co-operation and
Development and claims on banks in
OECD countries receive lower risk
weights than corresponding claims on
the governments and banks of other
countries. Under the amended guidelines, any OECD country that reschedules its sovereign debt is excluded from
lower-risk-weight treatment for five
years from the rescheduling. The other
federal banking agencies also adopted
the revised definition.
Regulation H
Membership of State Banking
Institutions in the Federal Reserve
System and
Rules of Practice for Hearings
February 2, 1995—Amendments
The Board approved a new subpart D
and appendix D of Regulation H and a
new subpart I to its Rules of Practice for
Hearings to establish standards for
safety and soundness for state member
banks, effective August 9, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Ms. Yellen. Absent and not voting: Ms.
Phillips.
The Riegle Community Development
and Regulatory Improvement Act of
1994 authorized the federal banking
agencies to prescribe safety and soundness standards and eliminated bank
holding companies from the scope of
section 132 of the act. Subpart D and
appendix D of Regulation H are the
Interagency Guidelines Establishing
Standards for Safety and Soundness.
Subpart I of the Rules of Practice for
Hearings specifies procedures for submitting compliance plans and for issuing orders to correct deficiencies.
Regulation K
International Operations of United
States Banking Organizations
December 21, 1995—Amendment
The Board approved an amendment to
Regulation K to expand the authority of
strongly capitalized and well-managed
banking organizations to make certain
foreign investments, effective December 21, 1995.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Mses. Phillips
and Yellen. Absent and not voting:
Mr. Blinder.1
The Board amended subpart A of
Regulation K to permit U.S. banking
organizations that are strongly capitalized and well managed to make larger
investments in foreign countries without
advance approval or review by the
Board. The amendment also streamlines
the review procedures for notices and
applications.
Board Policy Actions
Regulation O
Loans to Executive Officers,
Directors, and Principal
Shareholders of Member Banks;
Loans to Holding Companies and
Affiliates
March 28, 1995—Amendment
The Board approved an amendment to
Regulation O, effective April 7, 1995, to
allow a member bank to make a loan to
an executive officer without the approval
of its board of directors if the loan is
secured by a first lien on the officer's
residence.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen.
The revision implements an amendment to the Federal Reserve Act by
the Riegle Community Development
and Regulatory Improvement Act of
1994.
June 2, 1995—Amendment
The Board approved an amendment to
Regulation O to revise the definition of
unimpaired capital and surplus, effective
July 1, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, and
Lindsey and Mses.
Phillips and Yellen.1
The amendment conforms the definition of unimpaired capital and surplus to
a revision by the Office of the Comptroller of the Currency of the definition of
capital and surplus used to calculate the
limit on loans by a national bank to a
single borrower.
97
Regulation Y
Bank Holding Companies and
Change in Bank Control
April 25, 1995—Amendments
The Board approved an amendment to
Regulation Y to permit subsidiaries of
bank holding companies to offer a discount on their products to customers
who maintain certain combined minimum balances, effective May 26, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen.
The amendment to the antitying provisions of Regulation Y allows subsidiaries of a bank holding company to offer
a discount on their products to customers who maintain a combined minimum
balance in products specified by the
company offering the discount.
June 23, 1995—Amendment
The Board approved an amendment to
Regulation Y to eliminate the requirement for certain determinations of control under the Bank Holding Company
Act, effective July 6, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, and
Lindsey and Mses.
Phillips and Yellen.1
Under certain conditions the amendment eliminates the need for a bank
holding company to file a request with
the Board for a determination under section 2(g)(3) of the Bank Holding Company Act that it no longer controls
shares or assets that it has sold to a third
party with financing. The conditions are
that the purchaser is not an affiliate or a
principal shareholder of the divesting
98
82nd Annual Report, 1995
bank holding company or of a company
controlled by its principal shareholder
and that the purchaser has no officers,
directors, trustees, or beneficiaries in
common with, or subject to control by,
the divesting company.
Regulation Z
Truth in Lending
March 13, 1995—Amendments
The Board approved amendments to
Regulation Z to require certain disclosures for reverse mortgages and
mortgages with rates or fees above a
certain percentage or amount, effective
March 22, with optional compliance
until October 1, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen.
To implement the requirements of the
Home Ownership and Equity Protection
Act of 1994, the Board amended Regulation Z to require new disclosures for
reverse mortgages, which provide periodic advances, usually to elderly homeowners, and rely mostly on the home's
value for repayment. The amendments
also require that creditors disclose information about the potential cost of the
transaction and impose substantive limitations on home mortgage transactions
having rates or fees above a certain percentage or amount.
Regulation BB
Community Reinvestment and
Regulation C
Home Mortgage Disclosure
April 19, 1995—Revision and
Related Amendments
The Board approved a revised Regulation BB to change the standards for
evaluating compliance by financial institutions with the requirements of the
Community Reinvestment Act (CRA).
The revised regulation is effective January 1, 1996, for small financial institutions and institutions electing to be
evaluated under a strategic plan. Wholesale and limited-purpose institutions that
have collected data on their community
development lending may elect to be
evaluated under a separate test after
January 1, 1996. Large financial institutions will be subject to the final rule no
later than July 1, 1997.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, and Lindsey and
Ms. Yellen. Votes against this action:
Mr. LaWare and Ms. Phillips.
The Board also adopted related conforming amendments to Regulation C
and to the instructions that financial
institutions use to comply with the
annual reporting requirements under the
regulation, effective May 1, 1995. Compliance for loan and application data is
mandatory for data collected after
December 31, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, and Lindsey and Ms. Yellen.
Votes against this action: Messrs. Kelley
and LaWare and Ms. Phillips.
The revision of Regulation BB was
part of a comprehensive effort by the
federal financial supervisory agencies to
reform their standards for evaluating
complaince with the requirements of the
CRA. In addition to incorporating new
procedures for assessing compliance, the
Board provided guidance to financial
institutions on those procedures. Parallel
regulations were adopted by the other
federal banking agencies.
In dissenting, Mr. LaWare thought
that the revised Regulation BB and
related amendments to Regulation C
imposed management mandates that far
Board Policy Actions
exceeded the intent of the original Community Reinvestment Act, and he disagreed with the underlying premise
that banks did not satisfactorily meet
the credit needs of their communities.
Both Mr. LaWare and Ms. Phillips
were concerned that these actions
would lead to the allocation of credit.
Ms. Phillips did not think that the
revised Regulation BB achieved the goal
of more emphasis on performance with
less process and paperwork, and she
was concerned about the increased burdens of data collection and processing,
increased costs for examinations, and
increased requirements for documentation for which she did not see offsetting
benefits. Ms. Phillips did not support the
amendments to Regulation C because
she did not think that expansion of the
requirement to collect home mortgage
loan data by census tract would be constructive.
Mr. Kelley did not support the amendments to Regulation C because he
thought that the expanded reporting
requirements would not improve the
ability of the agencies to assess CRA
performance enough to justify the substantial additional burden on financial
institutions.
Regulation DD
Truth in Savings
January 4, 1995—Amendment
The Board approved an amendment to
Regulation DD to require that the annual
percentage yield on interest-bearing
accounts reflect the frequency of interest
payments.
Votes for this action: Messrs. Blinder,
Kelley, and Lindsey and Ms. Yellen. Voting against this action: Messrs. Greenspan
and LaWare and Ms. Phillips.
99
The Truth in Savings Act requires
that depository institutions calculate and
disclose an annual percentage yield for
interest-bearing accounts that reflects
the interest rate paid and the frequency
of compounding. The formula for calculating the annual percentage yield
assumes that interest remains on deposit
until maturity. This assumption produces
an annual percentage yield that does not
always reflect the time value of money
when there are interest payments before
maturity. To facilitate the comparison
of accounts, the Board revised the definition of the annual percentage yield
to reflect the frequency of interest
payments.
In dissenting, Messrs. Greenspan and
LaWare and Ms. Phillips believed that
the costs associated with implementing
the amendment would not be offset by
increased benefits to consumers arising
from an annual percentage yield that
assumes all periodic interest payments
are immediately reinvested at the contract rate.
January 17, 1995—Reconsideration
of Decision, Interim Amendment
The Board agreed to reconsider the
January 4, 1995, amendment to Regulation DD, which would have required
that the annual percentage yield disclosed by depository institutions on
interest-bearing deposits reflect the
frequency of interest payments. The
Board also approved an interim amendment to the regulation to permit institutions to disclose an annual percentage
rate equal to the contract interest rate for
certain accounts with maturities greater
than one year, effective January 18,
1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen.
100 82nd Annual Report, 1995
In response to requests from several
banking and consumer organizations,
the Board agreed to reconsider the January 4, 1995, amendment and sought further public comment on calculation of
the annual percentage yield. The Board
also approved an interim rule that permits institutions to disclose an annual
percentage rate equal to the contract
interest rate for time accounts with
maturities greater than one year that do
not compound and require interest distributions at least annually.
Rules Regarding Access to
Personal Information
Under the Privacy Act
January 5, 1995—Revision
The Board revised and updated its Rules
Regarding Access to Personal Information Under the Privacy Act, effective
February 16, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen.
The Board's Rules Regarding Access
to Personal Information implement the
requirements of the Privacy Act of 1974,
which is designed to restrict access by
third parties to records on individuals
that are maintained by the federal government and to give individuals access
to their own records. As part of its regulatory review and improvement process,
the Board revised the rules to reflect
changes in the Board's organization and
procedures.
Rules Regarding Delegation
of Authority
April 25, 1995—Amendment
The Board approved an amendment
to its Rules Regarding Delegation of
Authority to allow the Federal Reserve
Banks to approve certain investments
designed primarily to promote the public welfare, effective June 5, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, and LaWare and Mses.
Phillips and Yellen. Absent and not voting: Mr. Lindsey.
Regulation H (Membership of State
Banking Institutions in the Federal
Reserve System) permits state member
banks to make some public welfare
investments without advance approval
by the Board and to make other such
investments with specific approval. The
Board delegated to the Federal Reserve
Banks the authority to approve certain
public welfare investments that otherwise would have required the Board's
approval.
Rules Regarding Equal
Opportunity
December 27, 1995—Amendment
The Board approved an amendment to
its Rules Regarding Equal Opportunity
to correct an ambiguity in a provision
concerning confidential information in
an investigative file, effective February 5, 1996.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Mses. Phillips
and Yellen. Absent and not voting:
Mr. Blinder.1
The rules require that the file compiled during an investigation of an
administrative complaint of discrimination be made available to each complainant on completion of the investigation. The Board amended its rules to
clarify that confidential information
relevant to the complaint must be
included in the investigative file
unless it is classified national security
information.
Board Policy Actions
March 24, 1995—Guidelines for
Appeals of Material Supervisory
Determinations
The Board approved a process for
appeals by depository institutions of
adverse material supervisory decisions,
effective March 24, 1995.
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 required that the Board and the
other federal banking agencies establish
an independent, intra-agency process to
review appeals by depository institutions of material supervisory determinations such as an adverse examination
report. To implement the requirements
of the act, the Board adopted a set of
guidelines for such appeals.
May 22, 1995—Regulatory
Ombudsman Policy Statement
The Board approved a policy statement
that outlines the responsibilities of the
Board's ombudsman for agency regulatory matters, effective August 2, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, and
Lindsey and Mses.
Phillips and Yellen.1
Section 309 of the Riegle Community
Development and Regulatory Improvement Act of 1994 requires that each
federal banking agency appoint a regulatory ombudsman. The Board adopted a
policy statement that provides for the
appointment of an ombudsman to act as
a facilitator and mediator for the resolution of complaints and to ensure that
those complaints are addressed fairly
and promptly. The Board also appointed
an ombudsman.
101
August 9, 1995—New Fedwire
Closing Times
The Board approved the establishment
of a firm closing time for the Fedwire
securities transfer service, beginning
January 2, 1996.
Votes for this action: Messrs. Blinder,
Kelley, and Lindsey and Ms. Phillips.
Absent and1not voting: Mr. Greenspan and
Ms. Yellen.
The Board established a firm closing
time of 3:15 p.m. eastern time for transfer originations and 3:30 p.m. eastern
time for reversals of the Fedwire bookentry securities transfer system. The
Board also authorized the Federal
Reserve Banks to continue to close the
service earlier than the regular times on
days when the U.S. government and
mortgage securities markets observe
holidays. The new closing time is
expected to benefit market participants
by reducing uncertainty about the final
closing time of the system.
August 9, 1995—Policy Statement
on Payment System Risk
The Board approved revisions of the
Fedwire third-party access policy to
clarify its applicability and reduce
administrative burden, effective August
10, 1995.
Votes for this action: Messrs. Blinder,
Kelley, and Lindsey and Ms. Phillips.
Absent and 1not voting: Mr. Greenspan and
Ms. Yellen.
To reduce costs imposed by the policy, the Board made several requirements applicable only to arrangements
in which the service provider is not
affiliated with the Fedwire participant.
The Board also clarified the scope of the
policy.
102 82nd Annual Report, 1995
1995 Discount Rates
The Board approved one change in the
basic discount rate during 1995, an
increase from 43A percent to 5lA percent
in early February. Over the course of the
year, the Board also approved numerous
changes, including both increases and
decreases, in the rates charged by the
Federal Reserve Banks for seasonal and
for extended credit; rates for both types
of credit are set on the basis of marketrelated formulas, and they exceeded the
basic discount rate by varying amounts
during the year.
Basic Discount Rate
The Board's decisions on the basic rate
are made against the background of the
policy actions of the Federal Open Market Committee (FOMC) and the related
economic and financial developments
that are covered more fully in the minutes of the FOMC and in the monetary
policy reports to the Congress that
appear elsewhere in this REPORT.
Monetary policy had been tightened
considerably during 1994; as part of the
process, the basic discount rate was
raised in three steps, from 3 percent to
43/4 percent. Despite these policy tightening moves, economic activity had
continued to advance at a substantial
and unsustainable pace, and a number
of signs—including high levels of utilization of labor and other producer
resources—had pointed to a continued
risk of some increase in inflation.
During January 1995 a growing number of Federal Reserve Banks—a total
of seven by late in the month—
submitted requests to raise the basic discount rate by XA or xh percentage point.
The Board considered the requests during January but took no action until
February 1, when it approved an
increase of xh percentage point. This
action accompanied a corresponding
tightening of reserve conditions approved by the FOMC on the same day.
The purpose of these actions was to
adjust monetary policy to a stance that
was judged to be needed to contain inflation and foster sustainable economic
growth.
Over the remainder of 1995 the Board
considered but took no action on further
requests to change the basic rate. All
those requests called for reductions of
l
A or xh percentage point in the basic
rate. At various times from June through
September and then again in December,
one to five Reserve Banks had such
requests pending before the Board, all
but two of which had been withdrawn
by year-end. In reaching its decisions
not to approve the requests, the Board
took account of the slight easing actions
implemented by the FOMC in early
July and mid-December. Those actions
focused on indications of receding inflationary pressures and some associated
moderation in inflationary expectations,
and given surrounding circumstances,
the Board decided not to accompany
them with reductions in the basic rate.
Structure of Discount Rates
The basic rate is the rate normally
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 intrayearly movements
in their deposits and loans, funds may
be provided for periods longer than
those permitted under adjustment credit.
Board Policy Actions
Since its introduction on January 9,
1992, the flexible rate charged on seasonal credit has been closely aligned
with short-term market rates; it is never
less than the basic rate applicable to
adjustment credit.
A different flexible rate is charged on
extended-credit loans, which are made
to depository institutions that are under
sustained liquidity pressure and are not
able to obtain funds from other sources.
The rate for extended credit is 50 basis
points higher than the seasonal rate and
is at least 50 basis points above the basic
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 1995 the structure of
discount rates was as follows: a basic
rate of 5.25 percent for short-term
adjustment credit, a rate of 5.75 percent for seasonal credit, and a rate of
6.25 percent for extended credit. During
1995 the flexible rate on seasonal credit
ranged from a low of 5.60 percent to a
high of 6.10 percent, and the flexible
rate on extended credit ranged from
a low of 6.10 percent to a high of
6.60 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
103
and to submit such rates to the Board of
Governors for review and determination. Federal Reserve Bank proposals
on the discount rate include requests to
renew the formulas for calculating the
flexible rates on seasonal and extended
credit. Votes relating to the reestablishment of existing rates or for the updating of market-related rates under the
seasonal and extended credit programs
are not shown in this summary. All
votes on discount rates taken by the
Board of Governors during 1995 were
unanimous.
Votes on the Basic Discount Rate
February 1, 1995. 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
San Francisco to increase the basic
discount rate Vi percentage point, to
5lA 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 Philadelphia, Atlanta, Minneapolis, and Dallas,
effective February 2, 1995, and the Federal Reserve Bank of Cleveland, effective February 9, 1995.
.
105
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
1995. 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, 1995
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
106 82nd Annual Report, 1995
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 107
Domestic Policy Directive
In Effect January 1, 19951
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
43/4 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
will foster price stability and promote sustainable growth in output. In furtherance of
1. Adopted by the Committee at its meeting on
December 20, 1994.
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 nonfmancial 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 coming months.
Authorization for Foreign
Currency Operations
In Effect January 1, 1995
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:
108 82nd Annual Report, 1995
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, wjih 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
Regular
Special
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
3,000
1,500
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
Minutes of FOMC Meetings
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.
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 for
109
eign currency operations, and to consult with
the Secretary on policy matters relating to
foreign currency operations;
C. From time to time, to transmit
appropriate reports and information to the
National Advisory Council on International
Monetary and Financial Policies.
8. Staff officers of the Committee are
authorized to transmit pertinent information on System foreign currency operations
to appropriate officials of the Treasury
Department.
9. All Federal Reserve Banks shall participate in the foreign currency operations
for System Account in accordance with paragraph 3 G(l) of the Board of Governors'
Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks
dated January 1, 1944.
Foreign Currency Directive
In Effect January 1, 1995
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.
110 82nd Annual Report, 1995
C. For such other purposes as may be
expressly authorized by the Committee.
operation is associated with repayment of
swap drawings.
4. System foreign currency operations
shall be conducted:
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.
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, 1995
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 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.
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 January 31-February 1, 1995
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.
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
Board of Governors of the Federal
Reserve System, in Washington, D.C.,
starting on Tuesday, January 31, 1995,
at 1:30 p.m. and continuing on Wednesday, February 1, 1995, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Minutes of FOMC Meetings, January-February
Mr. Blinder
Mr. Hoenig
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. Melzer
Ms. Minehan
Mr. Moskow
Ms. Phillips
Ms. Yellen
Messrs. Boehne, Jordan, McTeer, and
Stern, Alternate Members of the
Federal Open Market Committee
Messrs. Broaddus, Forrestal, and Parry,
Presidents of the Federal Reserve
Banks of Richmond, Atlanta, and
San Francisco 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. Davis, Dewald, Lindsey,
Mishkin, Promisel, Siegman,
Slifman, and Stockton, Associate
Economists
Mr. Fisher, Manager, 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. Simpson, Associate Director,
Division of Research and
Statistics, Board of Governors
Mr. Winn,2 Assistant to the Board,
Office of Board Members, Board
of Governors
Messrs. Hooper and Reinhart,2
Assistant Directors, Divisions of
International Finance and
Monetary Affairs respectively,
Board of Governors
2. Attended portions of the meeting.
HI
Mr. Rosine,2 Senior Economist,
Division of Research and
Statistics, Board of Governors
Mr. English,2 Economist, Division of
Monetary Affairs, Board of
Governors
Mr. Freeman,2 Section Chief, Division
of International Finance, Board of
Governors
Ms. O'Day,2 Associate General
Counsel, Legal Division, Board of
Governors
Mr. Baer2 and Ms. Misback,2
Managing Senior Counsels, Legal
Division, Board of Governors
Mr. Ely,2 Senior Attorney, Legal
Division, Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Barron and Rasdall, First Vice
Presidents, Federal Reserve Banks
of San Francisco and Kansas City
respectively
Messrs. Beebe, Goodfriend, Lang,
Rosenblum, and Sniderman and
Ms. Tschinkel, Senior Vice
Presidents, Federal Reserve Banks
of San Francisco, Richmond,
Philadelphia, Dallas, Cleveland,
and Atlanta respectively
Messrs. McNees and Miller, Vice
Presidents, Federal Reserve Banks
of Boston and Minneapolis
respectively
Mr. Evans and Ms. Krieger, Assistant
Vice Presidents, Federal Reserve
Banks of Chicago and New York
respectively
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, 1995, and ending December 31, 1995, had been received and that
the named individuals had executed
their oaths of office.
The elected members and alternate
members were as follows:
112 82nd Annual Report, 1995
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;
Cathy E. Minehan, President of the Federal
Reserve Bank of Boston, with Edward
G. Boehne, President of the Federal
Reserve Bank of Philadelphia, as
alternate;
Michael H. Moskow, President of the Federal Reserve Bank of Chicago, with
Jerry L. Jordan, President of the Federal Reserve Bank of Cleveland, as
alternate;
Thomas C. Melzer, President of the Federal
Reserve Bank of St. Louis, with
Robert D. McTeer, President of the
Federal Reserve Bank of Dallas, as
alternate;
Thomas M. Hoenig, President of the Federal
Reserve Bank of Kansas City, with
Gary H. Stern, President of the Federal Reserve Bank of Minneapolis, 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 regularly scheduled meeting of the
Committee after December 31, 1995,
with the understanding that should they
discontinue 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
William J. McDonough
Chairman
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
Lynn E. Browne, Thomas E. Davis,
William G. Dewald, David E. Lindsey,
Frederic S. Mishkin, Larry J. Promisel,
Charles J. Siegman, Lawrence Slifman,
David J. Stockton, and Carl E.
Vander Wilt, 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, 1995.
By unanimous vote, Peter R. Fisher
was selected to serve at the pleasure of
the Committee as Manager, System
Open Market Account, on the understanding that his selection was subject to
being satisfactory to the Federal Reserve
Bank of New York.
Secretary's note. Advice subsequently was
received that the selection of Mr. Fisher was
satisfactory to the board of directors of the
Federal Reserve Bank of New York.
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on December 20, 1994,
were approved.
The Manager of the System Open
Market Account reported on developments in foreign exchange markets since
the December meeting. There were no
market transactions for System Account
during this period, and thus no vote was
required of the Committee.
The Manager also reported on developments in domestic financial markets
and on System open market transactions
in government securities and federal
agency obligations during the period
December 20, 1994, through January 31, 1995. 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
Minutes of FOMC Meetings, January-February
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 a strong further rise
in economic activity during the closing
months of 1994. Although consumer
spending appeared to be less buoyant
and housing demand had softened somewhat, growth in business investment,
exports, and inventories remained brisk.
Industrial production and payroll
employment continued to record substantial gains. Broad indexes of prices
for consumer goods and services had
risen moderately on average over recent
months despite shrinking margins of
unemployed resources and further sizable increases in the prices of many
materials.
Nonfarm payroll employment advanced considerably further in December after a sharp rise in November. Substantial job gains were recorded in
December in service industries and in
the retail trade sector. Hiring in manufacturing was brisk for a third straight
month, with labor demand especially
strong in motor vehicles, capital goods,
and electronic equipment. Construction
payrolls slipped after a large increase in
November. The average workweek was
unchanged in December, but factory
overtime edged back up, matching the
highest level reached in the history of
this series. The civilian unemployment
rate declined to 5.4 percent.
Industrial production
registered
another large advance in December.
Manufacturing accounted for all of the
gain; an upturn in mining production
offset a decline in the output of utilities
associated with unseasonably warm
113
weather. In manufacturing, the output of
motor vehicles and parts surged again
and further solid gains were recorded in
the production of other goods. The large
advance in industrial output in December boosted rates of capacity utilization
above already high levels.
Retail sales were reported to have
changed little over November and
December after substantial advances in
September and October; the flattening
of sales reflected sharply reduced
increases in outlays for non-auto consumer goods. Consumer spending on
services rose moderately on balance
over November and December, with
outlays for energy services held down
by unusually mild weather. Although
some indicators of housing demand had
weakened, housing starts posted sizable
gains on balance over November and
December; single-family construction
remained at a relatively high level
despite the rise in mortgage rates in
1994, and multifamily construction continued its gradual recovery from the
depressed levels of early 1993. The
regional pattern of starts activity suggested that favorable weather accounted
for little of the strength in December.
Business fixed investment was estimated to have grown at a very rapid
pace in the fourth quarter, with a pickup
indicated for business spending on both
equipment and nonresidential structures.
New orders for nondefense capital
goods declined on balance over November and December, but the large backlog
of unfilled orders, especially for computers, pointed to a continued strong
expansion in spending on business
equipment in coming months. Nonresidential construction activity was up
considerably in November for a third
straight month, with increases in construction widespread by type of structure. Recent data indicated that permits
for nonresidential construction were
114 82nd Annual Report, 1995
continuing to trend higher and perhaps
were running ahead of construction
activity.
Business
inventory
investment
remained brisk in November; in the
aggregate, the buildup was in line with
shipments and sales. In manufacturing,
stocks increased more rapidly in
November, but the ratio of stocks to
shipments declined further and was at a
historically low level. In wholesale
trade, inventories rose less rapidly in
November, but the inventory-to-sales
ratio increased further, although it
remained within its range of recent
years. Inventory accumulation slowed a
little at the retail level, and the
inventory-to-sales ratio for this sector
remained near the middle of its range of
recent years.
The nominal deficit on U.S. trade in
goods and services widened somewhat
further in November, and for October
and November combined the deficit was
well above its average rate in the third
quarter. The value of exports of goods
and services increased more slowly in
the October-November period than in
the third quarter, largely reflecting
reduced growth of exported industrial
supplies. The rise in the value of imports
of goods and services for the OctoberNovember period was led by increased
imports of non-oil industrial supplies
and automotive, capital, and consumer
goods. Available data for the fourth
quarter of 1994 indicated continued
growth in economic activity, though
perhaps at a somewhat slower pace, in
the major foreign industrial countries.
Consumer price inflation slowed a
little in December despite a jump in
food prices that was only partly offset
by a decline in energy prices. Excluding
food and energy items, consumer prices
edged up in December and rose significantly less in 1994 than in 1993. At the
producer level, prices of finished goods
also advanced more slowly in December, with a drop in energy prices balancing a surge in food prices. Prices of
finished goods other than food and
energy increased modestly in 1994 after
being held down in 1993 by a sharp
drop in the prices of tobacco products.
In contrast to prices of finished goods,
price inflation at earlier stages of production picked up in 1994. For intermediate goods other than food and energy
items, prices rose at a faster rate in the
second half of 1994, with the pickup
most clearly evident in materials used in
manufacturing. Prices of crude materials
rose rapidly in the second half of 1994
and for the year as a whole. Increases in
labor costs remained moderate. Average
hourly earnings were little changed
on balance over November and
December, and for the year as a whole
they advanced only slightly more than
in 1993. More broadly, hourly compensation of private industry workers
increased more slowly in the fourth
quarter than in any of the previous
three quarters of 1994, and the rise for
the year was significantly less than in
1993.
At its meeting on December 20,1994,
the Committee adopted 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, 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 associated with this directive were
expected to be consistent with modest
Minutes of FOMC Meetings, January-February
growth in the broader monetary aggregates over coming months.
Open market operations during the
intermeeting period were directed
toward maintaining the existing degree
of pressure on reserve positions. With
the need for seasonal credit diminishing
over the period, adjustment plus seasonal borrowing trended lower but averaged a little above anticipated levels.
Near year-end, the Trading Desk accommodated heavy demands for reserves
through System repurchase agreements
(RPs). The federal funds rate averaged
close to 51/2 percent during the intermeeting period.
Most other market interest rates
declined slightly on balance over the
period after the December 20 meeting.
Very short term interest rates fell after
the first of the year, reflecting the disappearance of year-end premiums. More
broadly, favorable news on inflation and
indications of some unexpected slowing
in the growth of final demand apparently led market participants to conclude that further tightening of monetary policy, though still expected to be
substantial, would be less than previously thought and would be spread over
a longer period. Yields on tax-exempt
instruments declined considerably as
concerns about the implications of
Orange County's problems for the financial condition of other municipal governments abated. Strong earnings
reports for the fourth quarter boosted
major indexes of equity prices.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
declined somewhat over the intermeeting period. The dollar fell substantially
against the mark, which was buoyed by
safe-haven inflows from weaker European currencies, but dropped less
against the yen. One factor that weighed
against the dollar was uncertainty about
115
the consequences for the U.S. economy
of the sharp depreciation of the Mexican
peso and the related economic and
financial problems in Mexico and other
developing economies; market participants expressed some concern that the
crisis might constrain U.S. monetary
policy in the event of further domestic
inflation pressures and that the counterpart to the large prospective reduction in
the Mexican current account deficit
would lie importantly in the already substantial U.S. deficit.
Growth of M2 and M3 strengthened
in December, and data for the first half
of January suggested a further acceleration in that month. Much of the pickup
in M2 in December was due to rapid
expansion in overnight RPs and overnight Eurodollars, which outweighed a
further contraction of liquid accounts
associated in part with depositor efforts
to obtain higher returns by shifting
funds into market instruments. The
faster growth of M3 reflected, in addition to the acceleration of its M2 component, bank use of large CDs and nondeposit sources of funds to finance
relatively robust demands for credit.
From the fourth quarter of 1993 to the
fourth quarter of 1994, M2 grew at the
lower end of the Committee's range for
1994 and M3 in the lower half of its
range. Total domestic nonfinancial debt
had continued to expand at a moderate
rate in recent months, and for 1994 it
was in the lower half of its monitoring
range.
The staff forecast prepared for this
meeting suggested that growth of economic activity would slow substantially
over the next several quarters and for
some period thereafter would average
less than the rate of increase in the
economy's potential output. Consumer
spending was projected to be well sustained for a time but to be restrained
later by smaller gains in real incomes,
116 82nd Annual Report, 1995
the satisfaction of pent-up demands, and
the lagged effects of higher interest rates
on the demand for durable goods. Business outlays for new equipment were
expected to decelerate substantially in
response to higher financing costs and
slower growth of sales and profits.
Homebuilding was anticipated to soften
a little in response to slower growth in
jobs and income as well as to the
increase that had occurred in mortgage
rates. Recent developments in Mexico
were expected to cut into exports in the
near term, but the sustained economic
growth elsewhere would keep export
demand on an uptrend. Although there
was considerable uncertainty regarding
the fiscal outlook, in light of the congressional intent to cut the federal deficit the forecast incorporated a somewhat
greater degree of fiscal restraint than
had been built into recent forecasts. In
the staff's judgment, the economy currently was operating beyond its longrun, noninflationary capacity, and there
remained a substantial risk that inflation
could ratchet higher absent further monetary policy actions.
In the Committee's discussion of current and prospective economic developments, the members agreed that growth
in economic activity could be expected
to moderate considerably over the
course of 1995, although inflation was
likely to be higher than in 1994. They
acknowledged that their current projections were subject to substantial risks.
The expansion continued to display
appreciable momentum and signs of
slower growth were still quite limited
and tentative. Even so, the members
remained persuaded that the lagged
effects of the policy tightening implemented over the course of 1994 would
become increasingly evident in interestsensitive sectors of the economy as the
year progressed. The projected moderation in the growth of final demands,
which probably would be concentrated
at least initially in the housing and consumer durables sectors, would undoubtedly reinforce an expected cutback in
inventory investment from its unsustainable pace in recent quarters. A key
uncertainty in the outlook was whether
the slowing in overall economic growth
would be sufficient to relieve the current
pressures on labor and other producer
resources, which many members saw as
portending higher inflation, or, indeed,
whether such pressures would intensify
further. Opinions differed to some
degree with regard to both the likely
extent of the prospective slowing in economic growth and the outlook for inflation. However, most of the members
concluded that some rise in inflation
appeared probable over coming quarters, and they were concerned that this
upturn would not be reversed and could
be extended in the absence of further
monetary restraint.
In keeping with the practice at meetings when the Committee establishes its
long-run ranges for growth of the money
and debt aggregates, the members of the
Committee and the Federal Reserve
Bank presidents not currently serving as
members had prepared individual projections of economic activity, the rate of
unemployment, and inflation for the
year 1995. Measured from the fourth
quarter of 1994 to the fourth quarter of
1995, their forecasts of the growth in
real GDP had a central tendency of 2 to
3 percent, compared with a growth rate
of 4 percent estimated for 1994. Most of
the members also anticipated that economic expansion in line with their forecasts would be associated with little
change in the unemployment rate, and
their projections of the rate in the fourth
quarter of 1995 were centered in a narrow range around 5l/i percent. The high
levels of resource utilization implied by
these projections were viewed by most
Minutes of FOMC Meetings, January-February
members as likely to foster somewhat
greater pressure on wages and prices.
Accordingly, projections of the rate of
inflation, as indexed by the consumer
price index, had a central tendency of 3
to 31/2 percent for the period from the
fourth quarter of 1994 to the fourth
quarter of 1995, compared with rates of
about 23/4 percent in both 1993 and
1994.
In their review of regional economic
developments, members referred to
widespread evidence of further growth
in business activity, but a number also
mentioned scattered signs of some softening in a few areas or industries. Several emphasized, however, that the anecdotal evidence did not currently point to
any significant moderation in the overall
growth of the economy. With regard to
financial conditions, members commented that they saw little indication
that policy tightening actions over the
past year were constraining the availability of credit to any observable
degree. Despite higher interest rates,
financial conditions remained broadly
supportive of further economic expansion. The performance of stock market
prices and the relatively narrow quality
spreads in debt markets attested to a
considerable degree of confidence
among investors. Members also took
note of the accommodative lending policies of banking institutions. Those policies had encouraged rapid growth in
consumer and business loans and evidently were contributing to the ongoing
strength of the economic expansion.
Some members expressed concern that a
number of banks might have eased their
lending standards unduly and thus
assumed unwarranted risks in their loan
portfolios.
In their assessment of developments
in key sectors of the economy, members
referred to the sluggish behavior of nonauto retail sales in November and
117
December, but they also noted that the
available information on consumer
spending during the first few weeks of
this year was inconclusive with regard
to the possible emergence of a slowing
trend. Anecdotal commentary on retail
sales was mixed, and evidence of some
decline in January sales of motor vehicles needed to be evaluated with caution
because of the introduction of a new
reporting method. Consumer confidence
was at a high level, but some members
observed that consumer indebtedness
had grown rapidly and was likely to
exert a retarding effect on consumer
spending at some point. In this regard,
however, it was pointed out that rising
consumer incomes had kept debt service
burdens from increasing significantly
thus far. On balance, the members
believed that the growth in consumer
spending probably would slow over the
forecast horizon though such spending
might be relatively well maintained for
some period, given the ongoing expansion in jobs and incomes and the ready
availability of financing to many consumers. In any event, the outlook for
this sector of the economy, which was
critical to any significant moderation in
overall economic growth, was uncertain
with regard to both the timing and the
extent of possible slowing.
Housing construction was cited as
potentially the most important demand
sector of the economy that was likely to
contribute to more moderate economic
growth over the year ahead. As evidenced by nationwide data through the
end of 1994, single-family housing
starts had held up unexpectedly well
despite sizable increases in home mortgage rates, but anecdotal reports from
around the country had pointed to
weakening demand for new homes for
several months and continued to do
so. Against the background of current
mortgage rate levels and the rise that
118 82nd Annual Report, 1995
had occurred in home mortgage indebtedness, the members continued to
anticipate softening demand for housing, at least in the single-family sector.
The mild uptrend in the much smaller
multifamily sector was likely to continue for some period, given low rental
vacancy rates in a number of areas, and
further improvement in nonresidential
construction was likely to offset to some
extent the overall slowing in housing
construction.
In the capital goods sector, real
business-fixed investment had strengthened further in the fourth quarter, and
the members believed, on the basis of
rising order backlogs and the strength of
permits for new business construction,
that considerable momentum had carried into this year. While the growth
in spending for business equipment
undoubtedly would moderate from its
extraordinary pace over an extended
period, large business profits and the
still relatively low user cost of capital
would tend to support appreciable further growth in such investment in the
context of elevated levels of capacity
utilization and ongoing efforts, induced
by strong market competition, to
increase productivity. Moreover, nonresidential construction was now trending higher, with particular strength evident in industrial and commercial
construction.
The pace of inventory accumulation0
in recent quarters was viewed as unsustainable and a decline in inventory
investment was seen as likely over the
forecast horizon, though the precise timing and extent were impossible to predict. While slower growth in final
demand might in most circumstances
stimulate a relatively sharp adjustment
in inventory investment, members cited
factors that could mute the size of that
adjustment and its effects on overall
GDP. These included relativelv low
inventory-sales ratios across much of
the economy and little anecdotal or other
evidence of unintended inventory accumulation. Moreover, because an unusually large share of the inventory buildup
in recent quarters appeared to involve
imports, a cutback in such investment
should tend to have a smaller-than-usual
impact on domestic production. There
was no current evidence that inventory
investment was slowing, and indeed
recent data on business loans at banks
might suggest some acceleration in
inventory accumulation since the beginning of the year. Nonetheless, as more
moderate growth in final demand began
to emerge, concerns about the availability of materials used in the production
process or stocks needed to meet market
demand should diminish, and business
firms could be expected to trim their
demand for inventories, perhaps aggressively for a time. Indeed, this sector of
the economy might well account for
much of the slowing in the expansion
for some period of time during the year
ahead.
Fiscal policy was under active debate
in the Congress, and the members
viewed the outcome of that debate as
very uncertain. The emergence of a
moderately restrictive fiscal policy
might be a reasonable assumption to
incorporate in current forecasts, albeit
an assumption that clearly was subject
to a wide range of error. In any event,
any progress toward cutting future budget deficits was likely to have a favorable effect on domestic financial markets and perhaps also on the dollar in
foreign exchange markets.
Developments in Mexico and their
possible repercussions in other developing nations had negative implications
for U.S. exports, at least over the short
run. Indeed, some members cited anecdotal evidence that reduced trade with
Mexico had alreadv emerged since late
Minutes of FOMC Meetings, January—February
1994. Moreover, the effects of the earthquake in Kobe, Japan, seemed to be
disrupting trade with that nation in agricultural and other bulk goods and was
likely to continue doing so over the near
term. Looking beyond the months
immediately ahead, the relatively robust
growth projected for many industrial
countries together with the lower value
of the dollar should boost the nation's
overall external trade balance, though
probably not to the extent of providing
substantial stimulus to the economy.
One member observed that a number of
countries throughout the world faced the
potential for important changes in political conditions that could have adverse
effects on their growth and trading relationships, with possible repercussions on
U.S. exports.
Members commented that the strong
growth in economic activity and high
levels of resource utilization had fostered relatively rapid increases in the
prices of many raw materials and semifinished goods used in the production
process, but contrary to numerous forecasts these developments had not led
thus far to a broad pickup in inflation as
measured by the prices of final goods
and services. This favorable development might be explained in part by lags
in the inflation transmission process and
perhaps to some degree by various structural changes and productivity improvements in recent years that may have
raised both the level and the rate of
increase of the economy's potential for
sustained activity. Many members
observed, however, that it would not be
prudent from a monetary policy standpoint to assume that continued rapid
economic growth and further pressures
on producer resources would not lead to
rising inflation over the quarters ahead.
While competitive pressures still generally limited the extent to which business
firms could pass through rising costs of
119
raw materials and other producer inputs
to the prices of final goods, the members
referred to increasingly numerous
examples of successful efforts to raise
such prices and to apparently growing
business expectations that it would be
possible to implement such increases
over the months ahead. On balance, the
members generally were persuaded that
the economy had attained levels of labor
and capital utilization that implied a
strong risk of rising inflation over coming quarters.
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
1995 that it had established on a tentative basis at its meeting in July 1994.
The tentative ranges included expansion
of 1 to 5 percent for M2 and 0 to 4 percent for M3, measured from the fourth
quarter of 1994 to the fourth quarter of
1995. The monitoring range for growth
of total domestic nonfinancial debt had
been set provisionally at 3 to 7 percent
for 1995. The ranges for M2 and M3
were unchanged from those that the
Committee had used in 1994, while the
range for debt was 1 percentage point
lower.
All the members endorsed a proposal
to adopt the ranges that the Committee
had set on a tentative basis in July 1994.
While some acceleration in the growth
of the broad monetary aggregates from
the pace in 1994 could be anticipated
over the year ahead according to a staff
analysis, monetary expansion within the
ranges in question appeared to be consistent with the moderation in the expansion of nominal GDP that the members
were projecting for 1995 and that they
viewed as desirable to head off increasing inflation. Moreover, the ranges for
the broad monetary aggregates had been
120 82nd Annual Report, 1995
reduced over the past decade to levels
that, notably in the case of M2, should
now be consistent over long periods
with the Committee's objectives for
stable prices and maximum sustainable
economic growth. This outcome would
depend on the restoration over time of
the historical velocity patterns linking
the monetary aggregates to broad measures of. economic performance, including a level velocity trend for M2. It was
noted in this regard that until recent
years the growth of M3 had tended to
exceed that of M2—a pattern that
seemed to be re-emerging—and therefore a somewhat higher range might be
set for M3 than for M2. However, the
members did not believe that a persuasive argument could be made at this
juncture for raising the M3 range,
though they did not want to rule out the
option of doing so later, possibly when
the ranges were reviewed at midyear.
Indeed, to make the change at this point
might convey a misleading message
regarding the Committee's policy intentions or its confidence in prospective
monetary growth relationships.
The Committee also considered the
potential advantages and disadvantages
of setting specific targets for bringing
inflation down and achieving price stability over time. Such targets might
provide an alternative or supplemental
approach to the monetary growth
ranges, which had been found to be
unreliable guides for monetary policy
over the past several years. The members discussed a number of aspects of
inflation targeting. On the one hand,
such targeting would help to anchor the
conduct of monetary policy and progress
in meeting these objectives could
enhance the credibility of the Federal
Reserve and perhaps reduce the overall
cost of attaining price stability. On the
other hand, close adherence to preset
inflation targets could unduly constrain
the Federal Reserve in its efforts to
counteract the effects of cyclical shortfalls in the performance of the economy.
The members agreed that the discussion
had been helpful in outlining the issues
and that the subject should be revisited.
It was noted in this connection that the
Committee might be asked to comment
during the months ahead on specific
congressional proposals for inflation
targeting.
At the conclusion of its discussion, all
the members voted to approve without
change the tentative ranges for 1995 that
the Committee had established in July
of last year. In keeping with its usual
procedures under the HumphreyHawkins Act, the Committee would
review its ranges at midyear, or sooner
if interim conditions warranted, in light
of the growth and velocity behavior of
the aggregates and ongoing economic
and financial developments. Accordingly, the following longer-run policy
statement for 1995 was approved 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 1994 to the fourth quarter of 1995. The
Committee anticipated 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 lowered to 3 to 7 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, Blinder, Hoenig, Kelley,
Minutes of FOMC Meetings, January-February
LaWare, Lindsey, and Melzer, Ms. Minehan, Mr. Moskow, and Mses. Phillips and
Yellen. Votes against this action: None.
In the Committee's discussion of policy for the intermeeting period ahead, all
the members indicated that they could
support some firming in reserve conditions, though a few preferred to delay
such an action pending the receipt
within the next few weeks of significant
new information that could help the
Committee to evaluate whether and to
what extent the economic expansion
might be slowing. Most of the members
were convinced, however, that current
monetary policy should be adjusted
promptly to a more clearly restrictive
stance. In their view, prompt action was
needed to counter inflationary pressures
and inflationary expectations in an economy that already seemed to be operating
at, and perhaps beyond, sustainable
capacity levels and to be continuing to
expand at a pace above its long-run
potential. In these circumstances, a
delay in tightening policy would incur
an unacceptable risk of allowing further
inflationary momentum to develop in
the economy and would require more
tightening over time than might otherwise be needed to achieve the Committee's objectives. Part of the risk involved
a potential further decline in the dollar
at a time when there already was considerable concern about rising pressures on
prices. Some tightening of policy at this
meeting was generally anticipated in
markets, and a failure to take action now
was likely in the view of a number of
members to raise questions about the
credibility of the System's anti-inflation
resolve and to generate some unsettlement in financial markets, notably in the
foreign exchange market where the dollar already appeared to be vulnerable to
further weakness. In terms of balancing
the policy risks that were involved, a
121
prompt move would provide some
insurance against what these members
viewed as the principal risk in current
circumstances—that of rising inflation.
The risks of excessive tightening, while
not completely absent, were believed to
be limited in light of the apparent
strength and momentum of the expansion, which many forecasters had underestimated over the past year. One
member expressed the view that while
monetary growth had been damped,
continuing restraint on the growth of the
narrow monetary aggregates was desirable to offset a previous buildup in
liquidity and to help ensure that inflationary pressures would be contained.
Members who saw an advantage in
postponing a decision to tighten policy
commented that, in light of some scattered signs of a moderating expansion, it
would be helpful to wait for certain key
statistics that would become available
within the next few weeks to judge the
extent of any moderation. Data on retail
sales in January might provide particular insights as to whether the softening
in such sales in November and December was persisting. The favorable news
on inflation in the fourth quarter had
lessened concerns about an immediate
inflation threat, and if the incoming
information confirmed the need for further tightening, the short delay in implementing it would have only a minimal
cost. In addition, an increase in monetary restraint would be likely to exacerbate the problems of Mexico and perhaps to some extent those of Canada and
would have potentially adverse implications for U.S. trade with both of these
key trading partners. Because the probability that incoming information would
counsel against any further policy tightening was certainly less than 50 percent
so that only a matter of timing was
likely to be involved, these members
indicated that they would join with the
122 82nd Annual Report, 1995
other members in voting to tighten policy at this meeting.
Concerning the possible need to
adjust policy during the intermeeting
period, the members were unanimously
in favor of adopting a symmetric
directive. Given a decision to implement
some tightening in monetary policy at
this meeting, they did not believe that
there should be a presumption toward
possible further tightening in this period.
A number of members observed that
further monetary restraint might not be
needed if, in line with their expectations, the incoming evidence on the performance of the economy suggested that
the expansion was moderating sufficiently for the economy to return to a
growth path consistent with containing
inflation pressures. In any event, the
Committee's most difficult decision over
the next several quarters was likely to be
that of determining when further tightening was no longer desirable.
Prior to the end of the meeting, the
members were apprised of a disposition
on the part of the Board of Governors to
approve an increase of Vi percentage
point in the discount rate that was pending at several Federal Reserve Banks. In
the event that such an increase was
approved by the Board, the members
agreed that open market operations
should be conducted so as to allow that
increase to be reflected fully in reserve
markets.
At the conclusion of the Committee's
discussion, all the members indicated
that they could support a directive that
called for increasing somewhat the
degree of pressure on reserve positions.
In the implementation of this policy,
account would be taken of a possible
increase of xh percentage point in the
discount rate that was under consideration by the Board of Governors. The
members also agreed that the directive
should not include any 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
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 moderate
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 a strong further rise in economic
activity during the closing months of 1994.
Nonfarm payroll employment was up considerably further in December after a sharp
increase in November, and the civilian unemployment rate declined to 5.4 percent. Industrial production registered another large
advance in December and capacity utilization continued to move up from already high
levels. Current estimates indicate little
change in retail sales over November and
December, while housing starts posted sizable gains on balance over the two months.
Orders for nondefense capital goods point to
a continued strong expansion in spending on
business equipment; permits for nonresidential construction have been trending appreciably higher. The nominal deficit on U.S.
trade in goods and services widened somewhat in October-November 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.
Most market interest rates have declined
slightly on balance since the Committee
Minutes of FOMC Meetings, January-February
123
meeting on December 20, 1994. In foreign
exchange markets, the trade-weighted value
of the dollar in terms of the other G-10
currencies has declined somewhat over the
intermeeting period. The Mexican peso has
depreciated sharply against the dollar.
Growth of M2 and M3 strengthened in
December and January. From the fourth
quarter of 1993 to the fourth quarter of 1994,
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 1994 it grew at a
rate in the lower half of its 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 1994 to the fourth quarter of 1995. The
Committee anticipated 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 lowered to 3 to 7 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, 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 moderate
growth in M2 and M3 over coming months.
On December 30, 1994, the Committee
approved a temporary increase from
$3 billion to $4Vi billion in the System's
reciprocal currency (swap) agreement
with the Bank of Mexico and it also
approved the activation of that agreement. The Committee approved a further temporary increase of $VA billion
and activation of that amount at this
meeting, thereby raising the swap
arrangement with the Bank of Mexico to
a level of $6 billion, consisting of the
regular $3 billion line and a special
$3 billion line. The special $3 billion
line may be drawn on until January 31,
1996. Drawings would be for threemonth periods and could be renewed a
maximum of three times. Once a drawing on the special line is repaid, the size
of the line will be reduced pari passu.
All drawings on the special line will
have to be repaid no later than January 31, 1997. The terms and conditions
for use of the permanent $3 billion swap
facility with the Bank of Mexico remain
unchanged and drawings, once repaid,
will require Committee action prior to
subsequent use. The Treasury has undertaken to ensure the repayment of any
swap drawing by the Bank of Mexico on
the $6 billion in lines that is outstanding
more than twelve months.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Hoenig, Kelley,
LaWare, Lindsey, and Melzer, Ms. Minehan, Mr. Moskow, and Mses. Phillips and
Yellen. Votes against this action: None.
The Committee also approved at this
meeting an increase from $5 billion to
$20 billion in the amount of eligible
foreign currencies that the System is
Temporary Increase in Reciprocal
Currency Agreement with the Bank
of Mexico and Increase in
Agreement to "Warehouse"
Foreign Currencies
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Hoenig, Kelley, and
LaWare, Ms. Minehan, Mr. Moskow, and
Mses. Phillips and Yellen. Votes against
this action: Messrs. Lindsey and Melzer.
124 82nd Annual Report, 1995
prepared to "warehouse" for the Treasury and the Exchange Stabilization
Fund (ESF). The purpose of the warehousing facility, which has been in place
for many years, is*to supplement the
U.S. dollar resources of the Treasury
and the ESF for financing purchases of
foreign currencies and related international operations. The size of the warehousing facility had ranged up to
$15 billion in past years, but it was
reduced to $5 billion in February 1992.
The expansion of the, warehousing
agreement at this meeting was intended
to facilitate U.S. participation in the
Multilateral Program to Restore Financial Stability in Mexico, announced by
President Clinton on January 31, 1995,
by warehousing up to $20 billion in
German marks and Japanese yen held
by the Treasury through the ESF..The
Committee will review each year the
need to maintain this level of warehousing authority in light of the progress and
needs of the Program.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Hoenig, Kelley, and
LaWare, Ms. Minehan, Mr. Moskow, and
Mses. Phillips and Yellen. Votes against
this action: Messrs. Lindsey and Melzer.
Members who voted to approve these
proposals were persuaded that the nature
and severity of Mexico's financial problems could not be contained without
making substantial financial assistance
available to the Government of Mexico.
The financial support provided by the
United States would be accompanied by
similar assistance from the IMF and
would be conditioned on Mexico's commitment to implement major changes in
its economic policies, including monetary policy. It was emphasized during
the Committee's discussion that the
United States had a strong interest in
encouraging the restoration of stability
in Mexico for numerous reasons, includ
ing the growth of trade between the two
nations and the resulting creation of jobs
in both countries. Moreover, Mexico's
financial problems appeared to be
spreading to a number of other nations
and adversely affecting the dollar in the
foreign exchange markets. The participation of the Federal Reserve in this
effort was strongly endorsed by the
Administration and the overall program
had the support of the bipartisan leadership in the Congress. Apart from temporary financial resources, the Federal
Reserve was in a position to supply
expertise and experience that were not
readily available elsewhere. On the
negative side, the members acknowledged that there could be no assurances
that the rescue program would succeed,
but its scale, its multinational character,
and the apparent willingness of Mexican
officials to pursue the difficult policies
needed to ensure success were grounds
for optimism.
Messrs. Lindsey and Melzer dissented
with respect to increases in both the
swap line and the warehousing arrangement with the Exchange Stabilization
Fund. They did not believe that the
Committee had been provided sufficient
information to assess whether developments in Mexico threatened U.S. financial stability, a possible justification for
increased central bank lending on a
short-term basis. Furthermore, they considered it inappropriate for the Federal
Reserve to participate, directly or indirectly, in intermediate- to long-term
financing to facilitate debt restructuring.
They were concerned that such participation in a fiscal policy matter might
compromise, or appear to compromise,
the independence of the monetary policy process. Mr. Lindsey added that the
latter risks were significantly enhanced
given the absence of congressional
authorization or more general public
support for these measures.
Minutes of FOMC Meetings; January-February
Disclosure Policy
At this meeting, the Committee decided
to retain the procedures that it had followed over the past year for providing
greater information to the public about
its policy actions and discussions. It was
the judgment of the members that these
procedures strike an appropriate balance
between making the Committee's decisions and deliberations accessible to the
public as soon and as fully as feasible,
while safeguarding the Committee's
flexibility in policymaking and preserving an unfettered deliberative process.
The procedures in question involve the
prompt announcement of the Committee's decisions and the release of minutes and transcripts of FOMC meetings.
The Committee will continue its practice of announcing each change in the
stance of monetary policy in a press
release on the day the decision is made.
This practice removes any uncertainty
about the Committee's intentions in
regard to reserve conditions and enables
all financial market participants and
others to receive the information at the
same time. When no change is made at a
meeting, the Committee normally will
announce only the time when the meeting ended and that there are no further
announcements. However, in some
infrequent circumstances, the Committee may decide to issue a statement even
when no change in policy is made.
The full substance of the Committee's deliberations relating to each policy decision will continue to be reported,
as is the current practice, in comprehensive minutes of the meeting that are
released two or three days following the
next regularly scheduled meeting. For
historians and other students of monetary policymaking, those minutes will
be supplemented by lightly edited transcripts of the discussion at each Committee meeting. For recent and future
125
meetings, transcripts for an entire year
will be released with a five-year lag;
earlier transcripts dating back to
March 1976 will continue to be released
on an ongoing basis as the light editing
process is completed. Continuing the
practice followed since the beginning
of 1994, transcripts prepared by the
Committee's Secretariat will be circulated to each participant to verify his
or her comments, and only changes
that clarify meaning, such as the correction of grammar or transcription errors,
will be permitted. A limited amount
of material will be withheld from
the publicly released version of these
documents, primarily to protect the confidentiality of foreign and domestic
sources of information that likely
would be lost if the information they
provide were to be made public. As
required by law, a complete, unredacted version of the transcript of each
meeting will be turned over to the
National Archives after thirty years have
elapsed.
For the purpose of preparing the minutes and transcripts, the discussions of
monetary policy at Committee meetings
will continue to be recorded. The tape
recorder may be turned off at the Chairman's discretion when the Committee
deals with issues unrelated to monetary
policy, such as organizational and personnel matters. The transcripts will indicate that the tape recorder has been
turned off and the minutes will provide
a summary description of the matters
that were discussed. As permitted by the
National Records Act, the recordings
and unedited transcripts will be discarded after all the participants at the
meeting have reviewed and corrected, as
necessary, the transcripts prepared by
the Secretariat.
It was agreed that the next meeting
of the Committee would be held on
Tuesday, March 28, 1995.
126 82nd Annual Report, 1995
The meeting adjourned at 3:20 p.m.
Donald L. Kohn
Secretary
Meeting Held on
March 28, 1995
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 28, 1995, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Blinder
Mr. Hoenig
Mr. Kelley
Mr. Lindsey
Mr. Melzer
Ms. Minehan
Mr. Moskow
Ms. Phillips
Ms. Yellen
Messrs. Boehne, Jordan, McTeer, and
Stern, Alternate Members of the
Federal Open Market Committee
Messrs. Broaddus, Forrestal, and Parry,
Presidents of the Federal Reserve
Banks of Richmond, Atlanta, and
San Francisco respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Ms. Browne and Messrs. Davis, Hunter,
Lindsey, Mishkin, Promisel,
Siegman, Slifman, and Stockton,
Associate Economists
Mr. Fisher, Manager, 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. Simpson, Associate Director,
Division of Research and
Statistics, Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Goodfriend, Lang, Rolnick,
Rosenblum, and Sniderman,
Senior Vice Presidents, Federal
Reserve Banks of Richmond,
Philadelphia, Minneapolis, Dallas,
and Cleveland respectively
Mr. Kos, Mr. Judd, and
Ms. Rosenbaum, Vice Presidents,
Federal Reserve Banks of
New York, San Francisco, and
Atlanta respectively
Mr. Thornton, Assistant Vice President,
Federal Reserve Bank of St. Louis
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on January 3 1 February 1, 1995, were approved.
By unanimous vote, responsibility for
making decisions on appeals of denials
by the Secretary of the Committee for
access to Committee records was delegated under the provisions of 271.4(d)
of the Committee's Rules Regarding
Availability of Information to Ms. Phillips and, in her absence, to Ms. Yellen.
By unanimous vote, the Committee
elected Thomas C. Baxter, Jr., as Deputy General Counsel from the Federal
Reserve Bank of New York and William C. Hunter as Associate Economist
from the Federal Reserve Bank of Chicago to serve until the next election at
the first meeting of the Committee
after December 31, 1995, with the
understanding that in the event of the
Minutes of FOMC Meetings, March 127
discontinuance of their official connection with the Federal Reserve Banks of
New York and Chicago respectively,
they would cease to have any official
connection with the Federal Open Market Committee.
On January 12, 1995, the continuing
rules, regulations, 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 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,
and no requests for substantive consideration were received. Apart from
the updating of the Manager's title
(see minutes of Jan. 31-Feb. 1 meeting),
all of the instruments identified below
remained in effect in their existing
forms:
1. Federal Open Market Committee Rules
a) Rules of Organization
b) Rules of Procedure
c) Rules Regarding Availability of
Information
d) Open Market Operations of Federal
Reserve Banks
e) Procedures for Allocation of Securities in the System Open Market Account
f) Resolution to Provide for the Continued Operation of the Committee During an
Emergency
g) Resolution Authorizing Certain
Actions by Federal Reserve Banks During an
Emergency
h) Guidelines for the Conduct of System Open Market Operations in Federal
Agency Issues
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 relating to examinations of
the System Open Market Account
4. Regulation relating to Open Market
Operations of Federal Reserve Banks
By unanimous vote, the Authorization for Domestic Open Market Operations shown below was reaffirmed.
Authorization for Domestic Open
Market Operations
Reaffirmed March 28, 1995
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, to the extent necessary
to carry out the most recent domestic policy
directive adopted at a meeting of the
Committee:
(a) To buy or sell U.S. Government
securities, including securities of the Federal
Financing Bank, and securities that are direct
obligations of, or fully guaranteed as to
principal and interest by, any agency of the
United States in the open market, from or to
securities dealers and foreign and international accounts maintained at the Federal
Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System
Open Market Account at market prices, and,
for such Account, to exchange maturing U.S.
Government and Federal agency securities
with the Treasury or the individual agencies
or to allow them to mature without replacement; provided that the aggregate amount of
U.S. Government and Federal agency securities held in such Account (including forward
commitments) at the close of business on the
day of a meeting of the Committee at which
action is taken with respect to a domestic
policy directive shall not be increased or
decreased by more than $8.0 billion during
the period commencing with the opening of
business on the day following such meeting
and ending with the close of business on the
day of the next such meeting;
(b) When appropriate, to buy or sell in
the open market, from or to acceptance dealers and foreign accounts maintained at the
Federal Reserve Bank of New York, on a
cash, regular, or deferred delivery basis, for
the account of the Federal Reserve Bank of
New York at market discount rates, prime
bankers acceptances with maturities of up to
nine months at the time of acceptance that
(1) arise out of the current shipment of goods
between countries or within the United
States, or (2) arise out of the storage within
128 82nd Annual Report, 1995
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 U.S. 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. Govern
ment 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, System Open Market
Account (see minutes of Jan. 31-Feb. 1
meeting).
Authorization for Foreign Currency
Operations
Amended March 28, 1995
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:
Minutes of FOMC Meetings, March 129
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
dollar 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
Regular
Special
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
3,000
3,000
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 l.A. above
shall, unless otherwise expressly authorized
by the Committee, be at prevailing market
rates. For the purpose of providing an investment return on System holdings of foreign
currencies, or for the purpose of adjusting
interest rates paid or received in connection
with swap drawings, transactions with foreign central banks may be undertaken at
non-market exchange rates.
4. It shall be the normal practice to
arrange with foreign central banks for the
coordination of foreign currency transactions. In making operating arrangements
with foreign central banks on System holdings of foreign currencies, the Federal
Reserve Bank of New York shall not commit
itself to maintain any specific balance, unless
authorized by the Federal Open Market
Committee. Any agreements or understandings concerning the administration of the
accounts maintained by the Federal Reserve
Bank of New York with the foreign banks
designated by the Board of Governors under
Section 214.5 of Regulation N shall be
referred for review and approval to the
Committee.
5. Foreign currency holdings shall be
invested insofar as practicable, considering
130 82nd Annual Report, 1995
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, 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.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or
understanding with the Secretary of the Treasury about the division of responsibility for
foreign currency operations between the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with
the Secretary on policy matters relating to
foreign currency operations;
C. From time to time, to transmit
appropriate reports and information to the
National Advisory Council on International
Monetary and Financial Policies.
8. Staff officers of the Committee are
authorized to transmit pertinent information on System foreign currency operations
to appropriate officials of the Treasury
Department.
9. All Federal Reserve Banks shall participate in the foreign currency operations
for System Account in accordance with paragraph 3 G(l) of the Board of Governors'
Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks
dated January 1, 1944.
By unanimous vote, the Foreign
Currency Directive shown below was
reaffirmed.
Foreign Currency Directive
Reaffirmed March 28, 1995
1. System operations in foreign currencies shall generally be directed at countering
disorderly market conditions, provided that
market exchange rates for the U.S. dollar
reflect actions and behavior consistent with
the IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain
reciprocal
currency
("swap") arrangements with selected foreign central banks and with the Bank for
International Settlements.
C. Cooperate in other respects with
central banks of other countries and with
international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light
of probable future needs for currencies.
B. To provide means for meeting System and Treasury commitments in particular
currencies, and to facilitate operations of the
Exchange Stabilization Fund.
C. For such other purposes as may be
expressly authorized by the Committee.
4. System foreign currency operations
shall be conducted:
A. In close and continuous consultation and cooperation with the United States
Treasury;
B. In cooperation, as appropriate, with
foreign monetary authorities; and
C. In a manner consistent with the
obligations of the United States in the
International Monetary Fund regarding
exchange arrangements under the IMF
Article IV.
Minutes of FOMC Meetings, March
By unanimous vote, the Procedural
Instructions with Respect to Foreign
Currency Operations shown below were
amended to reflect the new title of Manager, System Open Market Account.
Procedural Instructions with
Respect to Foreign Currency
Operations
Amended March 28, 1995
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, 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):
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.
131
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.
The Manager of the System Open
Market Account reported on developments in foreign exchange markets and
on System open market transactions in
foreign currencies during the period
February 1, 1995, through March 27,
1995. By unanimous vote, the Committee ratified these transactions.
The Manager also reported on developments in domestic financial markets
and on System open market transactions
in government securities and federal
agency obligations during the period
February 1, 1995, through March 27,
1995. 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.
132 82nd Annual Report, 1995
The information reviewed at this
meeting suggested that the expansion of
economic activity had moderated considerably in early 1995. Slower growth
in consumer spending, associated in part
with a sharp decline in expenditures for
motor vehicles, and weakness in housing purchases were factors in the moderation. Despite signs of some weakening in final demand, however, further
sizable gains had been recorded in
industrial production and payroll employment, and overall rates of resource
utilization remained high. Broad indexes
of consumer and producer prices had
risen more rapidly on average over January and February, but wages had shown
no sign of an acceleration.
Nonfarm payroll employment increased considerably over January and
February, although the average monthly
advance was somewhat smaller than that
of 1994. Further brisk job gains were
recorded in the January-February period
in manufacturing; hiring in retail and
wholesale trade and in the serviceproducing sector slowed a bit; and
construction payrolls changed little on
balance. The average workweek of production or nonsupervisory workers
remained at a high level over the two
months. The civilian unemployment rate
rose in January but fell back in February
to its December level of 5.4 percent.
The expansion in industrial production also moderated in January and
February from the rapid pace of last
year. Manufacturing production grew
less rapidly, with output gains down
sharply in February for consumer durable goods and construction supplies.
Mining production continued to be sluggish. By contrast, the output of utilities
surged during the January-February
period as winter temperatures, which
had been unusually warm, moved back
toward normal. Capacity utilization
rates, which were little changed over the
first two months of the year, remained
high.
Retail sales fell in February, reversing
most of a sizable rise in January. The
February declines in sales were widespread, with slippage evident at most
types of retail outlets. Most indicators of
housing activity had weakened in recent
months in lagged response to the earlier
rise in mortgage interest rates. Housing
starts fell sharply in January and edged
still lower in February; these declines
more than erased the gains that had been
posted on balance over the closing
months of 1994. A substantial drop in
sales of existing homes in January (latest data) extended the trend that had
been evident for some months.
Shipments of nondefense capital
goods recorded another strong advance
in February. Shipments of office and
computing equipment rebounded in
February from declines in December
and January, and demand for most other
types of equipment remained brisk.
Business outlays for heavy trucks fell
back slightly in February after a surge in
January. While there were tentative
signs in the recent orders data of some
deceleration in business equipment
spending, the still-growing backlog of
unfilled orders suggested further solid
expansion in business spending on
equipment. Nonresidential construction
activity had been trending appreciably
higher over the past two years; however,
a slowdown in spending by public utilities in December and January, in an
environment of uncertainty related to
pending deregulation, and a third
straight monthly decline in permit issuance for nonresidential structures in
February pointed to some softening in
the uptrend.
Business inventory investment surged
in January after a slowdown in December; excluding a large increase in stocks
of motor vehicles at the wholesale and
Minutes of FOMC Meetings, March 133
retail levels, inventories rose in January
at about the average rate of the final
three quarters of 1994. In manufacturing, inventory accumulation outpaced
sales in January; the stocks-to-sales ratio
edged higher but was still near historical
lows. At wholesale establishments,
inventory accumulation picked up in
January as a large rise in automotive
inventories more than offset a reduced
increase in stocks of other goods. The
inventory-to-sales ratio for the sector
moved higher in January but remained
well within its range of the last several
years. At the retail level, inventories
jumped in January after a slight decline
in December; almost all the rise reflected increased stocks of motor vehicles. The inventory-to-sales ratio for the
retail sector as a whole was unchanged
in January and remained near the middle
of its range of recent years; at automotive dealerships, the inventory-to-sales
ratio rose sharply while elsewhere the
ratio edged lower.
The nominal deficit on U.S. trade in
goods and services widened sharply in
January from its December level and its
average rate in the fourth quarter; some
of the increase in the deficit was due to
trade with Mexico, but somewhat distorted seasonal adjustment factors also
may have been involved. The value of
exports of goods and services declined
substantially in January after having
increased strongly in November and
December. The value of imports rose
considerably in January, continuing the
pattern of the fourth quarter. The export
losses and import gains in January were
distributed widely across major trade
categories. The pace of economic recovery in the major foreign industrial countries appeared to have moderated in
recent months. In the fourth quarter, economic activity declined in Japan and
grew more slowly in most of the other
major industrial countries; growth had
picked up in Canada. Available data
suggested that in the first quarter economic expansion had slowed in all of
the major foreign industrial countries
except Japan, where growth appeared to
be positive despite the Kobe earthquake.
Consumer price increases in January
and February were a little larger than the
average monthly rise in 1994. Food
prices were unchanged on balance over
the two-month period, while energy
prices were up only slightly. Producer
prices of finished goods increased in
January and February at the same rate as
consumer prices; producer price inflation for the two months also was higher
than in 1994, with a steep rise in gasoline prices in January contributing to the
pickup. Producer prices of intermediate
materials surged in the first two months
of this year after having accelerated
sharply in the second half of 1994. Average hourly earnings of private production or nonsupervisory workers were
unchanged in February after a substantial rise in January. For the two months
combined, hourly earnings increased at
about the same average monthly pace as
in 1994.
At its meeting on January 3 1 February 1, 1995, the Committee
adopted a directive that called for increasing somewhat the existing degree
of pressure on reserve positions, taking
account of a possible rise of Vi percentage point in the discount rate. The directive approved by the Committee did not
include a presumption about the likely
direction of any 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
134 82nd Annual Report, 1995
intermeeting period. The reserve conditions associated with this directive were
expected to be consistent with moderate
growth of M2 and M3 over coming
months.
On the second day of the meeting, the
Board of Governors approved an
increase of V2 percentage point in the
discount rate, to 5V4 percent. The rise
was made effective immediately and
was passed through fully to interest rates
in reserve markets. Open market operations during the intermeeting period
were conducted with a view to maintaining the tighter policy stance adopted at
the meeting and implemented immediately thereafter. The federal funds rate
averaged a little less than 6 percent over
the intermeeting interval, and adjustment plus seasonal borrowing was a
little below anticipated levels.
Financial market participants generally had expected a firming in reserve
market conditions, and consequently
market interest rates showed little immediate reaction. Subsequently, most market interest rates declined considerably
in response to both incoming data that
were seen as indicating an appreciable
slowing in the pace of economic
expansion and statements by Federal
Reserve officials that were viewed as
suggesting that the period of monetary
policy tightening might be coming to a
close. The largest declines in yields
were concentrated in intermediate- and
long-term obligations. Stronger-thanexpected earnings reports coupled with
heightened prospects for sustained,
moderate economic expansion and continued low inflation boosted major indexes of equity prices to record levels.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies fell
substantially further. The dollar's
decline was particularly sharp against
the Japanese yen and the German mark,
and post-World War II record lows
against these two currencies were
recorded. Declines in U.S. interest rates
and concerns about the persistence of
large U.S. trade and fiscal deficits
appeared to have contributed to the dollar' s drop. Continuing economic and
financial problems in Mexico, which
resulted in further depreciation on balance of the Mexican peso against the
dollar, also seemed to add to negative
sentiment toward the dollar because the
process of adjustment in the Mexican
economy to the lower value of the peso
was viewed as implying reduced
imports from and increased exports to
the United States.
M2 declined, and growth of M3
slowed in February after sizable January
gains; data for the first part of March
pointed to some recovery in both aggregates. M2's weakness in February partly
reflected an unwinding of temporary
increases in January of its volatile components, including demand deposits,
overnight repurchase agreements, and
overnight Eurodollars; the weakness
also appeared to be associated with
depositor efforts to obtain higher returns
by shifting funds into market instruments. The slowdown in growth of M3
in February was entirely attributable to
the decline in M2; its non-M2 component increased substantially further as
banks continued to rely heavily on managed liabilities to fund loan growth.
Expansion of total domestic nonfinancial debt had picked up a little in recent
months.
The staff forecast prepared for this
meeting suggested that growth of economic activity was slowing and for
some period ahead would average a little
less than the rate of increase in the
economy's potential output. The pace of
the expansion seemed to have slackened
somewhat more than had been anticipated at the last meeting; however, the
Minutes of FOMC Meetings, March 135
recent declines in long-term interest
rates and the rally in stock prices were
expected to provide additional support
for aggregate demand later in the year.
Moreover, the substantial depreciation
of the dollar against the yen and several
European currencies was acting to offset
some of the effects on demand of the
previous tightening of reserve conditions. The forecast continued to anticipate that in the period ahead consumer
spending would be restrained by smaller
gains in real incomes, the substantial
degree to which pent-up demands had
been satisfied, and the lagged effects of
earlier increases in interest rates on the
demand for durable goods. Business
outlays for new equipment would decelerate substantially in response to slower
growth of sales and profits. Homebuilding was projected to decline somewhat
further in the near term and to remain at
somewhat subdued levels for a time in
reflection of the damping effects on
housing demand of slower growth in
jobs and incomes and of the earlier rise
in mortgage rates. Developments in
Mexico were likely to interrupt only
briefly a strong uptrend in U.S. exports,
based on sustained growth in the economies of other U.S. trading partners. Considerable uncertainty continued to surround the federal fiscal outlook but, as
in the previous forecast, a moderate pace
of deficit reduction was assumed over
the forecast horizon. In the staff's judgment, the economy was operating
beyond its long-run, noninflationary
capacity, and there remained a risk that
higher inflation could emerge if the
expansion did not moderate sufficiently.
In the Committee's discussion of current and prospective economic developments, the members agreed that the pace
of the economic expansion was moderating, though the extent of the slowdown was not yet clear. The effects of
the policy tightening implemented since
early 1994 seemed to be showing
through in interest-sensitive sectors, and
those effects were expected to be reinforced by some cutback in inventory
accumulation from the unsustainable
rates of previous quarters. Quarters of
fairly slow growth were not unusual in a
period of expansion. On the whole, however, the economy appeared to retain
considerable forward momentum, with
current imbalances seemingly of a relatively minor nature and in the process of
being corrected. Moreover, the recent
declines in long-term interest rates, if
these persisted, could provide fresh support for interest-sensitive spending later
in 1995 and in 1996. While opinions
differed somewhat with respect to both
the likely extent of the slowdown and
the prognosis for inflation, the members
generally agreed that the economy
appeared to be on a trajectory toward
a more sustainable path for economic
activity. However, a number of members expressed concern that the slowdown might not be sufficient to relieve
the persisting pressures on labor and
capital resources, thereby portending
higher inflation.
In the course of the Committee's discussion, members reported on widespread signs that business activity, while
still quite strong in many areas, was
growing less rapidly on balance. Still, a
number of factors pointed to continued
solid expansion. Business sentiment was
generally described as quite positive,
though somewhat less ebullient than in
earlier months. Likewise, recent surveys
suggested that consumer confidence
remained very favorable, though down
slightly from recent peaks by most measures. In addition to the favorable recent
developments in financial markets, bank
lending policies remained quite accommodative, although business loan
growth had slowed recently after a
period of unusual strength.
136 82nd Annual Report, 1995
In their review of developments in
key sectors of the economy, members
took note of the sluggishness in consumer spending that had emerged in
recent months in much of the country.
To a considerable extent the recent
weakness reflected a sharp reduction in
spending for motor vehicles, but there
also were signs in the most recent data
of broader declines in spending, especially for durable goods other than automobiles. Some reduction in spending for
durable goods could be expected in
lagged response to the policy tightening
over the past year, but a few members
noted that unusual weather might have
led to the temporary postponement of
some discretionary purchases. In assessing the recent spending patterns, it was
difficult to determine whether they represented a temporary pause or a more
prolonged pullback by consumers. On
balance, however, growth in consumer
spending probably would slow somewhat further to a rate more in line with
the expansion in jobs and incomes. Consumer spending would tend to be sustained, however, by the ready availability of consumer financing and the rise in
bond and stock prices, which had
strengthened household balance sheets
and perhaps was helping to bolster consumer confidence.
The housing market had weakened
noticeably according to incoming data
and anecdotal reports from around the
country. The decline in home sales that
began in the latter part of 1994 had
persisted, and housing starts had fallen
sharply in the early part of the year as a
consequence of the weaker sales and a
larger inventory of unsold homes. Partly
because of the higher mortgage rates
that had prevailed for some time,
members anticipated still soft housing
demand, particularly for single-family
houses. There had been some reports
that recent declines in mortgage interest
rates were having a mitigating effect. In
some parts of the country, the weakness
in housing construction was being countered by further improvement in nonresidential construction activity. In other
areas where commercial real estate conditions remained soft, declines in
vacancy rates seemed to be preparing
the way for a pickup in commercial
building activity.
Committee members anticipated that
growth of business investment in plant
and equipment would moderate from the
extraordinary rate of the last two years
but that such investment would continue
to support growth in aggregate final
demand during the forecast period. The
demand for durable equipment was
expected to increase more gradually as
the growth of economic activity slowed
and business profits tended to flatten
out, and the available data on equipment
expenditures thus far in 1995 appeared
to be in line with that expectation. However, some anecdotal reports suggested
that investment in plant and equipment
might be stronger than expected in an
environment of tight labor supply and
elevated levels of capacity utilization,
intense desires to control costs and
improve competitiveness, and a still
relatively low user cost of capital. The
desire for additional production capacity
was reflected in spending for the construction of commercial and industrial
structures, which remained on an
uptrend.
The rapid rise in business inventories
in recent quarters had been sustainable
in the context of briskly increasing final
sales, but with some further accumulation early in the first quarter and economic growth projected to moderate, the
rate of inventory investment would have
to adjust downward as well. While the
timing and extent could not be anticipated with any precision, a short-term
inventory correction nrocess might
Minutes of FOMC Meetings, March 137
already be under way, with firms initiating cutbacks to production schedules to
reflect smaller-than-expected gains in
sales over recent months. Members
noted that inventory-to-sales ratios
already were at generally low levels,
and they anticipated that any desired
adjustments to production would be
made quickly. In the circumstances, the
size of the inventory correction and its
effect on economic activity would be
limited. Moreover, reports of inventory
shortages in some industries suggested
that many firms might raise their desired
inventory levels to protect against shortfalls in materials needed in the production process.
The defeat of the balanced budget
amendment in Congress had clouded the
outlook for deficit reduction. Nonetheless, a moderately restrictive fiscal
policy that would provide for some
progress toward a balanced budget during the forecast period was seen as a
reasonable assumption. One member
observed that there was a risk of a more
restrictive fiscal policy arising out of the
dynamics of the current political debate.
In any event, any progress toward a
balanced budget might be expected to
have a favorable effect on domestic
financial markets and perhaps also on
the dollar in foreign exchange markets.
Members commented that considerable uncertainty surrounded the outlook
for the external sector, but for now it
seemed reasonable to forecast that this
sector would make a small positive contribution, on balance, to the growth of
economic activity over the forecast
period. In the near term, economic developments in Mexico were leading to
lower U.S. exports and higher imports;
anecdotal reports suggested that the
effects on trade flows and local business
activity tended to be felt most strongly
in states that border Mexico. However,
there were signs that conditions were
stabilizing in Mexico, and more generally the relatively robust growth projected for the major trading partners of
the United States and the lower value of
the dollar now prevailing were expected
to foster improvement in the nation's
trade balance.
Members noted that while the pace of
the expansion evidently had slowed,
economic activity and utilization of
labor and other producer resources were
still at very high levels. Prices of many
materials inputs to the production process had risen sharply, but thus far there
had been only a small pickup in consumer prices. Likewise, the persisting
tightness in many labor markets had
not to this point fostered appreciable
increases in wages. The absence of a
significant rise in prices of finished
goods or in wages might reflect in some
measure the lags in the inflation transmission process, the fruits of heavy
business investments in new capacity
and more productive equipment in
recent years, and perhaps structural
changes in business organization that
were raising the economy's capacity for
sustained, noninflationary
activity.
Members were concerned, however, that
despite continuing competitive pressures
and some recent abatement in materials
prices, business firms were reporting
greater success in passing cost increases
through to prices. The depreciation of
the dollar also would add to inflationary
pressures in the economy. In these circumstances, the members generally concluded that some increase in inflation
was likely in coming months.
In the Committee's discussion of
monetary policy for the intermeeting
period ahead, all the members endorsed
a proposal to maintain an unchanged
degree of pressure in reserve markets.
The policy tightening that had been
implemented since early 1994 appeared
to be exerting a desired restraining effect
138 82nd Annual Report, 1995
on the growth of economic activity and
associated demands for goods and services. But the extent of the slowing in
growth and its effects on inflationary
pressures were not yet clear. On balance, though, the available evidence
tended to suggest that the economy
might be moving toward a growth path
for economic activity that would be consistent with limiting the uptick in inflation that was currently being experienced. In discussing their policy
choices, several members noted the relatively steep decline in the value of the
dollar. However, they believed that policy should not be directed toward the
achievement of a specific level for the
dollar but rather toward the implementation of an effective anti-inflationary
monetary policy, taking account of all
the factors bearing on the economic outlook. In current circumstances, and
given the substantial uncertainties that
were involved, the members believed
that it would be prudent to pause and
assess developments before taking any
further policy action.
With regard to possible adjustments
to policy during the intermeeting period,
most members expressed a preference
for an asymmetric directive tilted toward restraint. These members indicated
that near-term developments were not
likely to call for an adjustment to policy
in either direction. Nonetheless, with the
economy expected to be operating in
the neighborhood of its potential, the
recent rise in inflation and the risk of an
unexpected impulse that could ratchet
inflation even higher suggested that an
asymmetric directive would be more
consistent with the Committee's objective of moving over time toward price
stability. The economy retained considerable forward momentum and, as had
often happened in the past, the recent
slowdown in growth could prove to
be temporary, with additional monetary
tightening needed at some point to contain inflation. In this connection a few
members indicated that further tightening might well be needed sooner rather
than later. An asymmetric directive also
would provide a clear signal of the
Committee's intention to resist higher
inflation.
A few members preferred a symmetric directive. These members agreed that
additional policy tightening might be
needed if inflation began to pick up.
However, they saw an undesirably
weaker economic performance as being
about equally likely, and in their view
this balance in the risks to the outlook
called for the adoption of a symmetric
directive. The Committee's determination to keep inflation under control
would be appropriately conveyed, in
their view, through future actions
rather than through the adoption of a
tilt toward restraint. However, these
members indicated that they could
accept an asymmetric intermeeting
instruction.
At the conclusion of the Committee's
discussion, all the members indicated
that they preferred or 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 and 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 of M2 and M3
over coming months.
Minutes of FOMC Meetings, March
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 expansion of economic
activity has moderated considerably in early
1995. Nonfarm payroll employment rose
appreciably further in January and February,
but at a pace below the average monthly gain
in 1994; the civilian unemployment rate,
after rising in January, fell back in February
to its December level of 5.4 percent.
Advances in industrial production also moderated in January and February, and capacity
utilization rates generally changed little from
already high levels. Total retail sales were
about unchanged over the two months. Housing starts have declined somewhat after posting sizable gains on balance during the closing months of 1994. Orders for nondefense
capital goods point to a still strong expansion of spending on business equipment, but
with tentative signs of some deceleration;
nonresidential construction has been trending appreciably higher. The nominal deficit
on U.S. trade in goods and services widened
sharply in January from its average rate in
the fourth quarter. Broad indexes of consumer and producer prices increased faster
on average over January and February.
On February 1, 1995, the Board of Governors approved an increase from 43A to
l
5 A percent in the discount rate, and in keeping with the Committee's decision at the
January 31-February 1 meeting, the increase
was allowed to show through fully to interest
rates in reserve markets. Nonetheless, most
market interest rates have declined somewhat since the Committee meeting; the
largest declines have been concentrated
in intermediate- and long-term obligations.
In foreign exchange markets, the tradeweighted value of the dollar in terms of the
other G-10 currencies was down substantially further over the intermeeting period.
The Mexican peso has continued to depreciate against the dollar.
M2 and M3 weakened in February, though
data for the first part of March pointed to
139
some rebound. Growth of total domestic
nonfinancial debt has picked up a little 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 on January 31-February 1 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
1994 to the fourth quarter of 1995. The Committee anticipated 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 lowered to 3 to 7 percent
for the year. The behavior of the monetary
aggregates will continue to be evaluated
in the light of progress toward price level
stability, movements in their velocities, and
developments in the economy and financial
markets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. In the context of the
Committee's long-run objectives for price
stability and sustainable economic growth,
and giving careful consideration to economic, financial, and monetary developments, 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 moderate growth in M2 and M3 over coming
months.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Hoenig, Kelley,
Lindsey, and Melzer, Ms. Minehan,
Mr. Moskow, 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, May 23, 1995.
The meeting adjourned at 1:15 p.m.
Donald L. Kohn
Secretary
140 82nd Annual Report, 1995
Meeting Held on
May 23, 1995
A meeting of the Federal Open Market
Committee was held in the offices of
the Board of Governors of the Federal
Reserve System, in Washington, D.C.,
on Tuesday, May 23, 1995, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Blinder
Mr. Hoenig
Mr. Kelley
Mr. Lindsey
Mr. Melzer
Ms. Minehan
Mr. Moskow
Ms. Phillips
Ms. Yellen
Messrs. Boehne, Jordan, McTeer, and
Stern, Alternate Members of the
Federal Open Market Committee
Messrs. Broaddus, Forrestal, and Parry,
Presidents of the Federal Reserve
Banks of Richmond, Atlanta, and
San Francisco respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. Davis, Dewald, Hunter,
Mishkin, Promisel, Siegman,
Slifman, and Stockton, Associate
Economists
Mr. Fisher, Manager, 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. Simpson, Associate Director,
Division of Research and
Statistics, Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Beebe, Goodfriend, Lang, and
Rosenblum and Mses. Tschinkel
and White, Senior Vice Presidents,
Federal Reserve Banks of
San Francisco, Richmond,
Philadelphia, Dallas, Atlanta, and
New York respectively
Mr. McNees, Vice President, Federal
Reserve Bank of Boston
Mr. Altig, Assistant Vice President,
Federal Reserve Bank of
Cleveland
Mr. Weber, Senior Research Officer,
Federal Reserve Bank of
Minneapolis
Secretary's note. Advice had been
received that Ernest T. Patrikis had been
elected by the board of directors of the Federal Reserve Bank of New York as an alternate member of the Federal Open Market
Committee for the period June 1, 1995,
through December 31, 1995, and that he had
executed his oath of office.
Program for Safeguarding
FOMC Information
At this meeting the Committee amended
its "Program for Security of FOMC
Information." The changes included an
increase in the number of staff at the
Federal Reserve Banks who could be
given access to confidential Class I and
Class II FOMC information. The Committee also liberalized its rule relating to
attendance at FOMC meetings to allow
first vice presidents of the Federal
Reserve Banks to attend meetings on a
rotating basis. Other changes of a technical or updating nature also were made
to the program. The Committee's brief
discussion of this organizational matter
was not recorded, in keeping with the
decision made at the meeting on Jan-
Minutes of FOMC Meetings, May
uary 31-February 1, 1995, normally not
to record discussions unrelated to monetary policy.
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on March 28, 1995,
were approved.
The Manager of the System Open
Market Account reported on developments in foreign exchange markets and
on System foreign currency transactions
during the period March 28, 1995,
through May 22, 1995. By unanimous vote, the Committee ratified these
transactions.
The Manager also reported on developments in domestic financial markets
and on System open market transactions
in government securities and federal
agency obligations during the period
March 28, 1995, through May 22, 1995.
By unanimous vote, the Committee ratified these transactions.
The Manager requested a temporary
increase of $2 billion, to $10 billion, in
the limit on intermeeting changes in outright System Account holdings of U.S.
government and federal agency securities. He advised the Committee that the
current leeway of $8 billion might not
be sufficient to accommodate the potentially large need for additional reserves
over the intermeeting period to meet an
anticipated seasonal rise in the domestic
demand for currency as well as continued currency outflows to foreign countries. By unanimous vote, the Committee amended paragraph l(a) of the
Authorization for Domestic Open Market Operations to raise the limit to
$10 billion for the intermeeting period
ending with the close of business on
July 5, 1995.
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 eco
141
nomic 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 expansion of
economic activity had slowed considerably further and that rates of resource
utilization had declined. Although business investment in equipment and structures had remained strong, overall final
sales had expanded less rapidly and
inventories had continued to build.
Manufacturing output appeared to be
down appreciably, in large measure
reflecting cutbacks in motor vehicle production, and the slump in housing starts
since the turn of the year was depressing
construction activity. Broad indexes
of consumer and producer prices had
increased a little faster thus far this year,
while advances in labor compensation
costs had remained subdued.
Nonfarm payroll employment posted
reduced gains in the first quarter and
changed little in April; special factors
and seasonal adjustment difficulties may
have depressed reported job growth
in April. Hiring in service-producing
industries was down sharply from the
pace in previous months, with jobs in
personnel supply services falling for a
second consecutive month after three
years of rapid growth. Employment in
manufacturing decreased further, and the
number of construction jobs contracted
after a sizable weather-related surge in
March. Initial claims for unemployment
insurance increased considerably in
recent weeks, and the civilian unemployment rate rose to 5.8 percent in
April.
Industrial production fell further in
April, with manufacturing registering a
substantial decline. The drop in indus-
142 82nd Annual Report, 1995
trial output largely reflected a cutback in
the production of motor vehicles and
parts, but declines in output also were
evident in other cyclically sensitive sectors, such as non-auto consumer durables and construction supplies. Production of business equipment other than
motor vehicles registered a small gain.
Total utilization of industrial capacity
continued to decline in April; however,
operating rates in manufacturing remained at relatively high levels.
Retail sales were down in April after
having risen moderately over the first
quarter; a steep drop in sales of motor
vehicles accounted for all of the April
decline. Total expenditures on other
types of goods edged higher in April,
even though sales of apparel, furniture,
and home appliances were noticeably
weaker. Housing starts changed little in
April after having declined sharply in
the first quarter, and the inventory of
new homes for sale remained relatively
large. On the other hand, sales of both
new and existing homes rose moderately in March after sizable declines in
February, and recent surveys indicated
some improvement in attitudes toward
homebuying.
Shipments of nondefense capital
goods remained on a strong uptrend in
March, with outlays for office and computing equipment registering another
sharp increase. Manufacturers of heavy
trucks continued to operate at capacity
to meet demand; by contrast, business
expenditures for motor vehicles reportedly plunged in April. Data on orders
for nondefense capital goods pointed to
further strong expansion of spending
on business equipment in the months
ahead, although gains appeared likely to
be smaller than those of the past several
quarters. Nonresidential construction
continued to rise in March, and data on
permits for new construction suggested
that building activity would advance fur
ther in coming months, though perhaps
at a somewhat slower rate.
Business inventories surged again in
March, and the pace of inventory accumulation over the first quarter was substantially higher than the average rate
for the second half of 1994. Much of the
first-quarter increase in stocks reflected
a buildup in inventories of motor vehicles at the wholesale and retail levels.
Non-auto stocks also increased at a brisk
pace in the first quarter, accompanied
by the emergence of scattered signs of
inventory imbalances in furniture, appliances, and apparel at the retail level and
in construction supplies at earlier stages
of production and distribution. The
stock-to-sales ratio in manufacturing
was unchanged in March from the very
low fourth-quarter level. At the wholesale level, the ratio of inventories to
sales rose in March but remained within
the range of the past several years.
Inventory accumulation in the retail
sector slowed in March despite a further rise in inventories of motor vehicles. For the retail sector as a whole, the
inventory-to-sales ratio increased in
March to the top end of its range of the
past two years; when the motor vehicle
components of stocks and sales are
excluded, however, the ratio was near
the middle of its range in recent years.
The nominal deficit on U.S. trade in
goods and services was little changed in
March from the February level and
remained substantially narrower than in
January. On a quarterly average basis,
the trade deficit widened in the first
quarter as growth in the value of exports
slowed while the expansion in the value
of imports continued unabated. A drop
in shipments to Mexico was among the
factors holding down export growth in
March. Data available for the first quarter indicated that economic recovery
continued in the major foreign industrial
countries as a group but that the pace
Minutes of FOMC Meetings, May
varied significantly across countries.
There were signs of sustained growth in
the United Kingdom, slower growth in
Canada, renewed recovery in Japan, and
weakness in France and Italy.
Inflation had picked up somewhat
in the early months of 1995. At the
consumer level, prices rose a little
more rapidly in the first quarter, despite
unchanged food prices and lower energy
prices. In April, a surge in food prices
and a rebound in energy prices contributed to a further step-up in consumer
inflation. At the producer level, prices of
finished goods followed a roughly similar pattern, increasing at a slightly faster
pace in the first quarter and then more
briskly in April. The April rise partly
reflected a sharp jump in the prices of
finished energy goods, but prices of nonenergy, nonfood items also advanced at
a somewhat faster rate. At earlier stages
of production, prices of intermediate
materials continued to increase rapidly
in April. By contrast, trends in labor
compensation costs remained subdued.
Gains in hourly compensation of private
industry workers slowed further in the
first quarter of 1995, with a continuing moderation in the cost of benefits
accounting for all of the deceleration in
compensation.
At its meeting on March 28, 1995, the
Committee adopted a directive that
called for maintaining the existing degree of pressure on reserve positions but
that included a bias toward the possible
firming of reserve conditions 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 reserve
restraint would be acceptable or slightly
lesser reserve restraint might be acceptable during the intermeeting period. The
143
reserve conditions associated with this
directive were expected to be consistent
with moderate growth in the broader
monetary aggregates 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 trended
higher over the period, reflecting a rising need for seasonal credit at the beginning of the planting season, while the
federal funds rate continued to average
close to 6 percent.
Most market interest rates moved
lower over the intermeeting period in
reaction to weaker-than-expected incoming economic data, which market
participants interpreted as signaling a
considerable slowing of the economic
expansion and a growing likelihood that
the next monetary policy move would
be in an easing direction. Market assessments that the prospects for major
reductions in budget deficits were
improving also seemed to contribute to
the drop in rates. In this environment,
the release of data indicating large
increases in consumer and producer
prices for April only temporarily interrupted the decline in rates. Intermediateand long-term interest rates posted the
largest declines over the intermeeting
period.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
declined substantially further over the
first half of the intermeeting period. In
mid-April, the dollar reached a record
low against the Japanese yen and
approached a record low against the
German mark. The dollar's weakness
appeared to have been related in part to
further indications of softening economic activity and related declines in
interest rates in the United States and to
144 82nd Annual Report, 1995
increasing trade tensions with Japan.
Late in the period, the dollar reversed its
course and moved up sharply against the
yen and the mark; monetary easing
abroad, improving prospects for reductions in the U.S. budget deficit, and stabilizing financial conditions in Mexico
appeared to contribute to the turnaround.
The dollar ended the intermeeting period
higher on balance against the other G-10
currencies.
The growth of M2 picked up further
in April, reflecting in part the need for
additional liquid balances to make
unusually heavy final tax payments;
these payments resulted from the
stronger economy in 1994 and from new
tax regulations allowing individuals to
delay a larger portion of their tax payments until April. The expansion of M2
also appeared to be boosted by the
increased relative attractiveness of small
time deposits and money market funds
following declines in market interest
rates. For the year through April, M2
grew at a rate in the lower half of its
range for 1995 while M3 expanded at a
rate somewhat above its range. The persisting strength of M3 in April largely
reflected the needs of commercial banks
to fund continuing heavy credit demands
by households and businesses. Total
domestic nonfinancial debt had grown at
a rate a little above the midpoint of its
monitoring range in recent months.
The staff forecast prepared for this
meeting suggested that growth of economic activity was slowing somewhat
more than previously anticipated, with
the recent plunge in motor vehicle sales
prompting a deeper-than-expected reduction in the production of cars and
light trucks. Economic expansion would
average less than the rate of increase in
the economy's potential output for a
number of months, but the favorable
wealth and interest-cost effects of the
extended rally that had occurred in stock
and bond markets were expected to provide underlying support for aggregate
demand later in the year and in 1996.
The forecast continued to anticipate that
consumer spending would be restrained
by smaller gains in real incomes and the
satisfaction of pent-up demands for
motor vehicles and other durable goods.
Business outlays for new equipment
were expected to decelerate substantially in response to the slower growth
of sales and profits. Homebuilding was
projected to pick up somewhat in lagged
response to the recent decline in mortgage rates. Developments in Mexico
might depress U.S. exports further, but
mainly in the very near term given the
size of the adjustments already evident
in the Mexican current account. With
this influence waning, sustained growth
in the economies of other U.S. trading
partners was expected to boost export
demand. Considerable uncertainty continued to surround the fiscal outlook,
but the forecast maintained the greater
degree of fiscal restraint that had been
assumed since early in the year. In the
staff's judgment, the prospects for some
easing of pressures on resources suggested that price inflation would likely
moderate from its recently higher level.
In the Committee's discussion of current and prospective economic conditions, members reported on statistical
and anecdotal indications of further
slowing in the expansion of economic
activity and some related easing of pressures on labor and other producer
resources. A number commented that
they anticipated a relatively sluggish
economic performance over coming
months as production was cut back to
bring inventories into better balance
with sales. However, underlying demand
was likely to remain sufficiently robust,
especially in light of developments in
financial markets, to avert a cumulative
decline in business activity and, indeed,
Minutes of FOMC Meetings, May
to return economic growth to a pace
broadly in line with potential. Members
cited in particular the strength in business fixed investment and the potential
for improvement in housing activity and
the trade balance as factors that should
help to sustain the expansion. Nonetheless, the longer-run outlook remained
subject to considerable uncertainty,
especially given the undecided course of
fiscal policy and the ongoing inventory
correction; the ultimate extent of that
correction and its effects on overall economic performance were subject to a
cyclical dynamic whose outcome could
not be predicted with confidence. A
worsening in key measures of inflation,
including the consumer price index and
the producer price index for finished
goods, was a disappointing—if not
unexpected—development. A number of
members expressed concern that the
risks were still tilted in the direction of
some further step-up in inflation; however, others were more inclined to the
view that inflation was not likely to rise
much further in a climate of moderate
growth in demand, intense competitive
pressures in many markets, and relatively subdued increases in labor costs.
Members commented that a reduction
in the rate of inventory investment was
likely to be the dominant influence on
the near-term performance of the economy. Some also saw a risk that a significantly greater-than-expected softening
in inventory accumulation might have
adverse, and possibly cumulative,
effects of a longer-term nature on production and incomes and thus on consumer and business spending. With the
exception of the motor vehicle industry,
however, current inventory levels generally were quite low in relation to sales
and potential inventory adjustments
were likely to be limited in size. Once
further inventory adjustments were completed, the rate of accumulation could
145
be expected to remain well below the
unsustainable pace experienced over the
past year and perhaps settle into a
pattern where changes in inventories
became a relatively neutral factor in the
ongoing economic expansion.
In their comments about broad factors
underlying the economic outlook, members reported that current business and
consumer sentiment remained generally
favorable across the nation. Despite the
softening demand in some markets or
industries, notably that for motor vehicles, business contacts continued to
express optimism about the outlook for
their firms, though some of their comments were tempered by greater caution
than had been observed earlier. A number of members referred to the general
financial climate as an important element in the outlook for sustained economic expansion. They noted that the
decline in interest rates had favorable
implications for demand in interestsensitive sectors of the economy. The
rise in equity prices also was contributing to reductions in the cost of capital to
businesses, and banks continued to ease
terms and standards on loans. In addition, the rise in stock and bond prices
had increased the net worth of many
households, though some concern was
expressed about the sustainability of the
stock market's strong performance.
With regard to developments in key
sectors of the economy, the slowdown in
the growth of consumer spending was
somewhat more pronounced than anticipated earlier. Some rebound in consumer demand seemed likely and
already appeared to be occurring in the
motor vehicle industry in May. Underlying conditions for further growth in
consumer spending were viewed as
relatively favorable; these conditions
included strengthened balance sheets
stemming from developments in financial markets, continued growth of
146 82nd Annual Report, 1995
incomes, and aggressive extensions of
consumer credit by a number of lenders.
In at least one view, however, consumer
credit had been growing at a pace that
could not be sustained, and the inevitable correction could coincide with and
exacerbate emerging weakness in consumer demand. On balance, growth in
personal consumption expenditures was
seen as likely to continue over coming
quarters but at a reduced pace given the
apparent satisfaction of a large portion
of earlier pent-up demands for consumer
durables and some expected moderation
in the growth of jobs and incomes.
Business investment remained on a
strong uptrend as numerous firms continued to respond to the need to relieve
pressures on existing capacity and to
increase operating efficiencies in the
face of vigorous competition. Rapid
growth in profits and a ready availability
of financing also were cited as factors
tending to support business investment
spending. The increase in such spending
was likely to moderate over the projection horizon, though to a still brisk pace,
as declining growth in demand and
easing pressures on capacity induced
growing caution in business investment
decisions. Indeed, the growth in expenditures for producer durable equipment
already appeared to be moderating from
an extremely rapid pace, though nonresidential construction was reported to
be posting solid gains in several parts of
the country.
Members also expected some
strengthening in residential construction
following the large declines in mortgage
interest rates that had occurred since late
1994. Housing construction had trended
lower since the start of the year, but
several indicators pointed to a revival.
The latter included surveys showing
improving homebuyer attitudes and
builder assessments of the outlook for
new home sales, and rising applications
to purchase homes. Sizable inventories
of unsold new homes would probably
continue to damp construction activity
for some months, but contacts in the real
estate and mortgage finance industries
were more optimistic about the outlook
for housing.
The foreign trade sector likewise was
expected to make an appreciable contribution to the expansion of economic
activity in coming quarters. The robust
uptrend in U.S. exports during 1994 had
been slowed to a considerable extent
thus far this year by the sharp adjustment in trade with Mexico, but in the
view of several members that adjustment might now be largely completed.
In that event, gains in exports could be
expected to resume at a fairly brisk pace
despite indications of reduced economic
growth in some key foreign countries.
This assessment was supported by anecdotal reports of rising foreign demand
for some U.S. products in the context of
the generally improved international
competitive position of the United
States. Concurrently, growth in imports
would tend to be held down by the projected slowing in the expansion of
domestic demand. On the negative side,
some members referred to the possibility that a longer period might be needed
to resolve the difficulties being experienced by Mexico, and several expressed
particular concern about the potential
for relatively severe disruptions to trade
if current negotiations with Japan were
not successfully concluded.
Fiscal policy was seen as a major
uncertainty in the economic outlook.
Federal purchases of goods and services
were expected to continue trending
lower and the growth of transfer payments was likely to be trimmed, but the
extent and timing of fiscal restraint
could not be determined while federal
deficit reduction continued to be debated in the Congress. In the view of at
Minutes of FOMC Meetings, May
least some members, however, a larger
fiscal contraction than was commonly
expected might well materialize, perhaps starting later this year. The course
of fiscal legislation undoubtedly would
continue to affect financial markets and,
in the opinion of some members, would
need to be taken into account in the
formulation of monetary policy.
Concerning inflation, several members commented that the rise in consumer prices and some other broad measures of inflation in recent months
appeared to reflect cyclical developments relating to the tightening of
resource and product markets over the
past year, including the partial passthrough of sizable increases in prices at
earlier stages of production. In addition,
higher import prices might have been
playing a role. A number of members
expressed concern that, with the economy already producing at or even
slightly above its sustainable potential,
inflation pressures were likely to intensify if the current pause in the expansion
were to be followed by a period of
above-average growth. On the other
hand, members who saw the odds as
pointing to a more moderate rebound
after a period of relatively sluggish economic performance were inclined to the
view that an upward trend in inflation
was likely to be averted. In addition, the
ongoing competitive pressures in many
markets, the restraint in compensation
increases, and the continuing efforts to
cut production costs would help to contain pressures on prices over time.
In the Committee's discussion of policy for the intermeeting period ahead, all
the members endorsed a proposal to
maintain the current stance of policy.
The higher interest rates of 1994 clearly
had damped demand, but since year-end
intermediate- and long-term market
rates had declined, stock market prices
had risen, bank lending terms had con
147
tinued to ease, and the dollar had fallen
against the currencies of many major
industrial countries. On balance, it
appeared that the current configuration
of financial market conditions and degree of monetary restraint was likely to
be consistent with moderate expansion
in nominal GDP and prices following a
period of some weakness in the economy as inventory imbalances were corrected. The risks of a different outcome,
in either direction, seemed to be reasonably balanced. In the circumstances,
because the dimensions of the near-term
deceleration and the potential strength
of underlying demand remained uncertain, the members concluded that it was
desirable to monitor developments carefully and wait for additional information
before deciding on the next policy
move.
With regard to the possible need to
adjust policy during the intermeeting
period, all the members were in favor of
shifting to an unbiased instruction that
did not incorporate any presumption
with regard to the direction of potential
intermeeting changes. The members
agreed that no compelling case could be
made at this point for potential adjustments to policy in either direction during the period ahead, and retaining a
bias in the directive would give a misleading indication of the Committee's
current intentions for the period. One
member expressed the view that the
costs of being wrong currently seemed
higher in the direction of accommodating too much inflation, though signs of a
possible cumulative deterioration in economic activity could not be ignored
should they materialize. Another member, who saw the longer-term risks to
the economy as tilted to the downside of
current projections, indicated that while
the recent performance of the economy
might argue for some easing of monetary policy, a steady policy course with-
148
82nd Annual Report, 1995
out any bias in the intermeeting instruction was appropriate for now in light of
the generally accommodative financial
and banking markets.
At the conclusion of the Committee's
discussion, all the members supported a
directive that called for maintaining the
existing degree of pressure on reserve
positions and that did not include a presumption about the likely direction of
any adjustments to policy during the
intermeeting period. Accordingly, in the
context of the Committee's long-run
objectives for price stability and sustainable economic growth, and giving
careful consideration to economic,
financial, and monetary developments,
the Committee decided that somewhat
greater or somewhat lesser reserve
restraint would be acceptable during the
intermeeting period. The reserve conditions contemplated at this meeting were
expected to be consistent with moderate
growth in M2 and M3 over the months
ahead.
At the conclusion of the meeting, the
Federal Reserve Bank of New York was
authorized and directed, until instructed
otherwise by the Committee, to execute
transactions in the System Account in
accordance with the following domestic
policy directive:
The information reviewed at this meeting
suggests that the expansion of economic
activity has slowed considerably further. In
April, nonfarm payroll employment was
about unchanged after posting reduced gains
in the first quarter, and the civilian unemployment rate rose to 5.8 percent. Industrial
production fell in April, largely reflecting a
cutback in the production of motor vehicles,
and capacity utilization rates declined somewhat. Reflecting markedly weaker demand
for motor vehicles, total retail sales were
down in April after rising moderately over
the first quarter. Housing starts were
unchanged in April after declining sharply in
the first quarter. Orders for nondefense capital goods point to further strong expansion of
spending on business equipment; nonresidential construction has continued to trend
appreciably higher. The nominal deficit on
U.S. trade in goods and services widened in
the first quarter from its average rate in the
fourth quarter. Broad indexes of consumer
and producer prices have increased faster on
average thus far this year, while advances in
labor compensation costs have remained
subdued.
Intermediate- and long-term interest rates
have declined considerably further since the
Committee meeting on March 28, while
short-term rates have registered small
decreases. In foreign exchange markets, the
trade-weighted value of the dollar in terms
of the other G-10 currencies, after falling to
low levels, rose on balance over the intermeeting period.
M2 and M3 strengthened in March and
April. For the year through April, M2
expanded at a rate in the lower half of its
range for 1995 and M3 grew at a rate somewhat above its range. Total domestic nonfinancial debt has grown at a rate a bit above
the midpoint of its monitoring range 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 on January 31-February 1 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 1994 to
the fourth quarter of 1995. The Committee
anticipated 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 lowered to 3 to 7 percent for the year.
The behavior of the monetary aggregates
will continue to be evaluated in the light of
progress toward price level stability, movements in their velocities, and developments
in the economy and financial markets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and
giving careful consideration to economic,
financial, and monetary developments, somewhat greater reserve restraint or somewhat
Minutes of FOMC Meetings, July
lesser reserve restraint would be acceptable
in the intermeeting period. The contemplated
reserve conditions are expected to be consistent with moderate growth in M2 and M3
over coming months.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Hoenig, Kelley,
Lindsey, and Melzer, Ms. Minehan,
Mr. Moskow, and Mses. Phillips and
Yellen. Votes against this action: None.
It was agreed that the next meeting of
the Committee would be held on
Wednesday-Thursday, July 5-6, 1995.
The meeting adjourned at 12:15 p.m.
Donald L. Kohn
Secretary
Meeting Held on
July 5-6, 1995
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 Wednesday, July 5, 1995, at
2:30 p.m. and continued on Thursday,
July 6, 1995, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Blinder
Mr. Hoenig
Mr. Kelley
Mr. Lindsey
Mr. Melzer
Ms. Minehan
Mr. Moskow
Ms. Phillips
Ms. Yellen
Messrs. Boehne, Jordan, McTeer, and
Stern, Alternate Members of the
Federal Open Market Committee
Messrs. Broaddus, Forrestal, and Parry,
Presidents of the Federal Reserve
Banks of Richmond, Atlanta, and
San Francisco respectively
149
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
Ms. Brown and Messrs. Davis, Dewald,
Hunter, Lindsey, Mishkin,
Promisel, Siegman, and Slifman,
Associate Economists
Mr. Fisher, Manager, System Open
Market Account
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Mr. Simpson, Associate Director,
Division of Research and
Statistics, Board of Governors
Ms. Johnson, Assistant Director,
Division of International Finance,
Board of Governors
Messrs. Clouse3 and Roberts,3
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. Connolly, First Vice President,
Federal Reserve Bank of Boston
Messrs. Beebe, Goodfriend, Lang,
Rosenblum, and Sniderman and
Ms. Tschinkel, Senior Vice
Presidents, Federal Reserve Banks
of San Francisco, Richmond,
Philadelphia, Dallas, Cleveland,
and Atlanta respectively
Ms. Krieger and Mr. Miller, Vice
Presidents, Federal Reserve Banks
of New York and Minneapolis
respectively
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on May 23, 1995, were
approved.
3. Attended portion of meeting relating to the
Committee's review of the economic outlook and
policy discussion.
150 82nd Annual Report, 1995
The Manager of the System Open
Market Account reported on developments in foreign exchange markets and
on System foreign currency transactions
during the period May 23,1995, through
July 5, 1995. By unanimous vote, the
Committee ratified these transactions.
The Manager also reported on developments in domestic financial markets
and on System open market transactions
in government securities and federal
agency obligations during the period
May 23, 1995, through July 5, 1995. By
unanimous vote, the Committee ratified
these transactions.
The Committee then turned to a discussion of the economic and financial
outlook, the ranges for growth of money
and debt in 1995 and 1996, 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 level of economic activity was about unchanged in
the second quarter. Consumer spending
apparently remained sluggish, and business spending on plant and equipment
rose less rapidly than in other recent
quarters. With final sales flagging, firms
sought to hold down production and
employment in order to keep inventories
under control. Broad indexes of consumer and producer prices had increased
faster on balance thus far this year, but
signs of some moderation in inflation
were evident in recent price data.
Growth of labor compensation costs
remained subdued.
Nonfarm payroll employment fell
substantially in May after a small
decline in April and reduced gains in the
first quarter. Payrolls in the services
industry continued to rise in May, but
the pace of hiring was well below the
average rate of increase over other
recent months. In manufacturing and
construction, employment contracted
further in May, although part of the job
decline in construction might have been
temporary, reflecting heavy rains and
floods in the South. The civilian unemployment rate edged lower in May, to
5.7 percent, but was somewhat above its
average for the first quarter.
Industrial production continued to
weaken in May, and incoming data suggested a further decline in June. Manufacturing output fell in May for a fourth
consecutive month, reflecting another
cutback in the production of motor vehicles. Output of non-auto manufactured
goods was unchanged, with increases in
the production of nondurable consumer
goods and non-auto business equipment
offsetting declines in output elsewhere.
Utilization of manufacturing capacity
dropped again in May but was still at a
relatively high level.
Nominal retail sales were about
unchanged over April and May. Purchases at furniture and appliance stores
were up slightly on balance over the two
months. Sales at automotive dealerships
and apparel outlets fell in April but
revived somewhat in May. Spending at
building materials stores fell in both
months. The retail sales reports, in combination with data on consumer prices
and unit motor-vehicle sales, suggested
that inflation-adjusted spending for consumer goods had changed little since the
fourth quarter of last year. Housing
starts were unchanged on balance over
April and May; a reduction in starts of
single-family homes was offset by a rise
in starts of multifamily units. Adverse
weather in some parts of the country
might have contributed to the sluggishness in starts. Home sales were higher
Minutes of FOMC Meetings, July
in May: Sales of new homes turned up
sharply, and sales of existing homes also
advanced somewhat.
Shipments of nondefense capital
goods increased considerably in May
after being unchanged in April.
Shipments of computing equipment
remained robust on balance over April
and May, but growth of shipments of
other business equipment slowed significantly. Sales of heavy trucks
rebounded strongly in May from an
April decline. Recent data on new
orders for nondefense capital goods suggested that spending on business equipment might moderate somewhat in the
months ahead after an extended period
of rapid expansion. Nonresidential construction continued to trend appreciably
higher in April; particularly large gains
were recorded in the public utility,
industrial, and institutional categories.
Business inventories grew at a little
slower rate in April than in the first
quarter. In manufacturing, inventory
investment remained brisk in April
but slowed somewhat in May; the
inventory-to-sales ratio for the two
months was at the high end of the range
for the past year. At the wholesale level,
the rate of increase in stocks in April
equaled the first-quarter pace and the
ratio of stocks to sales reached its highest level in several years. Inventory
accumulation in the retail sector was
more moderate in April. More than half
the rise occurred at automotive establishments. The inventory-to-sales ratio
for retailers other than auto dealers had
remained stable for a number of months
and was near the middle of its range for
recent years.
The nominal deficit on U.S. trade in
goods and services widened substantially in April from its average rate for
the first quarter. The value of imports
was up sharply, with increases posted in
nearly all major import categories. The
151
value of exports rose modestly from the
first-quarter level; increases in exports
of aircraft and industrial supplies were
partially offset by declines in exports
of automotive products to Canada and
Mexico. Available data indicated that,
on average, economic growth in the
major foreign industrial countries had
been sluggish in the first quarter and
apparently had remained so in the second quarter; growth had been particularly weak in Canada and Japan.
Incoming data suggested that price
inflation might be slowing a little after
having picked up early in the year. Consumer prices rose a bit less in May;
energy prices recorded another sizable
increase, but food prices changed little
and prices of other items advanced
more slowly. However, for the twelve
months ended in May, prices of
nonfood, non-energy consumer items
increased slightly more than in the preceding twelve months. At the producer
level, prices of finished goods were
unchanged in May, reflecting declines in
the prices of finished foods and finished
energy goods; excluding food and
energy, prices of finished goods rose in
May at the same rate as in April. For the
year ending in May, producer prices
rose moderately after being essentially
unchanged in the previous year. At earlier stages of production, producer
prices grew at a considerably slower
rate or declined in May, suggesting
some easing of cost pressures over the
next few months. Average hourly compensation in the nonfarm business sector
accelerated in the first quarter of the
year, owing in large part to temporary
developments. Over the year ended
in March, this compensation measure
increased somewhat more than it had
over the previous year. Average hourly
earnings declined in May, but the
change in hourly earnings over the past
twelve months was slightly larger than
152 82nd Annual Report, 1995
the advance over the preceding twelvemonth period.
At its meeting on May 23, 1995, the
Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions
and that did not include a presumption
about the likely direction of any adjustments to policy during the intermeeting
period. Accordingly, the directive 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 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 moderate
growth in the broader monetary aggregates over the months ahead.
Open market operations during the
intermeeting period were directed
toward maintaining the existing degree
of pressure on reserve positions. The
federal funds rate generally remained
near 6 percent, but most short-term
interest rates were down on balance in
response to incoming economic data,
particularly the employment report for
May, that were seen by market participants as increasing the likelihood that
monetary policy would be eased in the
near future. Longer-term interest rates
also declined in reaction to growing
indications that efforts to narrow substantially the U.S. budget deficit might
be successful. Yields on corporate and
municipal obligations fell less than
Treasury rates and risk spreads widened
a little, particularly for junk bonds.
Major indexes of equity prices rose over
the intermeeting period, partly in
response to lower interest rates.
In foreign exchange markets over the
intermeeting period, the trade-weighted
value of the dollar in terms of the other
G-10 currencies declined considerably
on balance. The dollar fell sharply in the
week after the May meeting on further
news of weakening in the U.S. economy
but rebounded somewhat at the end of
the month when concerted central-bank
intervention was carried out. The dollar
remained relatively stable over the balance of the period.
Growth of M2 strengthened substantially in May and June. Downward
adjustments in returns on deposits and
retail money fund shares had lagged
declines in market interest rates in
recent months, and investors evidently
responded by shifting funds from market instruments into these M2 assets.
For the year through June, M2 expanded
at a rate in the upper half of its range for
1995. M3 also accelerated in May and
June; and for the year through June, this
aggregate grew at a rate well above the
annual range set in February. The pickup
in M3 growth importantly reflected
more rapid inflows to institution-only
money funds, whose yields also adjusted
sluggishly to falling money market
rates. Total domestic nonfinancial debt
had grown at a rate in the upper half of
its monitoring range in recent months.
The staff forecast prepared for this
meeting suggested that economic activity would expand sluggishly over the
next few months as business firms
adjusted production schedules to bring
inventories into better alignment with
sales. Subsequently, as inventory positions were corrected, and with underlying support for final sales from the
favorable wealth and interest-cost
effects of the extended rally in the equity
and debt markets, the economy would
begin to expand at a moderate pace. The
forecast assumed a modest step-up
in the pace of consumer spending in
response to some diminution of concerns about job prospects and incomes
Minutes of FOMC Meetings, July
as well as improved financial conditions
and household balance sheets. Homebuilding was projected to pick up somewhat in lagged response to the recent
decline in mortgage rates and the related
improvement in housing affordability.
Business outlays for new equipment
were expected to slow from the very
rapid pace of the past few years in
response to the slower growth of sales
and profits, but lower costs of capital
and the ready availability of financing
would help to sustain appreciable
growth in such investment. Export
expansion would pick up in response to
some anticipated strengthening in the
economies of major U.S. trading partners. Considerable uncertainty continued to surround the fiscal outlook, but in
light of recent developments the forecast now reflected a greater degree of
fiscal restraint. In the staff's judgment,
the prospects for some easing of pressure on labor and other resources suggested that price inflation likely would
moderate from its recently higher level.
In the Committee's discussion of current and prospective economic developments, members commented that the
apparent pause in the expansion was
likely to prove temporary, and their forecasts generally pointed to an upturn
in overall economic activity to a pace
in the neighborhood of the economy's
potential by the latter part of this year
or early 1996. Many emphasized that
the prospects for a strengthening economy were enhanced by the drop in
intermediate- and long-term interest
rates and the rise in equity prices. In the
view of most members, however, the
risks to the outlook were tilted to
the downside. Several stressed that the
ongoing adjustments to business inventories could prove to be more pronounced and of longer duration than
they anticipated, with negative repercussions on production and incomes
153
and in turn on consumer spending and
business investment. Other downside
risks included the adverse implications
for exports of potentially less-thanprojected expansion in a number of
major foreign economies. Nonetheless,
recent developments suggested that the
period of maximum risk to the domestic
expansion might have passed. With
pressures on resources having diminished and likely to ease somewhat further and with labor costs remaining subdued, the risk of continuing increases in
inflation had fallen considerably; indeed,
in the view of many members inflation
should moderate over the projection
period.
In keeping with the practice at meetings when the Committee sets its longrun ranges for the money and debt
aggregates, the members of the Committee and the Federal Reserve Bank presidents not currently serving as members
provided their individual projections of
the growth in real and nominal GDP, the
rate of unemployment, and the rate of
inflation for the years 1995 and 1996.
The forecasts of the rate of expansion
in real GDP for 1995 as a whole had
a central tendency of V/z to 2 percent,
reflecting expectations of a pickup in
growth to a moderate pace in the second
half of the year; for 1996, projections of
growth in real GDP centered on a range
of 2lA to 23/4 percent. With regard to the
expansion of nominal GDP, the growth
forecasts were concentrated in a range
of 4lA to 43/4 percent for 1995 and 43A to
53/s percent for 1996. The rate of unemployment associated with these forecasts was expected to edge higher in the
second half of this year to a consensus
range of 53/4 to 6x/s percent in the fourth
quarters of both 1995 and 1996. Projections of the rate of inflation, as measured by the consumer price index,
pointed to a small decline over the projection horizon; the projections con-
154 82nd Annual Report, 1995
verged on rates of 3Vs to 33/s percent for
1995 and 2Vs to 3V4 percent for 1996.
In the course of the discussion, members indicated that much of the economic information that had become
available since the May meeting had
suggested a greater softening in the
economy than they had anticipated and
had raised concerns about the timing
and strength of the upturn over coming
quarters. However, the most recent data
and some of the anecdotal reports from
around the country had a better tone.
Among the positive factors in the economic outlook, members gave particular
emphasis to the favorable financial climate, including the stimulative effects
of lower interest rates on interestsensitive sectors of the economy, the
ready availability of financing from market sources and banking institutions,
and the impact of rising equity and bond
prices on balance sheets. Business and
consumer sentiment also remained
generally favorable, though anecdotal
reports suggested a heightened degree
of caution among business contacts in
many parts of the nation. Members
observed that the expansion did not
appear to have produced overall imbalances in the economy aside from an
apparent overhang of inventories in
some industries. The ongoing adjustments needed to bring these inventories
down to desired levels were seen as the
most serious threat to the expansion.
Some members commented that the
inventory correction in the second quarter appeared on the basis of the available
evidence to be less than was expected
earlier and that the period of inventory
adjustment might therefore be more
extended in time than they had anticipated. While such a development might
not in itself be sufficient to tilt the economy into recession, in the possible context of relatively sluggish growth in
final demands, the economy would be
vulnerable to adverse domestic or external shocks. On balance, while the timing
remained uncertain, a resumption of
growth at a moderate rate was viewed as
a likely prospect, given the underlying
strength of the economy.
In their review of prospective developments in key sectors of the economy,
members noted that consumer expenditures had fallen short of earlier expectations, but signs of some firming were
visible, notably the indications of an
improvement in sales of motor vehicles
since early spring. While a continued
sluggish performance of the consumer
sector could not be ruled out, the members generally expected a resumption of
moderate growth in consumer spending.
The upturn undoubtedly would be limited to some extent by the apparent
exhaustion of much of the earlier
pent-up demands and perhaps by concerns about job prospects and incomes,
but the effects of reduced interest rates
on borrowers and the wealth effects
from gains in values of financial assets
should help to sustain moderate growth.
Moreover, if the strengthening in housing activity materialized as projected,
sales of consumer durables would be
favorably affected. While consumer
confidence had declined earlier, recent
surveys indicated that confidence had
stabilized or even edged up more
recently and was in any event at relatively high levels in most parts of the
country.
Business fixed investment appeared
to have moderated since earlier in the
year, though expenditures for both producer durable equipment and nonresidential structures were still registering
strong gains. Further moderation was
anticipated over the course of coming
quarters in association with slower
growth in business sales and decreased
pressures on producer resources. While
some concern was expressed about the
Minutes of FOMC Meetings, July 155
vulnerability of capital spending to a
downturn in the growth of sales, the
members generally expected this sector
of the economy to remain a positive
factor in the expansion. The ready availability of financing on favorable terms
and the ongoing need to modernize
equipment and other producer resources
for competitive reasons, notably to take
advantage of continuing improvements
in computer and other technologies,
should foster continued overall growth
in business investment. Members also
noted that the strength in business profits, though likely to moderate cyclically
at some point, remained a favorable
factor undergirding business capital
spending.
Housing activity had stagnated in
recent months, but this sector of the
economy also was expected to provide
some stimulus to the expansion as home
buyers responded to reduced mortgage
rates. Although the latest available data
indicated that housing starts were still
relatively depressed, home sales and
mortgage loan applications for home
purchases had strengthened recently.
With some exceptions, building industry
contacts in local areas tended to confirm
broader indications that improvement in
housing activity was occurring. Members also noted that rising occupancy
levels and rents should support fairly
robust construction of multifamily housing in many areas.
With regard to the outlook for fiscal
policy, members gave considerable
emphasis to recent developments in the
Congress that suggested there could be
greater deficit reduction over the years
ahead than had been built into many
forecasts. The direct effects of deficit
cutbacks would tend to hold down the
growth in final demand and act as a
restraining influence on overall economic activity over the projection horizon. But those cutbacks also would have
favorable effects on financial markets,
thereby stimulating to an extent offsetting increases in spending. Over the
longer run, deficit reduction should
enhance the performance and growth of
the economy, though monetary policymakers would need to carefully monitor
possible transition effects.
A considerable downside risk in the
view of many members was the outlook
for exports. Economic activity in the
major foreign industrial nations had
been more sluggish than anticipated during the first half of the year, and this
raised questions about the strength of
the expansion in those countries and the
related prospects for faster growth in
U.S. exports. Most of the major economies in Latin America also were projected to strengthen, and indeed such
expectations were reflected in financial
markets, but substantial problems
remained that could undermine the
favorable outlook. On the positive side,
members observed that U.S. exports
were now quite competitive in world
markets, as evidenced by continuing
gains in exports to numerous countries,
and such a perception was reinforced by
anecdotal reports of increasing foreign
sales of a variety of products by firms
around the country. On balance, some
growth in exports remained a reasonable
prospect but it might fall below current
expectations.
The members generally agreed that
the inflation risks in the economy had
diminished, though some still saw the
potential for little or no progress in
unwinding the recent uptick in inflation.
Many referred to indications of easing
pressures on resources in recent months,
and they generally felt that such pressures would be contained over the projection horizon if economic growth were
to materialize in line with their forecasts. Developments seen as consistent
with such an expectation included per-
156 82nd Annual Report, 1995
sisting anecdotal reports of highly competitive markets that made it very difficult for business firms to pass on cost
increases or to raise profit margins.
Moreover, despite continuing reports of
labor scarcities in some areas and industries, increases in nominal labor costs
generally had remained subdued across
the nation. Prices of many raw materials
and semifinished goods had increased
sharply in earlier months and these
increases would continue to put upward
pressure on the prices of finished goods,
but there recently had been signs of
some abatement of inflation at the earlier
stages of production. Similarly, earlier
declines in the foreign exchange value
of the dollar were placing upward pressure on the prices of many imported
products, but the recent stability of the
dollar promised a diminution of such
pressure over time. On balance, most of
the members believed that the underlying trend of inflation was now tilted
toward gradual deceleration in the context of marginally higher rates of unemployed labor and other resources, but
they acknowledged that the risks to such
an outcome remained substantial.
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 1995,
and it decided on tentative ranges for
growth in those aggregates in 1996. The
current ranges set in February for the
period from the fourth quarter of 1994
to the fourth quarter of 1995 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 3 to 7 percent for 1995.
In the Committee's discussion, the
members took account of the acceler
ated rates of M2 and M3 growth since
early spring that, for the year to date,
had lifted the expansion of M2 to the
upper half of the Committee's range and
the expansion of M3 further above its
range. According to a staff projection,
the growth of both aggregates was likely
to moderate over the balance of the year,
assuming an unchanged monetary policy, as rates paid on various components
of the aggregates were adjusted more
fully to the reductions in market interest
rates that had occurred since early in the
year. Even so, the projected growth of
the broad aggregates would remain well
above that experienced over the last several years. These developments implied
velocity behavior for these aggregates
that was more in line with historical
patterns after several years of pronounced and atypical velocity increases.
The members noted that financial innovations, technical changes, and deregulation had obscured historical distinctions among various financial instruments and had affected the extent to
which holders might shift funds into
or out of components of the monetary
aggregates in response to changing
interest rate patterns. As a result, substantial uncertainty remained about projections of money growth and the future
relationships of money and debt to the
basic objectives of monetary policy.
Against this background, members
expressed somewhat differing views
regarding appropriate ranges for the
growth of M2 and M3 in 1995 and 1996.
With regard to M2, a majority of the
members favored or could accept a proposal to maintain the existing 1 to 5 percent range for both years. These members noted that M2 growth was projected
to remain within the current range,
though in the upper half in 1995 and at
the top in 1996. While recognizing that
expansion at a rate above that range
could not be ruled out, especially for
Minutes of FOMC Meetings, July 157
1996, they suggested that an increase in
the range, at a time when substantial
uncertainties continued to surround the
relationship of M2 to broad measures of
economic performance, would imply a
degree of confidence regarding the relationship that the Committee did not possess at this point. Moreover, if the more
normal behavior of velocity over the
past several quarters were to continue, a
1 to 5 percent range for growth of M2
likely would prove consistent with the
Committee's ultimate objectives of sustained economic expansion and reasonable price stability. There was concern
that an increase in the M2 range could
foster a misreading of the Committee's
intentions, especially if some easing in
policy were to be approved during this
meeting, explanations of the technical
reasons notwithstanding.
Members preferring a somewhat
higher M2 range emphasized that expectations for growth of this aggregate in
1995 and 1996 were around the upper
end of the current range. In their view,
under the Federal Reserve Act, the
Committee's target ranges—and normally their midpoints—should be consistent with the Committee's expectations for growth in nominal GDP and
money. From this perspective, a higher
M2 range was clearly defensible and the
reasons for it easily communicated.
Indeed, a failure to adjust the range
upward could be interpreted by observers as indicating an intent to tighten
policy should M2 growth remain high in
relation to its current range.
With regard to M3, all the members
indicated that they preferred or could
accept an increase in its range to 2 to
6 percent for both years. The current
0 to 4 percent range was quite low in
relation to the range for M2, judging by
the average historical growth of this
aggregate relative to that of M2. The
range had been adopted in the light
of unusual developments that had
depressed M3 growth over much of the
1990s. Those developments, which also
had served to curb M2 growth though
to a lesser extent, involved a reduced
role of banking institutions in the intermediation of flows of funds between
savers and borrowers. That reduced
role had been induced to a large degree
by balance sheet adjustments undertaken in response to extraordinary
strains experienced by banks and thrifts.
Against the background of favorable
economic developments, the financial
health of depository institutions had
improved markedly over the past few
years, and the increased ability and
willingness of these institutions to serve
as financial intermediaries appeared to
be working toward strengthening the
growth of M3 and lowering its velocity.
In the circumstances, the members
believed that the contemplated increase
in the M3 range was essentially a technical response to developments that
were tending to restore both traditional
financing patterns and the historical
pattern of somewhat faster growth in
M3 than in M2. In this respect, the
increase in the M3 range did not have
any implications for the underlying
thrust of monetary policy, though the
higher range could prove to be more
consistent over time with sustainable
and noninflationary economic growth.
As in the case of the current M2 range,
that conclusion assumed the eventual
restoration of historic relationships
between M3 and measures of overall
economic performance.
The Committee was unanimous in its
view that the current monitoring range
for the growth of total domestic nonfinancial debt should be retained for
1995 and extended to 1996. This view
took into account staff projections indicating that the debt aggregate was likely
to grow at rates well within its 3 to
158 82nd Annual Report, 1995
7 percent range—indeed, not far from
The Committee voted to retain the
the midpoint—in both years.
3 to 7 percent monitoring range for
At the conclusion of this discussion, growth of total domestic nonfinancial
the Committee voted to reaffirm the debt for 1995 and to extend that range
range of 1 to 5 percent for growth of M2 on a tentative basis to 1996:
in 1995 and to set the same range on a
Votes for this action: Messrs. Greenspan,
tentative basis for 1996:
McDonough, Blinder, Hoenig, Kelley,
Lindsey, and Melzer, Ms. Minehan, Mr.
Votes for this action: Messrs. Greenspan,
Moskow, and Mses. Phillips and Yellen.
McDonough, Hoenig, Kelley, Lindsey,
Votes against this action: None.
and Melzer, Ms. Minehan, Mr. Moskow,
and Ms. Phillips. Votes against this action:
These votes constituted approval of
Mr. Blinder and Ms. Yellen.
the following paragraph for the directive
Mr. Blinder and Ms. Yellen dissented that would be issued at the end of the
on a technical judgment, not a policy meeting:
difference. They noted that if growth in
the demand for M2 were close to historic norms in 1995 or 1996, as indeed it
had been for some time, then the Committee members' projections for nominal GDP would likely imply M2 growth
near the top of, or even above, the current range. While the relationship
between the growth of M2 and that of
nominal GDP remained subject to a
great deal of uncertainty, they were persuaded that the range—in fact, the midpoint of the range—should normally be
consistent with members' forecasts of
nominal GDP growth. This would be
truer to the spirit of the aggregates targeting provision in the Federal Reserve
Act. From this perspective, they viewed
a higher M2 range for 1995 and 1996 as
clearly preferable in communicating the
Committee's objectives for the economy and its expectations for money
growth.
The Committee then voted to raise
the range for growth of M3 to 2 to
6 percent for 1995 and to extend that
higher range provisionally to 1996:
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Hoenig, Kelley,
Lindsey, and Melzer, Ms. Minehan, Mr.
Moskow, and Mses. Phillips and Yellen.
Votes against this action: None.
The Federal Open Market Committee
seeks monetary andfinancialconditions that
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee reaffirmed
at this meeting the range it had established
on January 31-February 1 for growth of M2
of 1 to 5 percent, measured from the fourth
quarter of 1994 to the fourth quarter of 1995.
The Committee also retained the monitoring
range of 3 to 7 percent for the year that it had
set for growth of total domestic nonfinancial
debt. The Committee raised the 1995 range
for M3 to 2 to 6 percent as a technical
adjustment to take account of changing intermediation patterns. For 1996, the Committee
established on a tentative basis the same
ranges as in 1995 for growth of the monetary
aggregates and debt, measured from the
fourth quarter of 1995 to the fourth quarter
of 1996. 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 course of the Committee's discussion of its monetary growth ranges,
members commented on the failure of
the monetary aggregates to provide a
reliable nominal anchor for the conduct
of monetary policy in recent years.
Moreover, the restoration of historic
relationships, or the emergence of new
but stable relationshios. between money
Minutes of FOMC Meetings, July
growth and measures of progress toward
broad economic objectives could not be
predicted with any degree of confidence.
Some members expressed the view that
in these circumstances the Committee
needed to continue to look at potential
alternative approaches to guide the formulation of policy and to communicate
its intentions to the public, especially
with respect to the Committee's objective of promoting price stability over
time.
In the Committee's discussion of policy for the intermeeting period ahead,
nearly all the members indicated that
they favored or could support a proposal
to ease slightly the current degree of
pressure on reserve positions. Preferences for an unchanged policy stance
and for somewhat greater easing also
were expressed. In support of at least
slight easing, members commented that
they viewed current monetary policy as
somewhat restrictive, judged in part by
the level of the inflation-adjusted federal
funds rate. This degree of monetary
restraint had been appropriate early in
the year when the economy was operating at or possibly beyond its longrun potential and inflation pressures
appeared to be mounting. Some modest
easing was desirable now that the
growth of the economy had slowed considerably more than anticipated and
potential inflationary pressures seemed
to be in the process of receding.
Although inflation was higher than in
1994 and the economy was still operating at an elevated level, looking forward
many members saw prospects for
declining inflation and the possibility of
shortfalls in economic growth. The
members agreed that under present economic conditions a slight easing of the
stance of policy would incur little risk
of stimulating increased inflation and
would be entirely consistent with their
commitment to continued progress
159
toward price stability over time. Several
members also observed that any move
toward less restraint should be cautious
at this point because easing would represent a change in the direction of policy
and its repercussions on financial markets, including the foreign exchange
markets, could be relatively pronounced.
A few members preferred somewhat
greater easing. They stressed that such a
move was warranted by the recent pause
in the expansion and the apparent vulnerability of the economy to a variety of
downside risks. Indeed, a move from
what they saw as a restrictive monetary
policy toward a more neutral policy
stance was somewhat overdue in their
view. While they could support a slight
adjustment to policy at this point, these
members were persuaded that the stance
of monetary policy probably would
need to be eased by more than a slight
amount over time to accommodate the
intermediate- and long-term needs of
an expanding economy. Moreover, the
risks of increasing inflationary pressures
appeared to be relatively remote in the
context of the current and anticipated
performance of the overall economy.
The declines in intermediate- and longterm interest rates were helping to support the expansion, but those declines
rested in part on market expectations
of significant monetary policy easing;
failure to ratify such expectations could
well result in at least a partial reversal of
those desirably lower rates.
Members who leaned toward an
unchanged policy remained concerned
about the persistence of inflationary
pressures and whether a somewhat
easier policy stance would be consistent
with the objective of capping inflation
and setting the stage for further progress
toward price stability. The available evidence on the economy's current performance remained mixed, and most forecasts pointed to moderate strengthening
160 82nd Annual Report, 1995
ahead; in the circumstances an easing
move did not appear to be needed at
this time. One member emphasized that,
while the risks of greater inflation
seemed small, the costs of a policy error
in the direction of too much easing
would be high in terms of its effects
on the credibility of the System's antiinflationary policy and the need to rein
in inflationary growth next year.
Although their preference would be to
wait for further evidence on the performance of the economy, all but one of
these members indicated that, given the
current uncertainties surrounding the
economic outlook and the small amount
of easing that was proposed, they would
not dissent from the majority position.
With regard to possible adjustments
to policy during the intermeeting period,
most of the members who favored some
easing also preferred an asymmetric
directive, including a marked preference
on the part of those who supported
greater easing than the majority. An
asymmetric directive was consistent
with the view shared by most members
that the risks to the expansion were
biased to the downside, but no member
expressed a strong presumption about
the likely need to ease policy during the
weeks ahead. The Committee would, of
course, monitor and respond as needed
to the incoming economic information.
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they favored or could
support a directive that called for some
slight easing in the degree of pressure
on reserve positions and that included a
bias toward possible further easing 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 monetary
restraint might be acceptable or slightly
lesser monetary restraint would 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 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 level of economic activity
was about unchanged in the second quarter.
Nonfarm payroll employment fell in April
and May after posting reduced gains in the
first quarter, and the civilian unemployment
rate, at 5.7 percent in May, was up somewhat
from its first-quarter average. Industrial production continued to decline in May, reflecting another cutback in the production of
motor vehicles, and capacity utilization
was down somewhat further. Total retail
sales have been sluggish on average in
recent months. Housing starts were about
unchanged over April and May, but sales of
new homes turned up sharply in May. Orders
for nondefense capital goods have moderated somewhat in recent months but still
point to considerable further expansion of
spending on business equipment; nonresidential construction has continued to trend
appreciably higher. The nominal deficit on
U.S. trade in goods and services widened in
April from its average rate in the first quarter. Broad indexes of consumer and producer
prices have increased faster on average thus
far this year, though there were signs of
some moderation in the most recent data;
advances in labor compensation costs have
remained subdued.
Most interest rates have declined somewhat further since the Committee meeting on
May 23. In foreign exchange markets, the
trade-weighted value of the dollar in terms
of the other G-10 currencies declined considerably over the intermeeting period.
Minutes of FOMC Meetings, August
M2 and M3 strengthened substantially in
May and June. For the year through June,
M2 expanded at a rate in the upper half of its
range for 1995 and M3 grew at a rate well
above its range. Total domestic nonfinancial
debt has grown at a rate in the upper half of
its monitoring range 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 range it had established
on January 31-February 1 for growth of M2
of 1 to 5 percent, measured from the fourth
quarter of 1994 to the fourth quarter of 1995.
The Committee also retained the monitoring
range of 3 to 7 percent for the year that it had
set for growth of total domestic nonfinancial
debt. The Committee raised the 1995 range
for M3 to 2 to 6 percent as a technical
adjustment to take account of changing intermediation patterns. For 1996, the Committee
established on a tentative basis the same
ranges as in 1995 for growth of the monetary
aggregates and debt, measured from the
fourth quarter of 1995 to the fourth quarter
of 1996. The behavior of the monetary
aggregates will continue to be evaluated
in the light of progress toward price level
stability, movements in their velocities, and
developments in the economy and financial
markets.
In the implementation of policy for the
immediate future, the Committee seeks to
decrease slightly the existing degree of pressure on reserve positions. In the context of
the Committee's long-run objectives for
price stability and sustainable economic
growth, and giving careful consideration to
economic, financial, and monetary developments, slightly greater reserve restraint might
or slightly lesser reserve restraint would
be acceptable in the intermeeting period.
The contemplated reserve conditions are
expected to be consistent with moderate
growth in M2 and M3 over coming months.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Kelley, Lindsey,
and Melzer, Ms. Minehan, Mr. Moskow,
and Mses. Phillips and Yellen. Vote
against this action: Mr. Hoenig.
Mr. Hoenig dissented because he
believed the stance of monetary policy
161
should remain unchanged at this time.
With the pace of economic activity
likely to return to trend growth later this
year and inflation expected to be higher
this year and next than in 1994, he felt
an unchanged policy in the near term
would enhance the prospects of achieving the Committee's long-run objectives
of sustainable economic growth and
price stability.
It was agreed that the next meeting of
the Committee would be held on Tuesday, August 22, 1995.
The meeting adjourned at 12:20 p.m.
Donald L. Kohn
Secretary
Meeting Held on
August 22, 1995
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 22, 1995, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Blinder
Mr. Hoenig
Mr. Kelley
Mr. Lindsey
Mr. Melzer
Ms. Minehan
Mr. Moskow
Ms. Phillips
Ms. Yellen
Messrs. Boehne, Jordan, McTeer, and
Stern, Alternate Members of the
Federal Open Market Committee
Messrs. Broaddus, Forrestal, and Parry,
Presidents of the Federal Reserve
Banks of Richmond, Atlanta, and
San Francisco respectively
162 82nd Annual Report, 1995
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Deputy General Counsel
Ms. Brown and Messrs. Davis, Dewald,
Hunter, Lindsey, Mishkin,
Promisel, Siegman, Slifman, and
Stockton, Associate Economists
Mr. Fisher, Manager, System Open
Market Account
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Mr. Simpson, Associate Director,
Division of Research and
Statistics, Board of Governors
Ms. Johnson, Assistant Director,
Division of International Finance,
Board of Governors
Mr. Ramm,4 Section Chief, Division
of Research and Statistics,
Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Ms. Strand, First Vice President,
Federal Reserve Bank of
Minneapolis
Messrs. Beebe, Goodfriend, Rolnick,
Rosenblum, and Sniderman and
Mses. Tschinkel and White,
Senior Vice Presidents, Federal
Reserve Banks of San Francisco,
Richmond, Minneapolis, Dallas,
Cleveland, Atlanta, and
New York respectively
Mr. Meyer, Vice President, Federal
Reserve Bank of Philadelphia
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on July 5-6, 1995, were
approved.
4. Attended portion of meeting relating to the
Committee's economic discussion.
The Manager of the System Open
Market Account reported on developments in foreign exchange markets
and on System foreign currency transactions during the period July 6, 1995,
through August 21, 1995. By unanimous vote, the Committee ratified these
transactions.
The Manager also 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, 1995, through August 21, 1995.
By unanimous vote, the Committee ratified these transactions.
The Committee then turned to a discussion of the economic and financial
outlook and the implementation of
monetary policy over the intermeeting
period ahead. A summary of the economic and financial information available at the time of the meeting and of
the Committee's discussion is provided
below, followed by the domestic policy
directive that was approved by the Committee and issued to the Federal Reserve
Bank of New York.
The information reviewed at this
meeting suggested that economic activity was expanding more rapidly after
increasing at a sluggish pace in the
second quarter. Consumer spending
appeared to be growing at a moderate
rate, housing demand seemed to be
rebounding sharply, and business investment remained on a solid uptrend. With
efforts to adjust inventories still under
way, industrial production had changed
little in recent months, and employment
gains had been modest. After increasing
at elevated rates in the early part of the
year, consumer and producer prices had
risen more slowly in recent months.
Advances in labor compensation costs
remained subdued.
Nonfarm payroll employment rose
further in July after a modest second-
Minutes of FOMC Meetings, August
quarter gain; the July advance was held
down by continuing employment losses
in manufacturing that were widespread
by industry. Outside of manufacturing,
payrolls continued to increase at a relatively slow pace in July; reduced job
growth in the services industry reflected
smaller increases in employment at business and health service establishments.
The civilian unemployment rate rose
slightly in July, returning to its secondquarter average of 5.7 percent.
Industrial production edged higher in
July, but it was unchanged on balance
over the three months ending in July
after declining in earlier months. Manufacturing output fell further in July; a
sharp contraction in the production of
motor vehicles and parts accounted for
the entire decline. Within manufacturing, output of business equipment other
than motor vehicles continued to
advance as additional strong gains were
recorded in the production of office and
computing equipment. The output of
non-auto consumer goods weakened; a
cutback in the production of home furnishings offset an increase in the manufacture of appliances. With capacity
continuing to expand rapidly, total utilization of industrial capacity dropped
somewhat further.
Despite edging down in July, revised
data for earlier months suggested that
total retail sales had risen appreciably
on balance since early spring. The July
decline entirely reflected weakness in
motor vehicles; elsewhere, spending on
furniture and appliances continued to
firm, and purchases of other durable
goods and of apparel rose sharply. Housing market activity picked up considerably in June, with sales of both new and
existing homes increasing significantly.
Housing starts were up strongly in July
after changing little in previous months.
Shipments of nondefense capital
goods, led by surging purchases of com
163
puting equipment, continued to grow
rapidly in the second quarter. However,
business spending for transportation
equipment, notably heavy trucks and
aircraft, was lackluster. New orders for
nondefense capital goods edged lower
in the second quarter after rising sharply
early this year, although the elevated
level of order backlogs pointed to considerable further expansion of spending
on business equipment over coming
months. Nonresidential construction
activity posted a solid gain in the second
quarter, and recent data on permits
suggested further increases in building
activity in coming months.
Business inventory accumulation
slowed markedly further in June, and
inventory-to-sales ratios for most types
of business establishments declined
again. In manufacturing, the aggregate
inventory-to-sales ratio was only a little
above the historical low reached around
the end of 1994. In the wholesale sector,
the ratio of stocks to sales in June was
slightly below the top of the range prevailing over the last year. At the retail
level, inventories changed little in June,
and the inventory-to-sales ratio for this
sector was near the middle of its range
for recent years.
The nominal deficit on U.S. trade in
goods and services widened in June,
with exports declining marginally more
than imports. For the second quarter as a
whole, the deficit was substantially
larger than in the first quarter. Exports
were up considerably in the second
quarter despite declines in automotive
products shipped to Canada and Mexico,
but imports rose even more, with
increases widely spread across most
major trade categories. In the major
foreign industrial countries, economic
growth appeared to have ranged from
weak to moderate in the second quarter,
and the limited available evidence suggested that subdued expansion contin-
164 82nd Annual Report, 1995
ued into the third quarter. Economic
activity remained particularly weak in
Japan. In Europe, expansion apparently
was still under way, though somewhat
unevenly across countries.
Consumer prices rose more slowly in
June and July, with food and energy
price movements having little effect on
the overall index; price increases for
nonfood, non-energy items were somewhat smaller than those seen earlier in
the year. Over the twelve-month period
ended in July, however, this measure of
consumer inflation rose at about the
same rate as in the preceding twelve
months. Producer prices of finished
goods edged lower on balance in June
and July, reflecting substantial declines
in prices of finished energy goods.
Excluding food and energy, producer
prices rose more over the year ended in
July than over the preceding year. At
earlier stages of production, increases in
producer prices had diminished sharply
in recent months, perhaps suggesting
some abatement of pressures on production capacity and prices. Total hourly
compensation for private industry workers increased somewhat more in the second quarter than in the first; however,
the rise in compensation costs for the
year ended in June was smaller than that
for the previous year, primarily reflecting slower growth in costs of benefits.
Average hourly earnings grew faster in
July than in June; for the year ending in
July, earnings rose somewhat more than
in the preceding year.
At its meeting on July 5-6, 1995, the
Committee adopted a directive that
called for some slight easing in the
degree of pressure on reserve positions
and that included a tilt toward possible
further easing 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 might 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 moderate
growth in M2 and M3 over coming
months.
Immediately after the meeting, open
market operations were directed toward
implementing the slight easing in the
degree of reserve pressure that had been
adopted by the Committee. Thereafter,
operations were conducted with a view
to maintaining this slightly more accommodative reserve posture, and the federal funds rate remained near 53A percent over the intermeeting interval.
Adjustment plus seasonal borrowing
averaged somewhat above anticipated
levels, largely reflecting heavy adjustment borrowing activity on the August 2
reserve settlement day when demands
for excess reserves were unexpectedly
large.
Treasury yields declined across the
maturity spectrum in response to the
announcement of the easing action on
July 6; market participants perceived the
policy move as an indication of the Federal Reserve's concern regarding the
state of the economy and, based on historical precedent, as likely the first in a
series of easing steps. Subsequently,
however, interest rates rebounded in
response to incoming economic data that
were seen as suggesting stronger economic performance and reduced chances
for further monetary policy easing. On
balance, short-term market interest rates
posted mixed changes over the intermeeting period, while intermediate- and
long-term rates rose appreciably. With
unexpectedly favorable corporate earnings reports outweighing the effects of
higher interest rates, major indexes of
Minutes of FOMC Meetings, August
equity prices were up moderately on
balance over the period.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
appreciated substantially over the intermeeting period. The dollar's gain
occurred partly in response to the
improving outlook for the U.S. economy
and the related rise in long-term interest
rates in the United States. Declines in
long-term yields in the major European
industrial countries probably contributed
to a higher value of the dollar in terms
of the German mark and most other
European currencies. In addition, the
dollar appreciated sharply against the
Japanese yen, largely in response to
actions by Japanese authorities to reduce
official interest rates, to encourage capital outflows from Japan, and to make
large intervention purchases of dollars
during a period when the dollar already
was rising against the yen.
M2 and M3 continued to register sizable increases in July and appeared to
be expanding considerably further in
August. The recent strength of M2
seemed to reflect in part the relatively
greater appeal of interest rates on M2
assets in the wake of the declines in
market interest rates that had taken place
this year, particularly at longer maturities. Robust M3 growth was associated
with the continuing requirements of
commercial banks for additional wholesale funds needed to meet persisting
strong loan growth. For the year through
July, M2 expanded at a rate in the upper
half of its range for 1995, and M3 grew
at a rate above its upwardly revised
range. Total domestic nonfinancial debt
had been in the upper half of its monitoring range in recent months.
The staff forecast prepared for this
meeting suggested that growth in economic activity would pick up from the
weak pace of the second quarter. The
165
inventory adjustment process appeared
to be well under way, and moderate
expansion of final sales would be supported by the favorable wealth and
interest-cost effects of the extended rally
in the debt and equity markets. In
response to improved financial conditions and balance sheets, consumer
spending was anticipated to keep pace
with the growth of incomes. Homebuilding was expected to strengthen somewhat in response to the earlier decline in
mortgage rates and the related improvement in housing affbrdability. Accompanying slower growth of sales and profits,
business investment in new equipment
and structures was projected to slow
from the very rapid pace of the past few
years, although the lower cost of capital
and the ready availability of financing
would help to sustain appreciable expansion in such investment. Export growth
would pick up in response to some
expected strengthening in the economies of major trading partners. Considerable uncertainty surrounded the fiscal
outlook, but the staff continued to anticipate the greater degree of fiscal restraint
that had been projected at the time of the
last Committee meeting. In the staff's
judgment, the prospects for some further
easing of pressure on labor and other
resources suggested that price inflation
likely would not deviate significantly
from recent trends.
In the Committee's discussion of current and prospective economic developments, the members focused on recent
indications of some strengthening in the
expansion of economic activity after a
period of limited growth during the
spring. Further growth in final demand
was generating an improvement in overall business activity, despite a more
rapid adjustment in inventory investment than many had expected. This
configuration suggested that the risks
of recession or an extended period of
166 82nd Annual Report, 1995
subpar growth were now reduced, and
sustained expansion at a moderate pace
was seen as the most likely course for
the economy. Although the risks to
the economy now seemed to be more
evenly balanced than at the time of the
July meeting, they were still sizable in
both directions. In particular, uncertainties about federal budget policies
and their effects on the economy
remained substantial. With respect to
prices, members noted that the recent
pause in the expansion had eased pressures on resources, and the economy
appeared to be in a better position
to accommodate moderate growth over
the forecast horizon without adding to
inflation. Indeed, some members were
optimistic that growth of the economy at
a pace in line with their expectations
would be consistent with modest further
decreases in inflation. Others expressed
concern, however, that the uncertainties surrounding the outlook for the
economy included questions about the
persistence of inflationary sentiment
and the prospects for further progress
toward stable prices over the next several quarters.
Members gave particular attention to
the ongoing discussions involving the
Congress and the Administration regarding future federal budget deficits. There
was a great deal of political support for
reducing the federal deficit substantially
over the years ahead; indeed, in the view
of one member the political dynamics
might very well result in larger reductions than many now anticipated. Nonetheless, the actual outcome remained
particularly uncertain. From the perspective of its macroeconomic stabilization
effects and its implications for monetary
policy, enactment of legislation involving substantial fiscal restraint would
raise the issue of fiscal drag; however,
the latter's impact on the economy
would have to be judged in the context
of attendant adjustments in market interest rates and, more broadly, in the light
of emerging economic conditions. A
legislative package containing strong
fiscal restraint measures would be
expected to ease pressures in debt
markets—indeed, enhanced prospects in
this regard were probably already contributing to reduced long-term interest
rates. On the other hand, a package that
included only modest deficit reduction
might well lead to upward pressure on
interest rates. The continuing uncertainty concerning the size of future budget deficits might be complicated by a
delay in passing appropriations legislation in the months ahead, with potentially dislocative effects on many federal
government operations. Accordingly,
federal budget developments were seen
as the major factor likely to bear on the
performance of the economy over coming months and quarters, and these
developments might well differ considerably from current forecasts.
Members described current business
conditions across the nation as ranging
from sluggish in some regions to robust
in a number of others, with at least some
improvement occurring recently in
many parts of the country. There were
anecdotal reports of strengthening retail
sales in numerous areas, with the
notable exception of motor vehicles, and
of relatively high levels of confidence
among consumers and many retailers.
Sustained growth in consumer spending
was seen as a reasonable expectation for
the projection period through 1996.
However, diminished pent-up demands
and possibly the increasing level of
consumer indebtedness would tend to
inhibit consumer spending, keeping its
growth below that in recent years. These
negative factors might be offset to some
extent by the wealth effects of the rise in
stock market prices and by a higher
level of housing activity that should
Minutes of FOMC Meetings, August
help to support demands for household
durables.
Members referred to recent indications, including widespread anecdotal
reports, of considerable gains in housing
activity after a period of pronounced
weakness during the earlier months of
the year. Homebuyers were reacting
favorably to the declines in rates on
fixed-rate mortgages from their highs
around the turn of the year. Homebuilders in a number of areas were reported
to be optimistic about the outlook for
further gains in housing demand, at least
for single-family homes. The prospects
for multifamily construction seemed less
promising; while robust activity characterized such construction in a number of
areas, still high vacancy rates and associated overbuilding across much of the
nation suggested little, if any, overall
impetus from this sector of the housing
industry.
The expansion in nonresidential construction was projected to slow from
its pace in recent quarters in line with
more moderate growth in overall economic activity and reduced pressures
on capacity. Even so, with the slowing
occurring only gradually as projects
under construction were completed, this
sector of the economy was expected to
remain a positive factor in the overall
expansion of economic activity over
the next several quarters. The members
also anticipated more moderate growth
in outlays for producers' durable equipment over the forecast horizon in
conjunction with slower growth in
final sales. However, current trends
pointed to further sizable increases in
outlays for office and computing equipment, and such expenditures were
expected to buttress still considerable
overall growth in spending for business
equipment, though at a pace well below
the exceptional rate experienced in
recent years.
167
Members commented that the adjustment in business inventories appeared to
have progressed a considerable distance
but probably was not yet completed for
the business sector as a whole. Nonetheless, inventory investment seemed likely
to become a more neutral factor in
its effects on the overall economy as
desired inventory ratios were reached in
an increasing number of industries. The
recent tendency for order patterns to
stabilize was a tentative indication of
such a development. In any event, the
recent upturn in final sales, apart from
its probable effects on desired inventory
levels, had allowed a larger-thanexpected amount of inventory correction to occur without preventing the
economy from regaining at least moderate expansionary momentum.
The external sector of the economy
remained subject to particular uncertainty. The members generally viewed
some improvement in the country's net
export position as a reasonable expectation, but several questioned the potential
for much expansion of exports to many
of the nation's important trading partners. While recent policy actions in
Japan might have diminished concerns
about the outlook for overall exports, a
number of members indicated that they
continued to anticipate fairly limited
growth in foreign demands for U.S.
goods and services, with the result that
the external sector was likely in their
view to make a relatively small, if any,
contribution to the growth of the domestic economy over the projection period.
Members generally viewed the nearterm outlook for inflation as more
encouraging than it had appeared to be
earlier this year. The pause in the expansion during the spring had eased pressures on resources, as evidenced in part
by anecdotal reports of lessening labor
shortages in some areas and reduced use
of overtime work by some firms, and the
168 82nd Annual Report, 1995
higher rate of inflation experienced
during the early months of the year
seemed unlikely to persist. The members differed somewhat, however, in
their assessment of the longer-term
outlook for inflation. Some emphasized
the reduction that had occurred in inflationary pressures, and with labor costs
remaining subdued they felt that economic growth in line with current forecasts should prove compatible with
moderating inflation over time. Further,
the recent appreciation of the dollar
should contribute marginally to a more
favorable inflation outcome after some
lag. Other members expressed reservations about the prospects for an
improved inflation performance over
coming quarters. They cited indications
of persisting inflationary expectations
such as the recent weakness of the bond
markets and survey results that pointed
to expectations of some rise in inflation
from current levels. They also referred
to the possibility that favorable labor
cost developments would not persist
indefinitely in an economy that was
operating in the vicinity of its potential.
Turning to monetary policy for the
intermeeting period ahead, all the members accepted a proposal to maintain an
unchanged degree of pressure in reserve
markets and to adopt a directive that
was not biased in either direction with
regard to potential intermeeting adjustments. For the near term, current trends
in economic activity and inflation
appeared favorable and likely to remain
so with an unchanged policy stance. A
steady policy also seemed appropriate
pending a clearer assessment of the outlook for fiscal policy. Over the longer
term, the members generally believed
that consideration would need to be
given to an adjustment in the Committee's policy stance, especially if substantial fiscal restraint were to be enacted.
The extent to which an adjustment might
be needed later in the stance of monetary policy—characterized by some
members as slightly to the restrictve side
at least in terms of the inflation-adjusted
federal funds rate—would have to be
assessed in terms of its consistency with
the Committee's continuing objectives
of fostering price stability and promoting sustained economic growth.
At the conclusion of the Committee's
discussion, all the members indicated
that they would vote for a directive
that called for maintaining the existing
degree of pressure on reserve positions.
They also favored a directive that did
not include a presumption about the
likely direction of any adjustments to
policy during the intermeeting period.
Accordingly, in the context of the
Committee's long-run objectives for
price stability and sustainable economic
growth, and giving careful consideration
to economic, financial, and monetary
developments, the Committee decided
that slightly greater or slightly lesser
reserve restraint would be acceptable
during the intermeeting period. The
reserve conditions contemplated at this
meeting were expected to be consistent
with more moderate growth in M2 and
M3 over the months ahead.
At the conclusion of the meeting, the
Federal Reserve Bank of New York was
authorized and directed, until instructed
otherwise by the Committee, to execute
transactions in the System Account in
accordance with the following domestic
policy directive:
The information reviewed at this meeting
suggests a strengthening in the expansion of
economic activity in the current quarter from
the weak second-quarter pace. Nonfarm payroll employment increased in June and July
after declining in May; the advance was held
down by continuing employment losses in
manufacturing. The civilian unemployment
rate in July was at its second-quarter average
of 5.7 percent. Industrial production changed
Minutes of the FOMC Meetings, September 169
little in recent months after falling earlier
while capacity utilization was down somewhat further. Total retail sales have risen
appreciably on balance since early spring,
but they edged down in July, reflecting
weakness in motor vehicles. Housing starts
were up sharply in July after changing little
in previous months. Orders for nondefense
capital goods still point to considerable
further expansion of spending on business
equipment over coming months; nonresidential construction has continued to trend
appreciably higher. The nominal deficit on
U.S. trade in goods and services widened in
the second quarter from its average rate in
the first quarter. After increasing at elevated
rates in the early part of the year, consumer
and producer prices have risen more slowly
in recent months. Advances in labor compensation costs have remained subdued.
Short-term interest rates have posted
mixed changes since the Committee meeting
on July 5-6, while intermediate- and longterm rates have risen appreciably. In foreign
exchange markets, the trade-weighted value
of the dollar in terms of the other G-10
currencies appreciated substantially over the
intermeeting period, with the gain occurring
since the beginning of August.
M2 and M3 continued to register sizable
increases in July and appeared to be expanding considerably further in August. For the
year through July, M2 expanded at a rate in
the upper half of its range for 1995 and M3
grew at a rate above its upwardly revised
range. Total domestic nonfinancial debt has
grown at a rate in the upper half of its
monitoring range 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 range it had established on January 31-February 1 for growth
of M2 of 1 to 5 percent, measured from the
fourth quarter of 1994 to the fourth quarter
of 1995. The Committee also retained the
monitoring range of 3 to 7 percent for the
year that it had set for growth of total domestic nonfinancial debt. The Committee raised
the 1995 range for M3 to 2 to 6 percent as
a technical adjustment to take account of
changing intermediation patterns. For 1996,
the Committee established on a tentative
basis the same ranges as in 1995 for growth
of the monetary aggregates and debt, measured from the fourth quarter of 1995 to the
fourth quarter of 1996. The behavior of the
monetary aggregates will continue to be
evaluated in the light of progress toward
price level stability, movements in their
velocities, and developments in the economy
and financial markets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and
giving careful consideration to economic,
financial, and monetary developments,
slightly greater reserve restraint or slightly
lesser reserve restraint would be acceptable
in the intermeeting period. The contemplated
reserve conditions are expected to be consistent with more moderate growth in M2 and
M3 over coming months.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Hoenig, Kelley,
Lindsey, and Melzer, Ms. Minehan, Mr.
Moskow, 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 26, 1995.
The meeting adjourned at 12:25 p.m.
Donald L. Kohn
Secretary
Meeting Held on
September 26, 1995
A meeting of the Federal Open Market
Committee was held in the offices of
the Board of Governors of the Federal
Reserve System, in Washington, D.C.,
on Tuesday, September 26, 1995, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Blinder
Mr. Hoenig
Mr. Kelley
170 82nd Annual Report, 1995
Mr. Lindsey
Mr. Melzer
Ms. Minehan
Mr. Moskow
Ms. Phillips
Ms. Yellen
Messrs. Boehne, Jordan, McTeer, and
Stern, Alternate Members of the
Federal Open Market Committee
Messrs. Broaddus, Forrestal, and Parry,
Presidents of the Federal Reserve
Banks of Richmond, Atlanta, and
San Francisco 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. Davis, Dewald, Hunter,
Lindsey, Mishkin, Slifman, and
Stockton, Associate Economists
Mr. Fisher, Manager, 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. Simpson, Associate Director,
Division of Research and
Statistics, Board of Governors
Mr. Hooper and Ms. Johnson, Assistant
Directors, Division of
International Finance, Board of
Governors
Mr. Ramm,5 Section Chief, Division of
Research and Statistics, Board of
Governors
5. Attended portion of meeting relating to the
Committee's economic discussion.
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Ms. Pianalto, First Vice President,
Federal Reserve Bank of
Cleveland
Messrs. Lang, Rolnick, and Sniderman
and Ms. Tschinkel, Senior Vice
Presidents, Federal Reserve Banks
of Philadelphia, Minneapolis,
Cleveland, and Atlanta
respectively
Messrs. Cox, Hetzel, Judd, and
McNees, Vice Presidents, Federal
Reserve Banks of Dallas,
Richmond, San Francisco, and
Boston respectively
Ms. Meulendyke, Adviser, Federal
Reserve Bank of New York
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on August 22, 1995,
were approved.
The Manager of the System Open
Market Account reported on developments in foreign exchange markets since
the August meeting. There were no
transactions in these markets for the
System Account during this period, and
thus no vote was required of the
Committee.
The Manager also reported on developments in domestic financial markets
and on System open market transactions
in government securities and federal
agency obligations during the period
August 22,1995, through September 25,
1995. 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
Minutes of the FOMC Meetings, September
the Committee's discussion is provided
below, followed by the domestic policy
directive that was approved by the Committee and issued to the Federal Reserve
Bank of New York.
The information reviewed at this
meeting suggested that economic activity was expanding at a moderate rate in
the current quarter. Consumer spending
appeared to be advancing somewhat further after a sizable gain in the second
quarter; housing demand had strengthened in response to earlier reductions in
mortgage rates; and business investment
remained on a solid uptrend. Although
business efforts to pare inventories
apparently were still in progress, both
production and employment were
advancing moderately. After having
increased at elevated rates in the early
part of the year, consumer and producer
prices had risen more slowly in recent
months.
Private nonfarm payroll employment
increased considerably in August after
changing little in July. Much of the rise
reflected a pickup in hiring in the services industry, notably in business services. Manufacturing payrolls were up
modestly in August; the gain followed
substantial declines in the previous four
months. Construction employment
changed little on balance over July and
August, with only small changes being
posted each month. The civilian unemployment rate edged down to 5.6 percent in August, remaining in the narrow
range that had prevailed since late 1994.
Industrial production jumped in
August to a level moderately above its
average for the second quarter. Manufacturing output rose sharply, posting its
first increase since January; a surge in
the production of motor vehicles and
parts accounted for some of the advance,
but the output of non-automotive consumer goods in August more than
reversed a sizable drop in July, and
171
the production of business equipment
recorded another robust gain. A steep
rise in electricity generation associated
with unusually hot weather over much
of the country more than offset a decline
in mining production. Total utilization
of industrial capacity moved higher in
August but remained below the average
rate for the first quarter.
Retail sales were up slightly on balance over July and August after having
risen appreciably in the previous two
months. Abstracting from the volatile
sales of motor vehicles during this
period, spending on goods changed little
on balance over the two months, as
increased outlays for durable goods
were offset by flagging purchases of
apparel. Spending on services rose in
July (latest data available), in part
because of elevated demand for energyrelated services during that month's
unseasonably warm weather. Housing
market activity increased further in July
and August. Sales of both new and existing homes in July (latest data) reached
their highest levels in more than a year,
and housing starts edged up in August
after a substantial rise in July.
Shipments of nondefense capital
goods fell appreciably in July after having risen rapidly over the first half of the
year, and sales of heavy trucks also were
down substantially. New orders for nondefense capital goods declined steeply
in July; however, the still-large backlog
of outstanding orders, coupled with the
favorable effects on the user cost of
capital of lower interest rates and higher
equity prices this year, pointed to further substantial expansion of spending
on business equipment over coming
months. Nonresidential construction
posted another sizable gain in July. Outlays for office, industrial, and institutional structures registered healthy
increases, but other commercial building activity was unchanged.
172 82nd Annual Report, 1995
Business inventory accumulation
slowed in June and July from a very
rapid rat£ earlier in the year; stockpiling
continued at a brisk pace in manufacturing and wholesale trade, but retail stocks
were drawn down. In manufacturing,
stocks increased in July at about the
average rate seen in the second quarter;
however, the stocks-to-shipments ratio
rose somewhat, reflecting in part a
reduction in shipments that might have
been exaggerated by difficulties of seasonal adjustment. Wholesale inventories
also advanced at about the secondquarter pace, and the inventory-to-sales
ratio for this sector moved up to the
upper end of its range for recent years.
At the retail level, reduced stocks at
automotive dealers accounted for much
of the July decline in inventories; the
ratio of inventories to sales edged lower
but remained near the middle of the
range for recent years.
The nominal deficit on U.S. trade in
goods and services widened slightly in
July from its average rate in the second
quarter. The value of both exports and
imports decreased. For exports, the largest decline was in aircraft and automotive products. The decrease in imports
was concentrated in automotive products and gold. Available indicators of
economic activity suggested that expansion was continuing in mcfct of the
major foreign industrial countries in the
third quarter and that the average rate of
growth remained near the subdued pace
of the first half of the year.
As in other recent months, consumer
prices rose more slowly in August than
in the early months of the year. Sizable
declines in energy prices were a contributing factor, but price increases also
had moderated for nonfood, non-energy
items; the moderation largely reflected a
downturn in automobile finance charges
and used-car prices along with smaller
increases in airline fares. For the twelve
months ending in August, nonfood, nonenergy prices rose by the same amount
as in the year-earlier period. At the producer level, prices of finished goods
edged lower in August after being
unchanged in July. Although declines in
prices of finished energy goods held
down the overall index in both months,
prices of finished goods other than food
and energy rose more slowly than in the
early months of the year; for the twelve
months ending in August, nonfood,
non-energy prices of finished goods
increased slightly more than in the comparable year-earlier period.
At its meeting on August 22, 1995,
the Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions
and that did not include a presumption
about the likely direction of any adjustments to policy during the intermeeting
period. 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 more moderate growth of M2 and
M3 over coming months.
Open market operations were directed
toward maintaining the existing degree
of pressure on reserve positions throughout the intermeeting period. Adjustment
plus seasonal borrowing and the federal
funds rate generally were in line with
expectations, with the funds rate averaging close to 53/4 percent. Other market
interest rates fell appreciably over much
of the period, though these declines
were partially reversed near the end of
the period. Further evidence of subdued
price pressures, indications that the
Minutes of the FOMC Meetings, September 173
rebound in growth of GDP would be
modest, and increasing confidence that
significant reductions in federal deficits
might be in train contributed to the drop
in rates. The lower interest rates, optimistic assessments of corporate earnings, and the brisk pace of merger
announcements and share buybacks
helped lift major indexes of equity
prices to new record levels during the
period, though they ended the period
below those highs.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
declined over the intermeeting period.
The dollar moved higher over most of
the period, partly in response to monetary easing actions in Germany, which
were quickly followed by similar steps
in other European countries, and in
Japan. The policy easing in Japan was
accompanied, inter alia, by statements
by U.S. and Japanese officials that they
would welcome a weaker yen. The dollar reversed course late in the intermeeting period, however, following the
announcement of a new Japanese fiscal
package and emerging uncertainties
about the prospects for European monetary union. On balance over the period,
the dollar moved lower against most
European currencies while appreciating
significantly further against the yen.
After further strong expansion in
August, M2 and M3 appeared to be
growing at a somewhat more moderate
rate in September. The still-brisk
demand for M2 assets was associated
with the lower market interest rates now
prevailing and the related decline in the
opportunity costs associated with holding these assets. The relatively robust
growth of M3 reflected inflows to
institution-only money market funds as
well as bank acquisitions of wholesale
funds to meet loan demand. For the year
through August, M2 expanded at a rate
somewhat below the upper end of its
range for 1995 and M3 grew at a rate
appreciably above its range. Total
domestic nonfinancial debt had grown at
a rate around the midpoint of its monitoring range in recent months.
The staff forecast prepared for this
meeting suggested that growth in economic activity over the forecast horizon
would be higher than the weak pace of
the second quarter. The process of bringing inventories into better alignment
with sales was well under way, and the
favorable wealth and interest-cost
effects of the extended rally in the debt
and equity markets would tend to support moderate expansion of final sales.
Consumer spending was expected to
grow at a pace generally in line with
incomes; the favorable effects on spending of higher prices for financial assets
held by households would be offset to a
degree in this forecast by less robust
labor market conditions and the difficulties that growing numbers of households
would encounter in servicing their
enlarged debts. Homebuilding was
expected to be somewhat stronger in
response to the earlier decline in mortgage rates and the related improvement
in housing affordability. In anticipation
of slower growth of sales and profits,
business investment in new equipment
and structures was projected to slow
from the very rapid pace of the past few
years, although the lower cost of capital
and the ready availability of financing
would help to sustain appreciable expansion in such investment. Export growth
would pick up in response to some
expected strengthening in the economies of major trading partners. A great
deal of uncertainty surrounded the fiscal
outlook, but the staff continued to build
a considerable degree of fiscal restraint
into its forecast. In the staff's judgment,
the prospects for some further easing of
pressures on labor and other resources
174 82nd Annual Report, 1995
suggested that price inflation likely
would not deviate significantly from
recent trends.
In the Committee's discussion of
current and prospective economic developments, members commented that the
information available since the August
meeting had tended to confirm earlier
indications of a pickup in the expansion
after a period of sluggish growth during
the spring. The economy did not display
uniform strength across industries or
regions, but it appeared on balance to
have considerable and desirable expansionary momentum. Growth at a pace
averaging close to, or perhaps slightly
below, the economy's potential was
viewed as the most likely prospect for
the year ahead. The outlook for economic activity remained subject to a
variety of uncertainties, including the
still unsettled course of the federal budget, and many members saw the risks of
a shortfall from expectations as slightly
greater than those of significantly faster
growth. With regard to inflation, the
slower increases in key measures of
consumer and producer prices since earlier in the year were a welcome development, and a number of members
commented that inflation was likely to
remain contained, given likely developments. Many expressed concern, however, that significant further progress
toward achieving stable prices might not
be made over the next year or two.
In keeping with indicators of nationwide economic performance, anecdotal
and other reports on regional activity
suggested somewhat uneven business
conditions in different parts of the country, but collectively the reports pointed
to moderate overall growth. Business
activity in most regions had tended to
improve or to remain firm during the
summer months, though declining
growth or very sluggish activity characterized some areas. The level of busi
ness confidence generally appeared to
have stayed high, but several members
indicated that they sensed from their
contacts that business expectations were
somewhat fragile and vulnerable to
adverse developments.
In their discussion of developments in
key sectors of the economy, members
generally viewed comparatively moderate growth in consumer spending as a
likely prospect over the forecast period.
After recording sizable gains in late
spring, retail sales had been well maintained in recent months, with some
strengthening in the motor vehicles sector in August apparently carrying over
to September. Favorable factors in the
outlook for consumer spending included
the increases that had occurred in the
value of financial assets and the demand
for household appliances and other durables that was expected to be generated
by stronger housing activity. On the
other hand, overall gains in consumer
spending were likely to be restrained by
cyclically waning pent-up demands for
consumer durables, especially motor
vehicles; still widespread concerns
about job security associated with ongoing business restructuring and downsizing activities; and higher consumer debt
loads.
Housing demand was continuing to
respond to more attractive mortgage
rates, as evidenced by nationwide data
and anecdotal reports from many parts
of the country. Increases in construction
activity were lagging the improvement
in housing demand and had been limited
thus far, but considerable strength in
homebuilding activity could be expected
over the next several months. The extent
of further lagged responses to reduced
mortgage rates could not be foreseen
with any degree of certainty, and in any
event housing demand would depend
on broad economic developments such
as trends in employment and income.
Minutes of the FOMC Meetings, September 175
Housing activity appeared to have weakened over recent months in one major
market where economic conditions were
described as relatively sluggish. In many
other areas, however, persons in the real
estate industry were reported to be optimistic about the outlook for housing.
Business fixed investment remained a
strongly positive factor in the economy
and was expected to provide further
impetus to growth over the next several
quarters. The contribution of this sector
could be expected to lessen, however, as
capital spending was adjusted to expectations of a maturing expansion characterized by the emergence of slower
growth in final demand and business
profits. In particular, the outsized growth
in business spending for equipment did
not appear to be sustainable under foreseeable economic conditions.
Diminished growth in inventories still
seemed to be retarding the expansion in
overall business activity, as evidenced in
part by continuing reports of efforts by
various business firms to bring their
inventories into better balance with
sales. Nonetheless, such adjustments
now appeared to have been largely
completed, or were expected to be
completed over the months immediately
ahead, so that inventory investment
could be expected to have little effect on
the course of the economy during 1996.
It was noted, however, that projections
of inventory behavior were subject to a
high degree of uncertainty.
A number of members commented
that fiscal policy developments constituted a major uncertainty in the outlook
for economic activity. While measures
incorporating substantial reductions in
spending from current trends were
widely expected to be enacted into law,
it was not possible to predict the outcome of the continuing debate on the
federal budget in the Congress and the
Administration. Further complicating
any efforts to assess the potential damping influence of prospective fiscal policy
were uncertainties regarding the time
frame during which the new expenditure
and tax measures would be put in
place—including the extent to which
they would be implemented over the
year ahead—and the effects of the new
fiscal measures on economic incentives
and financial markets. Favorable business and financial market reactions
would tend to mitigate, at least for a
time, the restraining effects of fiscal
measures on aggregate demand. On the
other hand, if the deficit reduction
measures that eventually were enacted
were to fall substantially short of current
expectations, there would be adverse
repercussions in financial markets and
possibly on business confidence.
The nation's trade deficit was
expected to diminish somewhat over the
next several quarters and in the process
to exert less restraint on domestic economic activity. The better trade performance was projected to result from a
number of factors, including the
improved competitive position of U.S.
producers and the lagged effects of earlier declines in the value of the dollar in
foreign exchange markets. It also was
associated with forecasts of somewhat
stronger growth in economic activity
abroad than in the United States. While
there were continuing anecdotal reports
of expanding export markets, some
members expressed reservations about
the extent to which the economies of
major foreign trading partners would
strengthen over the forecast period and
the related prospects for growth of
foreign demand for U.S. goods and
services.
Views on the outlook for inflation
centered on forecasts of little change or
some slight decline in the rate of
increase in consumer prices over the
year ahead. The appreciable moderation
176 82nd Annual Report, 1995
in inflation in recent months had
checked the deteriorating trend that
seemed to be emerging during the early
months of the year, but the members
generally believed that recent developments did not point to a significant
further decline in inflation. Pressures on
producer resources had eased since the
early part of the year, but the labor market remained tight and capacity utilization was still above its historical average. In this connection, a few members
commented that current forecasts were
subject to a range of error that included
a risk of some intensification of inflationary pressures.
One uncertainty bearing on the outlook for inflation was the extent to
which potentially greater pressures on
labor costs would be translated into
higher prices. Increases in labor expenses had been held down by markedly
reduced advances in the costs of benefits, notably medical benefits. The
economies from the latter source might
well lessen over coming quarters as the
most easily implemented reductions in
the costs of providing medical care were
achieved. Moreover, the rise in worker
compensation had been unusually
restrained in recent years in relation to
the strong demand for workers, evidently reflecting the effects of worker
concerns about job security in a period
of business restructurings and downsizings, but continued strength in the
demand for labor might be expected
to induce more rapid increases in labor
compensation over time. Some members commented, however, that the
underlying factors affecting employment
costs were not likely to change greatly
over the forecast period. In addition, the
prospect that intense competitive pressures would persist in many markets
under projected economic conditions
suggested that business firms would
continue to find it very difficult to pass
on rising costs through higher prices. It
also was possible that the rates of capacity utilization and employment associated with a steady rate of inflation had
changed in the direction of providing
the economy greater leeway to operate
at a somewhat higher level without generating more inflation.
In the Committee's discussion of policy for the intermeeting period ahead, all
the members supported a proposal to
maintain an unchanged degree of pressure on reserve positions. The expansion
seemed for now to have a desirable and
sustainable momentum that did not call
for any change in policy. Furthermore,
the outlook remained clouded by the
uncertainties stemming from the ongoing federal budget debate. In any event,
the Committee would need to remain
alert to a broader range of developments
that might warrant a policy change at
some point. In this connection, several
members expressed the opinion that
policy might have to be eased eventually in light of the downside risks that
they saw in the economy and a current
policy stance that they viewed as
slightly restrictive. However, the current
performance of the economy suggested
that the timing of an easing action was
not an immediate concern. Other members who preferred an unchanged policy
placed more emphasis on current forecasts of little or no progress in reducing inflation from recent levels. They
thought it would be premature to ease
policy without greater assurance that
inflation had been contained in the current cyclical expansion and that prospects for significant further progress
toward the long-run objective of price
level stability had improved. Indeed,
the direction of the next policy move
was not clear in the view of some members, and they believed that any easing should await a firm indication that
the outlook for economic activity was
Minutes of the FOMC Meetings, September 177
becoming less favorable or that inflation was decreasing more rapidly than
expected.
With regard to possible adjustments
to policy during the intermeeting period,
the members all endorsed a proposal to
retain an intermeeting instruction in the
directive that did not incorporate any
bias concerning the direction of possible
intermeeting policy changes. At this
juncture, there was no specific reason to
anticipate developments that would call
for an adjustment to policy during the
weeks ahead. While a change in policy
certainly could not be ruled out, the
reasons for the change likely would
involve sensitive issues that would warrant Committee consultation regardless
of the intermeeting instruction.
At the conclusion of the Committee's
discussion, all the members indicated a
preference for a directive that called for
maintaining the existing degree of pressure on reserve positions and that did
not include a presumption about the
likely direction of any adjustments to
policy during the intermeeting period.
Accordingly, in the context of the
Committee's long-run objectives for
price stability and sustainable economic growth, and giving careful consideration to economic, financial, and
monetary developments, the Committee decided that slightly greater or
slightly lesser reserve restraint would
be acceptable during the intermeeting
period. The reserve conditions contemplated at this meeting were expected
to be consistent with growth in M2 and
M3 over the balance of the year at a
pace near that experienced in recent
months.
The Federal Reserve Bank of New
York was authorized and directed, until
instructed otherwise by the Committee,
to execute transactions in the System
Account in accordance with the following domestic policy directive:
The information reviewed at this meeting
suggests that economic activity is expanding
at a moderate rate in the current quarter.
Nonfarm payroll employment increased
considerably in August after essentially no
growth in July; the civilian unemployment
rate edged down to 5.6 percent in August.
Industrial production posted a large increase
in August to a level moderately above the
average of the second quarter. Total nominal
retail sales rose slightly on balance over July
and August after registering appreciable
gains in the prior two months. Housing starts
were up a little in August after increasing
sharply in July. Orders for non-defense capital goods have softened but still point to
substantial expansion of spending on business equipment over coming months; nonresidential construction has been strong of
late. The nominal deficit on U.S. trade in
goods and services widened slightly in July
from its average rate in the second quarter.
After increasing at elevated rates in the early
part of the year, consumer and producer
prices have risen more slowly in recent
months.
Market interest rates have fallen somewhat since the Committee meeting on
August 22. In foreign exchange markets, the
trade-weighted value of the dollar in terms
of the other G-10 currencies has declined
over the intermeeting period, with most of
the decline occurring over the past several
days.
M2 and M3 continued to register sizable
increases in August but growth of those
aggregates appears to have moderated somewhat in September. For the year through
August, M2 expanded at a rate somewhat
below the upper end of its range for 1995
and M3 grew at a rate appreciably above its
range. Total domestic nonfinancial debt has
grown at a rate around the midpoint of its
monitoring range 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 range it had established on January 31-February 1 for growth
of M2 of 1 to 5 percent, measured from the
fourth quarter of 1994 to the fourth quarter
of 1995. The Committee also retained the
monitoring range of 3 to 7 percent for the
year that it had set for growth of total domes-
178 82nd Annual Report, 1995
tic nonfinancial debt. The Committee raised
the 1995 range for M3 to 2 to 6 percent as a
technical adjustment to take account of
changing intermediation patterns. For 1996,
the Committee established on a tentative
basis the same ranges as in 1995 for growth
of the monetary aggregates and debt, measured from the fourth quarter of 1995 to the
fourth quarter of 1996. The behavior of the
monetary aggregates will continue to be
evaluated in the light of progress toward
price level stability, movements in their
velocities, and developments in the economy
and financial markets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and
giving careful consideration to economic,
financial, and monetary developments,
slightly greater reserve restraint or slightly
lesser reserve restraint would be acceptable
in the intermeeting period. The contemplated
reserve conditions are expected to be consistent with growth in M2 and M3 over the
balance of the year near the pace of recent
months.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Hoenig, Kelley,
Lindsey, and Melzer, Ms. Minehan, Mr.
Moskow, and Mses. Phillips and Yellen.
Votes against this action: None.
Discussion of Proposed Legislation
At this meeting, the Committee discussed a bill, titled the "Economic
Growth and Price Stability Act of
1995," that recently had been introduced
in the U.S. Senate. The bill would make
price stability the primary long-run policy goal of the Federal Reserve and
require the Federal Reserve to establish
a numerical definition of price stability
and to implement a policy that would
effectively promote such stability over
time. It would repeal the Full Employment and Balanced Growth Act of 1978
(the "Humphrey-Hawkins Act") and
certain related provisions in the Employ
ment Act of 1946 and the Congressional
Budget Act of 1974. The Federal
Reserve had not yet been asked its views
of the bill, but testimony was likely at
some point and a preliminary discussion
would help to identify important issues.
The members had not had time to
review the bill in detail or to consider
fully all its implications. Nonetheless,
their initial reaction was favorable in
regard to the overall thrust of the bill's
monetary policy provisions. These
would make clear that price stability
was the primary long-run objective of
monetary policy and would restructure
the monetary policy reporting requirements to permit the Congress to carry
out its oversight responsibilities more
effectively. Many members felt that in
the context of seeking and maintaining
price stability, monetary policy should
have the flexibility to react to short-run
fluctuations in output and employment,
and they believed the bill would be
improved if its intent in this regard were
clarified. A few members expressed
strong reservations about the part of the
bill that would delete the employment
objectives set forth in the Employment
Act of 1946.
It was agreed that the next meeting of
the Committee would be held on
Wednesday, November 15, 1995.
The meeting adjourned at 1:20 p.m.
Donald L. Kohn
Secretary
Meeting Held on
November 15, 1995
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 Wednesday, November 15, 1995, at
9:00 a.m.
Minutes of FOMC Meetings, November
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Blinder
Mr. Hoenig
Mr. Kelley
Mr. Lindsey
Mr. Melzer
Ms. Minehan
Mr. Moskow
Ms. Phillips
Ms. Yellen
Messrs. Boehne, Jordan, McTeer, and
Stern, Alternate Members of the
Federal Open Market Committee
Messrs. Broaddus, Forrestal, and Parry,
Presidents of the Federal Reserve
Banks of Richmond, Atlanta, and
San Francisco respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Assistant General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. Davis, Hunter, Lindsey,
Mishkin, Promisel, Siegman,
Slifman, and Stockton, Associate
Economists
Mr. Fisher, Manager, 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. Simpson, Associate Director,
Division of Research and
Statistics, Board of Governors
Mr. Reinhart,6 Assistant Director,
Division of Monetary Affairs,
Board of Governors
6. Did not attend portion of meeting covering
the monetary policy discussion.
179
Mr. Ramm,6 Section Chief, Division of
Research and Statistics, Board of
Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Beebe, Goodfriend, Lang,
Rolnick, and Rosenblum, Senior
Vice Presidents, Federal Reserve
Banks of San Francisco,
Richmond, Philadelphia,
Minneapolis, and Dallas
respectively
Messrs. Gavin and Kopcke and
Mses. Krieger and Rosenbaum,
Vice Presidents, Federal Reserve
Banks of St. Louis, Boston,
New York, and Atlanta
respectively
Mr. Stevens, Consultant, Federal
Reserve Bank of Cleveland
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on September 26, 1995,
were approved.
The Manager of the System Open
Market Account reported on recent
developments in foreign exchange markets and on System foreign currency
transactions during the period September 26, 1995, through November 14,
1995. By unanimous vote, the Committee ratified these transactions.
The Manager also reported on developments in domestic financial markets
and on System open market transactions
in government securities and federal
agency obligations during the period
September 26, 1995, through November 14, 1995. By unanimous vote, the
Committee ratified these transactions.
By unanimous vote, the Committee
authorized the renewal for an additional
one-year period of the System's reciprocal currency ("swap") arrangements
with foreign central banks and the Bank
for International Settlements that were
180 82nd Annual Report, 1995
due to mature on various dates in
December 1995. The renewal encompassed all the System's swap arrangements except that with the Bank of
Mexico, which is scheduled to mature
on January 31, 1996, and will be considered at a later meeting. The amounts and
maturity dates of the arrangements
approved for renewal are shown in the
table that follows:
Foreign bank
Austrian National
Bank
Bank of England
Bank of Japan
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
arrangement
Term Maturity
(millions
date
(months)
of
dollars
equivalent)
250
3,000
5,000
250
300
4,000
12
12/04/95
12/04/95
12/04/95
12/04/95
12/04/95
12/04/95
600
12/04/95
1,250
12/04/95
1,000
2,000
12/18/95
12/28/95
250
2,000
12/28/95
12/28/95
6,000
3,000
500
12/28/95
12/28/95
12/28/95
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 available at the time
of the meeting was mixed, but on balance it suggested a more moderate rate
of expansion of economic activity after
a strong gain during the summer. Consumer spending had turned sluggish
recently; but with order backlogs still
large, business spending for durable
equipment was continuing at a robust if
somewhat less rapid rate, and the sizable
rise in housing starts in the third quarter
presaged higher residential construction
outlays. Appreciable increases in employment and hours worked tended to
confirm that the economy had continued
to expand at a solid pace, although
manufacturing activity had weakened a
little. Consumer and producer prices had
risen more slowly on average in recent
months after having increased at elevated rates in the early part of the year,
and growth in labor costs had slowed
further.
Nonfarm payroll employment, though
held down somewhat by the onset of a
labor strike in the aircraft industry,
increased in October at the average
monthly pace of the third quarter; in
addition, aggregate hours worked by
private production workers rose appreciably further. Construction payrolls
recorded another sizable advance. The
rate of job growth in the services industry slowed a little further, reflecting a
decline in employment in personnel supply services after two months of strong
advances. Manufacturing employment
declined again. The civilian unemployment rate edged down in October to
5.5 percent.
Industrial production fell somewhat
in October after having risen appreciably in the third quarter; most of the loss
reflected the strike in the aircraft industry, but motor vehicle production and
mining output also recorded substantial
declines. In contrast, production of
information processing equipment con-
Minutes of FOMC Meetings, November
tinued to rise at a rapid pace. Total utilization of industrial capacity contracted
in October, with declines widespread
across industries.
Total nominal retail sales, which had
expanded relatively briskly over the second and third quarters, fell in October.
As part of a pattern of widespread weakness in October, purchases at furniture
and appliance stores were down appreciably after large gains in earlier
months, and sales at general merchandise and apparel outlets reversed most
of their sizable September increases.
Housing demand and construction activity firmed in the third quarter: Sales of
both new and existing homes posted
solid advances, and single-family housing starts rose considerably, though multifamily starts remained sluggish.
Business investment in both equipment and structures expanded less rapidly in the third quarter. Stepped-up
shipments of nondefense capital goods
in August and September more than
offset a sharp drop in shipments in July,
but the quarterly average gain was significantly smaller than the increases
recorded in the previous two quarters.
Although orders for nondefense capital
goods also rose more slowly in the third
quarter, the still-sizable order backlogs
pointed to substantial expansion of
spending on business equipment in the
near term. Nonresidential construction
increased appreciably further in the third
quarter, reflecting a surge in office and
institutional building activity.
Available data suggested a reduction
in business inventory accumulation in
August and September. In manufacturing, the pace of stockbuilding slowed
in the third quarter from the brisk
rate of the first half of the year, leaving the factory stock-shipments ratio
unchanged in the third quarter and a
little above historic lows. In the wholesale sector, inventories were drawn
181
down in August and September after
sizable buildups in earlier months; with
sales weak, the aggregate inventorysales ratio for the sector edged up in the
third quarter and was at the upper end of
its range for recent years. Retail inventories expanded significantly in August
(latest data available), but the stockbuilding was generally in line with sales
and the ratio of inventories to sales
remained near the middle of its range in
recent years.
The nominal deficit on U.S. trade in
goods and services narrowed markedly
in August; for July and August combined, the deficit was significantly
smaller than its average rate in the
second quarter. The value of exports
declined over the two-month period,
with increases in exports of computers
and agricultural products more than offset by decreases in exports of aircraft,
gold, and service receipts. Imports fell
more than exports; with the notable
exception of computers and semiconductors, declines were recorded in most
major import categories. Available data
indicated that economic expansion
remained subdued in the major foreign
industrial countries. Growth continued
to slow in the European economies other
than Italy, and the Japanese economy
showed little evidence of a sustained
recovery.
Consumer prices rose at a slightly
faster rate in October; with a smaller
increase in food prices offsetting higher
energy prices, the index for items other
than food and energy also picked up a
little. For the four months ending in
October, prices for nonfood, non-energy
items advanced at a rate well below that
of earlier in the year. Producer prices of
finished goods edged down in October,
reflecting a further decline in the prices
of finished energy goods. Excluding
food and energy, producer prices were
unchanged in October and increased at a
182 82nd Annual Report, 1995
slower pace in the third quarter than in
the first half of the year. Growth in total
nominal hourly compensation of private
industry workers slowed in the third
quarter and, on a year-over-year basis,
continued to trend down; the decrease in
compensation growth over the past year
spanned most major occupations and
industries.
At its meeting on September 26,
1995, the Committee adopted a directive
that called for maintaining the existing
degree of pressure on reserve positions
and that did not include a presumption
about the likely direction of any adjustments to policy during the intermeeting
period. 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 growth of M2 and M3 over the
balance of the year at a pace near that
experienced in recent months.
Open market operations were directed
toward maintaining the existing degree
of pressure on reserve positions throughout the intermeeting period. The federal
funds rate averaged close to 5% percent,
apart from a temporary rise around the
end of the third quarter. Other shortterm market rates also changed little on
balance; market participants continued
to anticipate an easing of monetary
policy at some point but apparently
viewed the chances of near-term easing
as small. Longer-term interest rates
declined further over the intermeeting
period, perhaps in response to a growing
conviction that inflation pressures would
remain subdued and that substantial
reductions in fiscal deficits would be
achieved over a period of years. The
lower longer-term interest rates, coupled
with continuing reports of strong corporate earnings, helped lift major indexes
of equity prices to new record levels
during the period. In foreign exchange
markets, the trade-weighted value of the
dollar in terms of the other G-10 currencies declined slightly over the intermeeting period.
Expansion of the broad monetary
aggregates weakened in October. M2
was unchanged in October after having
grown relatively rapidly in the third
quarter and despite the persistence of
low opportunity costs associated with
holding M2 assets. For the year through
October, M2 expanded at a rate in the
upper half of the Committee's range for
this aggregate in 1995. Growth of M3
apparently was held down somewhat by
the reduced need for additional bank
funding during a time of sluggish loan
demand; for the year to date, M3 grew
at a rate a little above its range. Total
domestic nonfinancial debt had risen
more slowly in recent months, reflecting
reduced expansion of both private and
federal borrowing. Nonetheless, for the
year to date, this measure of debt
remained around the midpoint of its
monitoring range.
The staff forecast prepared for this
meeting suggested that the growth of
economic activity would slow from the
strong third-quarter pace to a rate more
in line with the increase in the economy's potential. The forecast assumed
that the favorable interest rate and
wealth effects of the extended rally in
the debt and equity markets would provide support for a moderate advance
in final sales. Consumer spending was
expected to expand at a rate generally in
line with the growth of incomes; the
favorable effects of higher prices on
financial assets held by households
would be offset to some extent by the
Minutes of FOMC Meetings, November
difficulties of increasing numbers of
households in servicing their growing
debts. The greater affordability of housing stemming from the earlier decline
in mortgage rates was projected to
help sustain homebuilding activity at a
relatively high level. In anticipation of
reduced growth in sales and profits,
business investment in new equipment
and structures was projected to slow
appreciably from the very rapid pace of
the past few years. Strong export expansion would be associated with the
improving outlook for the economies of
major trading partners. Although substantial uncertainty still surrounded the
fiscal outlook, the forecast continued to
incorporate a considerable degree of
fiscal restraint. In the staff's judgment,
wage and price inflation likely would
not deviate significantly from recent
levels.
In the Committee's discussion, members commented that recent statistical
and anecdotal information pointed on
balance to an appreciable slowing in the
economic expansion, which had displayed unexpected strength during the
summer months. There was some mix of
views among the members concerning
how far the slowing might proceed,
though they generally viewed moderate
growth as the most likely course for
the economy. A number of members
believed that growth around potential
was a probable outcome, with business
activity sustained in part by the favorable developments this year in the bond
and stock markets. Other members
expressed concern about some signs of
further ebbing in the strength of final
demands, and they envisaged the possible need for a policy adjustment at
some point to sustain continued moderate growth. With regard to inflation,
members noted that despite generally
high levels of resource use, including
tight labor markets in many parts of the
183
country, inflation had been more subdued than many had expected over the
past several months. A number of members commented that they saw a basis in
this development for mild optimism
about the outlook for inflation, but others expressed concern that, in the context of current forecasts for economic
activity and relatively high levels of
resource use, progress toward lower
inflation was unlikely over the projection period and indeed there was a risk
of some modest deterioration in price
performance.
In the course of the Committee's discussion, members reported on uneven
business conditions in different parts of
the country and among industries. On
balance, modest to moderate growth
appeared to characterize most regions,
with overall levels of activity ranging
from relatively robust in some regions
to comparatively depressed in others.
The mixed conditions were especially
notable in manufacturing where numerous producers faced lagging demands
while others, particularly in high-tech
industries, found it difficult to satisfy
strong demands for their products. More
generally, the industrial sector of the
economy had tended to stagnate for
some time, including a slight decline
in manufacturing activity reported for
October, but recent improvement in
orders for steel was cited as a favorable
if not decisive omen in the outlook for
industrial production. In other sectors of
the economy, members observed that
tourism displayed considerable strength
in many areas, while cattle operations
and energy production were adversely
affected by high production costs or low
prices.
In their review of developments in
key demand sectors of the economy,
members observed that consumer spending appeared to be on a firm growth
trend, though weakness in overall sales
184 82nd Annual Report, 1995
of motor vehicles in recent months and a
decline in total retail sales in October
had introduced a cautionary note. It was
suggested that the performance of retail
sales during the holiday season would
tend to set the tone for the longer-term
trend in such sales, and in this respect
available data and anecdotal reports covering the first part of November were
somewhat promising. More generally,
further growth in consumer spending,
though probably at a somewhat slower
pace than over the past year, appeared
likely. Such growth would be supported
by moderate expansion in incomes and
by the favorable effects on household
wealth and confidence of the substantial
improvement in the value of financial
assets this year and the ready availability of financing on relatively attractive
terms. Consumer confidence currently
seemed to be at a fairly high level, albeit
not uniformly so across the country, and
at least for the quarters immediately
ahead, anticipated strength in homebuilding should induce spending for
many household durables. On the negative side, some members emphasized
that the growth in consumer debt was
likely to exert an increasingly inhibiting
effect on consumer spending. Moreover,
the satisfaction of earlier pent-up demands might well limit sales of many
consumer durables, notably motor
vehicles, in coming quarters. In one
view, the projected growth in personal
incomes and the increases that had
occurred this year in the value of household holdings of financial assets would
provide relatively little stimulus to consumer spending because the distribution
of such gains was heavily tilted toward
consumers in higher income or older
age groups.
Further sizable growth in business
fixed investment, but at a pace well
below that experienced in recent years,
was expected to provide appreciable
impetus to the expansion over the next
several quarters. Favorable factors in the
outlook for business capital spending
included a desire to upgrade technological capabilities for competitive
reasons, strong business earnings and
cash flows, and an ample availability of
financing on relatively liberal terms.
Declining office vacancy rates in a number of areas would help to support office
construction, and several members also
commented on the strength in commercial and other nonresidential building
activity in various parts of the country.
Ongoing efforts by many business
firms to bring inventories into better
alignment with sales had resulted in
declining inventory investment since
earlier in the year. Some further inventory adjustments, notably in stocks of
motor vehicles, were expected over
coming months, though not at a pace
that would have a marked retarding
effect on economic activity. Over much
of 1996, inventory investment was projected to be a more neutral factor in the
economy, with accumulation proceeding
at a pace in line with growth in final
sales, but the risks of unexpected developments in this sector of the economy
were always substantial.
The outlook for fiscal policy remained
obscured by the uncertain outcome of
the current debate between the Congress
and the Administration. While substantial fiscal restraint aimed at eventually
balancing the budget appeared to be the
likely result, the timing of the implementation of various tax and expenditure initiatives and the resulting extent
of the fiscal restraint over the forecast
period could not be anticipated with any
degree of precision. For the nearer term,
the ongoing shutdown of much of the
federal government presented a downside risk to the expansion whose effects
would depend on the presently uncertain
duration of the shutdown and the poten-
Minutes of FOMC Meetings, November
tial unsettlement in financial markets
that might develop at some point. The
members generally believed, however,
that in light of the underlying strength
of the economy, the retarding effects of
likely federal budget developments
would not be sufficient in themselves to
arrest the expansion over the forecast
period, at least if the federal government
shutdown were of relatively short duration and a federal debt default were
averted.
The nation's foreign trade deficit had
worsened substantially during the past
several years, but current forecasts did
not point to further deterioration over
the projection period. An anticipated
firming in the economies of major U.S.
trading partners was expected to bolster
exports. Several members questioned,
however, the extent to which forecasts
of strengthening economic activity were
likely to materialize in a number of
these countries, and they suggested that
the foreign sector might well remain a
somewhat constraining factor in the performance of the domestic economy.
Members welcomed the generally
favorable price and cost developments
of recent months and the related indications that currently high levels of
resource use did not appear to be associated with rising inflationary pressures.
Many emphasized the persistence of
subdued increases in labor costs, and a
number provided supporting anecdotal
indications of relatively small advances
in labor compensation in many parts of
the country despite tight labor markets.
The anecdotal reports also continued to
suggest that strong competition was
holding down price inflation and that
producers were benefiting from soft
prices of industrial materials. While a
number of members believed that these
developments might augur a modest
decline in inflation over the year ahead,
given current forecasts of moderate
1 85
economic expansion, many viewed as
more likely the prospect of little or no
progress toward price stability over
coming quarters, and some expressed
concern about the potential for an
upward drift in the rate of inflation. An
underlying factor in the relatively favorable climate for inflation was the continued limited rise in the costs of worker
benefits. In the view of some members,
however, benefit costs were likely to be
less well contained as time went on and
further major gains in curbing such costs
became more difficult to achieve. Moreover, worker willingness to accept relatively limited increases in wages and
other compensation might well begin to
erode as concerns about job security
tended to diminish after an extended
period of relatively low unemployment.
On balance, recent experience had
raised questions about the relationship
between levels of resource use and inflation that warranted careful monitoring.
In the Committee's discussion of policy for the intermeeting period ahead, all
but one member favored or could accept
an unchanged policy stance. This policy
position took account of current indications of a generally acceptable rate of
economic growth and the absence of
any clear signs regarding the future
strength of the expansion in relation to
the economy's potential or the future
course of inflation. Several commented
that current monetary policy might be
viewed as somewhat restrictive, though
the degree of restraint was difficult to
calibrate and it did not appear as yet to
be inhibiting declines in intermediateand long-term interest rates, increases
in stock prices, or the availability of
financing from lending institutions.
Members expressed somewhat differing views regarding the stance of monetary policy that was likely to prove consistent with the Committee's objectives
over time. In the view of some, private
186 82nd Annual Report, 1995
spending was not likely to have sufficient momentum to overcome the effects
of increased fiscal restraint if the current
stance of monetary policy were maintained. In the circumstances, an easing
at some point would be needed to foster
sustained economic growth at an acceptable pace and would be consistent with
progress toward the System's price
stability objective. For most of these
members, however, the stronger-thanexpected performance of the economy
in the third quarter had reduced the
urgency of such a policy move and had
created enough uncertainties to justify a
careful appraisal of unfolding developments before a decision was made to
ease policy. In the view of one member,
the probability of a shortfall from an
acceptable rate of economic expansion
was sufficiently high to require an
immediate easing of policy. Other members believed that an unchanged policy
was desirable under current conditions
and that the direction and timing of the
next policy move were more open to
question. Not only were recent data giving an uncertain picture of the underlying strength of aggregate demand, but
current forecasts generally did not point
to progress toward the System's longrun goal of price stability. In this view,
therefore, the current stance of monetary
policy, even if slightly restrictive, was
likely to be consistent with satisfactory
economic growth over time, and it
would provide better assurance of consolidating gains against inflation and
fostering some further moderation in
price increases over coming years. With
regard to potential fiscal policy developments, although an especially broad
range of outcomes seemed possible, the
members agreed that the Committee
could not freeze its policy options while
it awaited the outcome of a prolonged
federal budget debate nor could it commit itself to a specific response to a
particular fiscal policy agreement. Fiscal
policy and any associated market reactions would be among the many factors
that would have to be taken into account
in the formulation of monetary policy.
In the Committee's discussion of possible intermeeting adjustments to monetary policy, a majority of the members
expressed a preference for retaining a
symmetric directive. In their view, the
potential need to adjust policy during
the relatively short intermeeting period
was remote, and some of these members
also believed that the direction of the
next adjustment to policy was uncertain.
A few also noted that the adoption of a
biased intermeeting instruction at this
point might send an unintended message
regarding the prevailing view within the
Committee concerning the risks to the
expansion. The remaining members said
that they preferred a directive that was
tilted toward an easing policy action.
Such an instruction in the directive
would be consistent with what they
viewed as the most likely policy course
over coming months. They agreed, however, that the current uncertainties surrounding the economic outlook were not
likely to be resolved during the weeks
immediately ahead, and since no policy
action was likely to be required in this
period they could accept a symmetric
directive.
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they could vote for a
directive that called for maintaining the
existing degree of pressure on reserve
positions and that did not include a presumption about the likely direction of
any adjustments to policy during the
intermeeting period. Accordingly, in the
context of the Committee's long-run
objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial,
and monetary developments, the Com-
Minutes of FOMC Meetings, November
mittee decided that slightly greater or
slightly lesser reserve restraint would
be acceptable during the intermeeting
period. The reserve conditions contemplated at this meeting were expected to
be consistent with moderate growth in
M2 and M3 over coming months.
The information reviewed at this meeting
suggests a moderation in the expansion of
economic activity after a strong gain in the
third quarter. Nonfarm payroll employment
increased further in October and the civilian
unemployment rate edged down to 5.5 percent. Industrial production fell somewhat in
October after a moderate rise in the third
quarter. Total nominal retail sales were little
changed on balance over September and
October. Single-family housing starts were
up considerably in the third quarter. Orders
for nondefense capital goods point to substantial expansion of spending on business
equipment in the near term; nonresidential
construction has risen appreciably further.
The nominal deficit on U.S. trade in goods
and services narrowed over July and August
from its average rate in the second quarter.
After increasing at elevated rates in the early
part of the year, consumer and producer
prices have risen more slowly on average in
recent months.
Short-term market interest rates have
changed little on balance since the Committee meeting on September 26 while longterm rates have fallen somewhat. In foreign
exchange markets, the trade-weighted value
of the dollar in terms of the other G-10
currencies has declined slightly over the
intermeeting period.
In October, M2 was unchanged and M3
growth moderated. For the year through
October, M2 expanded at a rate in the upper
half of its range for 1995 and M3 grew at a
rate a little above its range. Growth in total
domestic nonfinancial debt has slowed somewhat in recent months but for the year to
date remains around the midpoint of its
monitoring range.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee at its meeting in July reaffirmed the range it had established on January 31-February 1 for growth
187
of M2 of 1 to 5 percent, measured from the
fourth quarter of 1994 to the fourth quarter
of 1995. The Committee also retained the
monitoring range of 3 to 7 percent for the
year that it had set for growth of total domestic nonfinancial debt. The Committee raised
the 1995 range for M3 to 2 to 6 percent as a
technical adjustment to take account of
changing intermediation patterns. For 1996,
the Committee established on a tentative
basis the same ranges as in 1995 for growth
of the monetary aggregates and debt, measured from the fourth quarter of 1995 to the
fourth quarter of 1996. The behavior of the
monetary aggregates will continue to be
evaluated in the light of progress toward
price level stability, movements in their
velocities, and developments in the economy
and financial markets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and
giving careful consideration to economic,
financial, and monetary developments,
slightly greater reserve restraint or slightly
lesser reserve restraint would be acceptable
in the intermeeting period. The contemplated
reserve conditions are expected to be consistent with moderate growth in M2 and M3
over coming months.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Hoenig, Kelley, and
Melzer, Ms. Minehan, Mr. Moskow, and
Mses. Phillips and Yellen. Vote against
this action: Mr. Lindsey.
Mr. Lindsey dissented because he
believed that monetary policy should be
eased. The evidence suggested to him
that in the absence of an easing move
the underlying rate of nominal GDP
growth was likely to be lower than
needed to maintain real GDP at or near
its potential. The intermediate forecast
was subject to a number of significant
risks: household balance sheets seemed
unlikely to sustain the current rate of
durables expenditure for any extended
period; government expenditures were
188
82nd Annual Report, 1995
certain to be cut substantially; and with
fiscal contractions underway in Europe
and Canada and severe financial stresses
present in Japan and Mexico, he did not
see much likelihood of a substantial
expansion of exports. In keeping with
his views, the financial markets were
signalling the likelihood that a weaker
pace of nominal GDP growth would
materialize. The yield curve was virtually flat, with government securities up
through relatively long maturities trading at yields below the current average
federal funds rate. Thus, markets would
be unlikely to find some easing inappropriate and over the intermediate horizon
would view the current level of shortterm rates as unsustainable.
It was agreed that the next meeting of
the Committee would be held on Tuesday, December 19, 1995.
The meeting adjourned at 1:35 p.m.
Donald L. Kohn
Secretary
Meeting Held on
December 19, 1995
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 19, 1995, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Blinder
Mr. Hoenig
Mr. Kelley
Mr. Lindsey
Mr. Melzer
Ms. Minehan
Mr. Moskow
Ms. Phillips
Ms. Yellen
Messrs. Boehne, Jordan, McTeer, and
Stern, Alternate Members of the
Federal Open Market Committee
Messrs. Broaddus and Parry, Presidents
of the Federal Reserve Banks of
Richmond and San Francisco
respectively
Mr. Guynn, President-elect, Federal
Reserve Bank of Atlanta
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
Ms. Browne and Messrs. Davis,
Dewald, Lindsey, Mishkin,
Promisel, Siegman, Slifman, and
Stockton, Associate Economists
Mr. Fisher, Manager, 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. Simpson, Associate Director,
Division of Research and
Statistics, Board of Governors
Mr. Ramm,7 Section Chief, Division of
Research and Statistics, Board of
Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Beebe, Goodfriend, Lang,
Rosenblum, and Sniderman,
Senior Vice Presidents, Federal
Reserve Banks of San Francisco,
Richmond, Philadelphia, Dallas,
and Cleveland respectively
Ms. Rosenbaum, Vice President,
Federal Reserve Bank of Atlanta
7. Did not attend portion of meeting covering
the monetary policy discussion.
Minutes of FOMC Meetings, December
Ms. Perelmuter, Assistant Vice
President, Federal Reserve Bank
of New York
Mr. Weber, Senior Research Officer,
Federal Reserve Bank of
Minneapolis
Mr. Evans, Senior Economist,
Federal Reserve Bank of Chicago
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on November 15, 1995,
were approved.
The Report of Examination of the
System Open Market Account, conducted by the Board's Division of
Reserve Bank Operations and Payment
Systems as of the close of business on
September 29, 1995, was accepted.
The Manager of the System Open
Market Account reported on developments in foreign exchange markets during the period November 15, 1995,
through December 18, 1995. There were
no System open market transactions in
foreign currencies during this period,
and thus no vote was required of the
Committee.
The Manager also 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, 1995, through December 18, 1995. By unanimous vote, the
Committee ratified these transactions.
By unanimous vote, the Committee
authorized the renewal until December 13, 1996, of the System's regular
reciprocal currency ("swap") arrangement of $3 billion with the Bank of
Mexico and the System's participation
in the North American Framework
Agreement with the monetary authorities of Canada and Mexico. Both were
due to terminate on January 31, 1996.
The additional temporary $3 billion
swap arrangement with the Bank of
Mexico, approved by the Committee on
\ 89
February 1, 1995, would lapse on January 31, 1996, in line with its original
terms.
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 available at this
meeting suggested that the expansion of
economic activity had slowed substantially after a strong gain in such activity
during the third quarter. Data on employment and aggregate hours worked
since late summer were consistent with
moderate further increases in overall
economic activity. Industrial production
had changed little on balance after
a sizable rise in the third quarter. On
the spending side, robust advances in
business fixed investment continued to
provide considerable impetus to the
economy. The available information on
consumer expenditures pointed to somewhat reduced gains in recent months,
and indicators of housing demand suggested on balance that activity in housing markets had tended to stabilize after
several months of considerable strengthening. Consumer prices had risen relatively slowly in recent months, while
increases in labor compensation had
remained comparatively subdued.
Nonfarm payroll employment continued to grow at a pace roughly in line
with the expansion of the labor force in
recent months, with gains concentrated
in the private service-producing sectors.
The published information indicated
some further declines in factory and
government jobs in October and
190 82nd Annual Report, 1995
November. Although aggregate hours
of private production workers fell in
November, they remained appreciably
above their average level in the third
quarter. The unemployment rate edged
up to 5.6 percent in November, equaling
its average for the third quarter.
Industrial production was little
changed on balance over October and
November after a sizable increase in the
third quarter. A decline in October was
largely accounted for by a strike at a
major aircraft manufacturer; that strike,
very recently settled, had also exerted a
slightly depressing effect on production
in November. Production of motor vehicles and parts also fell, on net, in October and November. Further growth
outside the aircraft and motor vehicle
industries was paced by continuing
strength in the production of business
equipment. Outside manufacturing, the
output of utilities was boosted in
November by demand associated with
unusually cold weather.
Business fixed investment was continuing to grow at a rapid pace, with
much of the strength stemming from
the persisting and vigorous expansion
in spending for office and computing
equipment. However, the recent gains in
total business investment had moderated
from the extraordinary pace evident in
1994 and early 1995, and they also were
less widespread among major categories
of business equipment than they had
been earlier. New orders for nondefense
capital goods other than computers and
aircraft had leveled out, although shipments were being maintained at high
levels by still-large backlogs of unfilled
orders. Producers of aircraft had received very sizable new orders recently,
but shipments of completed aircraft had
been held back in recent months by the
strike at a major firm. Outlays for nonresidential construction were continuing
to advance brisklv. with construction of
commercial structures posting sizable
increases recently. Overall drilling and
mining activity also had continued to
move higher, led by increased exploration for natural gas.
Total nominal retail sales rose considerably in November, more than offsetting a drop in October; over the two
months, retail sales advanced at a slower
pace than the average rate in the second
and third quarters. Much of the November increase reflected strong gains in
sales of consumer durables, including
improved sales of motor vehicles. In
the nondurables sector, a sizable rise
in November about reversed a decline in
October. Recent surveys of consumer
sentiment pointed to generally positive
attitudes.
After
having recorded robust
advances during the third quarter, most
indicators of housing activity suggested
little further change more recently.
However, considerable strength in mortgage applications associated with lower
mortgage rates, together with survey
indications of an upturn in house-buying
intentions, pointed to strengthening
housing construction over coming
months. Housing starts were down in
October, the latest month for which
these data were available, after a large
increase in the third quarter.
Data for October indicated a sizable
accumulation of business inventories. In
manufacturing, stocks grew at a rate
only moderately below the brisk pace in
the third quarter, and the rise continued
to be concentrated in the capital goods
industries. The aggregate ratio of inventories to sales in manufacturing was
somewhat above the lows in late 1994
and early 1995. In the wholesale sector,
a buildup in stocks of capital equipment
accounted for the bulk of the accumulation in October, and the inventory-tosales ratio in this sector remained on an
uptrend. A sharp rise in retail inven-
Minutes of FOMC Meetings, December
tones in October was led by a large
increase in stocks at auto dealers and at
general merchandise and apparel outlets. The inventory-to-sales ratio for the
retail sector as a whole was at its high
for the year, but signs of overstocking,
apart from motor vehicles, were limited.
After having strengthened appreciably in the third quarter, federal government purchases were now lagging and
exerting some retarding effect on overall
economic activity. The decline in federal purchases in part represented the
transitory effects of government shutdowns and the restraining effects of
spending cuts imposed by continuing
resolutions and by curtailed appropriations in bills that already had been
enacted into law. At the state and local
government levels, however, available
data pointed to continued, relatively
strong growth in purchases.
The nominal deficit on U.S. trade in
goods and services changed little in September (latest data available). Measured
on a quarterly average basis, however,
the deficit declined substantially in the
third quarter, with the reduction about
equally divided between a rise in the
value of exports and a drop in the value
of imports. Increases in exports were
widespread among the major categories
of trade, while reductions in imports
were concentrated in categories in which
there had been large gains in the second
quarter. Available data pointed to subdued growth in most of the major foreign industrial countries in the second
half of 1995.
Consumer prices had risen more
slowly on balance in recent months than
they had during the first half of the year.
In November, the total index for consumer prices was unchanged, and consumer prices excluding food and energy
were up only slightly. In contrast, producer prices of finished goods registered
a relatively large increase in November,
191
and the component of this index excluding food and energy posted its largest
rise since January. At the same time,
prices of intermediate materials declined
a bit further in November. According to
recent survey results, consumers now
expected less inflation over the year
ahead and also over the next five to ten
years. The available data on wages and
worker benefits continued on balance to
display a relatively subdued trend of
increases in labor compensation.
At its meeting on November 15,
1995, the Committee adopted a directive
that called for maintaining the existing
degree of pressure on reserve positions
and that did not include a presumption
about the likely direction of any adjustments to policy during the intermeeting
period. 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 moderate growth in M2 and M3
over coming months.
Open market operations were directed
toward maintaining the existing degree
of pressure on reserve positions throughout the intermeeting period. The federal
funds rate averaged a bit above the
expected rate of 53A percent over the
period. The bunching of settlements of
several Treasury issues that had resulted
from debt ceiling disruptions and the
mid-December corporate tax date were
among the factors exerting pressure on
the funds rate. Most other short-term
interest rates fell slightly, and longerterm interest rates extended earlier
declines during the intermeeting period.
Market expectations of some easing of
192 82nd Annual Report, 1995
monetary policy appeared to be reinforced by market interpretations of the
incoming information as further evidence that overall demand would be
restrained and that the risks of a pickup
in inflationary pressures had diminished.
Over the intermeeting interval, major
indexes of stock prices continued to
move higher in concert with the rise in
bond prices.
The sluggish performance of the
broad monetary aggregates since August
continued in November. Despite the persistence of low opportunity costs associated with holding M2 assets, M2 growth
was relatively modest in November after
a slight contraction in October. M3
growth slowed further in November,
partly as a result of a shift of funding by
borrowers toward capital market instruments to take advantage of lower longterm market rates. Nonetheless, because
of robust expansion earlier in the year,
M2 remained in the upper half of its
1995 range through November and M3
expanded at a rate at the upper end of its
range. Growth of total domestic nonfinancial debt had slowed somewhat in
recent months, reflecting reduced expansion of both private and federal borrowing, and for 1995 to date, this debt measure had grown at a rate around the
midpoint of its monitoring range.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies rose
slightly further on balance over the
intermeeting period. Declining interest
rates in several major foreign industrial
countries, evidently induced by disappointing economic growth in those
countries, appeared to have a firming
effect on the dollar in relation to European currencies. The dollar changed
little against the Japanese yen over the
period after a sharp advance earlier. The
Mexican peso appreciated a bit in relation to the dollar over the oeriod.
The staff forecast prepared for this
meeting suggested that the growth of
economic activity would slow substantially from the very strong pace now
indicated for the third quarter. Although
this forecast did not differ significantly
from that prepared for the November
meeting, less growth than expected earlier seemed likely in the current quarter.
Over the forecast horizon, however, the
economy was still projected to expand
at a pace that would keep activity close
to the economy's potential. The forecast
anticipated that the expansion in consumer spending would slow a bit in
response to diminished gains in disposable income associated with less rapid
advances in spending in other sectors of
the economy. The rise that had occurred
in the value of financial assets held by
households would be a positive factor
helping to support consumer spending
but one that would be offset to a degree
by the difficulties of an increasing number of households in servicing their
growing debts. The greater affordability
of housing stemming from the earlier
decline in mortgage rates was projected
to help sustain homebuilding activity at
a relatively high level. In the context of
reduced growth in sales and profits,
business investment in new equipment
and structures was projected to increase
more moderately after several years of
rapid advance. Although indications of
excess inventories were limited, slower
growth in sales and ongoing efforts to
reduce inventory costs were projected to
lead to smaller increases in stocks over
the projection period. Exports were
expected to be bolstered to some extent
by the projected improvement in the
economies of major trading partners.
Although a great deal of uncertainty still
surrounded the fiscal outlook, the forecast continued to incorporate an appreciable degree of fiscal restraint. Given
the nroiected outlook, rates of utilization
Minutes of FOMC Meetings, December
of labor and capital resources would
remain relatively high, and the underlying trend of price inflation was seen as
unlikely to change significantly over the
projection period.
In the Committee's discussion of current and prospective developments,
members noted that the information that
had become available since the November meeting tended to confirm earlier
indications that the economic expansion
had slowed appreciably from the brisk
pace of the summer months. The members generally agreed that the most
likely course for the economy remained
one of moderate growth. Expansion at
or near potential was seen as the most
probable outcome, associated at least in
part with the favorable effects on business and consumer spending of lower
interest rates, higher equity prices, and
an ample availability of credit. However, a number of members expressed
concern that the strength of final demands would not be sufficient to support
growth near the economy's potential,
absent a policy adjustment. One factor
that might retard growth was a higher
level of real short-term interest rates
owing to the favorable performance of
inflation. Members noted that consumer
price increases had remained relatively
subdued and below expectations in
recent months, despite the generally
high levels of utilization of both labor
and capital resources that had prevailed
through much of the year. Several commented that the effects of new technologies, gains in productivity, global competitive pressures on businesses, and
restraint in wage setting might imply
that inflation would edge down further.
Others expressed concern that the prospects for further reductions in inflation
seemed quite limited in the context of
projected high levels of resource use,
including tight labor markets in many
parts of the country.
193
In the Committee's discussion of regional developments, members reported
that anecdotal and other information
pertaining to regional activity suggested
that the moderation in nationwide economic growth was evident across most
of the nation, with the rate of expansion
ranging from slow to moderate in different areas of the country. Overall levels
of business activity continued to vary
widely, from relatively weak in some
areas to comparatively robust in others.
Conditions also were uneven across
industries, particularly in manufacturing, where flagging auto sales and some
further inventory accumulation contrasted sharply with brisk demand for a
range of producers durable goods, notably office and computing equipment,
and building products. Despite indications that job growth had been relatively
limited, labor markets remained tight
in many parts of the country and there
were more, albeit still limited, reports
of rising wage pressures; in some areas,
however, labor market conditions
appeared to have eased somewhat
recently.
In their discussion of developments in
key sectors of the economy, members
commented that the data and the anecdotal information on consumer spending
had been mixed. For the holiday season,
reports indicated that retail sales had
been disappointing thus far, though sales
appeared to be holding up relatively well
in some sections of the country and for
higher-priced luxury items more generally. Consumers had remained very cautious despite considerable promotional
sales activity, perhaps anticipating even
more aggressive markdowns of prices as
the shopping season neared its end.
Members noted that the reluctance of
consumers also might be reflecting a
sense of continued job insecurity in
an environment of ongoing business
restructuring and downsizing, higher
194 82nd Annual Report, 1995
debt service burdens and rising delinquency rates, and the satisfaction of
pent-up demand for durable goods.
While these factors might be exerting an
inhibiting influence on consumers, the
members generally viewed moderate
growth in consumer spending as a reasonable expectation in the context of
further projected expansion in disposable incomes. The increase in household
wealth associated with the strong performance of the bond and stock markets
might tend to boost consumer spending
relative to disposable incomes, although
one member suggested that the highly
concentrated nature of wealth holdings
might limit any positive effect on aggregate consumption. With regard to housing, members took note of the recent
declines in single-family housing starts
and sales after a strong third quarter.
They remarked, however, that some of
their contacts were anticipating that the
declines in mortgage interest rates over
recent months to their current relatively
low levels would foster a wave of mortgage refinancing and a pickup in housing demand in the spring.
Business fixed investment was
expected to grow at a pace appreciably
below that observed in recent years but
nonetheless to continue supplying considerable impetus to the expansion.
Strong profits and cash flows, along with
the ample availability of financing on
attractive terms, were favorable factors
in the outlook; on the other hand, a
weakening trend in final demand, notably in consumer outlays, likely would
have a negative effect on business capital spending. Several members reported
that commercial and other nonresidential construction activity remained brisk
in various regions around the nation.
A number of members commented on
business inventory developments. Overall inventories of motor vehicles were
on the high side, and inventory accumu
lation more generally appeared to be
running somewhat ahead of sales. There
were no indications that serious overhangs were emerging, but there were
risks that efforts to hold down stocks
would damp production over the near
term.
The outlook for fiscal policy continued to be clouded by the uncertainty
surrounding the outcome of the debate
between the Congress and the Administration. The members anticipated that
the result of the debate would be considerable fiscal restraint, but the timing of
tax and spending initiatives aimed at an
eventual balancing of the budget and the
extent of the fiscal contraction over time
could not be forecast with any precision.
In the interim, much of the federal government was closed, and while federal
workers were expected to get paid eventually, their spending and that of federal
contractors might be damped until the
situation was resolved. The members
believed, however, that in light of the
plans being put forward, the fiscal drag
imposed by likely federal budget developments would not be unusually large
over the next few years.
In reviewing the outlook for inflation,
members referred to the generally favorable price and cost experience of recent
months. Several pointed to subdued
increases in labor compensation and to
anecdotal indications that upward pressures on wages and benefits remained
scattered despite tightness in many labor
markets. In this environment, and with
the economy expected to expand at a
comparatively moderate pace over the
forecast period, many members anticipated that inflation would remain relatively stable despite continuing high
levels of resource utilization, and some
believed that it might record a somewhat improved performance. One argument advanced in support of a possibly
better performance was that the recent
Minutes of FOMC Meetings, December
experience, which had been more favorable than expected given capacity
utilization levels, was perhaps suggestive of the effects of rapid technological
improvements on productivity, the
enhanced efficiencies from greater economic specialization around the world,
and the influence of heightened job insecurity on wages and prices. Another was
the possible effect on future wage
demands of the lower inflation expectations that now prevailed. Although no
member saw greater inflation as having
a high probability, several did refer to
risks in that direction, including the possibility of greater pressures on resources
stemming from faster than currently
anticipated economic growth.
In the Committee's discussion of policy for the intermeeting period ahead,
all the members either favored or could
accept a slight easing in the degree of
pressure on reserve positions. One argument cited in favor of some easing was
that the policy stance, as indexed by the
prevailing real federal funds rate, was
becoming somewhat restrictive as inflation and inflationary expectations moderated, leaving real short-term rates
higher than anticipated. In addition, with
markets expecting a reduction in the federal funds rate in coming months, an
unchanged policy was likely to lead to a
backup in intermediate- and long-term
rates. Although there was no sign that
a cumulative deterioration in economic
performance was about to get under
way, the downside risks to the expansion appeared to have increased and a
modest easing would better position policy to guard against the possibility that
over the longer term the expansion
would begin to fall short of the economy 's potential, especially with fiscal
policy likely to be at least moderately
restrictive. In any case, the recent slowing of the economic expansion, combined with the wage and price restraint
195
evident at current levels of resource utilization and continuing business efforts
to expand capacity, suggested that there
was little risk of a pickup in inflation.
Indeed, the favorable inflation experience over the last half year raised the
possibility of continued modest price
improvement.
A number of members, though willing to accept a slight easing, preferred
an unchanged policy stance. While
inflation had slowed from the elevated
pace observed in the early part of the
year, there was little hard evidence to
indicate that it would decline any further
over the forecast horizon or that there
had been a significant increase in the
sustainable growth rate of the economy.
A few members also expressed concern
about the possible repercussions in
financial markets of an easing action
that would follow an already strong rally
in bond and stock prices. In the circumstances, these members questioned
whether a somewhat easier policy stance
would prove consistent with the Committee's objective of fostering further
progress toward price stability. Moreover, although the available evidence
on the economy's current performance
remained mixed, the moderation in economic growth after the third-quarter
surge did not seem at this time to signal
a growing shortfall of the economy from
its potential. Instead, the economy was
likely in this view to continue to grow
at a generally acceptable rate at or near
capacity, and a few members saw some
potential for somewhat faster growth at
a pace that over time could intensify
inflationary pressures. Accordingly, they
preferred to wait for further evidence on
inflation trends and the performance of
the economy, but they indicated that
in light of the uncertainties that were
involved and the small amount of easing
that was proposed they would not dissent from the majority position.
196 82nd Annual Report, 1995
With regard to possible adjustments
to policy during the intermeeting period,
all the members endorsed a proposal to
retain an intermeeting instruction in the
directive that did not incorporate any
presumption about the direction of a
possible intermeeting change. While
such a change in policy could not be
ruled out, the potential need for a further
intermeeting policy adjustment appeared
remote at this juncture. The risks to the
outlook seemed generally in balance,
and the direction of the next policy
move was not clear in the view of some
members.
At the conclusion of the Committee's
discussion, all the members indicated
that they favored or could support a
directive that called for some slight easing in the degree of pressure on reserve
conditions during the intermeeting
period but that contained no presumption about the likely direction of any
intermeeting policy change. Accordingly, in the context of the Committee's
long-run objectives for price stability
and sustainable economic growth, and
giving careful consideration to economic, financial, and monetary developments, the Committee decided that
slightly greater or slightly lesser monetary restraint would be acceptable during the intermeeting period. A staff
analysis indicated that the reserve conditions contemplated at this meeting
would be consistent with moderate
growth of M2 and M3 over coming
months.
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 substantial slowing in the expansion of economic activity after a strong gain
in the third quarter. Nonfarm payroll employment increased further in November, but the
civilian unemployment rate edged up to
5.6 percent. Industrial production was little
changed on average over October and
November after a moderate rise in the third
quarter. Total nominal retail sales rose somewhat on balance over October and November. Housing starts were down in October
after a large increase in the third quarter.
However, orders for nondefense capital
goods point to substantial expansion of
spending on business equipment in the near
term, and nonresidential construction has
risen appreciably further. Wage trends have
been stable and consumer prices have risen
relatively slowly on average in recent
months.
Most market interest rates have declined
slightly since the Committee meeting on
November 15. In foreign exchange markets,
the trade-weighted value of the dollar in
terms of the other G-10 currencies has risen
slightly on balance over the intermeeting
period.
The substantial moderation in the growth
of M2 and M3 since midsummer continued
in November; however, for the year through
November, M2 expanded at a rate in the
upper half of its range for 1995 and M3 grew
at a rate at the upper end of its range. Growth
in total domestic nonfinancial debt has
slowed somewhat in recent months but for
the year to date remains around the midpoint
of its monitoring range.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee at its meeting in July reaffirmed the range it had established on January 31-February 1 for growth
of M2 of 1 to 5 percent, measured from the
fourth quarter of 1994 to the fourth quarter
of 1995. The Committee also retained the
monitoring range of 3 to 7 percent for the
year that it had set for growth of total domestic nonfinancial debt. The Committee raised
the 1995 range for M3 to 2 to 6 percent as a
technical adjustment to take account of
changing intermediation patterns. For 1996,
the Committee established on a tentative
basis the same ranges as in 1995 for growth
of the monetary aggregates and debt, measured from the fourth quarter of 1995 to the
fourth quarter of 1996. The behavior of the
Minutes of FOMC Meetings, December
monetary aggregates will continue to be
evaluated in the light of progress toward
price level stability, movements in their
velocities, and developments in the economy
and financial markets.
In the implementation of policy for the
immediate future, the Committee seeks to
decrease slightly the existing degree of pressure on reserve positions. In the context of
the Committee's long-run objectives for
price stability and sustainable economic
growth, and giving careful consideration to
economic, financial, and monetary developments, slightly greater reserve restraint
or slightly lesser reserve restraint would
be acceptable in the intermeeting period.
The contemplated reserve conditions are
expected to be consistent with moderate
growth in M2 and M3 over coming months.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Hoenig, Kelley,
Lindsey, and Melzer, Ms. Minehan, Mr.
Moskow, 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-Wednesday, January 30-31,
1996.
The meeting adjourned at 1:05 p.m.
Donald L. Kohn
Secretary
197
199
Consumer and Community Affairs
In 1995 the Division of Consumer and
Community Affairs continued to address
concerns about community development
and reinvestment, access to credit by
minorities and low-income households,
possible discrimination in mortgage
lending, and the need to match its
consumer regulations to industry
developments.
The Board joined in issuing revised
interagency regulations under the Community Reinvestment Act (CRA) after
rulemaking that included the publication
of two proposals. The new rules emphasize performance in lending, service,
and investment; they will help promote
consistency in assessments and reduce
compliance burdens for many banks. In
the area of bank and bank holding company applications, the Board acted on
a large number of cases that involved
CRA protests or adverse CRA ratings,
or both, or involved fair lending and
noncompliance with consumer regulations. Several of the applications
involved proposed "mega mergers" that
engendered great interest among members of the public, who voiced both
strong support and opposition regarding
the mergers. The Board approved them
after extensive analyses, finding that
convenience and needs factors were
consistent with approval.
In the fair lending area, the Board
adopted streamlined procedures for
referring discrimination complaints to
the Department of Justice; forwarded
the results of a major investigation into
a mortgage lender's "overages" practices; and successfully concluded a joint
enforcement action that involved credit
discrimination against Hispanic borrowers. The Board referred other cases,
which raised claims of alleged mortgage
discrimination, to the Department of
Housing and Urban Development
(HUD) for investigation. The Board
improved the System's examination process for fair lending, modifying statistical techniques that are used to test large
institutions for compliance; and took
steps with other agencies to achieve
more uniform enforcement and provide
greater clarity of legal standards for the
industry. Acting on behalf of the Federal Financial Institutions Examination
Council and HUD, the Board met statutory deadlines for the early release of
Home Mortgage Disclosure Act statements for individual lenders and aggregate reports for metropolitan areas.
From the data, the Board noted a marked
increase in lending to minority and lowincome homebuyers, although denial
rates continued to show disparities
among racial and ethnic groups.
These matters are discussed below,
along with other actions by the Board in
the areas of community affairs and consumer protection.
CRA Reform
In April the Board amended its Regulation BB (Community Reinvestment) in
a joint issuance with the three other
financial supervisory agencies that have
CRA responsibilities (the Federal Deposit Insurance Corporation, the Office
of the Comptroller of the Currency, and
the Office of Thrift Supervision). The
issuance marked an important step
toward a new agency approach for
assessing the CRA performance of
financial institutions and brought to closure a rulemaking process begun in 1993
200 82nd Annual Report, 1995
at the direction of President Clinton.
The President had asked the agencies to
reform the implementation of the act by
developing new regulations, supervisory
procedures, and standards for assessing
a financial institution's CRA performance. The goal was to orient assessment in CRA examinations more on
results than process, produce examinations that are more predictable and consistent, and make the law generally more
effective while reducing its burden on
the industry.
The President had directed the agencies to consult with community groups
and the banking and thrift industries;
the new regulation takes account of an
extensive outpouring of public views at
hearings and in comment letters as well
as the agencies' own experience with
the original assessment system. The
regulation provides more direct guidance to banks and thrift institutions on
the nature and extent of their CRA
responsibilities and the means by which
those obligations will be assessed and
enforced. It creates a more quantitative
system for assessing CRA performance
that includes measurements for lending,
service, and investment; requires institutions with assets of more than $250 million to collect additional data for smallbusiness and small-farm loans; and
allows alternative bases of evaluation to
minimize the regulatory burden for certain institutions. The rules establish a
streamlined examination for small lenders and allow any covered institution to
operate under, and have performance
measured against, its own strategic plan.
In the fall, the agencies issued new
examination procedures, and by yearend they had held five week-long staff
training sessions in Boston, Atlanta,
Chicago, Dallas, and San Francisco.
More than 1,100 examiners from the
OCC, the OTS, the FDIC, and the Federal Reserve took part. In December the
Board settled the procedures for the
wholesale and limited-purpose bank
designations and the strategic plan
approvals necessary for banks to qualify
for special examinations.
Some measures taken by the Federal
Reserve will assist both state member
banks and System examiners to implement the new CRA rules. Data-entry
software made available to institutions
will make it easier for them to collect
information about small-farm and smallbusiness lending, required for banks
with more than $250 million in assets
and those affiliated with bank holding
companies with $1 billion or more in
assets. The software has an export capability that allows institutions to download and submit data on diskette for
processing by the Federal Reserve. A
computer-analysis system will enable
examiners to produce the performancebased analyses called for by the new
rules and assist them in preparing summaries of demographic, economic, and
lending information that they will use in
examining small banks. Beginning in
1997, the system will incorporate data
for large-bank examinations.
Fair Lending
Under the Equal Credit Opportunity
Act, as amended in 1991, the Board is
required to refer violations that constitute a "pattern or practice" of discrimination to the U.S. Department of Justice.
The five referrals this year represent a
substantial increase over 1994, when the
Board referred one case. Justice officials
returned four of the five 1995 cases to
the Board for administrative handling,
finding that the Board's enforcement
action alone was adequate. The remaining case raised issues of potential discrimination in mortgage lending and
was under active investigation at
year-end.
Consumer and Community Affairs 201
In 1995 the Board addressed a lender
practice that involves the application of
"overages." The practice represents a
form of tiered loan pricing in which
individual loan officers exercise discretion, for any given loan transaction, in
seeking interest rates or points above
the institution's established minimums.
Often, the discretionary setting of rates
is a form of incentive for loan officers,
who may receive a significant share of
any overages obtained, as compensation
for increasing the lender's return on
the loan. In May 1994 the Board had
advised state member banks that while
overages may not be inherently discriminatory on a prohibited basis, bank
management should be aware that such
a program could, in some circumstances,
result in illegal lending discrimination
because of either disparate treatment or
disparate impact.
The Board dealt with two cases that
involved discriminatory pricing. One
case, involving a state member bank,
had been referred to the Department of
Justice in 1994; in October 1995, the
Board acted in concert with Justice
against the bank for what both agencies
regarded as a pattern or practice of
charging higher interest rates to Hispanic borrowers for consumer installment and single-payment loans. The
Board issued a cease-and-desist order to
bar the practice and required the bank to
adopt a series of corrective measures;
concurrently, the bank and Justice
entered into a stipulated judgment that
enjoined future discrimination in rates
or other loan terms and conditions; the
judgment also required the bank to
establish a $500,000 fund to compensate
victims of the alleged discrimination.
In the second case, the Board and a
Reserve Bank conducted an extensive
review of possible discrimination in
mortgage loan transactions by a bank
holding company subsidiary. The matter
was referred to the Department of
Justice, where it was under review at
year-end.
Assessing Compliance
with Fair Lending Laws
The Board completed its first full year
of operating a specialized fair-lending
school for Federal Reserve examiners.
The two-week school covers an extensive range of conceptual topics and
practical, hands-on classwork; a total of
109 examiners attended the three sessions offered during 1995.
In evaluating compliance with fair
lending laws, bank examiners assess
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
differential treatment warrants further
investigation.
Examiners also use data collected and
reported by banks and others under
the Home Mortgage Disclosure Act
(HMDA). Although the HMDA data do
not include the wide range of financial
and property-related factors that lenders consider in evaluating loan applications, access to the lenders' files on loan
applications and to related information
enables examiners to overcome many of
the data's limitations.
Since 1993 the banking agencies have
used a computer-based system to obtain
customized HMDA reports. Developed
in consultation among the agencies, the
system gives examiners a more complete picture of an institution's mortgage lending record than was readily
available in the past. In 1994 the Federal
Reserve began using a statistical analysis system to aid in the fair-lending
examination of large-volume mortgage
202 82nd Annual Report, 1995
lenders. The 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 loanapplication register. Examiners supplement the results of that analysis with
other information drawn from actual
loan files to identify specific cases that
may need further review and possible
discussions with bank management. To
aid examiners in the field, the Board has
developed a sampling system to run on a
laptop computer.
The Board also continues to improve
its automation capabilities for analyzing
HMDA data, making enhancements in
the application analysis and statistical
components that Reserve Banks use in
fair-lending examinations. Staff members from FDIC regional offices also
have direct access to the HMDA analysis system.
HMDA Data and Lending
Patterns
The Home Mortgage Disclosure Act
requires covered mortgage lenders in
metropolitan areas to disclose data
regarding home purchase and home
improvement loans, including refinancings. Depository institutions and mortgage companies generally are covered if
they are located in metropolitan areas
and have assets of more than $10 million. Since January 1993, independent
mortgage companies with lower assets
are also covered if they originated 100
or more home purchase loans in the
preceding calendar year. One consequence of the expanded coverage has
been a significant increase in the number of independent mortgage companies
reporting data. In 1993, about 225 independent mortgage companies reported
data (covering 1992 loans); in 1995,
more than 900 reported.
Under HMDA, covered lenders submit 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 HUD
and member agencies of the Federal
Financial Institutions Examination
Council (FFIEC).1
In 1995 the FFIEC prepared nearly
39,000 disclosure statements for the
9,858 lenders that reported HMDA data
for calendar year 1994. (Overall, the
1994 data include a total of 12.2 million
reported loans and applications, a
21 percent decrease from 1993 that is
largely attributable to a sharp decline in
refinancing activity.)2 In July, individual
institutions made these disclosure statements public, and in August, aggregate
reports that contain data for all lenders
in a given metropolitan statistical area
(MSA) became available at a central
depository in each of the nation's
329 MSAs. To enhance public access to
the HMDA data, the FFIEC also makes
the information available on paper,
microfiche, magnetic reel and cartridge,
PC diskette, and CD-ROM.
Lending institutions tend to specialize
in different types of home loans. Depository institutions are the predominant
source of home improvement and multifamily loans. Mortgage companies
accounted for about 50 percent of the
home purchase loans reported in 1994
and about 80 percent of the governmentbacked loans.
1. The member agencies are the Board, the
FDIC, the National Credit Union Administration,
the OCC, and the OTS.
2. A summary of the 1994 HMDA data appears
in a series of special tables included in the Federal
Reserve Bulletin, vol. 81 (September 1995),
pp. A68-A75.
Consumer and Community Affairs 203
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 that
these programs may be making a difference. From 1992 to 1993 the number
of conventional home purchase loans
extended to lower-income borrowers
increased 38 percent compared with an
8 percent increase for higher-income
homebuyers. The trend continued into
1994. The 1994 HMD A data show that
the number of loans to lower-income
borrowers increased about 27 percent
while the number extended to higherincome borrowers increased about
13 percent.3
Lending to minority homebuyers has
also increased markedly in recent years.
Among racial or ethnic groups from
1993 to 1994, the number of loans to
black applicants increased 55 percent,
to Hispanic applicants 42 percent, and
to Asian applicants 19 percent. The
increase for white applicants was 16 percent over the same period.
The 1994 data continue to show rates
of credit denial that are higher for black
and Hispanic loan applicants than for
Asian and white applicants even when
applicants are in the same income brackets. In 1994 the denial rates for conventional home purchase loans overall were
33 percent for black applicants, 25 percent for Hispanic applicants, 12 percent
for Asian applicants, and 16 percent for
3. Computations are adjusted to exclude the
effects, beginning with the 1993 data, of HMDA's
expanded coverage of independent mortgage
companies.
white applicants. These rates were not
much different from 1993. For neighborhoods, the data also show that the rate of
loan denial generally increased with an
increase in the proportion of minority
residents.
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 because the data can be
supplemented by other information
available to the agencies, they are an
important tool for enforcement of fair
lending laws.
The important uses of the HMDA
data make accuracy a critical issue. The
FFIEC's processing software is programmed to identify errors in the data
submitted by lenders for correction
before disclosure statements and reports
for specific MSAs are prepared. During the years that lenders have submitted their HMDA data in register format,
the quality has improved considerably.
The proportion of 1994 loan records
containing detected errors was less than
0.5 percent, down from about 4.4 percent in 1991 (the first year for which
data were collected on a loan-by-loan
basis).
Other Uses of HMDA Data
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 of the borrowers whose loans are purchased by
secondary-market entities and of the
204 82nd Annual Report, 1995
neighborhoods in which those borrowers reside.4
In carrying out a statutory responsibility to oversee housing activities by
government-sponsored entities, HUD
uses the expanded HMDA data to help
assess the efforts of 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 reviews.
The data assist in the handling of loan
applicants' and borrowers' allegations
of lending discrimination filed with
HUD, the Department of Justice, or
with some state or local agencies, and
in the agencies' targeting of lenders for
investigation.
Private Mortgage Insurance
On behalf of the private mortgage insurance (PMI) industry, the FFIEC also
compiles HMDA-like data pertaining
to PMI applications. PMI typically is
required by lenders when they extend
conventional mortgages with small
down payments.
Working through their national trade
association, the Mortgage Insurance
Companies of America, the eight active
PMI companies voluntarily submit their
data to the FFIEC, which prepares
company-specific disclosure statements
for each of the firms and aggregate
reports for each MSA. These reports are
available for public review at the central
depositories where HMDA data are
available. The information is also available from the FFIEC in other formats,
4. See the discussion of secondary-market
activity in Glenn B. Canner and Wayne Passmore,
"Credit Risk and the Provision of Mortgages to
Lower-Income and Minority Homebuyers," Federal Reserve Bulletin, vol. 81 (November 1995),
DD. 989-1016.
including data tape, CD-ROM, and PC
diskette.5
Community Development
The implementation of new CRA
rules—with their increased emphasis on
community development lending, service, and investment—helped shape the
activities of the Federal Reserve's Community Affairs program during 1995.
The community affairs offices provided a variety of training workshops—
often in cooperation with consumer
compliance examiners—designed to
help bankers, community groups, and
others understand and respond effectively to the revised CRA regulation.
The Federal Reserve Banks of Richmond" and San Francisco sponsored
workshops throughout their Districts to
explain the new rules. The Reserve
Banks at Kansas City, Chicago, and
Atlanta held educational workshops or
informational forums, and the remaining
Reserve Banks developed plans to hold
similar programs early in 1996.
Because the new CRA regulation
emphasizes community development
lending and investment, the Reserve
Banks' educational programs and informational materials continued to focus
on these areas:
• The Atlanta, Richmond, Dallas, and
St. Louis Reserve Banks co-sponsored a
major conference on rural economic
development
• The Richmond, Dallas, and Boston
Reserve Banks sponsored community
development training workshops
• The St. Louis, Philadelphia, and
Chicago Reserve Banks conducted edu-
5. For an analysis of the 1994 private mortgage
insurance data, see the appendix to Canner and
Passmore, "Credit Risk and the Provision of Mortgages," pp. 1007-16.
Consumer and Community Affairs 205
cational programs about opportunities
for bank involvement in financing
women-owned and minority-owned
small businesses, including "micro"
businesses
• The Kansas City Reserve Bank
conducted training programs in housing
finance techniques that help meet the
needs of low- and moderate-income
families.
Several Reserve Banks presented targeted training programs to meet special
needs of bankers in their Districts. The
Richmond Reserve Bank sponsored a
forum on the operation of multibank
community development corporations;
and the Kansas City, Chicago, and
Dallas Reserve Banks conducted educational sessions on fair lending. Overall
during 1995, community affairs programs sponsored or co-sponsored more
than 200 conferences, seminars, and
informational meetings on community
development, fair lending, and related
community reinvestment topics. As part
of their educational activities, the community affairs staff members at the
Board and the Reserve Banks also made
400 presentations at conferences, seminars, and meetings sponsored by banking, governmental, business, and community organizations.
The Federal Reserve's community
affairs program undertook several special initiatives to help banks develop
effective programs to meet community
credit needs. The Federal Reserve Bank
of Atlanta, working with the Board,
developed software for personal computers called "Partners: A Public Private Partnership Model for Home Mortgage Lending." The software helps
bankers determine borrowers' loan eligibility and provides ten potential loanqualifying techniques—from borrower
self-help to loan subsidies and other
combinations of public and private
funds—that bankers can consider in
serving low- and moderate-income
homebuyers. By year-end, more than
30,000 copies of the software had been
distributed nationwide by the Board and
the Reserve Banks. The software also is
available for downloading from the
Internet.
The Federal Reserve produced new
and updated publications in 1995. The
Board published Community Development Investments: A Guide for State
Member Banks and Bank Holding Companies, an overview of the Federal
Reserve's policies and guidelines on the
formation of community development
corporations (CDCs) and other uses
of equity investments for community
development purposes. The guide replaces Community Development Investments, first published in 1991. The new
publication covers changes to the Federal Reserve Act that authorize community development investments for
state member banks and a new Board
interpretation of Regulation Y for
community development investments
by bank holding companies. The Board
updated a companion publication,
Directory: Bank Holding Company
Community Development Investments,
which describes existing CDCs and
other investments made by bank holding
companies.
The Federal Reserve Bank of Dallas
published Breaking Ground: A Beginner's Guide for Nonprofit Developers,
which provides basic information for
prospective nonprofit community development groups about the planning,
financing, and development of affordable housing.
The Federal Reserve Bank of Philadelphia published Small Business = Big
Possibilities, which profiles the publicprivate partnerships of various financial
institutions throughout the country that
help finance small businesses. Each
206 82nd Annual Report, 1995
profile describes a bank's involvement,
gives the total lending activity under
the program, includes comments on the
profitability of the relationship for the
bank, and makes recommendations for
other banks that seek to develop a similar partnership program.
The Federal Reserve Bank of Chicago published Access to Credit: A
Guide for Lenders and Women Owners
of Small Businesses, a collaborative
effort with the Women's Business
Development Center of Chicago. The
guide presents the views of women business owners and of lenders on the loan
application process for small businesses
and gives recommendations that can
help foster successful lending relationships with small businesses.
Community affairs newsletters further
expanded the Reserve Banks' reach in
helping to inform financial institutions
about community development and reinvestment issues and program opportunities. The Federal Reserve Bank of Richmond began publishing Marketwise, a
newsletter that covers a broad range of
community development and reinvestment topics. The Chicago Bank began
issuing Economic Development News
and Views, a newsletter that focuses on
development issues for small and minority businesses and opportunities for
banks.
Each of the twelve Reserve Banks
now publishes one or more newsletters
covering various aspects of bank involvement in affordable housing and
community and economic development.
These newsletters reach a combined circulation of more than 55,000 bankers,
community representatives, government
officials, bank regulators, and others.
The Reserve Banks' community
affairs programs continued their outreach to help identify community development and reinvestment needs and
obtain guidance concerning the kinds of
educational and information products
that should be developed. Several
Reserve Banks prepared profiles of targeted communities to assist bankers,
community representatives, and others
interested in community credit needs:
• The Federal Reserve Bank of Richmond published community profiles for
the Prince George's County and Cumberland areas in Maryland, the RaleighDurham area in North Carolina, and the
Norfolk-Virginia Beach-Newport News
area of Virginia
• The Federal Reserve Bank of Philadelphia published a profile for the
Wilkes-Barre-Hazelton-Scranton area
of Pennsylvania
• The St. Louis Reserve Bank issued
profiles for the metropolitan areas of
Little Rock, Arkansas; Jackson, Tennessee; and Columbia, Missouri. For the
Lower Mississippi Delta region, the
Reserve Bank issued a profile and also
produced a video highlighting economic
development projects in which banks in
the region were participating
• The San Francisco Reserve Bank
published community profiles for Fresno
and Oakland
• The Federal Reserve Bank of Kansas City developed demographic analyses for the metropolitan areas of Kansas
City, Oklahoma City, Omaha, and
Denver
• The Federal Reserve Bank of New
York published a report that outlined the
credit needs of Washington Heights, a
Manhattan neighborhood, and convened
a forum with bankers and community
groups to discuss community investment options for the area.
Overall during 1995, the System's
community affairs offices held more
than 1,400 outreach meetings with bankers, community groups, business representatives, and others.
Consumer and Community Affairs 207
Community affairs programs continue
to meet a growing demand for technical
assistance and advice on community
development and reinvestment matters.
Technical assistance is aimed at helping
financial institutions and communities
develop program responses to recognized needs and, in many cases, to assist
individual institutions in strengthening
their CRA programs.
The Federal Reserve Bank of San
Francisco worked to foster the creation
and growth of multibank loan consortia
focusing on community reinvestment.
The Reserve Bank continued its efforts
to help establish a statewide loan consortium for small businesses, the California Economic Development Loan
Initiative. That effort culminated in the
formation of a $50 million statewide
loan pool involving about forty banks
and other corporations. The Reserve
Bank also provided organizational support for the formation of the Association
of Reinvestment Consortia for Housing
(ARCH) and helped launch the group's
newsletter, Consortia News. The Federal Reserve Bank of Atlanta assisted a
number of state member banks with
issues related to community development corporations and investments in
tax-advantaged low-income housing
projects. Overall during 1995, community affairs programs responded to
almost 600 requests for technical assistance on community development and
reinvestment matters.
In 1995 the Federal Reserve's Community Affairs program continued to
support the System's supervisory responsibilities for the CRA and for fair
lending laws. Board staff members
taught sessions for consumer compliance examiners on how to conduct community contacts and on bank involvement in community development
finance; and they presented seven halfday training sessions to help senior com
mercial examiners understand various
aspects of affordable housing and the
financing of community development
projects. Board and Reserve Bank staff
members also helped conduct fair lending schools, joined in interagency efforts
to reform implementation of the CRA,
and provided other briefings and educational sessions for bank examiners.
Other Regulatory Matters
The Board took the following other
actions with regard to rulemaking and
other responsibilities for the implementation of consumer protection laws.
Regulation B
(Equal Credit Opportunity)
In April the Board published for comment a proposal to amend Regulation B
to eliminate a general prohibition on
collecting data that relate to an applicant's race, color, sex, religion, or
national origin. If adopted, the rule
would allow, but not require, creditors
to collect these data for any credit product. The prohibition against taking such
data into account in credit decisions
would remain unchanged. At year-end
the Board expected to take final action
on the proposal early in 1996.
Regulation E
(Electronic Fund Transfers)
In April the Board made final an amendment to Regulation E that had been
adopted on an interim basis in November 1994. The rule gives financial institutions more flexibility in identifying
consumer accounts on receipts at automated teller machines (ATMs). It eliminates the requirement that the receipts
uniquely identify the consumer, the con-
208 82nd Annual Report, 1995
sumer's account, or the ATM card. This
change helps to protect consumers and
financial institutions against fraudulent
fund withdrawals.
Regulation M
(Consumer Leasing)
In September the Board published proposed revisions to Regulation M following a review under the Board's Regulatory Planning and Review program.
The primary focus of the review is on
automobile leasing, and the proposed
changes include a new disclosure of the
early termination charge; disclosure of
the gross cost of a lease, the residual
value, and an estimated lease charge; a
requirement that certain lease disclosures be segregated from other information; and, to implement a statutory
change enacted in 1994, revised provisions for radio and television
advertising.
At year-end, the Board was completing plans for focus group sessions in
Washington, D.C., and Los Angeles to
obtain the views of consumers on
the proposed disclosures. The Board
believes the focus groups will assist
in identifying information needed by
consumers to make informed decisions
about lease transactions. The comment period on the Board's proposal,
scheduled to end in December, was
extended to mid-February to accommodate the completion of the focus group
interviews.
Regulation Z
(Truth in Lending)
In March the Board amended Regulation Z to implement changes made to
the Truth in Lending Act by the Riegle
Community Development and Regulatory Improvement Act of 1994. The
amendments impose both new disclosures and substantive limitations on
home mortgage loans bearing rates
above a certain percentage or fees above
a certain amount. New disclosures also
apply to reverse mortgage transactions,
which provide periodic advances to the
borrower and rely principally on the
home's value for repayment. The disclosures will assist consumers (elderly
homeowners, for the most part) in comparing costs when shopping for reverse
mortgages.
The Riegle legislation of 1994
directed the Board to submit special
reports to the Congress about possible
amendments to the Truth in Lending
Act. In March the Board submitted a
report on consumers' ability to waive
the right of rescission when they refinance or consolidate home-secured
loans with new creditors. The Board
concluded that many consumers would
benefit from greater flexibility and supported amending the Truth in Lending
Act so that consumers can waive the
right of rescission more freely if the
transaction involves no additional debt.
The 1994 legislation also asked the
Board to report on how existing rules
governing credit advertising could be
modified to increase consumer benefit
and decrease creditor costs and whether
the rules for radio advertisements could
be modified without diminishing consumer protection. In June the Board
published a notice requesting public
comment on these issues; in September
it submitted a report to the Congress
recommending statutory amendments
that could decrease creditor cost without decreasing consumer benefit. One
recommended change would allow
creditors to give abbreviated credit disclosures in radio and television advertisements together with a toll-free number that consumers could call for further
information about credit costs.
Consumer and Community Affairs 209
Regulation DD
(Truth in Savings)
In January the Board requested comment on possible changes in the formula
for calculating an annual percentage
yield (APY). The Board adopted an
interim rule for certain noncompounding multiyear certificates of deposit; the
rule permits institutions to disclose an
APY equal to the contract interest rate.
The Board deferred final action on the
January proposal, taking account of
pending legislation that would make
significant reductions in the requirements of the Truth in Savings Act.
Interpretations
In 1995 the Board continued to offer
legal interpretations and guidance
through its official staff commentaries,
which are a substitute for individual staff
interpretations.
In April the Board revised the official
staff commentary to Regulation Z (Truth
in Lending). The update gives guidance
on the treatment of various fees and
taxes associated with real estate loans
and a creditor's responsibilities when
investigating a claim of the unauthorized use of a consumer's credit card. In
December the Board proposed revisions
for the 1996 update; they provide guidance on amendments to Regulation Z
affecting reverse mortgages and certain
mortgages bearing rates above a certain percentage or fees above a certain
amount. The proposed revisions also
address issues such as a credit card issuer's responsibilities when a cardholder
asserts a claim or defense relating to a
merchant dispute.
In July the Board published a proposed staff commentary to Regulation C (Home Mortgage Disclosure); in
December it published a final version.
The commentary provides guidance on
such matters as the treatment of loan
prequalifications, participations, refinancings, home equity lines of credit,
mergers, and loan applications received
through brokers. The Board expects the
commentary to reduce the burden of
compliance by clarifying difficult issues,
providing flexibility, and consolidating
the guidance previously contained in
various sources.
In December the Board proposed an
update to the official staff commentary
to Regulation DD (Truth in Savings). It
addressed issues such as the timing by
which credited interest becomes part of
principal and how leap years affect the
calculation of the APY.
In June the Board published an
update to the commentary to Regulation B (Equal Credit Opportunity). The
update addressed disparate treatment,
special-purpose credit programs, credit
scoring systems, and discrimination
based on marital status. In December the
Board published proposed revisions for
the 1996 update; they included guidance
on such issues as the use of age in credit
scoring systems, spousal signature rules,
and the signature rules for business
credit.
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. Proposed revisions to
Regulation E (Electronic Fund Transfers) under the Board's Regulatory
Planning and Review program were
scheduled as of year-end for Board consideration in early 1996.
The proposed revisions to Regulation
E are limited because the current regulation already follows closely the detailed
requirements of the statute. Most
210 82nd Annual Report, 1995
revisions would clarify and simplify the
text of the regulation, reorganize and
consolidate related material, and delete
obsolete provisions. The commentary to
Regulation E would be revised to follow
the format of the commentaries of other
regulations. These changes would reduce burden somewhat since they would
make it easier for financial institutions
to understand and use the regulation
and commentary. The few substantive
changes would not likely have much
effect on regulatory burden. As a whole,
the proposed revisions would reduce
ongoing burden without reducing consumer benefits. There would be some
transaction cost of learning and implementing the revised regulation.
Aside from regulatory changes that
potentially benefit consumers or reduce
compliance burdens, the economic
effects of the Electronic Fund Transfer
Act generally 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 85 percent of households with deposit accounts at financial
institutions now have one or more EFT
features on those accounts.
Automated teller machines are the
most widely used EFT service. Nearly
two-thirds of all households with
deposit accounts currently have ATM
cards, and most of the nation's depository institutions offer customers access
to their accounts through ATMs. Access
has been enhanced by the operation of
shared networks. Almost all ATMs in
operation today participate in one or
more shared networks. The monthly
average number of ATM transactions
increased about 16.3 percent, from
694.5 million in 1994 to 807.4 million
in 1995. During the same period, the
number of ATMs available to consumers rose 12.6 percent to 122,700.
Direct deposit is another widely used
EFT service. More than half of all U.S.
households with deposit accounts
receive some funds through direct
deposit. Direct deposit is particularly
widespread in the public sector: More
than half of social security payments
and two-thirds of federal salary and
retirement payments are made electronically. The use of direct deposit is less
common in the private sector, but it has
grown substantially in recent years.
Considering both public and private
payments, the proportion of households
receiving direct deposits grew about
5.4 percent per year during the 1990s.
Point-of-sale (POS) systems account
for a small share of EFT activity, but
their use continued to grow rapidly in
1995. The number of transactions on
POS systems rose 36.9 percent, from
47.2 million per month to 64.6 million
per month; the number of POS terminals
rose 53.6 percent, to 528,700.
The incremental costs associated with
the EFT act are difficult to quantify
because it cannot be determined 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 even in the
absence of regulation. The available
data provide no evidence of serious consumer problems with electronic transactions. In 1995 about 90 percent
of depository institutions examined by
federal agencies were in full compliance
with Regulation E. Statistics indicate
that among institutions examined, those
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
Consumer and Community Affairs 211
source of information on potential problems. In 1995, 38 complaints, of about
1,200 investigated by the Federal
Reserve, involved state member banks'
handling of electronic transactions. Two
of the EFT complaints involved a possible violation of the act or regulation.
Compliance Examinations
The Federal Reserve System has maintained a program of specialized examinations for compliance with consumer
protection laws since 1977. During the
1995 reporting period (from July 1,
1994, to June 30, 1995), the Federal
Reserve examined 593 state member
banks and 238 foreign banking organizations for compliance with consumer
laws governing financial services.6
The compliance examinations are
conducted by a consumer affairs unit
within each of the twelve Federal
Reserve Banks. The Compliance Section of the Board's Division of Consumer and Community Affairs reviews
and coordinates 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. New examiners in the Federal
Reserve System 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 lend6. The Federal Reserve examines statechartered agencies and state-chartered uninsured
branches of foreign banks, which are 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). Typically, in comparison with state member banks, these institutions conduct relatively few activities that are covered by consumer protection laws.
ing school, and a class in CRA examination techniques.7
During the reporting period, the Federal Reserve System conducted three
basic consumer compliance schools for
a total of 96 students, three advanced
consumer compliance schools for 51
students, and three fair lending schools
for 113 students.
Examiner training is supplemented by
the Reserve Banks through departmental meetings and special training sessions. In addition, the Board's resident
examiner program provides Federal
Reserve examiners with the opportunity
to get a System perspective through
working at the Board for several weeks;
they observe how the division operates,
how policies are developed, and how the
Board coordinates its activities with
those of other agencies that supervise
financial institutions.
The FFIEC is the interagency coordinating body charged with developing
uniform examination principles, standards, and report forms. In 1995 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
amendments to Regulation E (Electronic
Fund Transfers) and developed new
examination procedures for the revised
regulations that implement the CRA.
Agency Reports on Compliance
with Consumer Regulations
Data from the Board, other member
agencies of the FFIEC, and other federal
supervisory agencies cover the compliance of institutions with the Equal
Credit Opportunity Act, the Electronic
7. The Board did not offer the advanced CRA
examination techniques class during 1995.
Instead, FRB examiners attended interagency
training for the revised CRA.
212 82nd Annual Report, 1995
Fund Transfer Act, the Consumer Leasing Act, the Truth in Lending Act, the
Community Reinvestment Act, the
Expedited Funds Availability Act, and
the prohibitions in Regulation AA on
unfair and deceptive practices. The
degree of compliance with these laws
and regulations varied widely in 1995
but overall was little changed from
1994. The following section summarizes compliance data for the reporting
period July 1, 1994, to June 30, 1995.8
Equal Credit Opportunity Act
(Regulation B)
The level of full compliance with the
Equal Credit Opportunity Act (ECOA)
in 1995, 62 percent, was about the same
as 1994's 61 percent. The agencies
reported that 74 percent of the institutions examined in 1995 that were not in
full compliance with Regulation B had
between one and five violations (the
lowest-frequency category), compared
with 72 percent in 1994. 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
• Request information for monitoring
purposes about race or national origin,
8. The federal agencies that supervise financial
institutions do not use the same method to compile
compliance data. Consequently, the data in this
report, which are presented in terms of percentages of all financial institutions, represent general
conclusions. When overall levels of compliance
are discussed in terms of percentages of all financial institutions, the percentage shown is the mean.
sex, marital status, and age on credit
applications primarily for the purchase
or refinancing of a principal residence
• Give a statement of reasons for
adverse action that is specific and indicates the principal reasons for the credit
denial or other adverse action.
The Board issued three written agreements, one cease-and-desist order, and
one civil money penalty involving violations of Regulation B. The OTS issued
eight formal enforcement actions involving Regulation B. The FDIC issued
thirteen formal enforcement actions
involving consumer compliance regulations without distinguishing which of
those actions involved Regulation B.
The other agencies that enforce the
ECOA—the Farm Credit Administration (FCA); the Department of Transportation; the Small Business Administration; the Grain Inspection, Packers
and Stockyards Administration of the
Department of Agriculture; and the
Securities and Exchange Commission—
reported substantial compliance among
the entities they supervise. The FCAs
examination and enforcement activities
did reveal violations of the ECOA that
resulted in one formal enforcement
action. The FCA reported that the most
frequent violation it found involved the
failure to provide applicants with timely
notification of action taken on loan
applications. The Federal Trade Commission (FTC) reported a continuation
of its work with other government agencies and with creditor and consumer
organizations to increase awareness of,
and compliance with, the ECOA.
Electronic Fund Transfer Act
(Regulation E)
The five financial regulatory agencies
reported that approximately 90 percent
of examined institutions were in compli-
Consumer and Community Affairs 213
ance with Regulation E, the same level
of compliance reported for 1994. During
1995, financial institutions most frequently failed to comply with the following provisions of Regulation E:
• Provide a notice of the procedures
for resolving alleged errors at least once
each calendar year
• After receiving notice of an error,
investigate the alleged error in a prompt
manner, determine whether an error actually occurred, and transmit the results
of the investigation and determination to
the consumer within ten business days
• Provide a written statement outlining the terms and conditions of the electronic fund transfer service at the time a
consumer contracted for an EFT service
or before the first transfer was made
• Provide customers with a statement
of all required information at least
quarterly, or monthly if EFT activity
occurred.
The Board issued one written agreement involving violations of Regulation
E, and the OTS issued one formal enforcement action. The FTC reported that
litigation continues regarding a telemarketing company that allegedly failed to
obtain written authorization from consumers for preauthorized transfers. The
SEC continues to examine for brokerdealer compliance with the EFT Act,
but found no violations during 1995.
The FDIC reported thirteen formal
enforcement actions to deal with violations of Regulation E and other consumer compliance regulations without
specifying how many of the thirteen
involved electronic fund transfers.
Consumer Leasing
(Regulation M)
The FFIEC agencies reported substantial compliance with Regulation M,
which implements the Consumer Leasing Act. As in the 1994 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.
The Farm Credit Administration also
considers the institutions it supervises to
be in substantial compliance with the
Consumer Leasing Act. It found no violations of the act through its examination and enforcement activities.
The FTC issued one final consent
order involving violations of the Consumer Leasing Act by three automobile
dealerships whose advertisements failed
to make full disclosure of payment
terms.
Truth in Lending Act
(Regulation Z)
The FFIEC agencies reported that nearly
50 percent of examined institutions were
in full compliance with Regulation Z, a
slight improvement over the 48 percent
reported for 1994. The Board, the
NCUA, the FDIC, and the OCC showed
increases in compliance, while the OTS
reported a decrease. Agencies indicated
that, of the examined institutions not in
full compliance, 58 percent were in the
lowest-frequency category (between one
and five violations), compared with
56 percent in 1994.
The violations of Regulation Z most
often observed were the failure to accurately disclose the finance charge or disclose the payment schedule; to disclose
that the creditor has a security interest in
the property being purchased or in other
identified property; to provide a good
faith estimate within three business
days; and to provide two copies of the
notice of the right of rescission to
borrowers.
214 82nd Annual Report, 1995
The Board issued one written agreement, one cease-and-desist order, and
one civil money penalty involving violations of Regulation Z, and the OTS
issued fifteen formal enforcement
actions. The FDIC reported thirteen formal enforcement actions involving consumer compliance regulations without
distinguishing which of those actions
involved Regulation Z.
Under the Interagency Enforcement
Policy on Regulation Z, 388 institutions
supervised by the Board, the FDIC, the
OCC, and the OTS were required to
refund $2.8 million on 17,110 accounts
in 1995 for improper disclosures. In
1994, largely because of a single credit
card issuer, $6.8 million was refunded
on 137,504 accounts.
The FTC issued three final consent
orders that alleged violations of the
Truth in Lending Act. The cases
involved three automobile dealerships,
three building firms, and a franchisor of
video dating services and twenty-three
of its franchisees. The FTC expects the
respondents in the video case to make
refunds in excess of $200,000.
The FTC also continued its consumer
and business education efforts. To this
end, the FTC completed a brochure
about the new mortgage protections contained in the Truth in Lending Act and
Regulation Z that pertain to home equity
loans with rates above a certain percentage or fees above a certain amount.
Community Reinvestment Act
(Regulation BB)
The Board assesses the CRA performance of state member banks during
regular compliance examinations and
takes the CRA record into account,
along with other factors, when acting on
applications from state member banks
and bank holding companies. The Federal Reserve System maintains a three
faceted program for enforcing and fostering better bank performance under
the CRA:
• Examinations 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 in processing applications from banks and bank holding
companies.
Under the provisions of the CRA,
Federal Reserve examiners review the
performance of state member banks in
helping to meet the credit needs of their
communities. When appropriate, examiners suggest ways to improve CRA
performance. During the 1995 reporting
period, the Federal Reserve conducted
582 CRA examinations: 3 banks were
rated as being in "substantial noncompliance" with the CRA, 12 as "needs to
improve" in meeting community credit
needs, 435 as "satisfactory," and 132 as
"outstanding."9
Expedited Funds Availability Act
(Regulation CC)
The FFIEC agencies reported that
76 percent of examined institutions were
in full compliance with the Expedited
Funds Availability Act in 1995, about
the same level as in 1994. Of the institutions not in full compliance, 78 percent
were in the lowest-frequency category
(between one and five violations).
Among all institutions examined, the
following five rules were the provisions
of Regulation CC most often violated:
9. Foreign banking organizations and Edge Act
and agreement corporations accounted for 238 of
the institutions examined for compliance with consumer laws; they are not subject to the CRA.
Consumer and Community Affairs 215
• Follow special procedures for large
deposits
• Adequately train employees and
provide procedures to ensure compliance
• Provide the required second-day
availability for specified items
• Provide adequate written notice
when the bank extends the time that
funds will be unavailable based on
a permitted exception, including the
reason for not providing normal
availability
• Provide immediate availability on
$100 of deposits not subject to next-day
availability.
The Board issued one cease-anddesist order and one civil money penalty, and the OTS issued two formal
enforcement actions. The FDIC reported
thirteen formal enforcement actions
involving consumer compliance regulations without identifying the legislation
or regulations involved.
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 more than 98 percent of
examined banks were in full compliance
with the regulation. The most frequent
violation involved the failure to provide
a clear and conspicuous disclosure on
cosigner liability. The Board issued one
cease-and-desist order and one civil
money penalty.
Applications
During 1995 the Federal Reserve System acted on seventy-five bank and bank
holding company cases that involved
CRA protests or adverse CRA ratings.10
The System reviewed another twentythree cases that involved fair lending
and other issues related to compliance
with consumer regulations.11
Among the seventy-five cases involving CRA concerns, seventeen involved
adverse CRA ratings, fifty-three were
protested on CRA grounds, and five
involved both adverse CRA ratings and
protests.
Several applications related to major
bank mergers; all had been protested on
CRA grounds. The Board approved the
mergers, finding in each case that convenience and needs factors were consistent
with approval.
In October the Board approved the
application of First Union Corporation
(Charlotte, North Carolina) to acquire
First Fidelity Bancorporation (Lawrenceville, New Jersey). With the acquisition, First Union became the sixth
largest banking organization in the
nation.
In November the Board approved the
application of NBD Bancorp (Detroit)
to acquire First Chicago Corporation
(Chicago), an acquisition that made
NBD the seventh largest banking organization in the nation.
In August the Federal Reserve held
public meetings in Boston, Hartford, and
Albany on an application by the Fleet
Financial Group (Providence, Rhode
Island) to acquire Shawmut National
Corporation (Hartford and Boston) amid
protests against the acquisition. In
November the Board approved the
application. With the acquisition of
Shawmut, Fleet became the dominant
banking organization in New England
10. These cases involved applications and
requests for waiver of an application requirement.
11. Six cases involving CRA issues and five
involving other compliance issues were withdrawn
during 1995. Twenty-three cases were pending as
of year-end 1995.
216 82nd Annual Report, 1995
and among the top ten in the country.
The Board expressed concerns about a
loan-pricing policy involving "overages" at one of Fleet's nonbanking subsidiaries because of its effect on minority borrowers.
Also in November the Federal
Reserve held public meetings in New
York City on an application by Chemical Banking Corporation to acquire
Chase Manhattan Corporation (both of
New York), for the largest U.S. bank
merger to date. The meetings were conducted jointly with the New York State
Banking Department. At year-end the
Board had not yet acted on the
application.12
In December the Board approved the
application of NationsBank Corporation
(Charlotte, North Carolina), the fourth
largest banking organization in the
country, to acquire Bank South Corporation (Atlanta).
During 1995 the Board denied two
applications on CRA or compliance
grounds. In March the Board denied the
12. The Board approved the application on
January 5, 1996.
application of Johnson International,
Inc. (Racine, Wisconsin), to acquire
Seaboard Savings Bank, F.S.B. (Stuart,
Florida). Johnson's lead bank had
received three consecutive "unsatisfactory" compliance ratings, the first in
1989 and the most recent in September
1994. This application was the first to be
denied by the Board solely because of a
bank's compliance deficiencies.
In July the Board denied the application of Totalbank Corporation of Florida
(Miami) to acquire Florida International
Bank (Perrine, Florida). The Board
based the denial on the "less than satisfactory" CRA ratings received by Totalbank's two subsidiary banks from the
FDIC and OCC respectively.
Consumer Complaints
The Federal Reserve investigates complaints against state member banks, and
forwards to the appropriate enforcement
agencies complaints that involve other
creditors and businesses (see table). The
Federal Reserve also monitors and analyzes complaints about unregulated
practices.
Consumer Complaints to the Federal Reserve System Regarding State Member Banks
and Other Institutions, by Subject, 1995
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
Other
institutions '
Total
70
39
1
207
0
16
27
43
11
2
0
1
6
815
38
38
2
218
2
33
44
50
10
4
1
1
11
939
108
77
3
425
2
49
71
93
21
6
1
2
17
1,754
1,238
1,391
2,629
Consumer and Community Affairs 217
Complaints about State
Member Banks
In 1995 the Federal Reserve received
2,629 complaints: 2,193 by mail, 421 by
telephone, and 15 in person. The Federal Reserve investigated the 1,238 complaints that were against state member
banks. About 60 percent involved loan
functions (see table). Of these, 6 percent
alleged discrimination on a prohibited
basis, and 54 percent concerned credit
denial on nonprohibited bases (such as
length of residency) and other unregu-
lated lending practices (such as release
or use of credit information). Another
25 percent of the 1,238 complaints
involved disputes about interest on
deposits and general deposit account
practices. The remaining 15 percent
concerned disputes about electronic
fund transfers, trust services, and other
miscellaneous bank practices.
The System also received 2,463 inquiries about consumer credit and banking policies and practices. In responding
to these inquiries, the Board and Federal
Reserve Banks gave specific explana-
Consumer Complaints to the Federal Reserve System, by Function
and Resolution, 1995
Loans
Type of complaint
and resolution
Complaints about state
member banks,
by resolution
Insufficient information'
Information furnished to
complainant2
Bank legally correct
No reimbursement or
accommodation
Reimbursement or
accommodation—
goodwill3
Bank error
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
31
1
8
12
2
0
8
67
2
42
15
1
1
6
601
43
295
175
22
15
51
202
161
30
21
9
20
98
1
5
1
3
2
1
13
153
100
14
10
1
14
43
32
32
9
6
4
15
5
4
2
2
0
0
1
1
2
0
0
0
0
1
8
18
4
0
0
1
25
1,238
100
72
6
680
54
306
25
39
3
16
2
217
10
Complaints referred to
other agencies
1,391
52
695
373
38
16
217
Total
2,629
124
1,375
679
77
36
338
Total complaints, 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.
6
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.
218 82nd Annual Report, 1995
tions of laws, regulations, and banking
practices and provided relevant printed
materials on consumer issues.
Unregulated Practices
Under section 18(f) of the Federal Trade
Commission Act, the Board continued
to monitor complaints about banking
practices that are not subject to existing
regulations and to focus on those complaints that may be unfair or deceptive.
Three categories accounted for 11 percent of the 1,754 complaints received
in 1995: problems involving credit card
accounts (61), interest rates and terms
of credit cards (78), and miscellaneous
unregulated practices (59). Each of these
categories accounts for a small number
(about 4 percent or less) of all consumer
complaints received by the System.
Many complaints about credit card
accounts involved a variety of customer
service problems, including financial
institutions9 failing to close accounts as
requested; sending periodic statements
to the wrong address; and limiting the
number of telephone inquiries made to
their service departments. Complaints
about issuers of credit cards covered
interest rate increases, allegations that
banks are charging a higher-than-agreed
interest rate on transferred account
balances, and allegations that financial
institutions did not keep their word on
holding interest rates constant. Complaints in the miscellaneous category
covered a wide range of issues including
the purchase of certificates of deposit
check cashing, and the release of liens.
Complaints Referred to HUD
The Federal Reserve continued to refer
to the Department of Housing and
Urban Development complaints that
allege violations of the Fair Housing
Act, as required by a memorandum of
understanding between HUD and die
federal bank regulatory agencies. In
1995 the Federal Reserve referred
twelve complaints about state member
banks to HUD. Investigations completed
for ten of the twelve complaints revealed no evidence of discrimination;
the remaining two complaints were
pending at year-end.
Complaint Program Initiatives
To gain a better understanding of the
type and scope of complaint activity at
the federal level, the Board has undertaken an exchange of complaint data
among the federal financial regulatory
agencies. During 1995 the Board joined
with the FDIC in analyzing the two
agencies9 respective systems for categorizing complaints and researched ways
to facilitate data exchange and analysis;
data exchange was expected to begin by
the second quarter of 1996. Work with
other agencies will follow.
In 1995 the Consumer Complaints
Section joined with the division's
Information Systems unit to develop the
Consumer Complaint Executive Information System, a comprehensive system
that will consolidate all of the complaint
program's current analysis tools. The
system, expected to be fully operational
by mid-1996, will facilitate analysis of
the types of discrimination complaints
received by the Federal Reserve System; generate individualized response
letters automatically; analyze data to
determine complaint patterns and trends;
and provide geographic and demographic analysis of data, along with
other management tools.
In recent years the Federal Reserve
has received an increasing number of
consumer complaints about credit card
mail solicitations from financial
institutions that consumers allege are
misleading because they do not clearly
Consumer and Community Affairs 219
set out the interest rates being charged
and the credit limits offered. The Board
has undertaken a study of the complaints received by the System as well
as by the other federal financial regulatory agencies, state attorneys general,
and state banking departments.
To complement the data gathering,
the Board included questions on the Survey of Consumer Attitudes, conducted
by the University of Michigan's Survey
Research Center, for two successive
months. These survey data will help
define consumers' understanding of the
credit terms used in mail solicitations
and identify problems they have
experienced. Analysis of the survey data
and information from the state and federal agencies is scheduled for completion by mid-1996.
During 1995, individual staff members from the Reserve Banks' consumer
complaint sections continued to work at
the Board for several weeks at a time
to gain familiarity with operations in
Washington. Seven Reserve Banks participated in the program.
Consumer Policies
In 1995 the division formally established a Consumer Policies program to
explore alternatives to regulation for
providing consumer protection in retail
financial services. The program focuses
on bringing research information to bear
more directly on the policymaking process and is staffed by an economist with
an academic background in methods of
information dissemination and in the
study of consumer behavior. In its development of strategies, the program will
target both lenders and consumers. During 1995 the program helped launch a
focus-group project on consumer leasing disclosures (as discussed above, in
the section on proposed revisions to
Regulation M).
The program's most significant initiative to date is a nationwide campaign to
educate consumers about uninsured
products, especially mutual funds and
annuities, sold by financial institutions.
The project, carried out in cooperation
with the Federal Reserve Banks of
Minneapolis, Boston, Dallas, and Cleveland, and with assistance from the
American Association of Retired Persons, seeks to communicate the core
message that not all retail products
offered by banks are insured. It offers a
video and other resource materials to
facilitate seminar presentations to consumers and training sessions for bankers
on guidelines issued by the federal banking agencies. During 1995, sixty-four
consumer seminars and forty-seven
banker training programs reached
almost 4,800 consumers and nearly
1,400 bankers. A series of town meetings sponsored by the Securities and
Exchange Commission reached another
2,150 consumers. More than 7,200 copies of the video and more than 700 copies of the consumer seminar package
have been distributed. The materials are
available from the Board or electronically on the World Wide Web sites
of the Minneapolis and Philadelphia
Reserve Banks.
Consumer Advisory Council
The Consumer Advisory Council met in
March, June, and November to advise
the Board on matters concerning 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.
The council considered many topics
during 1995. These included regulatory
220 82nd Annual Report, 1995
and legislative reform of the CRA;
other statutory amendments in omnibus
burden-reduction bills; the potential
impact of technology on consumer
banking; use of mandatory arbitration
clauses in banks' agreements with consumers; fair lending matters; the sale
of uninsured investment products by
insured depository institutions; the
waiver of consumers' right of rescission
for certain loans; Truth in Savings proposals on the calculation of the annual
percentage yields on deposit accounts;
and the need for reconciling the requirements that govern real estate mortgage
transactions under the Truth in Lending
and Real Estate Settlement Procedures
Acts.
At each of the three meetings, committees and the full council discussed
various components of the Senate and
House bills to reduce regulatory burden.
The views of industry concerning regulatory burden often diverged from those
of consumer and community groups. By
contrast, in November, members of the
council's Consumer Credit Committee
offered, and the council unanimously
adopted, a resolution suggesting that the
Congress drop a proposed amendment
to the Truth in Lending Act that would
exclude first-mortgage loans from provisions of the Home Ownership Equity
Protection Act of 1994. The 1994 law
requires special disclosures when lenders offer loans that bear interest rates
above a certain percentage or fees above
$400, and sets substantive prohibitions
against, among other things, balloon
payments and negative amortization.
In adopting the resolution, council
members expressed concern that, if
enacted, the proposed legislation would
allow lenders to circumvent consumer
protections by replacing a homeowner's
existing mortgage with a higher-cost
loan that retained first-lien status. Council members noted that many of the
abuses that gave rise to the 1994 law
had involved first mortgages and not
just subordinate-lien transactions. Representatives of both industry and consumer interests agreed that the proposed
legislative amendment creates a serious
loophole in the Truth in Lending law.
The Board forwarded the council resolution to the chairmen of the House
and Senate banking committees in
November.
In regard to CRA reform, council
members discussed the fair assessment
of credit needs by financial institutions;
the need for consistency among agencies and examiners in rating institutions' CRA performance; and the
extent to which the revised CRA
regulation will reduce regulatory burden and a perceived over-emphasis on
documentation.
Technology and consumer banking
was a major topic in November. Members considered the potentially wider use
of electronic cash, pilot projects for
stored-value cards, and the lower operating costs for institutions and greater
flexibility for consumers that may flow
from these electronic services. They also
saw some potential drawbacks, such as
unequal access to the banking system
and the risk of loss from computer
breakdowns or security breaches.
At all three meetings, the council
addressed matters regarding the Board's
proposed amendments to Regulation M,
primarily as it affects the consumer leasing of automobiles. Discussion centered
on the format of disclosures, means of
highlighting the most important items,
and the best ways to convey information
about early-termination charges and
about the choice between purchasing
and leasing an automobile.
Roundtable discussions, known as the
Members Forum and held at each council meeting, gave council members the
opportunity through the year to offer the
Consumer and Community Affairs 221
Board their views on their industries or
localities.
Testimony and Legislative
Recommendations
The Board twice testified before the
Subcommittee on Financial Institutions
and Consumer Credit of the House
Committee on Banking and Financial
Services: in March regarding CRA
reform and in May regarding proposed
legislation on regulatory relief. In May
the Board also testified before the
Subcommittee on Financial Institutions
and Regulatory Relief of the Senate
Committee on Banking, Housing, and
Urban Affairs on a wide range of
regulatory relief issues. In October
the Board testified before the Subcommittee on Domestic and International
Monetary Policy of the House Committee on Banking and Financial Services on emerging electronic payment
technologies.
The Board's testimony on burden
reduction supported efforts to reduce the
cost of complying with federal laws.
The Board generally did not favor
proposals to substantially amend the
CRA, believing that the interagency
regulations adopted by the federal banking agencies in April 1995 ought to be
allowed to take effect. The Board also
did not support a proposed transfer to
the Board of rule writing authority for
the Real Estate Settlement Procedures
Act, and it raised specific objections to
the possibility of having to administer
rules regarding prohibitions on kickbacks. The rule writing authority currently rests with HUD.
In regard to emerging technologies
for electronic payment systems such
as stored-value products, the Board
described some areas of concern, including the potential impact on monetary
policy issues. The Board expressed a
desire not to hinder the development of
these products by the application of the
Electronic Fund Transfer Act, but it also
suggested that the Congress should defer
the wholesale exemption of storedvalued products from the act until some
basic analysis is conducted.
Recommendations
of Other Agencies
Each year the Board asks for recommendations that the federal supervisory
agencies may have for amending the
financial services laws or the implementing regulations.
In 1995 the OCC suggested that the
Congress consider alternatives to make
consumer disclosures less burdensome
for depository institutions and more beneficial to consumers than under current
laws. The OCC recommended also that
the Congress modify the ECOA provisions that require a referral to the
Department of Justice when an agency
finds a pattern or practice involving
violations of the nondiscrimination
rules. The OCC suggested either limiting the mandate to refer cases—for
example, to violations that involve particular prohibited bases—or alternatively, providing for waiver of referral if
a violation detected by the agency
stemmed from an institution's selfassessment.
The FDIC reiterated support for proposed amendments to the ECOA, EFT,
Consumer Leasing, and Truth in Lending Acts pending in the Congress. The
agency also noted its support, mentioned
in congressional testimony, for amendments to the Board's Regulation B that
would permit creditors to request information on race, color, national origin,
sex, and religion from credit applicants.
Such information, the FDIC believes,
would enable institutions to review
overall lending patterns to ensure that
222 82nd Annual Report, 1995
customers are being treated in a fair,
nondiscriminatory manner. The FDIC
also expressed support for the Board's
efforts to update and simplify the rules
governing consumer lease transactions to reflect the marketplace more
appropriately.
The FTC endorsed both the regulatory review of lease disclosures now
under way and an upcoming review of
credit requirements under Regulation Z.
The agency notes that consumer financing practices have changed considerably
since 1981, when the Board last revised
Regulation Z in its entirety following
the enactment of the Truth in Lending Simplification and Reform Act of
1980.
223
Litigation
of a Board order, dated March 1, 1995,
approving notices by Bane One Corporation, Columbus, Ohio; CoreStates
Financial Corp., Philadelphia, Pennsylvania; PNC Bank Corp., Pittsburgh,
Pennsylvania; and KeyCorp, Cleveland,
Ohio, to acquire certain data processing
assets of National City Corporation,
Cleveland, Ohio, through a joint venture
(81 Federal Reserve Bulletin 491). The
case is pending.
Jones v. Board of Governors, No. 951142 (D.C. Circuit, filed March 3,
Bank Holding Company Act—
1995), is a petition for review of a Board
Review of Board Actions
order, dated February 2, 1995, approvLee v. Board of Governors, No. 94-4134 ing applications by First Commerce
(2d Circuit, filed August 22, 1995), is a Corporation, New Orleans, Louisiana,
petition for review of two Board orders, to merge with City Bancorp, Inc.,
dated July 24, 1995, approving certain New Iberia, Louisiana, and First Banksteps of a corporate reorganization of shares, Inc., Slidell, Louisiana (81 FedU.S. Trust Corporation, New York, eral Reserve Bulletin 379). Petitioner's
New York, and the acquisition of U.S. motion for injunctive relief and for a
Trust by Chase Manhattan Corporation, stay of the Board's order was denied on
New York, New York (81 Federal August 17, 1995. The case is pending.
Kuntz v. Board of Governors, No. 95Reserve Bulletin 893). On September 12, 1995, the court denied petition- 3044 (6th Circuit, filed January 12,
er's motion for an emergency stay of the 1995) was a petition for review of a
Board order, dated December 19, 1994,
Board's orders. The case is pending.
Jones v. Board of Governors, No. 95- approving an application by KeyCorp,
1359 (D.C. Circuit, filed July 17, 1995), Cleveland, Ohio, to acquire BankVeris a petition for review of a Board order, mont Corp., Burlington, Vermont (81
dated June 19, 1995, approving the Federal Reserve Bulletin 160). On Sepapplication by First Commerce Corpora- tember 21, 1995, the court granted the
tion, New Orleans, Louisiana, to acquire Board's motion to dismiss.
National Title Resource Agency v.
Lakeside Bancshares, Lake Charles,
Louisiana (81 Federal Reserve Bulletin Board of Governors, No. 94-2050 (8th
793). On November 15, 1995, the court Circuit, filed April 28, 1994), was a
granted the Board's motion to dismiss petition for review of a Board order,
the petition. The petitioner's motion for issued March 30, 1994, approving the
application of Norwest Corp., Minnereconsideration is pending.
Money Station, Inc. v. Board of Gov- apolis, Minnesota, to acquire Double
ernors, No. 95-1182 (D.C. Circuit, filed Eagle Financial Corp., Phoenix, AriMarch 30, 1995), is a petition for review zona, and its subsidiary, and thereby
In 1995 the Board of Governors was a
party in fifteen lawsuits filed that year
and was a party in seven other cases
pending from previous years, for a total
of twenty-two cases. In 1994 the Board
had also been a party in a total of
twenty-two lawsuits. Six of the fifteen
lawsuits filed in 1995 raised questions
under the Bank Holding Company Act.
A total of twelve cases were pending at
year-end 1995.
224 82nd Annual Report, 1995
engage in title insurance agency activities and real estate settlement services
(80 Federal Reserve Bulletin 453
(1994)). On January 10, 1995, the court
upheld the Board's order (1995 U.S.
App. Lexis 284, unpublished opinion).
Litigation under the Financial
Institutions Supervisory Act
In Board of Governors v. Hotchkiss,
Adversary No. 95-3146 (United States
Bankruptcy Court, N.D. Ohio, filed
May 1, 1995), the Board sought a determination that a restitution obligation
arising from a Board consent order was
nondischargeable in bankruptcy (81
Federal Reserve Bulletin 406). On
December 15, 1995, the court granted
the Board's motion for summary judgment. The debtor filed a notice of appeal
on December 22, 1995.
Board of Governors v. Scott, Misc.
No. 95-127 (LFO/PJA) (D. District of
Columbia, filed April 14, 1995) is an
application to enforce an administrative
investigatory subpoena for documents
and testimony. On August 3, 1995, the
magistrate judge issued an order granting in part and denying in part the
Board's application. The intervenor
moved for reconsideration of a portion
of the magistrate's ruling. The case is
pending.
In Board of Governors v. Din, No.
95-1542 (J.C.L.) (D. New Jersey, filed
March 30, 1995), the Board filed a petition seeking to compel the defendant to
comply with an administrative subpoena
duces tecum issued in connection with a
Board investigation. On April 26, 1995,
the court granted the Board's petition.
In Board of Governors v. Interamericas Investments, Ltd., No. H-95-565
(S.D. Texas, filed February 24, 1995),
the Board sought to freeze certain assets
of a company pending the administrative adjudication of a civil money
penalty assessment by the Board. On
March 1, 1995, the court issued a stipulated order requiring the company to
deposit $1 million into the registry of
the court.
In DLG Financial Corp. v. Board of
Governors, No. 94-891 (U.S. Supreme
Court, filed November 14, 1994), appellants sought review of an order of the
Fifth Circuit Court of Appeals (29 F.3d
993) affirming both an asset freeze order
obtained by the Board in connection
with a pending enforcement action 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. On February 15, 1995, the Supreme Court dismissed appellants' petition for a writ of
certiorari(115S. Ct. 1085).
In Cavallari v. Board of Governors,
No. 94-4183 (2d Circuit, filed October
17, 1994), a former outside counsel to a
national bank sought review of a Board
order of prohibition (80 Federal Reserve
Bulletin 1046 (1994)). The case was
consolidated with a petition for review
of orders issued by the Officew of the
Comptroller of the Currency imposing a
civil money penalty and cease and desist
order against petitioner {Cavallari v.
OCC, No. 94-4151). On May 11, 1995,
the court upheld the Board's prohibition
order and the comptroller's civil money
penalty order and remanded to the
comptroller for further proceedings
regarding the order to cease and desist
(57 F.3d 137).
In Board of Governors v. Pharaon,
No. 91-CIV-6250 (S.D. New York,
filed September 17, 1991), the Board
sought to freeze the assets of an individual pending the administrative adjudication of a civil money penalty assessment by the Board. On September 17,
1991, the court issued an order temporarily restraining the transfer or disposi-
Litigation 225
bank holding company. The case was
dismissed on August 24, 1995.
In In re Subpoena Duces Tecum,
Misc. No. 95-06 (D. District of ColumOther Actions
bia, filed January 6, 1995), the plaintiff
Menick v. Greenspan, No. 95-CV- sought to enforce a subpoena for pre01916 (D. District of Columbia, filed decisional supervisory documents relatOctober 10, 1995), is a complaint ing to an action by Bank of England
alleging sex, age, and handicap dis- Corporation's trustee in bankruptcy
crimination in employment. The case is against the Federal Deposit Insurance
Corporation. The case is pending.
pending.
Zemel v. Board of Governors, No.
Kuntz v. Board of Governors, No. 951495 (D.C. Circuit, filed September 21, 95-5007 (D.C. Circuit, filed Decem1995), is a petition for review of a Board ber 30, 1994), was an appeal of a district
order issued under the Federal Reserve court order dismissing an action against
Act and the Bank Merger Act approving the Board under the Age Discrimination
the application of the Fifth Third Bank, in Employment Act. On March 8, 1995,
Cincinnati, Ohio, to acquire certain the court granted appellant's motion to
assets and assume certain liabilities of withdraw the appeal and dismissed the
twelve branches of PNC Bank, Ohio, action.
N.A., Cincinnati, Ohio, and to establish
In re Subpoena Duces Tecum, No.
certain branches (81 Federal Reserve 94-MS-214 (D. District of Columbia,
Bulletin 976). The case is pending.
filed June 27, 1994), was a subpoena
Vu Ti v. Board of Governors, No. CA enforcement action by the plaintiff in a
95-1663 (D. District of Columbia, filed securities fraud class action who was
August 28, 1995), was a complaint seek- seeking examination reports and intering injunctive relief and damages from nal memos from the Board. On February
the Board for alleged violations of plain- 1, 1995, the court granted the plaintiff's
tiff's civil and constitutional rights stem- motion to compel, subject to the Board's
ming from the cessation of her business right to claim privilege with respect to
as a sidewalk vendor. On October 19, the documents sought.
Bennett v. Greenspan, No. 93-1813
1995, the plaintiff voluntarily dismissed
(D. District of Columbia, filed April 20,
the complaint.
Beckman v. Greenspan, No. 95- 1993), was an employment discrimina35473 (9th Circuit, filed May 4, 1995), tion action. A jury verdict for the plainis an appeal of an order dismissing an tiff was rendered on October 13, 1994.
action against the Board and others The Board's motion for a new trial on
seeking damages for alleged violations the issue of damages was denied on
of constitutional and common law January 9, 1995.
rights. The case is pending.
In re Subpoena Duces Tecum, No.
95-5034 (D.C. Circuit, filed January 26,
1995), was an appeal of a partial denial
of plaintiff's motion to compel production of examination and other supervisory materials in connection with a
shareholder derivative action against a
tion of the individual's assets. The order
has been extended by agreement.
227
Legislation Enacted
Among the legislation enacted by the
Congress during 1995, the Truth in
Lending Act Amendments of 1995, the
Mexican Debt Disclosure Act of 1995,
and the Paperwork Reduction Act of
1995 directly affect the Federal Reserve
System or the institutions it regulates.
Truth in Lending Act
Amendments of 1995
The Truth in Lending Act Amendments
of 1995 (TILA), Public Law 104-29,
was enacted on September 30, 1995.
TILA is intended to address concerns of
mortgage lenders arising out of a 1994
court decision, Rodash v. AIB Mortgage
Co., 16 F.3d 1142 (11th Cir. 1994).
In Rodash the U.S. Court of Appeals
ruled that in connection with a mortgage
refinancing, the creditor incorrectly disclosed $22 in courier fees and a state
intangibles tax of approximately $200,
with the result that both the finance
charge and the annual percentage rate
were understated. Because of these and
other errors, the consumer was permitted to rescind the loan and recover all
fees and finance charges that had been
paid. A number of class action lawsuits
filed subsequent to Rodash alleged violations for the failure to disclose certain
fees as finance charges and sought the
remedy of rescission for thousands of
loans. Many of these lawsuits were put
on hold in May 1995, when the Congress enacted a temporary moratorium
on such litigation. The moratorium
expired October 1, 1995, and has now
been replaced by the TILA amendments.
Those lawsuits will now proceed under
the new law, which limits the lenders'
liability.
TILA limits lender liability for mortgage transactions consummated before
September 30, 1995, except where borrowers sought to assert their legal rights
before the dates specified in the act. For
these transactions, creditors will have no
civil, administrative, or criminal liability, and borrowers will have no right to
rescind their loans based on an inaccurate finance charge disclosure if the
lender understated the finance charge by
$200 or less or if the lender overstated
the actual finance charge. In addition,
for purposes of the borrower's right to
rescind a mortgage loan, the disclosed
finance charge will be considered accurate if it did not vary from the actual
charge by more than 1 percent of the
amount of credit extended for most refinancings in which no new money is
advanced (or by more than Vi percent
for other rescindable mortgage loans).
The act is intended to prevent litigation concerning future mortgage loans
that involve relatively minor disclosure
violations and creates a separate set of
tolerance rules for new loans secured
by real property or dwellings. For these
transactions, the act considers the disclosed finance charge to be accurate and
absolves lenders from any type of liability if the disclosed amount is understated by $100 or less or if it is overstated. Borrowers who can establish a
violation of the Truth in Lending Act
under the new tolerance levels may,
however, receive larger damage awards
under the new law. If a borrower seeks
rescission after foreclosure proceedings
are initiated on the borrower's primary
dwelling, a lower tolerance will be
applied to determine the borrower's
right to rescind the transaction. In such
228 82nd Annual Report, 1995
a case, the disclosed finance charge
will be considered accurate if it is
understated by $35 or less or if it is
overstated.
The act also provides greater clarity
with respect to the disclosure requirements for mortgage transactions by
listing closing-related costs that are to
be excluded from the finance charge.
Among these are fees imposed by thirdparty closing agents that are neither
required nor retained by the lender, fees
for preparing loan-related documents,
fees related to property inspections conducted prior to closing, and taxes on
security instruments or documents evidencing indebtedness that are paid as a
precondition for recording the instrument. On the other hand, the act requires
the Board to promulgate a regulation
that would include all mortgage broker
fees paid by a borrower in the finance
charge.
Finally, the act directs the Board
to report to the Congress within six
months with recommendations for
statutory and regulatory changes necessary to assure that disclosed finance
charges more accurately reflect the
cost of credit. In the report, the Board
must address the feasibility of including in the disclosed finance charge
all fees paid directly or indirectly by
the borrower and imposed directly or
indirectly by the lender (other than
those payable in a strictly "cash" transaction). The report must also address
"abusive refinancing practices" used
by lenders in order to avoid borrowers' right of rescission. The act
directs the Board to modify Regulation
Z within one year to implement the
report's recommendations in a manner
consistent with the existing statutory
provisions.
Mexican Debt Disclosure
Act of 1995
The Mexican Debt Disclosure Act, Public Law 104-6, was enacted on April 10,
1995. The act requires the Department
of the Treasury to provide detailed
monthly reports concerning all guarantees issued to, and short-term and longterm currency swaps with, the government of Mexico by the U.S. government,
including the Federal Reserve. The act
requires the President to submit reports
semiannually to the House and Senate
Banking committees describing changes
in the Mexican economy, regulatory
actions taken by the Mexican government, and all outstanding loans, credits,
and guarantees provided to the Mexican
government by the U.S. government,
including the Federal Reserve. The act
also includes a provision for Presidential certification of certain currency
swaps between Mexico and the United
States by either the Exchange Stabilization Fund or the Federal Reserve.
Paperwork Reduction
Act of 1995
The Paperwork Reduction Act of 1995,
Public Law 104-13, was enacted on
May 22, 1995, and took effect on
October 1, 1995. It reauthorizes and
amends the Paperwork Reduction Act of
1980, which gave the White House
authority to review government paperwork requirements in order to reduce
the paperwork burdens imposed by the
federal government on the public. The
1995 act reaffirms the authority of the
Office of Management and Budget
(OMB) to review and approve federal
requests for paperwork, and it reverses a
1990 Supreme Court decision that held
Legislation Enacted 229
that the 1980 act did not apply to
requirements to disclose information to
third parties.
The 1995 act reaffirms the authority
of the OMB's Office of Information and
Regulatory Affairs (OIRA) to review
and approve federal requests for paperwork. The act requires OIRA to assign
to all federal information requests a control number. Once a control number is
assigned, the director of OMB must take
action on the proposed request within
sixty days. If OMB fails to take action
within sixty days, the control number
expires within a year. The public is not
required to respond to a federal request
for information unless it displays a valid
control number. Individuals can point
to the lack of a control number as a
defense against a penalty assessment or
similar action arising from the failure to
comply with a request for information.
The act also allows individuals to
request a written determination from
OMB as to whether a federal paperwork
requirement complies with the act, and
it gives the director of OMB authority to
seek remedial action.
The act gives OIRA the authority to
establish standards to be used by federal
regulators in estimating the burdens
imposed on the public by proposed
paperwork requirements and directs
OIRA to work with OMB's federal procurement office to reduce burdens associated with federal contracting. The act
also gives OIRA broader authority to
establish governmentwide policy on
information resources management and
ties decisionmaking on such management to an agency's performance.
Finally, the act overturns the 1990
Supreme Court decision in Dole v.
United Steelworkers of America, 494
U.S. 26 (1990). In Dole the Court held
that under the 1980 act, the clearance
process for collection devices did not
include devices designed to disclose
information to parties other than the
government. The 1995 act reverses Dole
and requires that both information collected directly from businesses and disclosures that businesses must make to
third parties be included in estimates of
paperwork burdens.
The act provides a six-year reauthorization of appropriations for OIRA for
fiscal years 1996-2001, at $8 million
per year. The act sets a goal of reducing
federal paperwork burdens 10 percent in
fiscal 1996 and 1997 and 5 percent in
each of the following years through
fiscal 2001.
231
Banking Supervision and Regulation
The U.S. commercial banking industry
in 1995 booked its fourth consecutive
year of record profits. Earnings growth
was fueled in part by a continued strong
expansion in lending activity and by
increases in fee income and trading
revenue. Banks also benefitted from
favorable trends in overhead expense, in
part because of lower deposit insurance
premiums. Financial markets viewed
these events favorably, with share prices
of the largest institutions increasing
more rapidly than broad market indexes.
The favorable valuation also reflects
several large mergers during the year
that accentuated the trend toward consolidation in the industry.
The number and assets of failed commercial banks remained small in 1995,
and those of problem banks declined
sharply. These trends, combined with
continued efforts by the industry to control asset quality and to strengthen its
capital position, reflect favorably on the
industry's condition and its ability to
meet the nation's financial needs.
Despite its general strength, the banking industry continues to face important
challenges. As underscored by the failure of Barings PLC and serious losses
at the U.S. offices of Daiwa Bank, the
application of sound risk management
to expanding lines of business and products requires the careful attention of
institutions, especially in light of the
swift pace of financial and technological
innovation and the increasing complexity of many financial products. Accordingly, the Federal Reserve in 1995 continued to place increasing supervisory
emphasis on the importance of risk management. Building upon earlier initiatives focusing on trading activities, the
Federal Reserve issued advisories to its
examiners and regulated institutions outlining the key elements of risk management for both investments and end-user
derivative activities. In addition, the
Federal Reserve initiated a formal supervisory rating system for evaluating the
strength of an institution's entire risk
management process; beginning in
1996, formal ratings under the system
will be fully incorporated into the supervisory ratings of banks and bank holding companies.
Along with the other banking agencies, the Federal Reserve in 1995 took
steps to adjust and strengthen risk-based
capital standards in several areas. In
conjunction with an international agreement, the Board revised its capital requirements related to derivative instruments to recognize the effect of bilateral
netting agreements and to refine the
assessment of credit exposure arising
from certain derivative contracts. The
Board further amended its capital standards to take account of interest rate
risk, to reduce capital requirements for
certain assets sold with recourse, and to
determine a treatment for purchased
mortgage servicing rights. Also in conjunction with other national authorities,
the Board published for comment a
revised proposal to incorporate the market risk from trading activities into the
capital standards.
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
232 82nd Annual Report, 1995
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.1
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 corporations and agreement
corporations, (2) the international operations of state member banks and U.S.
bank holding companies, and (3) the
operations of foreign banking companies in the United States.2 The Foreign
Bank Supervision Enhancement Act of
1991 increased the Federal Reserve's
authority over the establishment, examination, and termination of branches,
agencies, commercial lending subsidi1. 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, the Federal Reserve specifically
trains a number of its bank examiners to evaluate
institutions with regard to such compliance. 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.
aries, and representative offices of foreign banks in the United States.
The Federal Reserve exercises important regulatory influence over the entry
into, and the structure of, the US. 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
and inspections and off-site surveillance
and monitoring; it also undertakes enforcement and other supervisory actions.
Examinations and Inspections
The on-site review of operations is an
integral part of ensuring the safety and
soundness of financial institutions. The
Federal Reserve conducts examinations
of state member banks, branches and
agencies of foreign banks, Edge Act corporations, and agreement corporations;
because the elements to be reviewed at
bank holding companies and their subsidiaries are different than they are in
examinations, the Federal Reserve conducts what are termed inspections of
holding companies and their subsidiaries. However, regardless of whether
it is an examination or inspection, the
review entails (1) an appraisal of the
quality of the institution's assets, (2) an
Banking Supervision and Regulation 233
evaluation of management, including an
assessment of internal policies, procedures, risk management, controls, and
operations, (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 1995, 1,042 state-chartered
banks belonged to the Federal Reserve
System (excluding nondepository trust
companies and private banks), an
increase of 62 from year-end 1994.
These banks represented about 10 percent of all insured commercial banks
and held about 23 percent of all insured
commercial bank assets.
The guidelines for Federal Reserve
examination 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. A full-scope, on-site examination
is required at least once during each
twelve-month period for all depository
institutions; however, well-capitalized
and well-managed institutions with
assets of less than $100 million may be
examined every eighteen months.
In conformance with legislated and
internal examination guidelines, state
member banks were examined as required in 1995. Altogether, the Reserve
Banks conducted 613 examinations
(some of them jointly with the state
agencies), and state banking departments conducted 339 independent required examinations. As required under
Federal Reserve examination guidelines,
Reserve Bank officials held 238 meetings with directors of large state mem
ber banks and with directors of those
that displayed significant weaknesses.
Bank Holding Companies
At year-end 1995, the number of bank
holding companies totaled 6,004, a
decline of 15 from the preceding year.
These organizations controlled about
7,577 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 have problems
are selected for inspection on a sample
basis, and medium-sized companies
($150 million to $500 million in assets)
that do not have problems are inspected
on a three-year cycle. The inspection
focuses on the operations of the parent
holding company, its nonbank subsidiaries, and the overall condition of the
consolidated organization.
In judging the financial 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, thereby
minimizing duplication of effort and
reducing the burden on banking organizations. In 1995 the Federal Reserve
inspected 1,935 bank holding companies. Altogether, Federal Reserve
examiners conducted 1,930 bank holding company inspections, 97 of which
were conducted off-site, and state
examiners conducted 80 independent
inspections. During 1995, Reserve
Bank officials held 271 meetings with
the boards of directors of bank holding companies to discuss supervisory
concerns.
234 82nd Annual Report, 1995
Enforcement Actions,
Civil Money Penalties, and
Significant Criminal Referrals
In 1995 the Federal Reserve Banks ret
ommeiidedT and members of the Board's
staff initiated and worked on, 132
enforcement cases involving 298 separate actions such as written agreements,
cease and desist orders, removal and
prohibition orders, civil money penalties, and prompt corrective action directives. Of these, 63 cases involving 109
actions were completed by year-end.
Of particular note w o e the actions
that the Board of Governors, in conjunction with other federal and state bank
supervisors, took against The Daiwa
Bank, Limited, which resulted in the
bank's consent to terminate its UJSL
activities. The Daiwa case is the first in
which the Board of Governors has exercised its termination authority under the
Foreign Bank Supervision Enhancement
Act In other significant matters, the
Board of Governors assessed civil
money penalties totaling $760,500 in
1995, including $600,000 against one
individual for violations of the Bank
Holding Company Act and $85,000
against a group of individuals for violations of, among other things, federal
consumer protection laws and regulations. The Board of Governors also
worked in coordination with the Department of Justice to address alleged discriminatory lending practices at a state
member bank.
All final enforcement orders issued
by the Board of Governors and all written agreements executed by the Federal
Reserve Banks in 1995 are available to
the public. Besides formal enforcement
actions, the Federal Reserve Banks
completed 183 informal enforcement
actions, such as memorandums of understandings commitment letters, and board
resolutions.
In 1995 the staff of the Division of
Banking Supervision and Regulation
forwarded 703 criminal referrals to the
Fraud Section of the Criminal Division
of die Department of Justice for inclusion in its significant referral tracking
system.
Specialized Examinations
The Federal Reserve conducts specialized examinations of banking organizations regarding electronic data processing,fiduciaryactivities, 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 mat act as transfer
agents.
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 corporations, Agreement corporations, and independent data
centers that provide EDP services to
these institutions. During 1995, the Federal Reserve conducted 341 EDP examinations. The Federal Reserve also was
the lead agency on one examination
of large multiregiona) data processing
servicers examined with the Federal
Deposit Insurance Corporation (FD1C),
the Office of the Comptroller of the Currency (OCQ, and the Office of Thrift
Supervision (OTS).
Fiduciary Activities
The Federal Reserve has supervisory
responsibility for institutions that hold
Banking Supervision and Regulation 235
more than $6.7 trillion of discretionary
and nondiscretionary assets in various
fiduciary capacities. This group of institutions includes 316 state-chartered
member banks and trust companies,
90 nonmember trust companies that are
subsidiaries of bank holding companies,
and 8 entities that are branches or agencies of foreign banking organizations
or Edge Act corporation subsidiaries of
domestic banking institutions,
On-site examinations are essential to
ensure the safety and soundness of
financial institutions that have fiduciary
operations. These examinations comprise (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
1995, Federal Reserve examiners conducted 181 on-site trust examinations of
state member banks and trust companies, branches and agencies of foreign
banking organizations, and Edge Act
corporation subsidiaries of domestic
banking institutions; together, these
institutions held approximately $6.2 trillion infiduciaryassets.
Government Securities Dealers
and Brokers
The Federal Reserve is responsible for
examining the government securities
dealing and brokering of state member
banks and foreign banks for compliance
with the Government Securities Act of
1986 and regulations of the Department
of Treasury. Forty state member banks
and five state branches of foreign banks
have notified the Board that they are
currently government securities dealers
or brokers mat are not otherwise exempt
from Treasury's regulations. During
1995 the Federal Reserve conducted
seventy-seven examinations of brokerdealer 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-four
banks that act as municipal securities
dealers and four clearing agencies that
act as custodians of securities involved
in transactions settled by bookkeeping
entries. In 1995 die Federal Reserve
examined all four of the clearing agencies and twenty-two of die 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 principally99 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
236 82nd Annual Report, 1995
1989 to 10 percent. To calculate the
10 percent limit, the Board in January
1993 adopted an optional indexed
revenue test 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 all of these types of
securities.
At year-end 1995 thirty-seven bank
holding companies had so-called section
20 subsidiaries authorized to underwrite
and deal in ineligible securities. Of
these, twenty could underwrite any debt
or equity security; three could underwrite any debt security; and fourteen
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-two such inspections in
1995.
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 countersign and monitor the issuance of securities, register their transfer, and exchange
or convert such securities. During 1995,
Federal Reserve examiners conducted
on-site examinations at 68 of the 190
banks and bank holding companies
registered as transfer agents with the
Board.
Surveillance and Monitoring
The Federal Reserve monitors the financial condition and performance of individual banking organizations and of the
banking system as a whole to identify
areas of supervisory concern. Reserve
banks and the Board use automated
screening systems 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 supervisory decisions such as
allocating extra supervisory or examination resources to institutions with deteriorating financial conditions.
Among the automated screening systems is a model for estimating examination ratings, which helps in tracking the
overall financial condition of individual
organizations. Another primary offsite
monitoring tool is a model that identifies
banks with characteristics of organizations that have previously failed and that
could potentially encounter deterioration within two years.
To assist supervisory staff in evaluating individual bank holding companies,
the Federal Reserve implemented a
revised surveillance program that incorporates results of the examination rating
model and on-site examination ratings.
The bank holding company surveillance
program also identifies companies displaying positions out of line with the
bulk of other institutions with respect to
tier 1 capital, return on average assets,
noncurrent assets, and investment activities. In addition, the Federal Reserve
produces and distributes the quarterly
Bank Holding Company Performance
Report, which contains detailed financial information on the condition and
performance of each bank holding
company.
Automated monitoring systems rely
heavily on the information in regulatory
Banking Supervision and Regulation 237
reports filed by banking organizations.
To ensure the timeliness and accuracy of
the reports, the Federal Reserve maintains the Regulatory Reports Monitoring
System to track domestic and foreign
banking organizations that file late or
inaccurately.
International Activities
The Federal Reserve is responsible for
supervising the international activities
of various banking entities.
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 1995 the
Federal Reserve examined seventy-six
Edge Act and agreement corporations,
which together at year-end held about
$33 billion in total assets.
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 the
foreign offices lies. In 1995 the Federal
Reserve conducted full-scope and
targeted-scope examinations of five foreign branches of state member banks
and sixty-four foreign subsidiaries of
Edge Act corporations and bank holding
companies. All of the examinations
abroad were conducted with the coop
eration 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 seventy-one visitations to
overseas offices (a visitation is a more
general form of review) to obtain current financial and operating information
and, in some instances, to evaluate their
compliance with corrective measures or
test-check their adherence to safe and
sound practice.
U.S. Activities of Foreign Banks
Foreign banks continue to be significant
participants in the U.S. banking system.
As of year-end 1995, 274 foreign banks
from 63 countries operated 474 statelicensed branches and agencies (of
which 35 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 10 Edge Act corporations and
6 commercial lending companies. In
addition, they held an equity interest of
at least 25 percent in 98 U.S. commercial banks. Altogether, these U.S. offices
of foreign banks controlled approximately 21 percent of U.S. banking assets
at year-end. These foreign banks also
operated 141 representative offices. An
additional 109 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 partici-
238 82nd Annual Report, 1995
pated with state and federal regulatory
authorities in the examination of 804
such offices during 1995.
Before the enactment 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
either by the Federal Reserve or a state
or other federal regulators.
FBSEA requires Federal Reserve approval of the establishment of branches,
agencies, commercial lending company
subsidiaries, and representative offices
by foreign banks in the United States. In
1995 the Federal Reserve approved
applications by fifteen banks from
twelve foreign countries to establish
branches, agencies, and representative
offices.
Joint Program for Supervising the
U.S. Operations of Foreign Banking
Organizations
In 1995 the Federal Reserve, in cooperation with the other federal and state
banking supervisory agencies, formally
adopted the joint program for supervising the U.S. operations of foreign banking organizations (FBOs). The program
consists of two major parts. The first
focuses primarily on those FBOs that
have multiple U.S. entities and is
intended to better coordinate the efforts
of the various U.S. supervisory agencies.
The second part of the program is a
review of the financial and operational
profile of each FBO to assess its general
ability to support its U.S. operations and
to determine what risks, if any, the
FBO poses through its U.S. operations.
Together, the two processes will give
critical information to the U.S. supervisors in a logical, uniform, and timely
manner.
Examination Manual
Recently, the U.S. state and federal
banking agencies worked together to
develop a manual for conducting individual examinations of the U.S. branches
and agencies of FBOs. The manual,
completed in 1995, serves as a primary,
comprehensive reference for examination guidelines and procedures both for
examiners and for the foreign banking
community in the United States. A task
force was formed in October 1995 to
review and, if necessary, revise the
manual.
Technical Assistance
In 1995, System staff members participated on a number of technical assistance missions and training sessions
on bank supervisory matters for central
banks in Eastern Europe, Asia, the
Caribbean, Latin America, and countries of the former Soviet Union.
Supervisory Policy
The Board amended its guidelines on
risk-based capital and released for public comment other proposals in this area
and in the areas of derivatives and interest rate and market risks.
Banking Supervision and Regulation 239
Risk-Based Capital Standards
The risk-based capital requirements
adopted by the Board in 1989 remained
in effect in 1995. These requirements
implement the international risk-based
capital standards that were proposed by
the Basle Committee on Banking Regulation and Supervisory Practices (Basle
Supervisors' Committee) and endorsed
by the Group of Ten (G-10) countries in
July 1988.3 The standards include a
framework for calculating risk-adjusted
assets and assigning assets to broad categories based primarily on credit risk.
Banking organizations are expected to
maintain capital equal to at least 8 percent of their risk-adjusted assets.
To supplement the risk-based capital
standards, the Board in 1990 also issued
leverage guidelines setting forth minimum ratios of capital to total assets to
be used in the assessment of an institution's capital adequacy.
Amendments
During 1995 the Board adopted amendments to its risk-based and leverage
capital guidelines in the following areas.
Interest rate risk. On August 2, 1995,
the Board, together with the FDIC and
the OCC, issued a final rule implementing the portion of section 305 of the
Federal Deposit Insurance Corporation
Improvement Act of 1991 dealing with
interest rate risk. The final rule amends
the risk-based capital standards to state
explicitly that, effective September 1,
1995, the banking agencies will consider "a bank's exposure to declines in
the economic value of its capital due to
changes in interest rates" in evaluating
3. The Group of Ten consists of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom,
and the United States.
its capital adequacy. The final rule formalizes the existing supervisory practice of considering interest rate risk in
the evaluation of an institution's capital
adequacy and supplements that practice
by identifying the use of economic value
as a key consideration in the evaluation.
Recourse. The Board adopted a final
amendment, effective March 22, 1995,
reducing the capital requirements for
low-level recourse transactions. The
amendment implements section 350 of
the Riegle Community Development
and Regulatory Improvement Act of
1994, which 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; the limit is to be the
maximum amount of recourse for which
the institution is contractually liable.
Recourse transactions involving small
business obligations. Section 208 of
the Riegle community development act
requires the federal banking agencies to
revise the regulatory capital treatment
applied to recourse transactions involving small business obligations. The
Board adopted a final rule implementing
section 208, effective September 1,
1995. The amendment permits qualifying banking organizations to maintain
capital against only the amount of
retained recourse on the transferred
small business obligations rather than
on the entire amount of assets sold with
recourse, provided certain conditions are
met.
To qualify for the preferential capital
treatment, the banking organization
transferring the small business obligations generally must be well capitalized,
the transfer of the small business obligations must meet the sale criteria outlined
under generally acceptable accounting
240 82nd Annual Report, 1995
principles, and the transferring organization must establish noncapital reserves
sufficient to meet its reasonably estimated liability under the recourse
arrangement. Furthermore, the aggregate amount of recourse that is retained
generally cannot exceed 15 percent of
the institution's total risk-based capital.
Derivatives transactions. The Board
adopted a final rule, effective October 1,
1995, addressing issues relating to the
capital treatment of off-balance-sheet
derivative transactions. The final rule,
which implemented a revision to the
Basle accord, amended and expanded
the set of conversion factors used to
calculate the potential future credit
exposure of derivative contracts. The
rule also permits institutions to recognize the effects of bilateral netting
arrangements when calculating the
potential future exposure for derivative
contracts subject to qualifying bilateral
netting arrangements.
Originated mortgage servicing rights.
The Board, along with the other federal
banking agencies, adopted an interim
rule, effective August 1, 1995, amending the risk-based capital guidelines to
treat originated mortgage servicing
rights the same as purchased mortgage
servicing rights for regulatory capital
purposes. The interim rule was developed in response to the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 122, Accounting for Mortgage
Servicing Rights, which eliminated the
accounting distinction between originated and purchased mortgage servicing
rights.
Country transfer risk. A modification
to the Basle Accord that involves country transfer risk was completed during
1995. The Federal Reserve Board and
the other regulatory banking agencies
issued a final revision to their respective
risk-based capital standards that incorporated this modification. Claims on the
central governments of the OECD-based
group of countries continue to be eligible for preferential capital treatment,
but under the revision, claims on any
country in that group that has rescheduled its external sovereign debt will
receive the standard capital treatment
for five years after the rescheduling. The
revision to the agencies' risk-based capital standards, and the modification to the
accord on which it was based, were
made to ensure that membership in the
OECD-based group of countries coincides with relatively low transfer risk.
The final revisions to the agencies' standards will become effective April 1,
1996.
Proposed Rule
During 1995 the Board issued for public
comment a proposed supplement to the
risk-based capital framework.
Measure for market risk. On July 25,
1995, the Board, together with the
Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation, issued a proposal to incorporate into the risk-based capital ratios
a capital charge for the market risk in
foreign exchange and commodity activities and in the trading of debt and equity
instruments. Under the proposal, certain
institutions with significant trading
activity would calculate capital requirements for market risk using either their
internal risk measurement models,
subject to specified parameters, or risk
measurement techniques developed by
supervisors. The proposal was based on
a proposed supplement to the Basle
accord that was issued in April 1995.
The comment period for the Board's
Banking Supervision and Regulation 241
proposal ended in September 1995. A
final amendment is expected in 1996
and would be effective at the end of
1997.
Risk Management Guidance
Throughout 1995 the Board continued
to focus on the adequacy of risk management practices and controls at banking institutions.
Securities and Derivatives Used
for Nontrading Purposes
Recognizing the increased complexity
and sophistication of financial instruments and strategies, the Federal
Reserve in March issued a supervisory
letter to guide banking institutions in
evaluating the risk management practices they use in their acquisition and
management of securities and offbalance-sheet derivative contracts for
nontrading purposes. The guidance
emphasized the importance of active
oversight by the board and senior
management, adequate risk management
policies and limits, appropriate risk
measurement and reporting systems, and
comprehensive internal controls as key
elements of sound risk management. In
addition, as with all risk-bearing activities, institutions were advised that they
should fully support the risk exposures
of nontrading activities with adequate
capital. The guidance complements a
supervisory letter issued in 1993 on trading activities at banking institutions.
Adequacy of Risk Management
and Internal Controls
In response to the continuing changes in
the nature of banking markets, the Federal Reserve introduced in November a
formal supervisory rating system for
evaluating the adequacy of an insti
tution's risk management processes,
including its internal controls. The rating system takes effect in 1996 for all
state member banks and bank holding
companies regardless of size; it represents a natural extension of current procedures, which incorporate an assessment of risk management and internal
controls during each on-site, full-scope
examination. The specific rating of risk
management and internal controls will
be given significant weight when evaluating management under the bank and
bank holding company rating systems.
The greater focus on risk management recognizes the changes brought
about by new technologies, product
innovation, and the size and speed
of financial transactions but does not
diminish the importance of reviewing
capital adequacy, asset quality, earnings,
liquidity, and other areas relevant to the
evaluation of safety and soundness. The
rating of risk management will bring
together and summarize many of the
findings examiners have long made in
their review of these areas with regard
to an institution's process for managing
and controlling risks.
Derivatives Disclosures and Supervisory
Reporting
The Federal Reserve and the Basle
Supervisors Committee have a number
of initiatives underway to ensure that
institutions involved in derivatives 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 May 1995 the Basle Committee on Banking Supervision and the
Technical Committee of the International Organization of Securities Commissions (IOSCO) established a joint
framework for supervisory information
about the derivatives activities of banks
242 82nd Annual Report, 1995
and securities firms. The joint framework is part of a continuing effort to
improve supervisors' access to, and
evaluation of, timely and comprehensive information about institutions'
activities involving over-the-counter and
exchange-traded derivatives.
The framework has two main parts.
The first part summarizes the risks associated with derivatives and discusses
qualitative and quantitative information
that supervisors could obtain to assess
these risks. The framework also discusses earnings information that may be
useful in conducting supervisory analysis. The second part sets forth a common minimum supervisory information
framework that focuses on information
useful for supervisors as they begin
assessing the extent of an institution's
derivatives activities and their effect on
its credit risk profile. The Basle Committee on Banking Supervision and
IOSCO plan to update the joint supervisory information framework periodically and incorporate information about
market risk into the common minimum
framework at a later stage.
Over the past few years, industry
groups and regulators have been issuing
accounting standards and regulations
regarding the derivatives activities and
disclosures made by banks. The main
thrust of these efforts has been to make
derivatives activities more transparent,
in that relevant information will be presented in a way that allows the public
and regulatory authorities to make informed judgments about a company's
derivatives activity. In 1995 the Division of Banking Supervision and Regulation published an analysis of the
derivatives-related disclosures in the
1993 and 1994 annual reports of the top
ten U.S. banks that deal in derivatives
{Federal Reserve Bulletin, vol. 81, September 1995, pp. 817-31). The article
summarizes the accounting standards
and recommendations that contributed
to the 1994 disclosures; it also reviews
the improvements since 1993 in qualitative and quantitative disclosures about
the credit and market risks of derivates
and about the earnings effects of
derivatives.
In November 1995 another joint
report on the public disclosure of trading and derivatives activities of banks
and securities firms worldwide was
issued by the Basle committee and
IOSCO. The report provides an overview of the disclosures about trading
and derivatives activities in the 1994
annual reports of a sample of the largest
internationally active banks and securities firms in the G-10 countries and
notes improvements since 1993.4 The
analysis builds, in part, upon a framework used by the Federal Reserve in
analyzing the trading and derivatives
disclosures of major U.S. banking
organizations.
The report's analysis revealed that a
number of firms in the sample have
made general improvements as well as
significant voluntary innovations in their
annual report disclosures. Many institutions, however, have continued to disclose very little about their trading and
derivatives activities. The report makes
recommendations for further improvements in disclosures of qualitative and
quantitative information about institutions' involvement in trading and
derivatives activities, including their risk
exposures and risk management policies
and the derivatives activities' effects on
earnings. The Basle committee and
IOSCO are planning to repeat the analysis in 1996 with the expectation that
4. The total sample consisted of seventy-nine
institutions holding more than $12 trillion in total
assets and more than $62 trillion in notional
amounts of derivative instruments.
Banking Supervision and Regulation 243
disclosure practices across international
financial markets will converge further.
Retail Sales of Nondeposit
Investment Products
In January 1995 the Federal Reserve
along with the other federal banking
agencies, entered into an Agreement in
Principal with the National Association
of Securities Dealers (NASD). Pursuant to the agreement, Federal Reserve
examiners have been coordinating
examinations of bank-affiliated brokerdealers with the NASD to the extent
practicable. The agreement is intended
to avoid duplication of supervisory
efforts, lessen the burden on the brokerdealers, and enhance the overall supervisory process.
In September the federal banking
agencies issued an interpretaion of the
February 1994 interagency statement
entitled "Retail Sales of Nondeposit
Investment Products." The interpretation addresses the application of the
statement to a bank's dealer and trust
departments and to standalone bankaffiliated broker-dealers. The interpretation also allows an abbreviated form of
the minimum disclosures to be used
exclusively in advertisements and indicates that the minimum disclosures are
not required in other signs used exclusively to identify the location where
products are available.
In October the federal banking agencies sent letters asking the New York
Stock Exchange, the NASD, and the
Municipal Securities Rulemaking Board
to permit bank retail sales personnel to
take the securities industry's professional qualification examinations. In the
letters, the banking agencies indicated
an intention to adopt rules requiring
bank sales personnel to pass the appropriate professional qualification exami
nation as a condition to selling, and to
maintain a recordkeeping system for
bank sales personnel comparable to the
NASD's Central Registration Depository for broker-dealer personnel.
National Information Center
The Division of Banking Supervision
and Regulation has overall responsibility for the management of the National
Information Center (NIC). The NIC
contains data bases that are maintained
at the Board of Governors and made
available to staff members at the Board,
the Reserve banks, and other federal and
state banking supervisors. The NIC
comprises structure data for banks, nonbanks, and bank holding companies;
international data for U.S. holding
companies and foreign banking organizations with activities in the United
States; financial information, such as
Call Report data for banks and FR-Y
report data for bank holding companies;
and supervisory information based on
inspections and examinations.
During 1995, development of the
Supervisory Information System (SIS)
database was combined with that of the
Federal Reserve Examination Database
(FRED). The SIS contains all the supervisory information within the NIC structure. FRED is an executive information
tool that facilitates fairly complex analysis of NIC information on a personal
computer. The redesign effort currently
under way and scheduled for completion in early 1997, will provide flexibility by enabling the System to use existing technology for future changes and
enhancements.
To expand the use of NIC, training
seminars were conducted for staff members throughout the System, and new
applications were developed to make the
vast amount of NIC data more easily
accessible to the staff. In addition,
244 82nd Annual Report, 1995
efforts have been made to make the NIC
data and software available to state
banking agencies for their use as a
supervisory tool.
Staff Training
The Supervisory Education Program
trains staff members having supervisory
or regulatory responsibilities at the
Reserve Banks, at the Board of Governors, and at state banking departments.
The program covers the four disciplines
of bank supervision: bank examinations,
bank holding company inspections,
surveillance and monitoring activities,
and applications analysis. The program
provides 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 also provided to
staff members of the Division of Banking Supervision and Regulation and staff
members of other divisions who are
engaged in System supervisory and
regulatory activities. Students from
supervisory counterparts in foreign
countries also attend on a spaceavailable basis. An objective of the
program is to provide students with an
increased awareness and knowledge of
the total supervisory and regulatory pro-
Number of Sessions of Training Programs for Banking Supervision and Regulation, 1995
Program
Schools or seminars conducted by the Federal Reserve
Core Schools
Introduction to examinations
Financial institution analysis
Loan analysis
Bank management
Effective writing for banking supervision staff
Management skills
Conducting meetings with management
Other Schools
Real estate lending seminar
Specialized lending seminar
Senior forum for current banking and regulatory issues
Bank operations
Bank applications
Bank holding company inspection
Basic entry-level trust
Advanced trust
Consumer compliance examination I
Consumer compliance examination II
Community Reinvestment Act training
Fair lending
Advanced Electronic Data Processing examination
Electronic Data Processing continuing education
Capital markets seminar
Section 20 securities seminar
Internal controls
Seminar for senior supervisors of foreign central banks1 .
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. . . . Not applicable.
1. Conducted jointly with the World Bank.
2. Open to Federal Reserve employees.
Total
Regional
9
11
10
6
24
23
25
1
24
20
25
5
5
2
5
2
11
1
1
3
4
5
3
1
1
12
6
3
78
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 245
dent days of training was 27,856 in
1995; 25,036 in 1994; 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 761 state examiners were
trained; 430 in Federal Reserve courses,
304 in FFIEC programs, and 27 in other
courses. During 1995 the Federal
Reserve also continued its participation
in joint core supervision schools with
the FDIC.
Every staff member wishing to obtain
an examiner's commission is required to
demonstrate mastery of the core curriculum and of a specialty area by passing
the Core Proficiency Examination,
which includes a core content area and a
specialty (Safety and Soundness, Consumer Affairs, Trust, or EDP). In 1995,
ninety-one people registered to take
the Core Proficiency Examination, and
sixty-seven took it by year-end (see
table).
cess, including the interrelationships of
the four functional areas, thus providing
a higher degree of cross training among
staff members.
The System participates in training
offered by the Federal Financial Institutions Examination Council 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, capital markets, payment
systems risk, white collar crime, preparation and presentation of testimony,
income property lending, management,
and instructor training. The System also
co-hosts the World Bank Seminar for
students from developing countries.
During 1995 the Federal Reserve conducted a variety of schools and seminars, and Federal Reserve staff members
participated in several courses offered
by or cosponsored with other agencies,
as shown on the accompanying table.
In 1995 the Federal Reserve trained
3,943 persons in System schools, 1,246
in schools sponsored by the Federal
Financial Institutions Examination
Council (FFIEC), and 217 in other
schools for a total of 5,406 students
including 206 representatives from foreign central banks. The number of stu-
Federal Financial Institutions
Examination Council
In November 1995 the Federal Reserve
and the other federal banking agencies
announced, under the auspices of the
FFIEC, the planned full adoption of generally accepted accounting principles
(GAAP) as the reporting basis for the
Status of Students Registered for the Core Proficiency Examination, 1995
Specialty area
Student status
Registrants
In queue
Taken
Passed
Failed
Core
91
24
67
65
2
Safety and
soundness
Consumer
Trust
Electronic data
processing
77
20
57
39
18
12
3
9
9
0
1
0
1
1
0
1
1
0
NOTE. Students choose a test in one specialty area to accompany the core examination.
246 82nd Annual Report, 1995
balance sheet, income statement, and
related schedules in bank Call Reports,
effective with the March 1997 report
date. While the accounting principles
used for bank Call Report purposes have
generally been based on GAAP, full
adoption of GAAP as the reporting basis
in the basic schedules of the Call Report
will eliminate existing differences with
GAAP. In addition, this change will
bring the accounting principles used for
bank regulatory reports into conformity
with the GAAP reporting basis used in
bank holding company FR-Y reports,
savings association Thrift Financial
Reports, and general purpose financial
statements. Furthermore, this uniform
reporting basis is consistent with the
objectives of section 307 of the Riegle
Community Development and Regulatory Improvement Act of 1994, which
requires the federal banking agencies to
work jointly to develop a single form for
the filing of core information by banks,
savings associations, and bank holding
companies.
During 1995 the FFIEC implemented
a number of improvements to disclosures for off-balance-sheet derivatives
instruments. The FFIEC developed
instructions to the bank Call Report
effective as of the March 1995 report
date, to implement an enhanced framework for derivatives reporting. Under
the enhanced framework, banks report
gross or notional amounts of derivative
contracts by class of instrument, type of
risk exposure, maturity, and use of the
instruments. Banks also report the gross
positive and negative fair values of
derivatives broken down by type of risk
exposure and use of the instruments.
In addition, the FFIEC collected data
on the net credit exposure from derivatives (reflecting legally enforceable
bilateral netting contracts), on the potential future credit exposure from derivatives, and on the effect of derivatives on
trading revenues and net interest margins. The FFIEC also agreed to make
additional refinements to this information as of the March 1996 report date in
a manner consistent with certain aspects
of the Supervisory Information Framework issued jointly by the Basle Committee on Banking Supervision and the
Technical Committee of the International Organization of Securities Commissions on May 16, 1995. Similar disclosures were instituted for regulatory
reports by bank holding companies filed
with the Federal Reserve.
The FFIEC published final guidance
on the Financial Accounting Standards
Board's
Statement
of
Financial
Accounting Standards No. 114,
Accounting by Creditors for Impairment
of a Loan (SFAS 114), in February 1995
and developed instructions for the bank
Call Report on this standard. The guidance clarifies that allowances calculated
under SFAS 114 may continue to be
included in tier 2 capital and reaffirms
existing supervisory policies on nonaccrual of interest income and the
classification of certain troubled collateralized loans. The FFIEC also issued
implementation guidance with respect
to SFAS 122, Accounting for Mortgage
Servicing Rights, and SFAS 115,
Accounting for Certain Investments in
Debt and Equity Securities.
In December 1995 the FFIEC
announced a number of revisions to the
Call Report. Several items will be
deleted, effective as of the March 31,
1996, reporting date, to reflect the
results of an annual review of the Call
Reports. New items will be added to the
Call Report to permit the agencies to
monitor bank regulatory capital ratios
more effectively, to provide better data
on short-term liabilities and assets for
liquidity purposes, and to provide information necessary for the supervision of
bank activities in other areas.
Banking Supervision and Regulation 241
The FFIEC also announced it is
adopting a new trust income statement
in the Annual Report of Trust Assets
(FFIEC 001), effective for the December 1996 report date. In addition, it
revised the supplement to die Report of
Assets and Liabilities of US. Branches
and Agencies of Foreign Banks (FFIEC
002) to adopt certain derivatives disclosures 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 US. banking at die local,
regional, and national levels. The Board
also has primary responsibility for regulating the international operations of
domestic banking organizations and
the overall U.S. banking operations of
foreign banks, whether conducted
directly through a branch or agency
or indirectly through a subsidiary commercial lending company. The Board
has established regulations for the
interstate banking activities of these foreign banks and for foreign banks that
control a US. 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 the financial
and managerial resources of the applicant the Mure 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.
Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1995
Acton anandiar -auSilaoriity dclegatte«l
by iae Bnamd of Govonoours
Direct aotiotn
toysfae
Bcaand *of GoveoMars
Pmpmsi
Divi<§»oaa <o(f Bamkiimg
Sopervisiaa m&
Approved;
Denied
33
2
Q
22
<o
(0
Q
Bank
Newtek
Bwfc service
ooapootoom ...
Otto-
55
183
Tefal
fcMmMum&iholding
omsapm^
Approved
Demed
Office
oftfhe
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248 82nd Annual Report, 1995
In 1995, the Federal Reserve acted on
1,558 bank holding company and
related applications or notices. The Federal Reserve received 340 proposals to
organize bank holding companies and
denied 2; approved all 105 proposals to
merge existing bank holding companies;
received 320 requests for acquisitions
by existing bank holding companies and
denied 1; received 601 requests by existing companies to acquire nonbank firms
engaged in activities closely related to
banking and denied 2; and approved
192 other applications. Data on these
and related bank holding company decisions are shown in the accompanying
table.
Bank Merger Act
The Bank Merger Act requires that all
proposed mergers of insured depository
institutions be acted upon by the appropriate federal banking agency. If the
institution surviving the merger is a state
member bank, the Federal Reserve has
primary jurisdiction. Before acting on a
proposed merger, the Federal Reserve
considers factors relating to the financial
and managerial resources of the applicant, the future prospects of the existing
and combined institutions, the convenience and needs of the community to
be served, and the competitive effects of
the proposal. The Federal Reserve must
also consider the views of certain other
agencies on the competitive factors
involved in the transaction.
During 1995 the Federal Reserve
approved 133 merger applications. As
required by law, each merger is
described in this REPORT (in table 16 of
the Statistical Tables chapter). When the
FDIC, the OCC, or the OTS has jurisdiction over a merger, the Federal Reserve
is asked to comment on the competitive
factors to 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. The Federal Reserve
submitted 1,014 reports on competitive
factors to the other federal banking
agencies in 1995.
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 in advance of the transaction. 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 1995, the Federal Reserve acted
on 148 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
Banking Supervision and Regulation 249
effected by an order or announcement.
Orders state the decision, 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 or
notice. During 1995, 90 percent of the
decisions met this standard.
Delegation of Applications
Historically, the Board has delegated
certain regulatory functions—including
the authority to approve, but not to deny,
certain types of applications—to the
Reserve Banks, to the Director of the
Board's Division of Banking Supervision and Regulation, and to the Secretary of the Board. The delegation of
responsibility for applications permits
staff members at both the Board and the
Reserve Banks to work more efficiently
by removing routine cases from the
Board's agenda.
In 1995, 84 percent of the applications processed were acted on under
delegated authority. The Board continued its efforts during the year to streamits processing procedures.
Digitizedline
for FRASER
Banking and Nonbanking Proposals
During 1995, the Board approved a variety of merger proposals involving some
of the largest banking organizations in
the United States. Most of these proposals generated many comments from
the public, particularly with respect to
the Community Reinvestment Act, fair
lending, and competitive issues. For one
of these proposals, the Board conducted
public meetings in three separate cities.
The meetings facilitated the receipt of
comments from the many parties interested in that transaction. For another
proposal, to form the largest banking
holding company in the U.S., the Board
conducted a two-day public meeting in
New York City; the proposal was pending at year-end.
In 1995 the Board continued to
approve proposals by domestic bank
holding companies and by foreign banking organizations to engage in securities
underwriting and dealing activities. For
the first time, the Board permitted a
bank holding company engaged in a
limited number of section 20 activities
(rather than all types of section 20
activities) to underwrite and deal in
certain "private ownership" industrial
revenue bonds.
During the year, the Board also
approved a proposal by a U.S. bank
holding company to indirectly acquire
interests in partnerships that would
invest in a variety of assets, including
discounted bank loans and other debt
instruments that are (or are expected to
be) in default of their original terms.
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
250 82nd Annual Report, 1995
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 1995 the Federal Reserve
reviewed fifty-one proposed stock repurchases by bank holding companies, all
of which were handled, under delegated
authority, either by the Reserve Banks
or by the Secretary 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 1995 the
Board approved the opening of 14 foreign branches of 5 banks.
By the end of 1995, 110 member
banks were operating 761 branches in
foreign countries and overseas areas of
the United States; 76 national banks
were operating 640 of these branches,
and 34 state member banks were operating the remaining 121 branches. In addition, 27 nonmember banks were operating 41 branches in foreign countries.
Edge Act Corporations
and Agreement Corporations
Under sections 25 and 25 (a) of the Federal Reserve Act, Edge Act and agreement corporations may engage in international banking and foreign financial
transactions. These corporations, which
are usually subsidiaries of member
banks, may (1) conduct a deposit and
loan business in states other than that
of the parent, provided that the business is strictly related to international
transactions and (2) make foreign
investments that are broader than those
of member banks because they can
invest in foreign financial organizations,
such as finance companies and leasing companies, as well as in foreign
banks.
In 1995 the Federal Reserve approved
one new Edge Act corporation and three
agreement corporations. At vear-end.
Banking Supervision and Regulation 251
seventy-six Edge Act and agreement
corporations were operating with fortytwo 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.
Foreign Investments
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
general-consent procedures that involve
only after-the-fact notification to the
Board.
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.
Financial Disclosure by State
Member Banks
State member banks must disclose certain information of interest to investors
if they issue securities registered under
the Securities Exchange Act of 1934.
This information includes financial
reports and proxy statements. By statute, the Board's financial disclosure
rules must be substantially similar to
those issued by the Securities and
Exchange Commission. At the end of
1995, thirty-six state member banks,
most of which are small or mediumsized, were registered with the Board
under the Securities Exchange Act.
Export Trading Companies
In 1982 the Bank Export Services Act
amended section 4 of the Bank Holding
Company Act to permit bank holding
companies, their subsidiary Edge Act or
agreement corporations, and bankers'
banks to invest in export trading companies, subject to certain limitations and
after Board review. The purpose of this
amendment was to allow effective participation by bank holding companies in
the financing and development of export
trading companies. The Export Trading
Company Act Amendments of 1988
provide additional flexibility for bank
holding companies engaging in export
trading activities. Since 1982 the Federal Reserve has acted affirmatively on
notifications by forty-eight bank holding
companies.
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.
In recent years, the Bank Secrecy Act
has been regarded as a primary tool in
the fight against money laundering. The
records required to be reported and
maintained by financial institutions
under the Bank Secrecy Act provide law
enforcement officials with useful data
for aiding in the detection and prevention of unlawful activity. At the same
time, these records provide assistance
252 82nd Annual Report, 1995
in the determination of the safety and
soundness of financial institutions.
In 1995 the Federal Reserve acted as
the lead regulatory agency in the development of new anti-money laundering
examination procedures as required by
the provisions of section 404 of the
Riegle Community Development and
Regulatory Improvement Act of 1994.
These procedures were added to the
newly developed Federal Reserve Bank
Secrecy Act examination procedures.
The Federal Reserve, through its use of
these procedures and other off-sight
measures, continued its efforts to monitor compliance with the requirements of
the Bank Secrecy Act by the institutions
it supervises.
During 1995 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 anti-money laundering measures
to be taken under the Bank Secrecy Act.
Also, through the Special Investigations
and Examinations Section, the Federal
Reserve has assisted in the investigation of money laundering activities and
provided anti-money laundering training to designated staff members at each
Reserve Bank.
The Federal Reserve has also continued its extensive participation in the
Financial Action Task Force, which in
1995, provided anti-money laundering
training to numerous foreign governments. A representative of the Federal
Reserve participated in the Financial
Action Task Force examinations of the
progress made in adopting and implementing anti-money laundering measures by foreign governments. Through
its representative, the Federal Reserve
also participated in the Summit of the
Americas Working Level Conference on
Money Laundering. The purpose of the
summit was to develop a coordinated
hemispheric response to money laundering activities in the Americas.
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
applies these credit limitations, or margin requirements, to certain borrowers
and to certain credit extensions, such as
credit obtained from foreign lenders by
U.S. citizens.
Several regulatory agencies enforce
compliance with the Board's securities
credit regulations. The Securities and
Exchange Commission, the National
Association of Securities Dealers, and
the national securities exchanges examine brokers and dealers for compliance
with Regulation T. The federal banking
agencies examine banks under their
respective jurisdictions for compliance
with Regulation U. The compliance of
other lenders with Regulation G is
examined by the Board, the Farm Credit
Administration, the National Credit
Union Administration, or the Office of
Thrift Supervision, according to the
jurisdiction involved. At the end of
1995, 743 lenders were registered under
Regulation G, and 226 came under the
Board's supervision. Of these 226, the
Federal Reserve regularly inspects 216
either biennially or triennially, according to the type of credit they extend. The
others are exempted from periodic onsite inspections by the Federal Reserve
but are monitored through the filing
of periodic regulatory reports. During
1995, Federal Reserve examiners
Banking Supervision and Regulation 253
inspected 108 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
1995 the OTC list was revised in February, May, August, and November. The
November OTC list contained 4,253
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 secu-
rities. In 1995 the foreign list was
revised in February, May, August, and
November. The November foreign list
contained 701 foreign stocks.
In 1995 the Board published proposed
amendments to Regulation T for public
comment. The amendments are part of
the Board's periodic review of its regulations and reflect consideration of the
comments submitted in response to
its earlier Advance Notice of Proposed
Rulemaking. Many of the proposed
amendments feature increased reliance
on rules of the Securities and Exchange
Commission and self-regulatory organizations. Others would make Regulation T consistent with Regulation G and
Regulation U.
Under section 8 of the Securities
Exchange Act, a nonmember domestic
or foreign bank may lend to brokers or
dealers who post registered securities as
collateral only if the bank has filed an
agreement with the Board that it will
comply with all the statutes, rules, and
regulations applicable to member banks
regarding credit on securities. The
Board processed seven new agreements
in 1995.
In 1995 the Securities Regulation
Section of the Board's Division of
Banking Supervision and Regulation
issued twenty-four interpretations of the
margin regulations. Those that presented
sufficiently important or novel issues
were published in the Securities Credit
Loans by State Member Banks to their Executive Officers, 1994-95
Number
Amount (dollars)
Range of interest
rates charged
(percent)
1994
October 1-December 31
684
23,755,000
3.7-21.0
1995
January 1-March 31
April 1-June 30
July 1-September 30
655
725
726
15,881,000
20,246,000
18,386,000
3.0-21.0
5.0-18.3
5.5-19.2
Period
SOURCE. Call Report.
254 82nd Annual Report, 1995
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 1995, 3,965 banks were
members of the Federal Reserve System, a decrease of 146 from the previous year-end. Member banks operated
38,129 branches on December 31, 1995,
a net increase of 1,041 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; these values
matched those for year-end 1994.
•
255
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 1995 the Board took a variety
of actions to reduce the regulatory burden on supervised institutions. These
actions included a major commitment to
fulfill the mandate of section 303 of the
Riegle Community Development and
Regulatory Improvement Act, which
requires reviews of all regulations and
written policies. In addition, the Board
took action to clarify recordkeeping
requirements for wire transfers; to permit flexibility in consumer accounts
on receipts at automated teller machines
in order to reduce fraud; to establish
a "safe harbor" from the anti-tying
restrictions of the Bank Holding Company Act; and to revise the Community
Reinvestment Act regulations to emphasize performance, promote consistency
in evaluations, and eliminate unneces
sary burden. The Board also took
actions to provide safety and soundness
guidelines that set forth broad, principlebased standards; to streamline the
risk-based capital treatment of small
business obligations transferred with
recourse; and to expand the ability of
U.S. banking organizations to invest in
foreign companies without advance
approval.
Comprehensive Reviews
Section 3O3(a)(l) of the Riegle Community Development and Regulatory
Improvement Act of 1994 requires that
each federal banking agency, including
the Board, conduct a review of its regulations and written policies for purposes
of streamlining, improving efficiency,
reducing unnecessary costs, and removing inconsistencies and outmoded or
duplicative requirements. The act also
requires the agencies work jointly to
make regulations and guidelines implementing common statutory and supervisory policies uniform. The Board and
the other agencies must report to the
Congress by September 1996 on the
progress they have made.
The Board has placed a high priority
on fulfillment of section 303's mandate
and has devoted considerable resources
to the project. The Board contemplates a
comprehensive review of all its regulations and written policies, including policy statements, Board interpretations,
Supervisory Letters, and the like.
Revised proposals for several Board
regulations have already been issued
for comment, including Regulation T
(Securities Credit by Brokers and Dealers), Regulation E (Electronic Fund
256 82nd Annual Report, 1995
Transfers), Regulation M (Consumer
Leasing), Regulation U (Securities
Credit by Banks), and Regulation K,
subpart A (Investments by Foreign
Banking Organizations in U.S. Subsidiaries). Interagency efforts to make common regulations and guidelines uniform
are under way as are internal reviews of
policies and related guidance.
Recordkeeping Requirements for
Certain Financial Records
In January 1995 the Board, in conjunction with the Department of the Treasury, adopted a final rule that established
enhanced recordkeeping requirements
related to certain funds transfers and
transmittals of funds (wire transfers) by
all financial institutions. The final rule
reflected modifications to the proposed
rule which reduced the burden associated with the rule while maintaining its
usefulness to law enforcement agencies.
Subsequent to the adoption of the
rule, several banks expressed concerns
that compliance would be complicated
by differences in the meanings of definitions in the rule and the Uniform
Commercial Code. The Treasury and
the Board proposed amendments to the
definitions and technical conforming
changes to conform the meanings of the
definitions in order to reduce confusion
as to the applicability of the rule and to
reduce the cost of complying with its
requirements. The Board approved the
conforming changes in December.
ATM Transaction Receipts
In March the Board adopted a final rule
amending Regulation E to permit financial institutions more flexibility in identifying consumer accounts on receipts at
automated teller machines (ATMs). The
amendment eliminated the requirement
that an electronic terminal receipt
uniquely identify the customer's account
or card; this requirement had posed
security risks for consumers and financial institutions by making accessible to
criminals information that could be used
to make fraudulent withdrawals. The
revised rule will help to reduce fraud
without compromising consumers' ability to identify transactions at ATMs. The
Board had issued an interim rule to
address this problem in November 1994.
Exception to Anti-tying
Restrictions
In April the Board established a "safe
harbor" from the anti-tying restrictions
of the Bank Holding Company Act and
Regulation Y. The safe harbor permits
any bank or nonbank subsidiary of a
bank holding company to offer a discount on any product or package of
products if a customer maintains a minimum combined balance in deposits and
other products specified by the institution. The Board believes such discounts
are proconsumer and not anticompetitive and had previously granted a similar exception by order to a particular
banking institution.
CRA
The purpose of the Community Reinvestment Act (CRA) regulations is to
establish the framework and criteria by
which the agencies assess an institution's record of helping to meet the
credit needs of its community, including
low- and moderate-income neighborhoods, consistent with safe and sound
operations, and to provide that the
assessment shall be taken into account
in reviewing certain applications.
In April the federal banking agencies
issued completely revised CRA regulations, which emphasize performance
rather than process by requiring reports
Regulatory Simplification 257
on loans rather than on outreach efforts.
The revisions also promote consistency
in evaluations by recognizing that different types of institutions (large retail and
small financial institutions, wholesale
and limited-purpose institutions, and
institutions electing strategic plans)
require different standards. And the
revisions reduce data collection and
reporting requirements for smaller
institutions.
Safety and Soundness Guidelines
As required by section 132 of the Federal Deposit Insurance Corporation
Improvement Act, the Board issued final
guidelines and a final rule, effective
as of August, regarding standards for
safety and soundness at state member
banks. The guidelines set forth broad,
principle-based standards that establish
the objectives that proper operations
and management should achieve, while
leaving the methods for achieving those
objectives to each institution. The final
rule establishes deadlines for submission and review of safety and soundness
compliance plans that may be required
for insured depositories that fail to meet
the guidelines.
At the same time, the Board issued
proposed guidelines for safety and
soundness standards relating to asset
quality and earnings. As amended by
the Community Development Act, section 132 no longer requires the agencies
to prescribe quantitative standards in
these areas but rather standards they
deem appropriate. The agencies have
proposed asset quality and earnings
guidelines that emphasize monitoring,
reporting, and preventive or corrective
action. Final action on these proposed
guidelines is expected in spring 1996.
Capital Treatment of Certain
Small Business Obligations
To implement section 208 of the Riegle
Community Development and Regulatory Improvement Act of 1994, the
Board amended the risk-based capital
treatment of certain small business obligations. Under the revised rule, adopted
in August, qualifying institutions that
transfer small business obligations with
recourse would be required to maintain
capital only against the amount of
recourse retained rather than the entire
amount of assets sold.
De Novo Investments in Foreign
Companies
In December the Board amended Regulation K (International Banking Operations) to provide expanded general consent authority for de novo investments
in foreign companies by U.S. banking
organizations that are strongly capitalized and well managed. The expanded
general consent authority is designed to
permit such organizations to make larger
investments without the need for
advance approval or review.
Investments under the expanded
authority are subject to an annual
aggregate limit and a post-investment
notice requirement. In addition, the
amended rule streamlines the processing
of notices for those investments that
require advance notice to the Board. •
259
Federal Reserve Banks
In 1995 the Federal Reserve Banks completed their first full year of operation
under a new inter-Bank management
structure for financial services. Under
the new structure, a policy committee—
chaired by the President of the Federal
Reserve Bank of St. Louis, Thomas C.
Melzer—establishes strategic directions
and policies, and a management committee develops and implements business plans and coordinates activities of
the product offices. A separate product
office exists for each of the following
services and is directed by the first vice
president of the indicated Reserve Bank:
retail payments (Boston), wholesale
payments (New York), cash and fiscal
agency operations (Philadelphia), and
automation and accounting support services (San Francisco). The new management structure will guide the Reserve
Banks as the financial services environment continues to evolve.
In other developments during 1995,
the Reserve Banks completed the first
phase of the transfer of mainframe
computer operations to the System's
consolidated data centers, managed by
Federal Reserve Automation Services
(FRAS). These data centers, located at
the Richmond and Dallas Reserve Banks
and at the East Rutherford (New Jersey)
Operations Center of the New York
Reserve Bank, now handle all Reserve
Bank mainframe applications except the
Fedwire funds and book-entry securities
transfer applications of the New York
Bank and the check applications of most
Reserve Banks. The New York Bank
plans to convert its wholesale payment
operations to FRAS in 1997.
The Reserve Banks also completed
several significant milestones in the
second phase of their plan to consolidate data processing within FRAS.
Eleven Reserve Banks converted to
the national funds transfer and account
balance monitoring applications, and
two Reserve Banks (Minneapolis and
Kansas City) converted to the national
automated clearinghouse (Fed ACH)
application. Four Reserve Banks—
Boston, New York, Philadelphia, and
San Francisco—completed their conversions to shared environments at FRAS
for the processing of individual District
applications. In 1996 the Reserve Banks
plan to complete their conversion to Fed
ACH and begin their conversion to the
new book-entry securities transfer and
banking statistics applications.
Also during 1995 the Federal Reserve
Banks continued implementing the System's new national communications
network, Fednet, which is replacing the
FRCS-80 backbone network and the
twelve District networks. Fednet is a
single unified communications network
that eliminates variations in the level of
service provided at different points in
the System and improves the reliability,
security, and disaster recovery capabilities of the network. In 1995 the Reserve
Banks installed equipment to support
communications among the Banks' local
applications, such as electronic mail. In
addition, the Banks continued converting to Fednet those depository institutions using leased-line connections to
the Reserve Banks. The Reserve Banks
expect to complete the conversions of
institutions to Fednet during 1996.
The remainder of this chapter details
1995 results in Federal Reserve Bank
priced services, currency and coin
operations, and fiscal agency services,
260 82nd Annual Report, 1995
and reports on examinations, income
and expenses, holdings of securities and
loans, and major construction activity.
The Monetary Control Act of 1980
requires the Federal Reserve System to
establish fees that, over the long run,
recover all direct and indirect costs of
providing services to depository institutions, as well as imputed costs, such as
the income taxes that would have been
paid and the pretax return on equity that
would have been earned had the services been provided by a private firm.
These imputed costs are collectively
referred to as the private sector adjustment factor (PSAF).1 Over the past ten
years, the Federal Reserve System has
recovered 101.0 percent of its costs,
including the PSAF.
The revenue from priced services in
1995 was $738.8 million, other income
was $26.4 million, and costs were
$764.8 million, resulting in net revenue
of $0.4 million and a recovery rate of
100.1 percent of costs, including the
PSAF but before the cumulative effect
of a change in accounting principle. The
one-time charge for the cumulative
effect on previous years of the retroactive application of the accrual method of
accounting for postemployment and
vacation benefits resulted in a net loss of
$19 million.2 In 1994 the System's
revenue was $14.0 million less than
total costs, resulting in a recovery rate
of 98.2 percent.
1. The imputed costs that are part of the PSAF
are interest on debt, return on equity, income and
sales taxes, and assessments for deposit insurance
from the Federal Deposit Insurance Corporation.
In addition, assets and personnel costs of the
Board of Governors that are directly related to
priced services are allocated to the Reserve Banks'
priced services. In the pro forma statements at the
end of this chapter, expenses of the Board of
Governors are included in operating expenses, and
assets of the Board are part of long-term assets.
2. 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. Total cost is the sum of operating
expenses, imputed costs (interest on debt, interest
on float, sales taxes, and the Federal Deposit Insurance Corporation assessment), imputed income
taxes, and the targeted return on equity. Net revenue is revenue plus net income on clearing balances minus total cost.
Developments in
Federal Reserve Services
Activity in Federal Reserve Priced Services, 1995, 1994, and 1993
Thousands of items except as noted
Percentage change
Service
Commercial checks
Funds transfers
Securities transfers
Commercial ACH
Noncash collection
Cash transportation
Definitive safekeeping
1994
1995
15,465,209
77,742
3,689
2,125,445
838
108
16,479,161
73,611
3,693
1,805,095
643
98
NOTE. Amounts in bold are restatements due to a
change in definition (securities transfers) and an error in
previously reported data (cash transportation).
Activity in commercial checks is defined as the total
number of commercial checks collected, including both
processed and fine-sort items; in funds transfers and
securities transfers, the number of transactions originated
on line and off line; in ACH, the total number of commer-
1993
19,008,808
71,199
3,638
1,544,848
1,020
65
17
1994-95
1993-94
-6.2
5.6
-.1
17.8
30.3
10.2
...
-13.3
3.4
1.5
16.8
-37.0
50.8
-100.0
cial items processed*, in noncash collection, the number of
items on which fees are assessed; in cash transportation,
the number of armored-carrier stops; and in definitive
safekeeping, the average number of issues or receipts
maintained. The Federal Reserve withdrew from the
definitive safekeeping service in 1993.
. . . Not applicable.
Federal Reserve Banks 261
Check Collection
Federal Reserve Bank operating
expenses and imputed costs for commercial check services in 1995 totaled
$559.8 million. Revenue from check
operations totaled $553.4 million, and
other income amounted to $20.6 million, resulting in income before income
taxes of $14.2 million.3 The Reserve
Banks handled 15.5 billion checks, a
decrease of 6.2 percent from the volume
of checks handled in 1994. The volume
of checks deposited in fine-sort deposit
products, requiring the depositing bank
to presort items by paying bank,
declined 16.5 percent; the volume of
checks deposited in other deposit products declined 3.5 percent.
The Reserve Banks continued to
encourage the use of electronics to
improve the efficiency of check processing. During 1995 nearly 1 billion
checks, or 6.5 percent of all checks presented to paying banks, were presented
electronically, an increase of approximately 70 percent over the 1994 level.
The Reserve Banks also continued to
offer electronic information products
that enable depository institutions to
provide timely cash-management information to their corporate customers.
During the year, several additional
Reserve Banks began to accept electronic cash letters from depositing institutions. Electronic cash letters are electronic files of the detailed check listings
and totals that depositors must provide
with every deposit. Their use streamlines check processing and reduces costs
by automating information at an earlier stage than otherwise possible. In
addition, by the end of the year, most
Reserve Bank offices were able to
accept requests for adjustments of check
3. See the pro forma income statement for Federal Reserve priced services, by service.
transactions via electronic transmissions
from depository institutions.
During 1995 the Federal Reserve continued to implement computer software
that can capture and store check images.
Paying banks that use truncation or other
electronic check presentment products
can use imaging technology to verify
signatures on checks, streamline the
handling of inquiries, and provide copies of checks in customers' statements
rather than physical checks. The Cleveland and Dallas Banks and the Helena
Branch of the Minneapolis Bank introduced image products during 1995. The
Minneapolis Bank began offering these
products during 1994. In addition, the
Boston Bank offers an image-enhanced
notification product for return items that
provides institutions with images of certain returned checks one day sooner than
they would otherwise be available.
In August 1995 the Chicago Bank
opened a satellite facility in Peoria, Illinois, to reduce the cost and improve the
quality of its check collection service.
Funds Transfer and Net Settlement
Federal Reserve Bank operating expenses and imputed costs for Fedwire
funds transfer and net settlement services totaled $78.7 million. Revenue
from Fedwire and net settlement operations totaled $87.8 million, and other
income amounted to $2.7 million, resulting in income before income taxes of
$11.8 million.
Funds Transfer
The number of Fedwire funds transfers
originated increased 5.6 percent, to
77.7 million—75.9 million value (monetary) transfers and 1.8 million nonvalue
messages.
During 1995 eleven Reserve Banks
completed the conversion to a new cen-
262 82nd Annual Report, 1995
tralized Fedwire funds transfer application. The New York Bank implemented
the new application in its local data
center. This new application is expected
to improve processing throughput, reliability, and the Reserve Banks' disaster
recovery capabilities.
In addition, the Reserve Banks began
development efforts to modify the Fedwire funds transfer and Fedline applications to accommodate the expanded
format for transfer messages approved
by the Board in late 1994. Depository
institutions must be able to receive funds
transfers in the new format by June 1997
and to send transfers by December 1997.
The expanded format will reduce
manual interventions in the transfer
process, eliminate the need to truncate
payment-related information when forwarding payment orders through Fedwire that were received via other largevalue transfer systems, and allow
additional information about the originator and beneficiary of a transfer to be
included in the transfer message, as
required by the new Bank Secrecy Act
rules adopted by the Department of the
Treasury.
In August 1995 the Board approved
certain modifications to its Fedwire
policy on third-party access to clarify its
scope and to reduce the administrative
burden of several provisions. Some
depository institutions have entered into
arrangements in which a third party
provides operating facilities for their
Fedwire funds and securities transfer
services. Under such arrangements, the
third party's actions may result in a debit
to the institution's Federal Reserve
account. The policy provides important
safeguards both to depository institutions participating in third-party access
arrangements and to the Reserve Banks.
At the time the Board clarified certain
provisions of the policy, it also placed
a moratorium on any arrangements
involving a service provider that is
located outside the United States, pending completion of a broader supervisory
review of related issues in early 1996.
Net Settlement
The Federal Reserve provides net settlement services to more than 150 local,
private-sector clearing and settlement
arrangements and to four 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' Federal Reserve
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, the former for interbank funds
transfers and the latter for the settlement
of mortgage-backed securities transactions. The other two national arrangements, Visa ACH and the National
Clearing House Association, process
and net small-dollar transactions, the
former for automated clearinghouse
transactions and the latter for check payments. The majority of local clearing
arrangements are check clearinghouses.
Book-Entry Securities
Federal Reserve Bank operating expenses and imputed costs for bookentry securities transfer services totaled
$16.4 million. Revenue from book-entry
securities operations totaled $15.4 million, and other income amounted to
$0.5 million, resulting in a net loss
before income taxes of $0.5 million. The
Federal Reserve Banks processed
3.7 million transfers of government
agency securities on the Fedwire book-
Federal Reserve Banks 263
entry securities transfer system during
the year, a 0.1 percent decrease from
1994.4
In August 1995 the Board approved a
firm closing time of 3:15 p.m. eastern
time for the origination of transfers and
3:30 p.m. eastern time for reversals,
both closing times to become effective
January 2, 1996. The Board believes
that these new closing times will benefit
market participants by reducing uncertainty about the final closing time of the
system due to ad hoc operating hour
extensions. Market participants, therefore, will be able to manage resources
and control costs more effectively than
in the past. The Federal Reserve Banks,
however, still retain the flexibility to
extend the closing time to facilitate the
smooth functioning of the government
securities market and to minimize the
systemic risk that may arise due to significant operating problems at one or
more depository institutions or major
dealers. Extensions are granted based on
established criteria with regard to the
total value of unsent transfers and the
amount of time required to resolve the
operational problems.
Throughout 1995, development work
continued on the new National BookEntry Securities System, the centralized
application that will replace the two
securities applications the Reserve
Banks now use. The Reserve Banks plan
to convert to the new application in
1996 and 1997.
4. The revenues, expenses, and volumes reflected here are for transfers of securities issued by
federal government agencies, governmentsponsored enterprises, and international institutions such as the World Bank. The Fedwire securities transfer service also provides custody, transfer,
and settlement services for securities of the U.S.
Treasury. The Reserve Banks act as fiscal agents
when they transfer Treasury securities, and the
Treasury Department assesses fees for the services. See the section on fiscal agency services in
this chapter for more details.
Automated Clearinghouse
Federal Reserve Bank operating
expenses and imputed costs for automated clearinghouse (ACH) services
totaled $69.0 million. Revenue from
ACH operations totaled $73.4 million,
and other income amounted to $2.3 million, resulting in income before income
taxes of $6.7 million. The Reserve
Banks processed 2.1 billion commercial
ACH transactions during the year, an
increase of 17.8 percent over 1994 volume levels.
The development of software to
support ACH services in the Federal
Reserve's new consolidated data processing environment was completed.
The new software incorporates a flow
processing concept and will provide a
number of new deposit and delivery
options. It will also allow customers
to trace ACH transactions or files of
transactions electronically, check the
status of a file in process, and obtain
limited information from the Federal
Reserve's database on other ACH participants. The Minneapolis and Kansas
City Banks began processing ACH
transactions with the new software in
1995. The remaining ten Districts are
expected to convert to the new software
during 1996.
In August 1995 the Board requested
comment on the benefits and costs of a
policy to control access to the ACH
service by entities other than the institution whose Federal Reserve account
will be debited. The proposed controls
would apply to ACH credit transactions sent by third-party processors
and respondent depository institutions
directly to a Reserve Bank or private
ACH operator. The proposed policy is
similar to the Fedwire third-party access
policy and would help to ensure the
safety and soundness of the ACH
service.
264 82nd Annual Report, 1995
Noncash Collection
Federal Reserve Bank operating
expenses and imputed costs for noncash
collection services totaled $4.8 million.
Revenue from noncash operations
totaled $3.8 million, and other income
amounted to $0.2 million, resulting in a
net loss before income taxes of $0.8 million. The number of noncash collection
items (maturing coupons and bonds)
processed by the Reserve Banks
increased 30.3 percent, to 838 thousand
items, in part because of a major commercial provider's unexpected termination of its noncash collection services.
The Reserve Banks continued to consolidate noncash operations in 1995; by
year-end only two Federal Reserve sites
were processing noncash items—the
Cleveland Bank and the Jacksonville
Branch of the Atlanta Bank. In addition,
the New York and Chicago Banks continued to present noncash items payable
through members of the clearinghouses
located in those two cities.
Cash Services
Federal Reserve Bank operating
expenses and imputed costs for cash services totaled $5.2 million. Revenue from
cash operations totaled $5.0 million, and
other income amounted to $0.2 million,
resulting in a net loss before income
taxes of $0.1 million. Special priced
cash services include cash transportation, coin wrapping services, and the
provision of nonstandard currency packaging and nonstandard frequency of
access to services.
Float
Federal Reserve float decreased in 1995
to a daily average of $338.8 million; it
was $479 million in 1994. The Federal
Reserve recovers the cost of float associ
ated with priced services through fees
for those services.
Developments in Currency and
Coin
The Federal Reserve's cost to print new
currency in 1995 was $370 million.
Reserve Bank operating expenses for
processing and storing currency and
coin, including priced cash services,
totaled $259.6 million. The Federal
Reserve supplies currency and coin to
the public through approximately 10,000
depository institutions throughout the
United States. The value of currency
and coin in circulation increased 5 percent in 1995 and exceeded $420 billion
by year-end. During 1995, the Reserve
Banks received more than 22.5 billion
Federal Reserve notes in deposits from
depository institutions and paid more
than 23.1 billion Federal Reserve notes
to depository institutions.
The Federal Reserve Banks continued
converting their currency processing
to the new ISS-3000 high-speed currency processing machines. At the end
of 1995, 94 of these machines were in
use at the Reserve Banks. The Federal
Reserve plans to install a total of 132
processors and to complete the conversion in 1997.
The Federal Reserve continued to
work closely with Treasury and other
agencies to deter counterfeiting and
laundering of U.S. currency. Circulation of the new-design $100 notes is
expected to begin during the first quarter
of 1996.
Developments in Fiscal Agency
Securities and Government
Depository Services
The Federal Reserve Act provides that,
when required by the Secretary of the
Treasury, Federal Reserve Banks will
Federal Reserve Banks 265
act as "fiscal agents" and "depositories" of the United States. As fiscal
agents of the Department of the Treasury, Reserve Banks provide debtrelated services, such as issuing, servicing, and redeeming marketable Treasury
securities and U.S. savings bonds, and
processing secondary market transfers
initiated by depository institutions. As
depositories, Reserve Banks collect and
disburse funds on behalf of the federal
government. The Reserve Banks also
provide fiscal agency services on behalf
of several domestic and international
government agencies.
In 1995 the total cost of providing
fiscal agency and depository services to
Treasury amounted to $265.0 million. In
addition, the Reserve Banks provide services to other government agencies,
such as the processing of food coupons for the Department of Agriculture.
The cost of providing such services
amounted to $46.3 million in 1995.
Fiscal Agency Securities Services
The Federal Reserve Banks handle marketable Treasury securities and savings
bonds and monitor collateral pledged by
depository institutions to the federal
government.
Marketable Treasury Securities
Reserve Bank operating expenses for
activities related to marketable Treasury
securities amounted to $55.3 million.
The Reserve Banks processed more than
1.2 million commercial tenders for government securities in Treasury auctions.
The volume of commercial tenders
decreased 7.3 percent between 1994 and
1995. Starting in 1996, processing of
commercial tenders will be consolidated
at the New York, Chicago, and San
Francisco Banks.
The Reserve Banks operate two bookentry securities systems for the custody
and transfer of Treasury securities—the
Fedwire book-entry securities transfer
system and Treasury Direct. Most bookentry Treasury securities, 97.4 percent
of the total par value outstanding at
year-end 1995, were maintained on Fedwire, and 2.6 percent of the total was
maintained on Treasury Direct.
The Reserve Banks processed
9.1 million Fedwire transfers of Treasury securities, an increase of 2.5 percent over the 1994 level. In addition, the
Banks processed 40.4 million interest
and principal payments for both Treasury and agency securities, an increase
of 6.3 percent over 1994 volume levels.
Depository institutions are charged the
same transaction fees for sending and
receiving Fedwire book-entry securities
transfers of Treasury securities as they
are charged for transfers of government
agency securities. A portion of the Treasury security transfer fee is retained by
the Federal Reserve to cover its settlement expenses and the remainder of the
fee is remitted to Treasury to cover its
expenses.
The Philadelphia Bank operates Treasury Direct, a system of book-entry
securities accounts for nondepository
institutions and individuals planning to
hold their Treasury securities to maturity. The Treasury Direct system contains more than 1.7 million accounts.
During 1995 the Reserve Banks processed 1.6 million tenders from Treasury Direct customers seeking to purchase Treasury securities in Treasury
auctions, and they handled 3.5 million
reinvestment requests. The volume of
tenders decreased 8.5 percent, and
the volume of reinvestment requests
decreased 17.9 percent relative to 1994.
In addition, 14.6 million payments for
discounts, interest, and redemption proceeds were issued to investors.
266 82nd Annual Report, 1995
Savings Bonds
Reserve Bank operating expenses for
savings bonds activities amounted to
$82.7 million. The Reserve Banks
printed and mailed a total of 122 million
savings bonds on behalf of Treasury's
Bureau of the Public Debt, an increase
of 35.9 percent over 1994 volume. The
Banks processed 20 million original
issue transactions. Redemption, reissue,
and exchange transactions totaled
1.2 million, an increase of 32.8 percent
over 1994. The Reserve Banks also
responded to 3 million service calls from
owners of savings bonds this year, an
increase of 30.4 percent relative to 1994
volume.
The Reserve Banks completed their
consolidation of savings bond operations from twenty-five sites to five sites
(Buffalo, Pittsburgh, Richmond, Minneapolis, and Kansas City) during 1995.
All of these sites process savings bond
transactions; only the Pittsburgh and
Kansas City sites print savings bonds.
Other Initiatives
The Reserve Banks monitor collateral
pledged by depository institutions that
hold Treasury deposits, such as Treasury tax and loan account balances,
and other government agency deposits.
To ensure that the value of collateral
pledged is adequate, the Reserve Banks
began marking to market all physical
securities (including more thinly traded
instruments) pledged as collateral. The
Reserve Banks plan to mark book-entry
securities to market following completion of the conversion to the National
Book-Entry System.
The Federal Reserve also worked
with Treasury's Financial Management
Service to implement a Treasury Offset
Program on a pilot basis. This program
electronically compares information
about delinquent debts owed to the U.S.
government with information about payments being issued. If a match occurs,
the program applies the payment to the
delinquent debt.
Depository Services
The Reserve Banks maintain Treasury's
checking account, accept deposits of
federal taxes and fees, pay checks drawn
on Treasury's account, and make electronic payments on behalf of the
Treasury.
Federal Tax Payments
Reserve Bank operating expenses for
federal tax payment activities were
$35.8 million. The Reserve Banks processed 12.7 million advices of credit
from depository institutions accepting
tax deposits from businesses and individuals. The Reserve Banks also received a small portion of tax payments
directly, representing about 1 percent of
the total value. Depository institutions
that receive tax payments may place the
funds in a Treasury tax and loan
account, or remit the funds to a Reserve
Bank.
The Reserve Banks continued working with Treasury to automate the flow
of federal tax deposits (business tax payments) as part of Treasury's Electronic
Federal Tax Payment System (EFTPS).
Tax payments made via EFTPS flow to
Treasury one day sooner than they do
under the paper-based process, improving its investment opportunities and
enabling it to manage its cash flows
more efficiently. The Reserve Banks
have developed and implemented new
payment mechanisms for use by taxpayers that must send their payments on
the same day their tax liability is established. The Reserve Banks also have
supported Treasury's financial agents in
Federal Reserve Banks 267
developing ACH tax payment mechanisms for EFTPS.
Payments Processed for Treasury
Operating expenses for government payment operations amounted to $50.8 million. During the year, Treasury continued to increase the proportion of its
payments made electronically. The volume of ACH transactions processed for
Treasury amounted to 598.9 million, an
increase of 4.3 percent over the 1994
level. The majority of government payments made via the ACH are for social
security, pensions, and salaries. Treasury also uses the ACH to make vendor
payments and has begun to experiment
with using financial electronic data
interchange for those payments.
The Reserve Banks processed
460 million government checks, a
decrease of 2.1 percent from the 1994
level. The Reserve Banks also issued
fiscal agency checks, which are used
primarily to pay semiannual interest on
registered, definitive Treasury notes and
bonds and Series H and HH savings
bonds. They are also used to pay the
principal of matured securities and coupons and discounts to first-time purchasers of government securities through
Treasury Direct. All recurring Treasury
Direct payments and many definitive
securities interest payments are made
via the ACH.
During 1995 the Federal Reserve
worked with Treasury to develop FedSelect checks, which will be introduced
in 1996. FedSelect checks permit Treasury to guard against fraud by comparing checks presented for payment
against information about checks issued
by selected government agencies. The
Chicago Reserve Bank will be the paying bank for FedSelect checks.
In September 1995 the Board of Governors approved a proposal from the
Reserve Banks to develop a system to
capture and archive high-quality electronic images of government checks.
The system, which is being developed at
the request of Treasury, will enhance the
truncation services the Reserve Banks
provide to Treasury and improve their
ability to research inquiries. The system
will be implemented over several years,
beginning in 1996.
Services Provided to Other Entities
When required to do so by the Secretary
of the Treasury or when required or
permitted to do so by federal statute, the
Reserve Banks perform fiscal agency
securities services and depository services for other domestic and international agencies. Depending on the
authority under which services are provided, the Reserve Banks may (1) facilitate the issuance of government agency
book-entry securities that are eligible to
be transferred over Fedwire,5 (2) provide custody of the stock of unissued,
definitive securities, (3) maintain and
update balances of outstanding bookentry and definitive securities for issuers, (4) perform various other securities
servicing activities, and (5) maintain
funds accounts for some government
agencies.
Food Coupons
Reserve Bank operating expenses for
food coupon services were $24.5 million in 1995. The Reserve Banks
redeemed 4.0 billion food coupons, a
decrease of 6.5 percent from 1994.
5. Unlike Treasury securities, agency securities
cannot be purchased directly from a Federal
Reserve Bank. The issuers generally rely on syndicates of securities dealers, including some commercial banks, to distribute original issues. As part
of this process, the Federal Reserve facilitates the
issuance of securities, through Fedwire, from the
issuer to the syndicate members on original issue.
268 82nd Annual Report, 1995
The Federal Reserve is assisting the
Departments of Agriculture and the
Treasury in their efforts to replace paper
food coupons with an electronic benefit
transfer system by developing settlement and reconciliation 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, and the
Board assigns this responsibility to its
Division of Reserve Bank Operations
and Payment Systems. The division
engaged a public accounting firm to
audit the year-end financial statements
of two or three Reserve Banks each year
in addition to the combined financial
statements of the Reserve Banks beginning in 1995. In 1995 the year-end
financial statements of the Atlanta and
St. Louis Reserve Banks were audited
by the public accounting firm, and
the year-end financial statements of the
other ten Banks were audited by the
division.
To assess compliance with the policies established by the Federal Open
Market Committee (FOMC), the division also annually audits the accounts
and holdings of the System Open Market Account (SOMA) at the Federal
Reserve Bank of New York and the foreign currency operations conducted by
the Bank. The public accounting firm
auditing the financial statements of the
Banks certifies the balance sheet for
SOMA, for System foreign currency
operations, and for the foreign currency
accounts distributed among the twelve
Reserve Banks. Division personnel follow up on the audit results. Copies of
the external audit reports are furnished
to the FOMC as are reports on the division's follow-up.
Income and Expenses
The accompanying table summarizes the
income, expenses and distribution of net
earnings of the Federal Reserve Banks
for 1995 and 1994.
Income was $25,395 million in 1995
and $20,911 million in 1994. Total ex-
Income, Expenses, and Distribution of Net Earnings
of Federal Reserve Banks, 1995 and 1994
Millions of dollars
1995
1994
Current income
Current expenses
Operating expenses'
Earnings credits granted
25,395
1,818
1,568
251
20,911
1,796
1,572
224
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
23,577
896
38
531
161
370
19,115
2,398
34
515
147
368
Net income before payments to Treasury
Dividends paid
Transferred to surplus
23,903
231
283
20,964
212
282
Payments to Treasury (interest on Federal Reserve notes)
23,389
20,470
Item
NOTE. Components may not sum to totals because of rounding.
1. Includes a net periodic credit for pension costs of $119.2 million
in 1995 and $75.6 million in 1994.
Federal Reserve Banks 269
penses were $1,980 million ($1,568 million in operating expenses, $251 million
in earnings credits granted to depository
institutions, and $161 million in assessments for expenditures by the Board of
Governors). The cost of new currency
was $370 million. Revenue from financial services was $739 million. Unreimbursed expenses for services provided to
Treasury amounted to $38 million.6
The profit and loss account showed a
net profit of $896 million. The profit
was primarily a result of realized and
unrealized gains on assets denominated
in foreign currencies. Statutory dividends to member banks totaled
$231 million, $19 million more than in
1994. 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
$23,389 million, up from $20,470 mil6. Fiscal agency and depository services are not
part of priced services (see note 4). The Reserve
Banks bill Treasury for the cost of certain services, and the portions of the bills that are not paid
are reported as unreimbursed expenses.
lion in 1994. The payments consist of
all net income after the deduction of
dividends and after the deduction of the
amount necessary to bring the surplus of
the Banks to the level of capital paid-in.
In the Statistical Tables chapter of
this REPORT, table 6 details income and
expenses of each Federal Reserve Bank
for 1995, and table 7 shows a condensed
statement for each Bank for 1914-95. A
detailed account of the assessments and
expenditures of the Board of Governors
appears in the next chapter—Board of
Governors Financial Statements.
Holdings of Securities and Loans
Average daily holdings of securities and
loans during 1995 were $376,069 million, an increase of $22,068 million
from 1994 (see accompanying table).
From 1994 to 1995, holdings of U.S.
government
securities
increased
$22,127 million, and loans decreased
$59 million.
Also during 1995, the average rate of
interest increased from 5.44 percent to
6.34 percent on holdings of U.S. government securities and increased from
4.39 percent to 5.62 percent on loans.
Securities and Loans of Federal Reserve Banks, 1993-95
Millions of dollars except as noted
Item and year
Average daily holdings11
1993
1994
1995
Earnings
1993
1994
1995
Average interest rate (percent)
1993
1994
1995
1. Includes federal agency obligations.
2. Does not include indebtedness assumed by the
Federal Deposit Insurance Corporation.
Total
U.S.
government
securities'
320,528
354,001
376,069
320,347
353,740
375,867
181
261
202
16,896
19,259
23,837
16,891
19,247
23,826
6
11
11
5.27
5.44
6.34
5.27
5.44
6.34
3.08
4.39
5.62
Loans2
3. Based on holdings at opening of business.
270 82nd Annual Report, 1995
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 1992
through 1995.
Federal Reserve Bank Premises
Construction continued in 1995 on the
new headquarters building for the
Minneapolis Bank and the expansion
and renovation of the headquarters
building of the Cleveland Bank.
The Board approved new building
programs for the Atlanta Bank's headquarters building and its Birmingham
Branch. Subsequently, the Atlanta Bank
purchased property for the new building
and retained design consultants for the
Birmingham project.
Multiyear renovation programs continued for the New York Bank's headquarters building, the Kansas City
Bank's Oklahoma City Branch, and the
San Francisco Bank's Seattle, Portland,
and Salt Lake City Branches. Renovation projects for the cash departments
at several Reserve Banks continued
in preparation for installation of new
currency-processing equipment.
The Dallas Bank sold its old headquarters building. The Chicago Bank
leased a new satellite check processing
facility in Peoria, Illinois.
Federal Reserve Banks 271
Pro Forma Financial Statements for Federal Reserve Priced Services
Pro Forma Balance Sheet for Priced Services, December 31, 1995, and 1994
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
504.2
4,537.8
63.7
10.6
19.4
2,397.4
Long-term assets (Note 2)
Premises
Furniture and equipment
Leases and leasehold improvements ..
Prepaid pension costs
Total long-term assets
356.6
170.3
24.2
242.1
Long-term liabilities
Obligations under capital leases
Long-term debt
Accrued benefits cost
Total long-term liabilities
6,406.0
377.6
168.4
8.6
205.4
793.1
760.0
8,326.2
7,166.0
5,154.8
2,284.5
93.7
4,133.1
2,186.6
86.3
7,533.1
3.8
164.3
176.1
Total liabilities
Equity
Total liabilities and equity (Note 3) .
NOTE. Components may not sum to totals because of
rounding.
400.3
3,602.7
60.6
10.2
15.5
2,316.7
7,533.1
Total assets
Short-term liabilities
Clearing balances and balances
arising from early credit
of uncollected items
Deferred-availability items
Short-term debt
Total short-term liabilities
1994
1995
Item
6,406.0
.6
170.5
140.5
344.3
311.6
7,877.4
6,717.6
448.8
448.4
8,326.2
7,166.0
The priced services financial statements consist of these
tables and the accompanying notes.
272
82nd Annual Report, 1995
Pro Forma Income Statement for Federal Reserve Priced Services, 1995 and 1994
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
postemployment and vacation benefits
net of $8.7 million tax) (Note 9)
Net income (Note 10)
MEMO: Targeted return on equity (Note 1 1 ) . .
1995
734.4
693.0
41.4
738.8
655.2
83.6
19.0
16.2
22.1
6.3
63.7
18.6
18.9
10.8
15.8
259.6
-233.2
26.4
46.3
14.4
64.1
-22.7
19.9
NOTE. Components may not sum to totals because of
rounding.
1994
241.2
208.4
32.8
10.1
3.1
31.9
7.0
19.4
12.6
31.5
7.0
21.0
The priced services financial statements consist of these
tables and the accompanying notes.
Federal Reserve Banks
273
Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 1995
Millions of dollars
Total
Commercial
check
collection
Funds
transfer
and net
settlement
Bookentry
securities
Commercial
ACH
Noncash
collection
Cash
services
Revenue from operations
738.8
553.4
87.8
15.4
73.4
3.8
5.0
Operating expenses
(Note 5)
Item
655.2
507.4
73.8
15.3
64.5
4.1
5.1
Income from operations
83.6
46.0
14.0
.1
8.9
-.2
-.1
Imputed costs (Note 6)
63.7
52.4
4.9
1.1
4.5
.7
.1
Income from operations
after imputed costs
9.1
-1.0
4.4
-1.0
-.2
19.9
-6.5
Other income and expenses,
net (Note 7)
26.4
20.6
2.7
.5
2.3
.2
.2
Income before income taxes .
46.3
14.2
11.8
-.5
6.7
-.8
-.1
NOTE. Components may not sum to totals because of
rounding.
The priced services financial statements consist of these
tables and the accompanying notes.
274 82nd Annual Report, 1995
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 $35.4 million in 1995 and $20.1 million in
1994 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
services been furnished by a private-sector firm. Other
short-term liabilities include clearing balances maintained
at Reserve Banks and deposit balances arising from float.
Other long-term liabilities consist of accrued postemployment (see note 9) and postretirement benefits costs and
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 1995 as well
as in 1994. 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. Although the portion of the SFAS 87 credit
related to the current year is allocated to individual services, the amortization of the initial effect of implementation is 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 1995 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
602.0
14.0
588.0
58.5
243.2
108.4
157.9
Federal Reserve Banks 275
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 1995.
(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) POSTEMPLOYMENT AND VACATION BENEFITS
Effective Jan. 1, 1995, the Reserve Banks implemented
SFAS 112, Employers' Accounting for Postemployment
Benefits, and SFAS 43, Accounting for Compensated
Absences. Accordingly, in 1995 the Reserve Banks recognized a one-time cumulative charge of $28.1 million to
reflect the retroactive application of these changes in
accounting principles.
(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):
Net income
Amortization of the initial
effect of implementing
SFAS87
Deferred costs of automation
consolidation
Cumulative effect of
retroactive application
ofSFAS 112
andSFAS43
Adjusted net income
1995
1994
12.6
7.0
-10.4
-10.5
-.1
13.6
19.4
21.5
^___
10.1
(11) 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 recovery of $0.1 million
of automation consolidation costs for 1995 and the deferral of $13.6 million of such costs for 1994. The Reserve
Banks plan to recover these amounts, along with a finance
charge, by the end of the year 2001. After-tax return on
equity has not been allocated by service because it relates
to the organization as a whole.
Board Financial Statements 277
Board of Governors Financial Statements
The financial statements of the Board were audited by Price Waterhouse, independent public accountants, for 1995 and 1994.
Price Waterhouse LLP
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Governors of the
Federal Reserve System
We have audited the accompanying balance sheets of the Board of Governors of
the Federal Reserve System (the Board) as of December 31, 1995 and 1994, and
the related statements of revenues and expenses and fund balance and of cash flows
for the years then ended. These financial statements are the responsibility of the
Board's management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards and Government Auditing Standards issued by the Comptroller General of
the United States. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Board as of December 31, 1995 and
1994, and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Notes 1 and 3 to the financial statements, the Board implemented
Statement of Financial Accounting Standards No. 112, Employers' Accounting for
Postemployment Benefits, effective January 1, 1994.
In accordance with Government Auditing Standards, we have also issued a report
dated March 25, 1996 on our consideration of the Board's internal control structure
and a report dated March 25, 1996 on its compliance with laws and regulations.
March 25, 1996
Arlington, Virginia
278
82nd Annual Report, 1995
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEET
As of December 31,
1995
1994
ASSETS
CURRENT ASSETS
Cash
Accounts receivable
Prepaid expenses and other assets
$16,142,195
1,900,155
1,225,022
$14,949,285
1,898,061
1,665,345
Total current assets
19,267,372
18,512,691
59,781,623
54,839,623
$79,048,995
$73,352,314
Accounts payable
Accrued payroll and related taxes
Accrued annual leave
Capital lease payable (current portion)
Unearned revenues and other liabilities
$ 7,580,371
4,868,497
6,601,004
75,840
2,184,882
$ 5,450,877
3,920,065
6,223,919
3,119,522
1,852,614
Total current liabilities
21,310,594
20,566,997
232,638
303,358
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (Note 3)
17,074,588
16,274,446
ACCUMULATED POSTEMPLOYMENT BENEFIT OBLIGATION (Note 3)
1,093,400
1,320,018
PROPERTY, BUILDINGS, AND EQUIPMENT, NET (Note 4)
Total assets
LIABILITIES AND FUND BALANCE
CURRENT LIABILITIES
CAPITAL LEASE PAYABLE (non-current portion)
FUNDBALANCE
Total liabilities and fund balance
39,337,775
34,887,495
$79,048,995
$73,352,314
The accompanying notes are an integral part of these statements.
Board Financial Statements 279
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF REVENUES AND EXPENSES
AND FUND BALANCE
For the years ended December 31,
1995
1994
BOARD OPERATING REVENUES
Assessments levied on Federal Reserve Banks for Board
operating expenses and capital expenditures
Other revenues (Note 5)
Total operating revenues
$161,347,900
10,240,830
$146,866,100
9,134,248
171,588,730
156,000,348
100,412,576
16,394,955
11,240,373
7,525,971
4,920,996
4,523,272
4,155,038
3,689,603
3,853,657
3,362,342
3,144,178
3,915,489
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
167,138,450
153,858,195
4,450,280
2,142,153
370,206,037
368,187,989
370,206,037
368,187,989
BOARD OPERATING EXPENSES
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
4,450,280
2,142,153
Less: Effect on prior years (to December 31, 1993) of change
in accounting for postemployment benefits (Note 3)
—
965,000
TOTAL REVENUES OVER EXPENSES
4,450,280
1,177,153
FUND BALANCE, Beginning of year
34,887,495
33,710,342
$ 39,337,775
$ 34,887,495
FUND BALANCE, End of year
The accompanying notes are an integral part of these statements.
280 82nd Annual Report, 1995
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
For the years ended December 31,
1995
1994
CASH FLOWS FROM OPERATING ACTIVITIES
Board operating revenues over expenses
$ 4,450,280
$1,177,153
Adjustments to reconcile operating revenues over expenses to net cash
provided by operating activities:
Effect of change in accounting for postemployment benefits
Depreciation and net losses on disposals
Increase in accrued postretirement benefits
(Decrease) increase in accrued postemployment benefits
Decrease (increase) in accounts receivable, and prepaid expenses
and other assets
Increase in accrued annual leave
Increase in accounts payable
Increase in payroll payable
Increase in unearned revenue and other liabilities
Net cash provided by operating activities
—
7,525,971
800,142
(226,618)
965,000
7,081,892
393,704
355,018
438,229
377,085
2,129,494
948,432
332,268
(877,486)
352,276
142,701
1,201,553
347,951
16,775,283
11,139,762
Proceeds from disposals of furniture and equipment
Capital expenditures
12,112
(15,594,485)
27,081
(8,404,272)
Net cash used in investing activities
(15,582,373)
(8,377,191)
CASH FLOWS FROM INVESTING ACTIVITIES
NET INCREASE IN CASH
CASH BALANCE, Beginning of year
CASH BALANCE, End of year
1,192,910
2,762,571
14,949,285
12,186,714
$16,142,195
$14,949,285
The accompanying notes are an integral part of these statements.
Board Financial Statements 281
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS
for future payments to retirees under these programs, and
it is not accountable for the assets of the plans.
(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.
(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 1995 and
1994, 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 totaled $802,200 and $838,800 in
1995 and 1994 respectively. The Board has no liability
(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
$4,320,400 in 1995 and $3,969,700 in 1994.
The Board also provides certain defined benefit health
and life insurance for its active employees and retirees
under Federal and Board sponsored programs. The net
periodic postretirement benefit cost for 1995 and 1994
included the following components:
1995
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
1994
$ 418,649 $ 260,677
1,441,350
(80)
1,191,213
6,542
$1,859,919 $1,458,432
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, 1995 and 1994, is comprised of:
1995
Retirees
Fully eligible active plan
participants
Other active plan
participants
Unrecognized net loss
Liability for accumulated
postretirement benefit
obligation
1994
$11,455,617 $11,301,461
2,947,889
2,419,656
3,510,808
4,392,114
17,914,314 18,113,231
(839,726) (1,838,785)
$17,074,588 $16,274,446
The liability for the accumulated postretirement benefit
obligation and the net periodic benefit cost was determined using an 8.75-percent discount rate. Unrecognized
losses of $839,726 result from larger than estimated 1995
and 1994 cash outlays. 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 1995
to 1996 was 10.0 percent. These rates were assumed to
gradually decline to an ultimate rate of 6.5 percent in the
year 2004 for the purpose of calculating the December 31, 1995, accumulated postretirement benefit obliga-
282 82nd Annual Report, 1995
tion. The effect of a 1-percent increase in the assumed
health care cost trend rate would increase the accumulated postretirement benefit obligation by $2,493,223 at
December 31, 1995, and the net periodic benefit cost by
$253,220 for the year. The assumed salary trend rate for
measuring the increase in postretirement benefits related
to life insurance was an average of 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 totaled $3,477,300 and
$3,510,500 in 1995 and 1994 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
As of December 31,
1994
1995
Less accumulated
depreciation
Total property,
buildings and
equipment
$
1,301,314 $
65,298,136
1,301,314
65,171,774
52,215,976
118,815,426
45,742,097
112,215,185
59,033,803
57,375,562
$ 59,781,623 $ 54,839,623
(5) OTHER REVENUES AND OTHER EXPENSES
The following are summaries of the components of
Other Revenues and Other Expenses.
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
$ 4,100,517
$4,058,655
2,070,267
2,031,876
1,648,931
1,547,628
383,752
2,037,363
441,316
1,054,773
$10,240,830
$9,134,248
$ 1,413,233
$1,116,155
788,506
708,394
755,857
957,893
676,989
922,449
$ 3,915,489
$3,423,987
(6) COMMITMENTS
The following is a summary of the components of the
Board's fixed assets, at cost, net of accumulated
depreciation.
Land and
improvements . . .
Buildings
Furniture and
equipment
For the years
ended December 31,
1995
1994
The Board has entered into several operating leases to
secure office, training, 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, 1995, are as follows:
19%
1997
1998
1999
afterl999
Operating
Capital
3,672,449
3,666,027
3,720,255
3,702,391
21,136,430
$35,897,552
75,840
75,840
75,840
80,958
—
$308,478
Rental expenses under the operating leases were
$3,301,186 and $2,987,500 in 1995 and 1994
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 1995 and 1994, the Board paid
$269,040 and $197,200 respectively, in assessments for
operating expenses of the Council. These amounts are
included in subsidies and contributions for 1995 and
1994. During 1995 and 1994, the Board paid $126,900
and $125,900 respectively, for office space subleased
from the Council.
•
Statistical Tables
284 82nd Annual Report, 1995
1. Detailed Statement of Condition of All Federal Reserve Banks Combined,
December 31, 1995
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
11,050,060
10,168,000
424,452
135,440
2,633,995
1,100,000
183,115,712
151,013,150
44,068,604
Total bought outright
378,197,466
Held under repurchase agreement
12,762,000
Total securities
390,959,466
Total loans and securities
394,828,901
Items in process of collection
Transit items
4,179,015
Other items in process of collection
1,101,279
Total items in process of collection
Bank premises
Land
Buildings (including vaults)
Building machinery and equipment
Construction account
Total bank premises
Less depreciation allowance
5,280,294
166,903
882,954
230,523
128,934
1,242,411
283,562
958,849
Bank premises, net
Other assets
Furniture and equipment
Less depreciation
Total furniture and equipment, net
Denominated in foreign currencies1
Interest accrued
Premium on securities
Overdrafts
Prepaid expenses
Suspense account
Real estate acquired for banking-house purposes
Other
Total other assets
Total assets
1,125,753
1,192,205
671,613
520,592
21,099,289
4,101,149
5,410,827
22,920
865,525
13,398
11,507
312,533
32,357,740
455,235,200
Tables 285
..—Continued
LIABILITIES
Federal Reserve Notes
Outstanding (issued to Federal Reserve Banks)
Less held by Federal Reserve Banks
481,044,070
-80,108,642
Total Federal Reserve notes, net
400,935,428
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
29,611,156
5,979,193
386,182
Other deposits
Officers' and certified checks
International organizations
Other2
25,622
114,289
794,904
Total other deposits
Deferred credit items
934,815
5,049,121
Other liabilities
Discount on securities
Sundry items payable
Suspense account
All other
3,613,735
95,718
15,153
682,621
Total other liabilities
4,407,226
Total liabilities
447,303,121
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 $7,316.6 million was invested in
securities issued by foreign governments, and the balance
was invested with foreign central banks and the Bank for
International Settlements.
3,966,402
3,966,402
0
455,235,925
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.
286 82nd Annual Report, 1995
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1995 and 1994
Millions of dollars
Total
Boston
Item
1995
1994
11,050
10,168
424
11,051
8,018
320
135
0
223
0
Federal agency obligations
Bought outright
Held under repurchase agreements
2,634
1,100
U.S. Treasury securities
Bought outright'
Held under repurchase agreements
Total loans and securities
1995
1994
ASSETS
Gold certificate account
Special drawing rights certificate account
Coin
575
511
17
553
511
15
3,637
1,025
130
0
190
0
378,197
12,762
394,829
364,519
9,565
378,969
18,600
0
18,736
19,082
0
19,278
5,280
1,126
5,199
1,076
299
94
293
93
21,099
11,258
22,031
10,231
799
459
797
450
0
0
7,063
-2,202
455,235
436,896
28,552
19,788
400,935
381,505
26,175
17,747
29,611
5,979
386
935
36,911
30,789
7,161
250
774
38,973
1,414
0
5
33
1,452
1,214
0
5
31
1,250
5,049
4,407
4,459
4,592
284
228
47^02
429,529
359
225
28,211
19,509
3,966
3,966
0
3,683
3,683
0
171
171
0
139
139
0
455,235
436,896
28,552
19,788
Federal Reserve notes outstanding (issued to Bank)
Less: Held by Bank
481,044
80,109
454,642
73,137
31,502
5,327
22,868
5,121
Federal Reserve notes, net
400,935
381,505
26,175
17,747
Collateral for Federal Reserve notes
Gold certificate account
Special drawing rights certificate account
Other eligible assets
U.S. Treasury and federal agency securities
11,050
10,168
0
379,717
11,051
8,018
0
362,437
Loans
To depository institutions
Other
Acceptances held under repurchase agreements
Items in process of collection
Bank premises
Other assets
Denominated in foreign currencies2
Mother
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 dividends
3
Total liabilities
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
FEDERAL RESERVE NOTE STATEMENT
Tables 287
2.—Continued
N e w York
Philadelphia
1994
1995
1995
Richmond
Cleveland
1994
1995
1994
1995
1994
4,134
2,808
19
433
413
26
393
303
19
621
584
24
660
556
17
862
790
71
902
652
56
0
0
0
0
1
0
17
0
0
0
0
0
0
0
0
0
1,047
1,100
1,344
1,025
114
0
142
0
152
0
229
0
202
0
291
0
150,316
12,762
165,225
134,693
9,565
146,627
16,408
0
16,523
14,256
0
14,416
21,802
0
21,954
22,978
0
23,207
29,047
0
29,249
29,138
0
29,428
764
146
649
137
254
49
332
47
265
66
269
46
552
127
392
134
5,654
5,378
-26,517
6,267
4,160
923
413
737
353
1,476
524
1,449
529
1,698
907
1,481
902
5,853
-237
2,232
220
-1,332
3,822
-867
158,846
170,653
18,797
18,833
25,734
25,400
38,077
33,080
139,004
151,608
16,223
16,733
23,524
22,542
34,912
28,847
8,658
5,979
283
433
15,353
7,105
7,161
149
261
14,677
1,702
0
6
29
1,737
1,491
0
5
26
1,523
1,161
0
10
40
1,211
1,814
0
9
41
1,864
1,555
0
11
86
1,652
2,782
0
9
70
2,862
734
1,642
551
1,843
251
206
32
183
232
250
222
257
592
338
447
332
156,733
168,678
18,416
18,511
25,217
24,885
37,494
32,487
1,057
1,057
0
988
988
0
190
190
0
161
161
0
259
259
0
258
258
0
292
292
0
296
296
0
158,846
170,653
18,797
18,833
25,734
25,400
38,077
33,080
167,545
28,541
174,495
22,888
19,585
3,362
18,463
1,690
26,869
3,344
26,124
3,581
41,346
6,435
35,331
6,484
139,004
151,608
16,223
16,773
23,524
22,542
34,912
28,847
4,273
3,903
20
288 82nd Annual Report, 1995
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1995 and 1994—Continued
Millions of dollars
Chicago
Atlanta
Item
1995
1994
1995
1994
1,220
1,079
35
1,217
1,036
23
ASSETS
Gold certificate account
Special drawing rights certificate account
Coin
556
523
66
Loans
To depository institutions
Other
542
318
46
28
0
18
0
Acceptances held under repurchase agreements
Federal agency obligations
Bought outright
Held under repurchase agreements
122
0
163
0
304
0
U.S. Treasury securities
Bought outright'
Held under repurchase agreements
Total loans and securities
17,558
0
17,689
16,293
0
16,484
43,602
0
43,906
41,758
0
42,193
688
77
753
64
519
110
509
112
1,954
460
2,073
423
2,401
1,119
2,527
1,069
Interdistrict Settlement Account
13,362
1,871
-3,016
-1,048
Total assets
35,375
22,573
47374
47,638
31,186
18,053
41,758
42,265
2,481
0
13
21
2,515
3,018
0
13
29
3,060
3,539
0
16
160
3,716
3,397
0
16
148
3,561
660
236
561
217
463
492
496
34,597
21,891
46,428
46,800
389
389
0
341
341
0
473
419
419
0
35,375
22,573
47,374
47,638
36,869
5,683
23,368
5,315
48,453
6,695
48,257
5,992
31,186
18,053
41,758
42,265
Items in process of collection
Bank premises
Other assets
Denominated in foreign currencies2
All other
411
0
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
473
0
479
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 289
2.—Continued
1995
1994
1995
Dallas
Kansas City
Minneapolis
St. Louis
1994
1995
1994
1995
San Francisco
1995
1994
453
377
28
1,036
1,102
977
37
904
33
1994
429
168
23
203
180
20
230
186
21
382
342
41
436
199
22
405
376
49
9
0
89
0
4
0
11
0
3
0
20
0
0
0
0
0
103
0
33
0
121
0
145
0
48
0
80
0
101
0
156
0
85
0
138
0
209
0
343
0
17,308
0
17,437
14,497
0
14,731
6,828
0
6,879
8,028
0
8,119
14,451
0
14,555
15,637
0
15,813
12,262
0
12,348
13,786
0
13,924
30,016
0
30,328
34,373
0
34,749
220
30
195
30
450
54
380
46
361
55
370
54
333
158
513
157
574
159
544
156
486
408
481
334
563
180
589
196
797
352
830
361
1,414
319
1,594
343
2,935
739
3,207
1,111
4,308
-1,082
-1,897
-2,610
-1,929
3,287
-1,303
5,351
-3,685
20,698
7,448
7,870
14,276
16,154
18,689
16,086
42,137
38,122
18,427
19,229
5,990
6,553
12,267
13,948
15,570
12,917
35,901
31,024
876
0
3
30
909
941
0
3
22
966
741
0
4
2
746
612
0
4
15
631
1,119
1,336
2,178
2,140
4,188
4,938
0
5
26
0
5
23
0
9
21
0
10
26
0
20
55
0
21
80
1,150
1,365
2,208
2,176
4,262
5,039
195
205
158
175
412
102
380
110
361
194
358
205
258
161
332
168
533
357
640
395
19,736
20,528
7,250
7,673
13,972
15,876
18,196
15,592
41,053
37,098
98
98
0
85
85
0
99
99
0
98
98
0
152
152
0
139
139
0
247
247
0
542
542
0
512
512
0
19,932
20,698
7,448
7,870
14,276
16,154
18,689
16,086
42,137
38,122
20,751
2,324
21,908
2,679
7,143
1,153
8,043
1,491
13,880
1,613
15,280
1,333
19,726
4,156
16,819
3,902
47,377
11,476
43,685
12,662
18,427
19,229
5,990
6,553
12,267
13,948
15,570
12,917
35,901
31,024
to to
357
19,932
O ON ON
484
490
20
290 82nd Annual Report, 1995
3. Federal Reserve Open Market Transactions, 1995
Feb.
Mar.
Apr.
0
0
30,150
0
0
0
31,530
0
0
0
36,449
0
0
0
30,983
0
Others within 1 year
Gross purchases ..
Gross sales
Maturity shift
Exchanges
Redemptions
0
0
2,835
-737
621
0
0
5,872
-6,025
0
0
0
4,802
-2,096
0
0
0
2,993
0
370
1 to 5 years
Gross purchases .
Gross sales
Maturity shift
Exchanges
0
0
-2,145
737
0
0
-5,872
3,606
0
0
-4,802
1,050
2,549
0
-All
0
5 to 10 years
Gross purchases .
Gross sales
Maturity shift
Exchanges
oooo
0
0
0
1,720
0
0
0
1,046
839
0
-2,516
0
More than 10 years
Gross purchases .
Gross sales
Maturity shift
Exchanges
oooo
0
0
0
700
oooo
Millions of dollars
Type of transaction
Jan.
1,138
0
0
0
All maturities
Gross purchases .
Gross sales
Redemptions
0
0
621
0
0
0
0
0
0
4,526
0
370
163,615
164,526
178,877
176,232
168,800
170,724
148,306
147,616
32,201
39,756
1,300
3,310
22,070
16,477
36,314
39,157
-9,087
634
3,669
2,004
0
0
91
0
0
55
0
0
83
0
0
20
5,243
4,948
25
1,345
4,926
3,821
4,415
5,020
204
-1,375
1,022
-625
-8,883
-741
4,691
1,379
U.S. TREASURY SECURITIES
Outright transactions (excluding matched transactions)
Treasury bills
Gross purchases
Gross sales
Exchanges
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
figures increase such holdings. Components may not sum
to totals because of rounding.
Tables 291
3.—Continued
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
0
0
31,663
0
4,470
0
42,983
0
0
0
25,213
0
433
0
39,195
0
409
0
30,333
0
1,350
0
29,397
900
4,271
0
39,057
0
0
0
31,535
0
10,933
0
398,488
0
0
0
7,174
-7,374
0
0
0
2,177
-1,392
0
0
0
2,063
-562
300
0
0
7,805
-5,599
0
0
0
0
0
485
0
0
1,745
-2,049
0
0
0
6,108
-4,937
0
390
0
0
0
0
390
0
43,574
30,771
1,776
0
0
-6,694
5,374
0
0
-2,177
1,392
0
0
-2,063
562
0
0
-3,379
4,905
100
0
0
0
0
0
-1,745
2,049
0
0
-5,292
3,237
2,317
0
0
0
4,966
0
-34,646
22,912
0
0
1,248
2,000
0
0
0
0
0
0
0
0
0
0
-319
1,800
0
0
0
0
0
0
0
0
400
0
-816
1,700
0
0
0
0
1,239
0
-3,093
8,266
0
0
-1,728
0
0
0
0
0
0
0
0
0
0
0
-525
1,100
100
0
0
0
0
0
0
0
0
0
0
0
1,884
0
0
0
3,122
0
-2,253
1,800
0
0
0
4,470
0
0
0
0
0
433
0
0
609
0
0
1,350
0
1,385
4,671
0
0
4,591
0
0
20,650
0
2,376
155,027
153,534
170,083
171,959
166,674
163,490
179,571
185,711
195,830
198,587
216,755
213,161
226,340
228,419
227,858
228,071
2,197,736
2,202,030
35,158
34,377
40,989
28,196
8,527
24,851
4,130
1,075
43,286
39,896
28,825
32,980
44,569
39,876
34,325
20,311
331,694
320,262
2,274
15,387
-13,141
-2,651
1,241
-597
7,285
18,392
25,410
0
0
30
0
0
262
0
0
333
0
0
122
0
0
46
0
0
83
0
0
120
0
0
58
0
0
1,303
6,155
5,955
1,941
2,180
711
1,172
1,610
1,510
1,434
1,459
3,740
3,605
3,763
3,973
2,888
1,788
36,851
36,776
170
-501
-794
-22
-71
52
-330
1,042
-1,228
2,444
14,886
-13,935
-2,673
1,170
-545
6,955
19,434
24,182
292
82nd Annual Report, 1995
4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,
December 31, 1993-95
Millions of dollars
Change
December 31
Description
1995
1994
1993
1994-95
1993-94
390,534
372,561
339,583
17,973
32,978
101,564
93,888
98,129
87,291
90,186
77,749
3,435
6,597
7,943
9,542
41,419
85,273
31,469
36,921
34,978
90,031
27,552
34,845
35,423
79,826
24,659
31,739
6,441
-4,758
3,917
2,076
-445
10,205
2,893
3,106
195,451
151,013
44,069
185,420
144,143
42,998
167,936
132,076
39,572
10,031
6,870
1,071
17,484
12,067
3,426
12,762
12,336
0
9,565
8,041
0
12,187
7,568
0
3,197
4,295
0
-2,622
473
0
Held outrightl
2,634
3,637
4,638
-1,003
-1,001
By remaining maturity
1 year or less
More than 1 year through 5 years
More than 5 years through 10 years
More than 10 years
1,241
841
527
25
1,737
1,387
488
25
1,823
2,105
569
142
-496
-546
39
0
-86
-718
-81
-117
2,634
912
230
66
1,425
3,637
1,050
796
66
1,725
4,638
1,201
1,249
66
2,005
-1,003
-138
-566
0
280
-1,001
-151
^53
0
-280
U.S. TREASURY SECURITIES
Heldoutright 1
By remaining maturity
Bills
1-91 days
92 days to 1 year
Notes and bonds
1 year or less
More than 1 year through 5 years
More than 5 years through 10 years . . .
More than 10 years
By type
Bills
Notes
Bonds
Repurchase agreements
MSPs, foreign accounts
MSPs, in the market
FEDERAL AGENCY SECURITIES
By issuer
Held outright
Federal Farm Credit Banks
Federal Home Loan Banks
Federal Land Banks
Federal National Mortgage Association ..
Washington Metropolitan Area
Transit Authority
Repurchase agreements
NOTE. Components may not sum to totals because of
rounding.
117
1,100
1,025
1,025
-117
75
0
1. Excludes the effects of temporary transactions—
repurchase agreements and matched sale-purchase agreements (MSPs).
Tables 293
5. Number and Annual Salaries of Officers and Employees of Federal Reserve Banks,
December 31, 1995
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
Salary
(dollars)
177,550
228,500
203,700
183,000
178,500
235,900
202,650
209,500
192,300
178,700
180,000
253,200
2,423,500
Total
Employees
Other officers
Number
Salaries
(dollars)
Number
Salaries
(dollars)
171
82
47
85
173
39
57
75
123
84
40
85
45,761,370
163,937,766
38,860,303
42,970,608
59,858,472
69,229,567
79,497,277
34,509,764
38,619,581
50,253,075
48,596,612
94,112,208
1,316
4,109
1,251
1,450
2,100
2,272
2,291
1,193
1,303
1,672
1,524
2,484
51,857,020
189,212,811
44,517,578
48,001,808
66,939,872
76,514,497
89,543,627
39,155,764
43,562,181
55,743,575
54,146,812
103,994,058
537
7
26,849,461
571
29,747,561
21,506
1,068
793,056,064
23,536
892,937,164
Number
Salaries
(dollars)
58
204
57
49
76
75
102
49
49
58
58
88
5,918,100
25,046,545
5,453,575
4,848,200
6,902,900
7,049,030
9,843,700
4,436,500
4,750,300
5,311,800
5,370,200
9,628,650
1,086
3,822
1,146
1,315
1,850
>,157
\>,131
,068
1,130
1,529
1,425
2,310
27
2,898,100
950
97,457,600
Fulltime
Parttime
294
82nd Annual Report, 1995
6. Income and Expenses of Federal Reserve Banks, 1995
Dollars
Item1
Total
Boston
New York
Philadelphia
Cleveland
CURRENT INCOME
Loans
U.S. Treasury and federal
agency securities
Foreign currencies
Priced services
Other
11,349,948
145,809
1,579,408
167,833
231,626
23,825,601,437
783,871,627
738,797,407
35,527,940
1,184,564,568
29,585,740
61,548,708
515,639
9,387,450,289
211,055,484
96,356,576
26,462,928
996,324,388
33,744,503
38,662,623
991,072
1,400,033,105
54,586,655
47,415,071
438,273
Total
25,395,148,359
1,276,360,464
9,722,904,685
1,069,890,419
1,502,704,729
968,128,041
138,881,982
36,130,198
47,286,944
51,796,738
55,139,483
16,273,037
1,163,407
2,384,408
1,300,525
205,557,300
56,769,196
5,988,921
7,231,579
10,387,125
48,956,743
16,005,925
588,000
2,237,368
1,337,081
51,899,768
15,147,167
2,032,139
2,671,641
1,487,121
78,135,828
9,983,821
59,351,008
35,936,275
458,023
3,134,005
6,352,209
2,092,635
10,944,955
1,656,413
393,221
3,571,298
2,626,454
756,508
3,537,614
25,095,917
51,644,631
30,947,281
31,739,518
25,938,497
3,772,154
4,039,266
2,381,156
663,440
739,704
4,291,798
8,212,326
6,494,577
13,743,277
5,394,249
1,657,086
2,158,300
2,814,936
221,589
1,619,909
1,505,371
2,426,453
1,751,924
441,602
789,985
8,653,193
32,090,834
127,989,785
74,418,077
250,683,017
46,475,891
3
-52,196,489
-3,344,060
297,107
92,543
3,746,454
4,179,819
19,801,408
2,507,778
-605,677
-9,535,620
-354,300
1,655,641
3,078,045
20,609,132
11,487,781
45,987,802
8,749,609
5,555,695
-6,882,913
-14,711
350,719
262,241
4,142,431
3,256,305
24,315,650
1,423,912
11,180,471
-3,077,231
-362,799
344,003
198,822
4,285,426
4,047,469
13,122,317
3,591,833
13,880,868
-2,213,989
-363,558
2,039,830,657
-221,414,464
1,818,416,193
147,51435
-10,451,456
137,062,939
433,686,229
-47,916,037
385,770,192
124,709,567
-17,792,525
106,917,042
123,966,938
-21,703,945
102,262,993
CURRENT EXPENSES
Salaries and other personnel
expenses
Retirement and other benefits
Fees
Travel
Software expenses
Postage and other shipping
costs
Communications
Materials and supplies
Building expenses
Taxes on real estate
Property depreciation
Utilities
Rent
Other
Equipment
Purchases
Rentals
Depreciation
Repairs and maintenance
Earnings-credit costs
Other
Shared costs, net3
Recoveries
Expenses capitalized4
Total
Reimbursements
Net expenses
For notes see end of table.
Tables 295
6.—Continued
Richmond
Atlanta
Chicago
St. Louis
Minneapolis Kansas City
Dallas
San Francisco
3,549,681
932,451
238,496
947,547
1,837,407,739 1,085,721,714 2,720,699,403 1,040,740,827 454,144,885
17,979,885 20,913,371
89,218,527
72,651,254
62,370,529
96,210,847
32,433,193 41,884,798
92,040,767
59,431,061
250,227
924,425
569,679
913,388
864,332
935,626,475
29,612,743
47,833,700
130,305
803,700,261
52,808,155
49,092,547
570,964
1,979,187,783
109,344,779
75,887,514
2,896,709
1,960^66,979 1,251,574,400 2,907,863,558 1,093,610,281 521,062,414 1,014,135,673
906,410,424
2,168,264,332
233,225
296,332
821,393
2,206,149
106,646,102
25,375,363
14,243,792
5,314,603
25,183,132
85,655,367
20,652,836
1,611,612
4,705,313
2,113,727
97,590,887
25,435,940
2,547,564
5,363,017
2,351,304
40,903,885
12,662,623
1,126,686
2,358,518
1,210,305
47,920,038
12,531,510
2,132,592
2,703,371
1,436,032
59,552,454
13,237,536
1,104,111
3,168,019
906,578
57,111,863
16,585,562
1,531,867
2,902,295
1,328,665
111,194,149
27,422,316
2,059,506
6,246,812
2,755,142
3,611,750
1,096,701
6,422,274
4,804,949
1,023,563
6,637,680
5,081,700
799,531
6,064,032
2,297,289
515,636
3,546,451
4,144,871
606,336
2,495,238
4,151,687
853,606
3,748,721
2,621,280
763,458
3,325,978
4,850,951
624,604
5,922,763
2,118,757
5,560,945
3,186,670
9,660,016
3,070,816
1,436,029
4,667,368
2,139,027
3,018,379
2,171,524
3,880,511
5,758,396
2,274,857
2,041,116
4,969,644
274,503
2,353,903
1,535,718
412,137
966,527
883,944
893,817
930,089
719,963
750,253
820,780
3,425,073
1,455,091
346,758
831,412
2,169,453
5,194,383
2,401,667
317,572
2,108,088
2,285,531
6,954,402
3,581,569
153,669
2,526,386
1,235,572
25,691,114
59,276,234
18,189,163
19,231,275
5,368,152
-130,330,534
-13,366,485
-387,955
865,135
756,675
7,042,557
7,835,346
22,887,466
4,454,651
17,262,583
-2,331,474
-493,096
1,302,065
759,321
8,414,165
7,580,366
41,724,211
5,616,837
23,247,676
-3,895,273
-171,501
302,156
117,205
2,415,271
2,025,822
6,860,237
2,112,438
11,726,256
-1,258,831
-134,306
607,249
285,091
2,977,140
2,735,265
6,146,680
1,526,323
7,645,698
-850,823
-346,125
450,392
207,533
2,441,689
2,137,790
11,465,246
2,988,114
17,396,930
-575,482
-544,483
500,299
152,341
4,982,796
3,064,515
18,070,847
3,117,136
14,257,400
-4,569,120
-117,618
742,855
489,904
7,656,491
7,878,435
21,069,881
5,019,110
8,782,638
-3,639,247
-53,607
196,397,456
-24,785,030
171,612,426
198,917,216
-13,758,203
185,159,013
248,736,365
-17,416,606
231,319,759
94,330,429 98,874,552
-9,189,092 -14,231,742
85,141,337 84,642,810
129,569,555
-17,715,058
111,854,497
137,820,724
-8,878,049
128,942,675
224,524,258
-17,576,720
206,947,539
296 82nd Annual Report, 1995
6. Income and Expenses of Federal Reserve Banks, 1995—Continued
Dollars
Item1
Total
Boston
New York
Philadelphia
Cleveland
23,576,732,165
1,139,297,525
9,456,351,521
962,973,377
1,400,441,737
6,264,277
253,285
2,973,126
345,705
267,913
1,004,671,984
146,749
1,011,083,011
-114,925,903
-114,925,903
38,032,962
2,725
38,288,972
-3,310,102
-3,310,102
269,388,856
54,636
272,416,618
-15,759,940
-15,759,940
43,940,036
599
44,286,340
-5,026,076
-5,026,076
70,243,911
13,175
70,524,999
-4,090,845
-4,090,845
896,157,108
34,978,870
256,656,678
39,260,264
66,434,154
38,369 263
2,017 434
3 416,012
2 101 899
2 183 009
161,347,900
370,202,935
6,256,100
17,221,230
43,172,300
147,117,303
7,147,800
16,276,500
11,216,100
21,874,736
23,902,969,175
1,148,781,632
9,519,302,585
976,707,442
1,431,602,046
230,527,278
9,461,492
61,464,192
10,795,852
15,514,258
PROFIT AND LOSS
Current net income
Additions to and deductions
from (-) current net income5
Profits on sales of U.S.
Treasury and federal
agency securities
Net profit on foreign
exchange
Other additions
Total additions
Deductions
Total deductions
Net addition to or
deductions from (-)
current net income
Cost of unreimbursed Treasury
services
.. .
...
Assessments by Board
Board expenditures6
Cost of currency
Net income before payment to
U.S. Treasury
Dividends paid
Payments to U.S. Treasury
(interest on Federal
Reserve notes)
23,389,366,647
1,107,918,189
9,388,855,493
936,813,240
1,414,849,038
Transferred to surplus
283,075,250
31,401,950
68,982,900
29,098,350
1,238,750
Surplus, January 1
Surplus, December 31
3,683,326,700
3,966,401,950
139,436,350
170,838,300
987,632,750
1,056,615,650
161,092,850
190,191,200
257,528,050
258,766,800
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 $119,217,028.
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 297
6.—Continued
Richmond
Atlanta
Chicago
St. Louis
Minneapolis Kansas City
1,788,754,554 1,066,415,387 2,676,543,799 1,008,468,944 436,419,604 902,281,176
Dallas
San Francisco
777,467,749
1,961,316,793
426,981
320,687
734,844
44,434
158,280
109,757
238,928
80,828,706
8,156
81,263,843
-6,941,624
-6,941,624
93,016,566
24,943
93,362,196
-24,164,016
-24,164,016
114,291,538
6,738
115,033,120
-6,740,193
-6,740,193
23,123,372 26,801,887
1,267
170
23,514,978 26,846,490
-4,069,780 -19,832,670
-4,069,780 -19,832,670
37,964,390
0
38,122,670
-3,299,300
-3,299,300
67,326,215
31,201
67,467,173
-15,036,655
-15,036,655
139,713,545
3,138
139,955,612
-6,654,703
-6,654,703
74,322,219
69,198,180
108,292,927
19,445,198
7,013,820
34,823,370
52,430,519
133,300,909
5,276,706
3,426,379
3,890,671
2,114,326
2,641,117
2,910,429
2,613,099
5,778,183
12,737,000
27,991,998
14,966,500
17,518,905
18,572,800
41,012,869
3,729,600
18,659,898
4,262,200
6,355,547
6,092,400
13,534,714
10,755,300
12,534,061
22,439,800
30,105,174
1,817,071,069 1,099,701,783 2,721,360,385 1,003,410,318 430,174,560 914,567,003
803,995,808
2,036,294,545
17,570,732
21,940,216
27,267,891
1,804,318,337 1,029,816,767 2,640,392,094
390,338
5,343,579
5,862,866
8,645,518
14,866,370
31,794,310
984,871,839 423,620,594
893,335,785
789,512,588
1,975,062,684
-4,818,000
47,944,800
53,700,400
13,194,900
691,100
12,585,700
-383,150
29,437,550
296,334,000
291,516,000
341,017,100
388,961,900
419,015,350
472,715,750
84,774,850
97,969,750
98,261,800
98,952,900
139,184,950
151,770,650
246,831,200
246,448,050
512,217,450
541,655,000
298
82nd Annual Report, 1995
7. Income and Expenses of Federal Reserve Banks, 1914-95
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
70,955,4%
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
-6,314,7%
-4,441,914
-8,233,107
-6,191,143
^,823,477
-3,637,668
-2,456,792
-5,026,029
-4,861,642
709,525
741,436
722,545
702,634
663,240
709,499
721,724
779,116
697,677
781,644
1,714,421
1,844,840
805,900
3,099,402
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
36,424,044
29,701,279
50,018,817
49,487,318
48,902,813
42,751,959
37,900,639
41,233,135
36,261,428
38,500,665
25,357,611
24,842,964
24,456,755
25,917,847
26,843,653
28,694,%5
26,016,338
25,294,835
25,556,949
25,668,907
-93,136
311,451
-1,413,192
-12,307,074
-4,430,008
-1,736,758
485,817
-1,631,274
2,232,134
2,389,555
809,585
718,554
728,810
800,160
1,372,022
1,405,898
1,679,566
1,748,380
1,724,924
1,621,464
2,175,530
1,479,146
1,105,816
2,504,830
1,025,721
1,476,580
2,178,119
1,757,399
1,629,735
1,356,484
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
43,537,805
41,380,095
52,662,704
69,305,715
104,391,829
142,209,546
150,385,033
158,655,566
304,160,818
316,536,930
25,950,946
28,535,547
32,051,226
35,793,816
39,659,4%
41,666,453
50,493,246
58,191,428
64,280,271
67,930,860
11,487,697
720,636
-1,568,208
23,768,282
3,221,880
-830,007
-625,991
1,973,001
-34,317,947
-12,122,274
1,704,011
1,839,541
1,746,326
2,415,630
2,2%,357
2,340,509
2,259,784
2,639,667
3,243,670
3,242,500
1,510,520
2,588,062
4,826,492
5,336,118
7,220,068
4,710,309
4,482,077
4,561,880
5,186,247
6,304,316
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
275,838,994
394,656,072
456,060,260
513,037,237
438,486,040
412,487,931
595,649,092
763,347,530
742,068,150
886,226,116
69,822,227
83,792,676
92,051,063
98,493,153
99,068,436
101,158,921
110,239,520
117,931,908
125,831,215
131,848,023
36,294,117
-2,127,889
1,583,988
-1,058,993
-133,641
-265,456
-23,436
-7,140,914
124,175
98,247,253
3,433,700
4,095,497
4,121,602
4,099,800
4,174,600
4,194,100
5,339,800
7,507,900
5,917,200
6,470,600
7,315,844
7,580,913
8,521,426
10,922,067
6,489,895
4,707,002
5,603,176
6,374,195
5,973,240
6,384,083
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1,103,385,257
941,648,170
1,048,508,335
1,151,120,060
1,343,747,303
1,559,484,027
1,908,499,8%
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
9%,230
2,093,876
8,519,996
-557,553
6,533,700
6,265,100
6,654,900
7,572,800
8,655,200
8,576,396
9,021,600
10,769,596
14,198,198
15,020,084
7,455,011
6,755,756
8,030,028
10,062,901
17,229,671
23,602,856
20,167,481
18,790,084
20,474,404
22,125,657
For notes see end of table.
Tables
299
7.—Continued
Payments to U.S. Treasury
Dividends
paid
Franchise
tax
Under
section 13b
Interest on
Federal Reserve
notes
Transferred
to surplus
(section 13b)
Transferred
to surplus
(section 7)
217,463
1,742,775
6,804,186
5,540,684
5,011,832
2,703,894
1,134,234
48,334,341
70,651,778
5.654,018
6,119,673
6,307,035
6.552.717
6,682,496
6,915,958
7,329,169
7,754,539
8,458,463
9,583,911
60,724,742
59,974,466
10,850,605
3.613.056
113,646
59,300
818,150
249,591
2,584,659
4,283,231
82,916,014
15,993,086
-659,904
2,545,513
-3,077,962
2,473,808
8,464,426
5,044,119
21,078,899
22,535,597
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
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
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
^19,140
^25,653
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
-^65,822,800
27,053,800
18,943,500
29,851,200
30,027,250
39,432,450
300
82nd Annual Report, 1995
7. Income and Expenses of Federal Reserve Banks, 1914-95—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
^9,615,790
-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...
1995...
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
25,395,148,359
718,032,836
814,190,392
926,033,957
1,023,678,474
1,102,444,454
1,127,744,490
1,156,867,714
1,146,910,699
1,205,960,134
1,332,160,712
1,349,725,812
1,429,322,157
1,474,530,523
1,657,799,914
1,795,328,343
1,818,416,193
-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
-987,787,687 2
-230,267,9192
2,363,862,097
857,787,845
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
161,347,900
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
370,202,935
Total, 1914-95.
392,244,535,021
28,599,119,876
7,762,488,695
2,151,612,508
3,986,616,067
Aggregate for each Bank,
1914-95
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
20,998,174,659
124,710,601,541
15,107,244,229
25,565,854,197
31,017,849,656
17,095,830,663
53,180,957,665
13,176,746,441
7,336,239,151
15,937,281,891
20,484,315,458
47,633,439,470
1,884,922,025
5,848,718,027
1,578,058,352
1,813,282,376
2,431,492,140
2,614,161,751
3,711,918,763
1,446,652,343
1,340,467,212
1,834,636,831
1,762,687,946
3,108,224,871
259,842,767
2,247,319,208
286,880,662
408,915,257
475,958,494
705,494,009
938,788,259
159,668,433
199,958,251
274,644,567
614,561,745
1,190,457,043
78,673,886
574,799,086
98,491,218
151,625,690
125,774,976
177,636,860
285,232,172
61,166,472
62,065,415
87,651,309
146,908,073
301,587,351
232,958,032
1,227,870,745
162,246,929
248,926,866
350,237,963
210,715,683
515,268,991
149,406,841
73,168,166
168,121,665
202,042,792
445,651,394
Total
392,244,535,021
28,599,119,876 * 7,762,488,695
2,151,612,508
3,986,616,067
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.
3. The $4,095,074,149 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 (1955), leaving a balance of $3,966,401,948 on December 31, 1995.
4. See note 2, table 6.
Tables 301
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
230,527,278
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
23,389,366,647
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
283,075,250
3,393,029,751
149,138,300
2,188,893
357,630,247,822
-3,657
4,095,074,1493
135,469,012
928,684,134
168,264,402
251,261,123
192,926,894
265,386,408
444,721,439
98,490,163
94,609,092
136,341,949
220,733,658
456,141,475
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
18,737,533,697
117,992,137,332
13,175,970,600
23,232,757,333
28,089,679,070
14,130,160,343
48,649,083,797
11,474,873,104
5,857,734,012
13,822,269,464
18,515,061,737
43,952,987,331
135,411
-433,412
290,661
-9,906
-71,517
5,491
11,682
-26,515
64,874
-8,674
55,337
-17,089
180,933,125
1,093,872,221
204,521,422
272,000,593
297,395,808
394,228,440
488,044,504
103,089,378
102,830,113
155,910,600
250,725,528
551,522,417
3,393,029,751
149,138,300
2,188,893
357,630,247,822
-3,657
4,095,074,149
302 82nd Annual Report, 1995
Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks
and Branches, December 31, 1995
Dollars
Acquisition costs
Federal Reserve
Bank or
Branch
Land
BOSTON.
22,073,501
NEW YORK.
Buffalo
20,330,426
887,844
Buildings
(including
vaults)'
89,499,467
Building machinery and
equipment
Total
2
Net
book
value
7,135,909
118,708,877
94,278,515
112,200,615 47,198,929
2,693,268 2,844,131
179,729,970
6,425,243
142,563,924
3,923,917
Other
real
estate3
PHILADELPHIA
2,251,556
56,966,200
6,340,260
65,558,016
47,863,835
CLEVELAND .
Cincinnati
Pittsburgh
2,298,644
2,246,599
1,658,376
41,553,212
13,978,275
10,114,189
6,967,450
8,245,465
4,544,546
50,819,306
24,470,339
16,317,111
42,956,601
11,147,920
12,324,775
RICHMOND.
Baltimore
Charlotte
6,111,681
6,476,335
3,129,645
58,755,396 16,463,414
27,100,992 3,842,189
27,402,251 4,737,485
81,330,490
37,419,516
35,269,381
68,482,713
27,742,419
30,303,237
5,708,457
ATLANTA...
Birmingham..
Jacksonville..
Miami
Nashville . . . .
New Orleans.
606,107
3,197,830
1,665,439
3,810,291
592,342
3,497,233
31,994,103
1,905,770
16,395,261
12,214,625
1,744,568
5,257,082
4,074,600
2,073,625
2,851,236
2,726,244
2,363,763
2,815,718
36,674,810
7,177,226
20,911,935
18,751,160
4,700,673
11,570,034
30,582,687
5,030,154
17,421,848
13,486,293
2,317,883
8,125,940
4,338,155
CHICAGO.
Detroit
114,242,044 13,591,362
4,588,589 3,426,327
16,477,933 5,298,206
2,357,733 1,003,022
2,859,819 1,131,238
4,216,382 2,280,473
132,398,414
8,812,650
101,919,572
7,970,420
ST. LOUIS.
Little Rock.
Louisville..
Memphis...
4,565,008
797,734
700,378
1,148,492
700,075
1,135,623
22,476,517
4,509,247
4,691,132
7,632,478
18,606,504
3,525,112
3,423,449
4,890,611
MINNEAPOLIS.
Helena
8,628,088
1,954,514
46,785,831
9,085,286
7,753,083
513,922
43,977,410
10,475,336
KANSAS CITY.
Denver
Oklahoma City..
Omaha
2,048,446
3,187,962
646,386
6,534,583
24,473,922
5,462,145
3,290,083
10,987,009
8,117,503
3,311,080
8,254
1,401,083
63,167,001
11,553,722
34,639,871
11,925,187
3,944,722
18,922,675
DALLAS
El Paso
Houston
San Antonio .
28,512,492
262,477
2,205,500
482,284
107,368,368 19,588,532
1,969,950
404,946
4,266,808
1,264,396
2,437,084
1,669,052
155,469,391
2,637,373
7,736,704
4,588,420
27,956,190
8,353,012
2,610,446
16,078,958
145,236,494
2,266,079
7,091,760
3,051,025
SAN FRANCISCO.
Los Angeles
Portland
Salt Lake City
15,599,928
3,891,887
2,248,415
494,556
324,772
70,806,647 18,068,955
51,184,892 8,876,766
7,784,968 2,328,714
4,893,058 2,490,226
6,609,964 2,771,072
104,475,531
63,953,546
12,362,097
7,877,841
9,705,808
80,875,608
52,544,944
11,092,575
6,415,939
7,838,694
Seattle
Total
166,903,447 1,011,887,789 230,523,179 1,409,314,414 1,125,752,800
NOTE. Components may not sum to totals because of
rounding.
1. Includes expenditures for construction at some
offices, pending allocation to appropriate accounts.
48,365
1,412,500
11,507,476
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 303
9. Operations in Principal Departments of Federal Reserve Banks, 1992-95
Operation
1995
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
1993
1992
6
22,594
8,911
7,578
8
20,166
7,244
6,950
6
20,768
7,376
7,690
8
20,166
7,506
8,660
460
203
15,465
13
76
470
200
16,479
13
72
480
192
19,009
12
70
493
181
19,053
12
68
2,125
599
3,954
1,805
574
4,229
1,545
555
4,198
1,327
531
4,183
22,854
345,318
113,828
1,112
22,853
277,685
76,620
1,045
20,760
290,989
79,599
1,143
29,427
277,681
96,744
1,275
490,299
24,835
11,567,820
149,764,431
222,954,083
504,479
23,764
12,079,107
144,702,226
211,201,540
534,236
22,207
14,066,518
146,220,304
207,629,814
588,311
20,188
13,241,785
139,675,710
199,175,034
8,076,660
1,117,452
20,862
7,420,499
948,984
21,867
6,710,035
885,011
21,661
6,530,731
859,774
21,452
1. Beginning with the 1994 Annual Report, "Government securities transfers" replaced the previous time
series that included "Issues, redemptions, and exchanges
of U.S. Treasury and federal agency securities." This
1994
change was made to enable consistent time series reporting for the fiscal area, where complex definitional changes
have occurred over the reported years.
304
82nd Annual Report, 1995
10. Federal Reserve Bank Interest Rates on Loans to Depository Institutions,
December 31, 1995
Extended credit3
Reserve Bank
All Federal Reserve Banks
Adjustment
credit'
Seasonal
credit2
5.25
5.75
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 201.3(b) of
Regulation A.
First thirty days
of borrowing
After thirty days
of borrowing
5.25
6.25
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 305
1. Reserve Requirements of Depository Institutions, December 31, 1995
Requirements
Type of deposit
Net transaction accounts'
$0 million-$52.0 million2
More than $52.0 million3
Nonpersonal time deposits 4
Eurocurrency liabilities
5
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. 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 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.
2. 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 19, 1995 for
institutions reporting quarterly and weekly, the amount
was decreased from $54.0 million to $52.0 million.
Under the Garn-St Germain Depository Institutions
Act of 1982, the Board adjusts the amount of reservable
Percentage of deposits
Effective date
3
10
12-19-95
12-19-95
0
12-27-90
0
12-27-90
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. Effective December 19, 1995, the
exemption was raised from $4.2 million to $4.3 million.
The exemption applies only to accounts that would be
subject to a 3 percent reserve requirement.
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 1V2 years was reduced from 3 percent to 1V2 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 1V2 years was reduced from 3 percent to zero on January 17, 1991.
5. The reserve requirement on Euroccurency liabilities
was reduced from 3 percent to zero in the same manner
and on the same dates as the reserve requirement on
nonpersonal time deposits with an original maturity of
less than 1V2 years (see note 4).
306 82nd Annual Report, 1995
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. 2 1 . .
1949, Mar. 3 . . .
1951, Jan. 1 7 . .
1953, Feb. 20..
1955, Jan. 4 ...
Apr. 2 3 . .
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 ...
25-45
25-55
55
40
50
75
100
75
50
75
50
60
70
50
70
90
70
50
70
70
80
65
55
65
50
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 307
13. Principal Assets and Liabilities and Number of Insured Commercial Banks
in the United States, by Class of Bank, June 30, 1995 and 1994
Millions of dollars, except as noted
Member banks
Item
Total
Total
National
State
Nonmember
banks
1995
ASSETS
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
2,989,950
2,203,551
2,198,915
786,399
2,223,301
1,660,229
1,657,617
563,072
1,663,696
1,272,736
1,270,711
390,961
559,605
387,493
386,905
172,112
766,648
543,322
541,298
223,327
320,388
466,011
197,464
207,085
355,987
157,071
151,774
239,186
117,407
55,311
116,801
39,664
113,303
110,024
40,393
2,425,001
38,389
770,200
1,892,167
328,472
1,775,412
31,305
574,715
1,341,251
245,865
1,325,357
21,844
428,590
1,022,098
180,470
430,055
9,461
146,125
319,154
65,394
669,589
7,084
195,485
550,916
82,607
10,090
3,923
2,931
992
6,167
LIABILITIES
Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital
Number of banks
1994
ASSETS
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
2,791,623
1,960,814
1,955,881
830,809
2,045,608
1,451,045
1,448,064
594,563
1,584,368
1,145,627
1,143,321
438,740
461,240
305,417
304,743
155,823
746,015
509,770
507,817
236,246
348,062
482,747
191,826
229,200
365,363
152,671
175,765
262,975
113,515
53,435
102,388
39,156
118,862
117,383
39,155
2,352,643
38,627
782,177
1,828,585
299,581
1,691,922
31,381
581,697
1,286,004
222,192
1,317,010
22,708
447,663
1,012,930
167,130
374,912
8,673
134,064
273,074
55,062
660,721
7,246
200,481
542,581
77,385
10,644
4,139
3,174
965
6,505
LIABILITIES
Deposits, total
Interbank
Other demand
Other time and savings
Equity capital
Number of banks
NOTE. Components may not sum to totals because of rounding.
308 82nd Annual Report, 1995
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-95, and Month-End 1995
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'
All
other2
Other
Federal
Reserve
assets3
Total
Gold
stock4
Special
drawing
rights
certificate
account
Treasury
currency
outstanding 5
1918
1919
239
300
239
300
0
0
1,766
2,215
199
201
294
575
0
0
2,498
3,292
2,873
2,707
1,795
1,707
1920
1921
1922
1923
1924
287
234
436
134
540
287
234
436
80
536
0
0
0
54
4
2,687
1,144
618
723
320
119
40
78
27
52
262
146
273
355
390
0
0
0
0
0
3,355
1,563
1,405
1,238
1,302
2,639
3,373
3,642
3,957
4,212
1,709
1,842
1,958
2,009
2,025
1925
1926
1927
1928
1929
375
315
617
228
511
367
312
560
197
488
8
3
57
31
23
643
637
582
1,056
632
63
45
63
24
34
378
384
393
500
405
0
0
0
0
0
1,459
1,381
1,655
1,809
1,583
4,112
4,205
4,092
3,854
3,997
1,977
1,991
2,006
2,012
2,022
1930
1931
1932
1933
1934
739
817
1,855
2,437
2,430
686
775
1,851
2,435
2,430
43
42
4
2
0
251
235
98
7
21
20
14
15
5
372
378
41
137
21
0
0
0
0
0
1,373
1,853
2,145
2,688
2,463
4,306
4,173
4,226
4,036
8,238
2,027
2,035
2,204
2,303
2,511
1935
1936
1937
1938
1939
2,431
2,430
2,564
2,564
2,484
2,430
2,430
2,564
2,564
2,484
1
0
0
0
0
5
3
10
4
7
12
39
19
17
91
38
28
19
16
11
0
0
0
0
0
2,486
2,500
2,612
2,601
2,593
10,125
11,258
12,760
14,512
17,644
2,476
2,532
2,637
2,798
2,963
1940
1941
1942
1943
1944
2,184
2,254
6,189
11,543
18,846
2,184
2,254
6,189
11,543
18,846
0
0
0
0
0
3
3
6
5
80
80
94
471
681
815
8
10
14
10
4
0
0
0
0
0
2,274
2,361
6,679
12,239
19,745
21,995
22,737
22,726
21,938
20,619
3,087
3,247
3,648
4,094
4,131
1945
1946
1947
1948
1949
24,252
23,350
22,559
23,333
18,885
24,252
23,350
22,559
23,333
18,885
0
0
0
0
0
249
163
85
223
78
578
580
535
541
534
2
1
1
1
2
0
0
0
0
0
15,091
24,093
23,181
24,097
19,499
20,065
20,529
22,754
24,244
24,427
4,339
4,562
4,562
4,589
4,598
1950
1951
1952
1953
1954
20,778
23,801
24,697
25,916
24,932
20,725
23,605
24,034
25,318
24,888
53
196
663
598
44
67
19
156
28
143
1,368
1,184
967
935
808
3
5
4
2
1
0
0
0
0
0
22,216
25,009
25,825
26,880
25,885
22,706
22,695
23,187
22,030
21,713
4,636
4,709
4,812
4,894
4,985
1955
1956
1957
1958
1959
24,785
24,915
24,238
26,347
26,648
24,391
24,610
23,719
26,252
26,607
394
305
519
95
41
108
50
55
64
458
1,585
1,665
1,424
1,296
1,590
29
70
66
49
75
0
0
0
0
0
26,507
26,699
25,784
27,755
28,771
21,690
21,949
22,781
20,534
19,456
5,008
5,066
5,146
5,234
5,311
1960
1961
1962
1963
1964
27,384
28,881
30,820
33,593
37,044
26,984
30,478
28,722
33,582
36,506
400
159
342
11
538
33
130
38
63
186
1,847
2,300
2,903
2,600
2,606
74
51
110
162
94
0
0
0
0
0
29,338
31,362
33,871
36,418
39,930
17,767
16,889
15,978
15,513
15,388
5,398
5,585
5,567
5,578
5,405
Digitized forFor
FRASER
notes see end of table.
638
Tables
309
14.—Continued
Factors absorbing reserve funds
Deposits, other
than reserves, with
Federa 1 Reserve Banks
Required
clearing
balances
Member bank
reserves 7
Other
Federal
Reserve
liaWith
bilities
Federal
and
capital3 Reserve
Banks
Currency
and
coin8
Required9
Excess 9
Cur
rency
in
circulation
Treasury
cash
holdings 6
4,951
5,091
288
385
51
51
96
73
25
28
118
208
0
0
0
0
1,636
1,890
0
0
1,585
1,822
51
68
5,325
4,403
4,530
4,757
4,760
218
214
225
213
211
57
96
11
38
51
5
12
3
4
19
18
15
26
19
20
298
285
276
275
258
0
0
0
0
0
0
0
0
0
0
1,781
1,753
1,934
1,898
2,220
0
0
0
0
0
0
1,654
0
1,884
2,161
0
99
0
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
-AA
-56
63
-41
-73
4,603
5,360
5,388
5,519
5,536
211
222
272
284
3,029
19
54
8
3
121
6
79
19
4
20
22
31
24
128
169
375
354
355
360
241
0
0
0
0
0
0
0
0
0
0
2,471
1,961
2,509
2,729
4,096
0
0
0
0
0
2,375
1,994
1,933
1,870
2,282
96
-33
576
859
1,814
5,882
6,543
6,550
6,856
7,598
2,566
2,376
3,619
2,706
2,409
544
244
142
923
634
29
99
172
199
397
226
160
235
242
256
253
261
263
260
251
0
0
0
0
0
0
0
0
0
0
5,587
6,606
7,027
8,724
11,653
0
0
0
0
0
2,743
4,622
5,815
5,519
6,444
2,844
1,984
1,212
3,205
5,209
8,732
11,160
15,410
20,499
25,307
2,213
2,215
2,193
2,303
2,375
368
867
799
579
440
1,133
774
793
1,360
1,204
599
586
485
356
394
284
291
256
339
402
0
0
0
0
0
0
0
0
0
0
4,026
12,450
13,117
12,886
14,373
0
0
0
0
0
7,411
9,365
11,129
11,650
12,748
6,615
3,085
1,988
1,236
1,625
28,515
28,952
28,868
28,224
27,600
2,287
2,272
1,336
1,325
1,312
977
393
870
1,123
821
862
508
392
642
767
446
314
569
547
750
495
607
563
590
106
0
0
0
0
0
0
0
0
0
0
15,915
16,139
17,899
20,479
16,568
0
0
0
0
0
14,457
15,577
16,400
19,277
15,550
1,458
562
1,499
1,202
1,018
27,741
29,206
30,433
30,781
30,509
1,293
1,270
1,270
761
796
668
247
389
346
563
895
526
550
423
490
565
363
455
493
441
714
746
111
839
907
0
0
0
0
0
0
0
0
0
0
17,681
20,056
19,950
20,160
18,876
0
0
0
0
0
16,509
19,667
20,520
19,397
18,618
1,172
389
-570
763
258
31,158
31,790
31,834
32,193
32,591
767
775
761
683
391
394
441
481
358
504
402
322
356
272
345
554
426
246
391
694
925
901
998
1,122
841
0
0
0
0
0
0
0
0
0
0
19,005
19,059
19,034
18,504
18,174
0
0
0
0
310
18,903
19,089
19,091
18,574
18,619
102
-30
-57
-70
-135
32,869
33,918
35,338
37,692
39,619
377
422
380
361
612
485
465
597
880
820
217
279
247
171
229
533
320
393
291
321
941
1,044
1,007
1,065
1,036
0
0
0
0
0
0
0
0
0
0
17,081
17,387
17,454
17,049
18,086
2,544
2,544
3,262
4,099
4,151
18,988
18,988
20,071
20,677
21,663
637
96
645
471
574
Treasury
Foreign
Other
Other
Federal
Reserve
accounts 3
310 82nd Annual Report, 1995
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-95 and Month-End 1995—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
U.S. Treasury and
federal agency securities
Period
Total
Loans
Float1
All
other2
Other
Federal
Reserve
assets3
Total
Gold
stock4
Bought
outright10
Held
under
repurchase
agreement ''
290
661
170
0
0
137
173
141
186
183
2,248
2,495
2,576
3,443
3,440
187
193
164
58
64
0
0
0
0
2,743
43,340
47,177
52,031
56,624
64,584
13,733
13,159
11,982
10,367
10,367
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
7,1543
1970
1971
1972
1973
1974
62,142
70,804
71,230
80,495
85,714
62,142
69,481
71,119
80,395
84,760
0
1,323
111
100
954
335
39
1,981
1,258
299
4,261
4,343
3,974
3,099
2,001
57
261
106
68
999
1,123
1,068
1,260
1,152
3,195
67,918
76,515
78,551
86,072
92,208
10,732
10,132
10,410
11,567
11,652
400
400
400
400
400
7,147
7,710
8,313
8,716
9,253
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
94,124
104,093
111,274
118,591
126,167
130,592
140,348
148,837
160,795
169,627
92,789
100,062
108,922
117,374
124,507
128,038
136,863
144,544
159,203
167,612
1,335
4,031
2,352
1,217
1,660
2,554
3,485
4,293
1,592
2,015
211
25
265
1,174
1,454
1,809
1,601
717
918
3,577
3,688
2,601
3,810
6,432
6,767
4,467
1,762
2,735
1,605
833
1,126
991
954
587
704
776
195
1,480
418
0
3,312
3,182
2,442
4,543
5,613
8,739
9,230
9,890
8,728
12,347
102,461
110,892
118,745
131,327
140,705
146,383
153,136
63,659
172,464
186,384
11,599
11,598
11,718
11,671
11,172
11,160
11,151
11,148
11,121
11,096
500
1,200
1,250
1,300
1,800
10,218
10,810
11,331
11,831
13,083
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 r
1990
1991
1992
1993
1994
1995
259,786
288,429
308,518
349,865
378,746
394,693
241,432
272,531
300,424
336,653
368,156
380,831
18,354
15,898
8,094
13,212
10,590
13,862
190
218
675
94
223
136
2,566
1,026
3,350
963 r
740
231
0
0
0
0
0
0
39,880
34,524
30,278
33,394
33,441
33,483
302,421
324,197
342,820
384,316 r
413,150
428,543
11,058
11,059
11,056
11,053
11,051
11,050
10,018
10,018
8,018
8,018
8,018
10,168
20,404
21,017 r
21,452'
22,101 r
22,912
23,951
5,575
6,317
6,784
6,795
6,852
Tables 311
14.—Continued
Factors absorbing reserve funds
Deposits, other
than reserves, with
Federal Reserve Banks
Currency
in
circulation
Treasury
cash
holdings 6
42,056
44,663
47,226
50,961
53,950
760
1,176
1,344
695
596
57,903
61,068
66,516
72,497
79,743
Required
clearing
balances
Other
Federal
Reserve
liaWith
bilities
Federal
and
Reserve
3
capital
Banks
Foreign
Other
Other
Federal
Reserve
accounts3
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
431
460
345
317
185
1,156
2,020
1,855
2,542
2,113
148
294
325
251
418
1,233
999
840
1,41913
1,27513
0
0
0
0
0
0
0
0
0
0
86,547
93,717
103,811
114,645
125,600
483
460
392
240
494
7,285
10,393
7,114
4,1%
4,075
353
352
379
368
429
1,090
1,357
1,187
1,256
1,412
0
0
0
0
0
136,829
144,774
154,908
171,935
183,796
441
443
429
479
513
3,062
4,301
5,033
3,661
5,316
411
505
328
191
253
617
781
1,033
851
867
197,488
211,995
230,205
247,649
260,456 r
550
447
454
395
450
9,351
7,588
5,313
8,656
6,217
480
287
244
347
589
286,965
307,759 r
334,706 r
365,299 r
403,762
424,192
561
636
508
377
335
270
8,960
17,697
7,492
14,809
7,161
5,979
369
968
206
386
250
386
Treasury
Member bank
reserves7
Currency
and
Required9
Ex-
18,447
19,779
21,092
21,818
22,085
4,163
4,310
4,631
4,921
5,187
22,848
24,321
25,905
27,439
28,173
-238
-232
-182
-700
-901
1,986
2,131
2,143
2,669
2,935
24,150
27,788
25,647
27,060
25,843
5,423
5,743
6,216
6,781
7,370
-460
30,033
1,035
32,496
98 12
32,044
35,268 -1,360
37,011 -3,798
0
0
0
0
0
2,968
3,063
3,292
4,275
4,957
26,052
25,158
26,870
31,152
29,792
8,036
8,628
9,421
10,538
11,429
35,197
35,461
37,615
42,694
44,217
0
0
0
0
0
0
117
436
1,013
1,126
4,671
5,261
4,990
5,392
5,952
27,456
25,111
26,053
20,413
20,693
13,654
15,576
16,666
17,821
675
40,558
42,145 -1,442
1,328
41,391
-945
39,179
1,041
917
1,027
548
1,298
0
0
0
0
0
1,490
1,812
1,687
1,605
1,618 r
5,940
6,088
7,129
7,683
8,486
21 Ml
46,295
40,097
37,742
36,713
242
1,706
372
397
876
932
0
0
0
0
0
0
1,963
3,945 r
5,897 r
6,332 r
4,239
5,171
8,147
8,113
7,984
9,292
11,959
12,342
36,695
25,467'
26,181r
28,614 r
26,550
24,441
n.a.
n.a.
-1,103 14
-1,535
-1,265
-893
-2,835
n.a.
312 82nd Annual Report, 1995
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-95, and Month-End 1995—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
1995
Jan. . . .
Feb. ...
Mar. . . .
Apr. ...
May . . .
June . . .
July . . . .
Aug. . . .
Sept. ...
Oct. ...
Nov. ...
Dec. . . .
Gold
stock4
Special
drawing
rights
certificate
account
Treasury
currency
outstanding 5
11,050
11,050
11,053
11,055
11,054
11,054
11,053
11,053
11,051
11,051
11,050
11,050
8,018
8,018
8,018
8,018
8,018
8,018
10,518
10,518
10,168
10,168
10,168
10,168
23,073
23,138
23,234
23,304
23,359
23,498
23,568
23,682
23,769
23,825
23,895
23,951
U.S. Treasury and
federal agency securities
Total
Bought
outrightl0
Held
under
repurchase
agreement ''
369,863
369,122
373,813
375,192
377,636
392,522
378,587
375,914
377,084
376,539
383,494
394,693
366,533
369,122
367,115
371,942
373,405
375,737
378,587
372,759
370,564
374,039
376,511
380,831
3,330
0
6,698
3,250
4,231
16,785
0
3,155
6,520
2,500
6,983
13,862
Loans
Float1
77
54
84
156
169
217
248
269
421
124
55
136
636
2,371
62
298
1,174
357
202
90
196
1,007
487
231
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
All
Federal
other2 Reserve
assets3
0
0
0
0
0
0
0
0
0
0
0
0
33,738
34,209
35,495
35,799
33,915
34,988
34,480
31,529
32,580
32,391
31,054
33,483
Total
404,314
405,756
409,454
411,445
412,894
428,084
413,517
407,802
410,282
410,061
415,090
428,543
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
313
14.—Continued
Factors absorbing reserve funds
Deposits, other
than reserves, with
Federal Reserve Banks
Currency
in
circulation
Treasury
cash
hold-
396,041
397,753
401,630
405,285
411,104
410,483
409,508
410,984
409,275
411,767
416,682
424,192
335
340
361
356
322
319
306
316
322
314
276
270
ings
6
Treasury
Foreign
13,964
6,891
4,543
8,242
4,646
20,977
11,207
4,767
8,620
7,018
5,703
5,979
185
188
370
166
227
168
190
166
201
275
194
386
Member bank
Other
Federal
Reserve
ac-
308
325
398
339
215
242
304
298
332
375
282
932
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
balances
4,159
4,038
3,925
3,905
4,133
4,274
4,178
4,535
4,556
4,753
4,870
5,171
Other
Federal
Reserve
liabilities
capital3
With
Federal
Reserve
Banks
12,854
13,710
14,449
13,095
12,181
13,519
12,671
11,438
13,088
13,073
12,697
12,342
18,609
24,716
26,084
22,433
22,497
20,672
20,293
20,551
18,877
17,531
19,500
24,441
Currency
and
coin8
Required9
Excess9-12
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.
314 82nd Annual Report, 1995
15. Number of Banking Offices in the United States, December 31, 1994 and 1995
Commercial banks
Type of office,
number, and change
Member
Total
3
State-chartered
Nonmember
Total
Total
National
4,111
3,127
State
Insured
Noninsured
984
6,401
308
banks2
Insured
Noninsured
BANKS
Number, Dec. 31, 1994 ..
11,352
10,820
532
0
Changes during 1995
New banks
Ceased banking
operation
Banks converted
into branches4
Other5
128
125
49
38
11
61
15
3
0
-64
-57
-33
-26
-7
-13
-11
-7
0
-597
14
-580
15
-260
98
-221
-6
-39
104
-320
-85
0
2
-17
-1
0
0
Net change
-519
-497
-146
-215
69
-357
6
-22
0
10,833
10,323
3,965
2,912
1,053
6,044
314
510
0
58,322
55,196
37,088
28,694
8,394
18,021
87
3,126
0
2,614
2,367
1,649
1,350
299
716
2
247
0
587
371
-1,319 -1,045
147
66
276
-776
56
95
-269
10
216
-271
81
0
-3
o
10
-88
94
0
0
Number, Dec. 31,1995 ..
BRANCHES AND
ADDITIONAL OFFICES
Number, Dec. 31, 1994 ..
Changes during 1995
De novo
Banks converted
into branches .
Discontinued
Other5
...
Net change5
Number, Dec. 31, 1995 ..
597
-1,407
241
o
2,045
1,782
1,041
906
135
742
-1
263
0
60,367
56,978
38,129
29,600
8,529
18,763
86
3,389
0
NOTE. Preliminary. Final data will be available in the
Annual Statistical Digest, 1995, 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. Includes noninsured trust companies that are members of the Federal Reserve System.
4. Includes eight banks that converted to thrift institution branches.
5. Includes interclass changes and sales of branches.
Tables 315
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1995
Citizens Commercial & Savings Bank, Flint,
Michigan to merge with Bank One banks of
Fenton (N.A.), Ypsilanti (N.A.), East Lansing,
and Sturgin, Michigan1
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
(1-6-95)
The applicant has assets of $1.3 billion; the targets
have assets of $691.1 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.
Triangle East Bank, Raleigh, North Carolina to
merge with Standard Bank and Trust Company,
Dunn, 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
(1-10-95)
The applicant has assets of $312.3 million; the
target has assets of $88.3 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.
Triangle East Bank, Raleigh, North Carolina
to merge with Columbus National Bank,
Whiteville, 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
(1-10-94)
The applicant has assets of $312.3 million; the
target has assets of $58.9 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.
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.
South Trust Bank of West Florida, St. Petersburg, Florida to acquire assets and liabilities
of the Tampa & New Port Richey branches
of Anchor Savings Bank, F.S.B., Hewlett,
New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12-21-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1-11-95)
The applicant has assets of $827.7 million; the
targets have assets of $180.8 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 Commerce, Billings,
Montana to merge with First Citizens Bank of
Bozeman, Bozeman, Montana
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12-21-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1-12-95)
The applicant has assets of $780.5 million; the
target has assets of $40.6 million. The parties do
not operate in the same market. The banking factors and considerations relating to the convenience
and needs of the community are consistent with
approval.
Crestar Bank, Richmond, Virginia to merge with
TideMark Bank, Newport News, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12-6-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1-19-95)
The applicant has assets of $12.6 billion; the target
has assets of $482.2 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.
Triangle East Bank, Raleigh, North Carolina
to merge with Unity Bank & Trust Company,
Rocky Mount, North Carolina
316 82nd Annual Report, 1995
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1995—Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-14-94)
The proposed transaction would not be significantly adverse to competition.
(2-10-95)
The applicant has assets of $4.2 billion; the target
has deposits of $3.2 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.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1-23-95)
The applicant has assets of $312.3 million; the
target has assets of $180.6 million. The parties do
not operate in the same market. The banking factors and considerations relating to the convenience
and needs of the community are consistent with
approval.
BancFirst, Oklahoma City, Oklahoma to merge
with State National Bank, Marlow, Oklahoma
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
(1-24-95)
The applicant has assets of $870.0 million; the
target has assets of $101.0 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.
Minden Bank & Trust Company, Minden,
Louisiana to acquire assets and liabilities of the
1633 North Market Street, 3400 Line Avenue,
and 6250 Hearne Avenue branches (all of
Shreveport) of Hibernia National Bank,
New Orleans, Louisiana
SUMMARY REPORT BY THE ATTORNEY GENERAL
(2-15-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2-15-95)
The applicant has assets of $172.5 million; the
targets have assets of $42.3 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.
The Callaway Bank, Fulton, Missouri to merge
with Steedman Bank, Mokane, Missouri
Farmers Trust Bank, Lebanon, Pennsylvania
to acquire assets and liabilities of the Schaefferstown branch of Meridian Bank, Reading,
Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
SUMMARY REPORT BY THE ATTORNEY GENERAL
(2-1-95)
The proposed transaction would not be significantly adverse to competition.
(2-1-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1-27-95)
The applicant has assets of $120.0 million; the
target has assets of $12.1 million. The parties do
not operate in the same market. The banking factors and considerations relating to the convenience
and needs of the community are consistent with
approval.
(2-17-95)
The applicant has assets of $152.7 million; the
target has assets of $315.0 thousand. 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 acquire assets and liabilities o/the Fayetteville
branch of Progressive Savings & Loan, Ltd.,
Lumberton, North Carolina
Bank of Great Neck, Great Neck, New York to
acquire assets and liabilities of the Great Neck
branch of North Fork Bank, Mattituck,
New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
SUMMARY REPORT BY THE ATTORNEY GENERAL
(2-1-95)
The proposed transaction would not be significantly adverse to competition.
(12-14-94)
The proposed transaction would not be significantly adverse to competition.
Tables
317
16.—Continued
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2-23-95)
The applicant has assets of $120.2 million; the
target has assets of $29.1 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
Enterprise Bank and Trust Company, WinstonSalem, North Carolina to acquire assets and
liabilities o/the Danbury branch of First Union
National Bank of North Carolina, Charlotte,
North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL
(1-25-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2-24-95)
The applicant has assets of $48.9 million; the
target has assets of $9.3 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
Pace American Bank, Lawrenceville, Virginia
to acquire assets and liabilities of the Alberta,
Bedford, Big Island, Brodnax, Chase City,
Chatham, Crewe, Drakes Branch, and Victoria
branches of NationsBank of Virginia, N.A.,
Richmond, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(1-25-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2-24-95)
The applicant has assets of $58.4 million; the
targets have assets of $157.7 million. The parties
operate in the same markets. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
First United Bank, Boca Raton, Florida to
merge with Jupiter Tequesta National Bank,
Tequesta, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
(2-1-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3-2-95)
The applicant has assets of $259.6 million; the
target has assets of $57.4 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.
First Interstate Bank of California, Los Angeles, California to merge with First Trust Bank,
Ontario, California
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors of First Trust Bank.2
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3-3-95)
The applicant has assets of $25.9 billion; the target
has assets of $198.0 million. The State has recommended immediate action by the Federal Reserve
System to prevent the probable failure of the
target.
Premier Bank, North, Haysi, Virginia to acquire
assets and liabilities of the Coeburn and Big
Stone Gap branches of NationsBank of Virginia, N.A., Richmond, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(2-15-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3-23-95)
The applicant has assets of $97.9 million; the
targets have assets of $49.8 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.
Merchants Bank, Vicksburg, Mississippi to
merge with Bank of Edwards, Edwards,
Mississippi
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."
318 82nd Annual Report, 1995
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1995—Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors of Bank of Edwards.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3-31-95)
The applicant has assets of $174.0 million; the
target has assets of $14.8 million. The State has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
the target.
Community Bank and Trust, Neosho, Missouri
to merge with State Bank of Seneca, Seneca,
Missouri
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3-22-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4-14-95)
The applicant has assets of $127.9 million; the
target has assets of $21.0 million. The parties
operate in the same market. The bank factors and
considerations relating to the convenience and
needs of the community are consistent with
approval.
First Community Bank, Glasgow, Montana
to merge with Citizens First National Bank of
Wolf Point, Wolf Point, Montana
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4-7-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4-14-95)
The applicant has assets of $72.2 million; the
target has assets of $13.3 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.
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4-19-95)
The applicant has assets of $725.0 million; the
target has assets of $595.8 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.
Centura Bank, Rocky Mount, North Carolina
to merge with First Southern Savings Bank,
Inc., SSB, Asheboro, North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4-26-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4-21-95)
The applicant has assets of $4.3 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.
Premier Bank, Inc., Wytheville, Virginia to
acquire assets and liabilities of the Fries, Galax,
Independence, and Rural Retreat branches
of NationsBank of Virginia, N.A., Richmond,
Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(2-15-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4-24-95)
The applicant has assets of $195.8 million; the
targets have assets of $63.4 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.
Vail Bank, Vail, Colorado to merge with Snow
Bank, N.A., Dillon, Colorado
SUMMARY REPORT BY THE ATTORNEY GENERAL
Fifth Third Bank of Northeastern Ohio, Cleveland, Ohio to merge with Falls Savings Bank,
F.S.B., Cuyahoga Falls, Ohio
(3-27-95)
The proposed transaction would not be significantly adverse to competition.
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3-16-95)
(4-28-95)
Tables
319
16.—Continued
The applicant has assets of $88.0 million; the
target has assets of $32.0 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.
Westamerica Bank, San Rafael, California
to merge with CapitolBank, Sacramento,
California
SUMMARY REPORT BY THE ATTORNEY GENERAL
(5-5-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5-2-95)
The applicant has assets of $1.8 billion; the target
has assets of $139.0 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.
Manufacturers and Traders Trust Company,
Buffalo, New York to acquire assets and liabilities of the Saugerties, Niagara Falls, Poughkeepsie, and LaGrangeville branches of The
Chase Manhattan Bank, N.A., New York,
New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4-26-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5-4-95)
The applicant has assets of $8.8 billion; the targets
have assets of $89.3 million. The parties operate in
the same markets. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
The Fifth Third Bank, Cincinnati, Ohio to
acquire assets and liabilities of the Lebanon
branch of Bank One Dayton, N.A., Dayton,
Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL
(5-26-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5-31-95)
The applicant has assets of $9.2 billion; the target
has assets of $18.0 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
West One Bank, Idaho, Boise, Idaho to acquire
assets and liabilities o/the Burley, Idaho, branch
of Washington Federal Savings and Loan Association, Seattle, Washington
SUMMARY REPORT BY THE ATTORNEY GENERAL
(5-26-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6-1-95)
The applicant has assets of $4.4 billion; the target
has assets of $5.3 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.
United Jersey Bank, Hackensack, New Jersey
to merge with New Jersey Savings Bank, Somerville, New Jersey
SUMMARY REPORT BY THE ATTORNEY GENERAL
(5-5-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6-9-95)
The applicant has assets of $12.4 billion; the target
has assets of $507.3 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.
First Citizens Bank & Trust Company,
Lawrenceville, Virginia to acquire assets and
liabilities of the Clifton Forge branch of
Crestar Bank, Richmond, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(5-26-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6-21-95)
The applicant has assets of $58.4 million; the
target has assets of $24.7 million. The parties do
not operate in the same market. The banking factors and considerations relating to the convenience
and needs of the community are consistent with
approval.
320 82nd Annual Report, 1995
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1995—Continued
Westamerica Bank, San Rafael, California
to merge with Novato National Bank, Novato,
California
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6-15-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6-21-95)
The applicant has assets of $2.0 billion; the target
has assets of $93.5 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.
Princess Anne Bank, Virginia Beach, Virginia
to acquire assets and liabilities of three branches
of Cenit Bank, F.S.B., Norfolk, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(5-26-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6-29-95)
The applicant has assets of $81.2 million; the
targets have assets of $89.6 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.
Sterling Bank & Trust Co., Baltimore, Maryland to acquire assets and liabilities of the
Annapolis branch of First Union National Bank
of Maryland, Rockville, Maryland
SUMMARY REPORT BY THE ATTORNEY GENERAL
(5-26-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6-29-95)
The applicant has assets of $76.4 million; the
target has assets of $13.0 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.
Terrace Bank of Florida, Tampa, Florida to
merge with University State Bank, Tampa,
Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
(5-5-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7-3-95)
The applicant has assets of $41.1 million; the
target has assets of $21.0 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.
Texas State Bank, McAllen, Texas to acquire
assets and liabilities of the Roma and Rio
Grande City branches of First National Bank
of South Texas, San Antonio, Texas
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6-15-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7-19-95)
The applicant has assets of $539.0 million; the
targets have assets of $87.0 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.
Bank of Naples, Naples, Florida to merge with
Fifth Third Trust Company and Savings Bank,
F.S.B., Naples, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6-15-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7-20-95)
The applicant has assets of $56.9 million; the
target has assets of $75.7 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
First Virginia Bank-Colonial, Richmond, Virginia to acquire assets and liabilities of the four
Richmond, Virginia, branches of Citizens Federal Bank, a Federal Savings Bank, Miami,
Florida
Tables 321
16.—Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6-15-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7-20-95)
The applicant has assets of $379.3 million; the
targets have assets of $200.4 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.
Cortland Savings and Banking Company, Cortland, Ohio to acquire assets and liabilities of the
North Bloomfield branch of Bank One, Youngstow n, N.A., Youngstown, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL
(7-20-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7-28-95)
The applicant has assets of $317.7 million; the
target has assets of $13.5 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.
First State Bank of Taos, Taos, New Mexico
to merge with First Bank of Grants, Grants,
New Mexico
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6-30-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7-28-95)
The applicant has assets of $203.4 million; the
target has assets of $40.5 million. The parties do
not operate in the same market. The banking factors and considerations relating to the convenience
and needs of the community are consistent with
approval.
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7-31-95)
The applicant has assets of $2.0 billion; the target
has assets of $13.4 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.
Orrstown Bank, Orrstown, Pennsylvania to
acquire assets and liabilities of the Path Valley
Road branch of Dauphin Deposit Bank and
Trust Company, Harrisburg, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
(7-20-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8-2-95)
The applicant has assets of $128.5 million; the
target has assets of $14.0 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.
Triangle Bank, Raleigh, North Carolina to
merge with The Village Bank, Chapel Hill,
North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8-7-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8-11-95)
The applicant has assets of $637.8 million; the
target has assets of $61.7 million. The parties do
not operate in the same market. The banking factors and considerations relating to the convenience
and needs of the community are consistent with
approval.
The Fifth Third Bank, Cincinnati, Ohio to
acquire assets and liabilities of twelve branches
of PNC Bank, Ohio, N.A., Cincinnati, Ohio
Westamerica Bank, San Rafael, California to
acquire assets and liabilities of the Point Arena
branch of Bank of America NT&SA, San Francisco, California
(6-30-95)
The proposed transaction would not be significantly adverse to competition.
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8-28-95)
(8-23-95)
SUMMARY REPORT BY THE ATTORNEY GENERAL
322 82nd Annual Report, 1995
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1995—Continued
The applicant has assets of $9.2 billion; the targets
have assets of $257.7 million. The parties operate
in the same markets. The banking factors and
considerations relating to the convenience and
needs of the community are consistent with
approval.
Triangle Bank, Raleigh, North Carolina to
acquire assets and liabilities of four branches
of NationsBank, N.A. (Carolines), Charlotte,
North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8-28-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8-29-95)
The applicant has assets of $699.5 million; the
targets have assets of $48.8 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 Commercial Bank, Arlington, Virginia to
merge with Bank First, N.A., McLean, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8-7-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8-29-95)
The applicant has assets of $60.9 million; the
target has assets of $20.2 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.
Bank of Oakfield, Oakfield, Wisconsin to
acquire assets and liabilities of the Van Dyne
branch of M&I Central State Bank, Ripon
Wisconsin
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8-28-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-5-95)
The applicant has assets of $19.1 million; the
target has assets of $2.3 million. The parties operate in the same market. The bankine factors and
considerations relating to the convenience and
needs of the community are consistent with
approval.
FCNB Bank, Frederick, Maryland to acquire
assets and liabilities of the Monrovia branch
of Laurel Federal Savings Bank, Laurel,
Maryland
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8-7-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-8-95)
The applicant has assets of $444.7 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.
Elkridge Bank, Elkridge, Maryland to merge
with Laurel Federal Savings Bank, Laurel,
Maryland
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8-7-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-8-95)
The applicant has assets of $85.1 million; the
target has assets of $107.6 million. The parties do
not operate in the same market. The banking factors and considerations relating to the convenience
and needs of the community are consistent with
approval.
Marine Midland Bank, Buffalo, New York to
merge with United Northern Federal Savings
Bank, Watertown, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6-30-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-11-95)
The applicant has assets of $18.6 billion; the target
has assets of $85.2 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the communitv are consistent with aDoroval.
Tables
323
16.—Continued
Crestar Bank (MD), Bethesda, Maryland to
acquire assets and liabilities of The Chase
Manhattan Bank of Maryland, Baltimore,
Maryland
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8-28-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-22-95)
The applicant has assets of $1.1 billion; the target has assets of $454.7 million. The parties operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
Valliwide Bank, Fresno, California to merge
with El Capitan National Bank, Sonora,
California
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8-7-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-22-95)
The applicant has assets of $1.1 billion; the target
has assets of $131.8 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.
Security Savings Bank, Farnhamville, Iowa
to acquire assets and liabilities of the Harcourt
and Lehigh branches of Boatmen's Bank of
Fort Dodge, Fort Dodge, Iowa
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8-7-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-29-95)
The applicant has assets of $21.5 million; the
targets have assets of $3.1 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.
The Fifth Third Bank, Cincinnati, Ohio to
acquire assets and liabilities of seven branches of
Bank One, Cincinnati, Ohio, N.A., Cincinnati,
Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10-20-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10-23-95)
The applicant has assets of $8.8 billion; the targets
have assets of $135.0 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.
Vectra Bank, Denver, Colorado to merge with
First National Bank of Denver, Denver,
Colorado
SUMMARY REPORT BY THE ATTORNEY GENERAL
(2-1-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10-26-95)
The applicant has assets of $334.0 million; the
target has assets of $47.0 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.
Byron Center State Bank, Byron Center, Michigan to acquire assets and liabilities of"the Moline
branch of First of America Bank-Michigan,
N.A., Grand Rapids, Michigan
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8-7-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10-27-95)
The applicant has assets of $192.2 million; the
target has assets of $11.3 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.
Fleet Bank-NH, Nashua, New Hampshire to
merge with Shawmut Bank NH, Manchester,
New Hampshire
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10-31-95)
324 82nd Annual Report, 1995
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1995—Continued
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-14-95)
The applicant has assets of $1.8 billion; the target
has assets of $1.5 billion. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
Fleet Bank, Albany, New York to merge with
Shawmut Bank New York, N.A., Schenectady,
New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10-31-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-14-95)
The applicant has assets of $14.8 billion; the target
has assets of $1.7 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.
BancFirst, Oklahoma City, Oklahoma to merge
with Bank of Johnston County, Tishomingo,
Oklahoma
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10-20-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-16-95)
The applicant has assets of $966.2 million; the
target has assets of $10.6 million. The parties do
not operate in the same market. The banking factors and considerations relating to the convenience
and needs of the community are consistent with
approval.
Fayette Bank, Uniontown, Pennsylvania to
merge with The Huntington National Bank of
Pennsylvania, Uniontown, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11-7-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-21-95)
The applicant has assets of $273.0 million; the
tareet has assets of $108.0 million. The oarties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
Republic Security Bank, West Palm Beach,
Florida to merge with Banyan Bank, Boca
Raton, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10-20-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-22-95)
The applicant has assets of $276.0 million; the
target has assets of $48.0 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.
Tri-County Bank, Brown City, Michigan to
acquire assets and liabilities o/the Yale and Peck
branches of NBD Bank, Detroit, Michigan
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11-29-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-29-95)
The applicant has assets of $55.1 million; the
targets have assets of $24.8 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.
Republic Security Bank, West Palm Beach,
Florida to acquire assets and liabilities of one
branch of Century Bank, F.S.B., Sarasota,
Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11-29-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-30-95)
The applicant has assets of $274.0 million; the
target has assets of $32.6 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
Tables
325
16.—Continued
and needs of the community are consistent with
approval.
and needs of the community are consistent with
approval.
Triangle Bank, Raleigh, North Carolina to
acquire assets and liabilities of the Benson, Clayton, Havelock, and Mount Olive branches of
First Union National Bank of North Carolina,
Charlotte, North Carolina
BancFirst, Oklahoma City, Oklahoma to merge
with City Bank & Trust Company, Oklahoma
City, Oklahoma
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11-7-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-1-95)
The applicant has assets of $770.2 million; the
targets have assets of $56.7 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
Citizens Bank of Talladega, Talladega, Alabama to merge with Talladega Federal Savings
and Loan Association, Talladega, Alabama
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9-29-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-1-95)
The applicant has assets of $28.4 million; the
target has assets of $35.0 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 Polk County, Lakeland,
Florida to merge with First Federal Savings &
Loan Association of Lake Wales, Lake Wales,
Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11-7-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-1-95)
The applicant has assets of
target has assets of $132.2
operate in the same market.
and considerations relating
$946.9 million; the
million. The parties
The banking factors
to the convenience
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11-29-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-5-95)
The applicant has assets of $977.0 million; the
target has assets of $139.0 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.
Wellington State Bank, Wellington, Texas to
acquire assets and liabilities of the Childress and
Memphis branches of Bank of America Texas,
N.A., Irving, Texas
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11-7-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-6-95)
The applicant has assets of $69.0 million; the
targets have assets of $18.1 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 United Bank, Boca Raton, Florida to
merge with The American Bank of the South,
Merritt Island, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9-29-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-11-95)
The applicant has assets of $307.0 million; the
target has assets of $166.5 million. The parties do
not operate in the same market. The banking factors and considerations relating to the convenience
and needs of the community are consistent with
approval.
326 82nd Annual Report, 1995
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1995—Continued
The Fifth Third Bank of Northern Kentucky,
Inc., Florence, Kentucky to merge with Kentucky Enterprise Bank, F.S.B., Newport,
Kentucky
The Fifth Third Bank of Northeastern Ohio,
Cleveland, Ohio to merge with First Nationwide
Bank, F.S.B., Dallas, Texas
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12-13-95)
The proposed transaction would not be significantly adverse to competition.
(11-29-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-21-95)
The applicant has assets of $976.3 million; the
target has assets of $268.4 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.
Bank of Essex, Tappahannock, Virginia to
acquire assets and liabilities of the West Point
branch of First Union National Bank of
Virginia, Roanoke, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12-13-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-21-95)
The applicant has assets of $91.8 million; the
target has assets of $17.2 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.
Sulphur Springs State Bank, Sulphur Springs,
Texas to merge with Colonial Bank of Greenville, Greenville, Texas
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11-29-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-21-95)
The applicant has assets of $317.7 million; the
target has assets of $81.7 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-26-95)
The applicant has assets of $1.0 billion; the target
has assets of $1.4 billion. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
Southeastern Bank of Florida, Alachva, Florida
to acquire assets and liabilities of the Yulee, Callahan and Hilliard branches of Compass Bank,
Jacksonville, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12-13-95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-28-95)
The applicant has assets of $40.0 million; the
targets have 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.
Mergers Approved Involving Wholly Owned
Subsidiaries of the Same Bank Holding
Company
The following transactions involve banks that are
subsidiaries of the same bank holding company. In
each case, the summary report by the Attorney
General indicates that the transaction would not
have a significantly adverse effect on competition
because the proposed merger is essentially a corporate reorganization. The Board of Governors,
the Federal Reserve Bank, or the Secretary of the
Board of Governors, whichever approved the
application, determined that the competitive
effects of the proposed transaction, the financial
and managerial resources and prospects of the
banks concerned, as well as the convenience and
needs of the community to be served were consistent with approval.
Tables 327
16.—Continued
Institution'
Integra Bank-Pittsburgh, Wheeling, West Virginia
Merger
Integra Bank-North, Titusville, Pennsylvania
Integra Bank-South, Uniontown, Pennsylvania
Premier Bank-North (formerly Dickenson-Buchanan Bank),
Haysi, Virginia
Merger
Premier Bank-Central (Pound branch),
(formerly Peoples Bank, Inc.), Honaker, Virginia
Assets
(millions
of dollars)
7,500
2-22-95
10
2,780
Old Kent Bank, Elmhurst, Illinois
Merger
Edgewood Bank, Countryside, Illinois
1,900
Shelby County State Bank, Shelbyville, Illinois
Merger
Strasburg, State Bank, Strasburg, Illinois
Commercial Bank of Fremont, Fremont, California
Merger
Alameda First National Bank (two Fremont branches),
Alameda, California
2-8-95
3,300
2,500
Firstar Bank Illinois, Naperville, Illinois
Merger
All American Bank, Chicago, Illinois
Colonial Bank, Chicago, Illinois
Community Bank & Trust Company of Edgewater,
Chicago, Illinois
Michigan Avenue National Bank, Chicago, Illinois
First Colonial Bank Southwest, Burbank, Illinois
First Colonial Bank of McHenry County, Crystal Lake, Illinois
First Colonial Bank of Downers Grove, Downers Grove, Illinois
York State Bank, Elmhurst, Illinois
Fox Lake State Bank, Fox Lake, Illinois
First Colonial Bank-High wood, High wood, Illinois
First Colonial Bank-Mundelein, Mundelein, Illinois
First Colonial Bank of DuPage County, Naperville, Illinois
First Colonial Bank-Northwest, Niles, Illinois
First Colonial Bank-Northlake, Northlake, Illinois
Avenue Bank of Oak Park, Oak Park, Illinois
First Colonial Bank-Rosemont, Rosemont, Illinois
First Colonial Bank of Lake County, Vernon Hills, Illinois
Fifth Third Bank of Northeastern Ohio, Cleveland, Ohio
Merger
Fifth Third Bank (certain assets), Cincinnati, Ohio
Date of
approval
3-1-95
73
329
70
224
42
48
37
152
94
102
89
59
88
46
151
117
56
3-2-95
196
De novo
3-8-95
725
95
3-10-95
17
112
39
3-22-95
328 82nd Annual Report, 1995
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors—Continued
Institution'
Concord Commercial Bank, Concord, California
Merger
Alameda First National Bank (Concord branch),
Alameda, California
The Bank of San Ramon Valley, San Ramon, California
Merger
Alameda First National Bank (San Ramon branch),
Alameda, California
Assets
(millions
of dollars)
53
85
ValliWide Bank, Fresno, California
Merger
Community First Bank, Bakersfield, California
739
First Interstate Bank of Commerce, Billings, Montana
Merger
First National Park Bank in Livingston, Livingston, Montana
789
First American Bank Valley, Grand Forks, North Dakota
Merger
First American Bank and Trust of Graf ton, Grafton, North Dakota .
First American Bank of Larimore, Larimore, North Dakota
164
3-30-95
394
5-3-95
176
5-18-95
54
5-25-95
112
31
8,720
6-1-95
531
84
6-2-95
39
First Bank of Arkansas, Jonesboro, Arkansas
Merger
First Bank of Arkansas, Trumann, Arkansas
243
Mercantile Bank of Kansas City, Kansas City, Missouri
Merger
Citizens-Jackson County Bank, Warrensburg, Missouri
777
6-13-95
58
6-14-95
537
1st Source Bank, South Bend, Indiana
Merger
1st Source Bank of Starke County, Hamlet, Indiana
1,540
M&I Marshall & Ilsley Bank, Milwaukee, Wisconsin
Merger
M&I South Shore Bank, Cudahy, Wisconsin
3,882
The Provident Bank, Cincinnati, Ohio
Merger
Heritage Savings Bank, Cincinnati, Ohio
5,000
3-22-95
13
583
Home Bank, Guntersville, Alabama
Merger
Bank of Albertville, Albertville, Alabama
3-22-95
25
Fifth Third Bank of Central Indiana, Indianapolis, Indiana
Merger
Fifth Third Bank of Southeastern Indiana, Greensburg, Indiana
Old Kent Bank, Grand Rapids, Michigan
Merger
First National Bank in Macomb County, Mount Clemens, Michigan
Date of
approval
6-19-95
43
7-28-95
99
51
7-31-95
Tables 329
16.—Continued
Assets
(millions
of dollars)
Institution'
27
Rolling Hills Bank & Trust, Atlantic, Iowa
Merger
Griswold State Bank, Griswold, Iowa
48
460
First Virginia Bank-Colonial, Richmond, Virginia
Merger
First Virginia Bank-Southside, Farmville, Virginia
604
10-26-95
118
15,671
Marine Midland Bank, New York, New York
Merger
Hang Seng Bank Limited (two branches), New York, New York
18,844
10-26-95
59
The Northern Trust Company, Chicago, Illinois
Merger
Northern Trust Bank-O'Hare, N.A., Chicago, Illinois
Northern Trust Bank-Lake Forest, N.A., Chicago, Illinois
Northern Trust Bank-DuPage, Chicago, Illinois
1. Each proposed transaction was to be effected under
the charter of the first-named bank. The entries are in
chronological order of approval. Some transactions
10-21-95
21
Rapides Bank and Trust Company, Alexandria, Louisana
Merger
Central Bank, Alexandria, Louisana
First Community Bank of Mercer County, Inc.,
Princeton, West Virginia
Merger
First Community Bank, Inc. (certain assets),
Princeton, West Virginia
10-2-95
3,500
BankWest, Goodland, Kansas ...
Merger
BankWest, St. Francis, Kansas ..
Hawkeye Bank, Des Moines, Iowa
Merger
Hawkeye Bank of Ankeny, Ankeny, Iowa
9-22-95
12
7,000
Signet Bank-Virginia, Richmond, Virginia ...
Merger
Signet Bank-Maryland, Baltimore, Maryland
Baylake Bank-Kewaunee, Kewaunee, Wisconsin
Merger
Baylake Bank, Sturgeon Bay, Wisconsin
Date of
approval
11-21-95
621
682
384
11-21-95
417
64
11-30-95
245
271
11-30-95
41
De novo
12-13-95
434
include the acquisition of only certain assets and liabilities of the affiliated bank,
330 82nd Annual Report, 1995
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 in
@FedFRASER