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'Report
\U

1996

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. It is also available at the
Board's World Wide Web site, at http://www.bog.frb.fed.us/




Letter ofTransmittal

BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM

Washington, D.C., May 28, 1997

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-third annual report of the Board of Governors
of the Federal Reserve System.
This report covers operations of the Board during calendar year 1996.

Sincerely,




Contents
Part 1

Monetary Policy and
the U.S. Economy in 1996

3
3
4

OVERVIEW
The evolution of policy in 1996
Debt and the monetary aggregates

7
7
9

THE PERFORMANCE OF THE ECONOMY IN 1996
The labor market
Prices

13
13
14
17
19

DOMESTIC SPENDING AND FINANCE IN 1996
The financial backdrop: interest rates, equity, and debt
The household sector
The business sector
The government sector

23
23
24

DEPOSITORY CREDIT AND THE MONETARY AGGREGATES
Depository credit
The monetary aggregates

29 INTERNATIONAL DEVELOPMENTS
30 Foreign economies
32 U.S. international transactions
34 Foreign exchange developments
35 Foreign exchange operations
37 MONETARY POLICY REPORTS TO THE CONGRESS
37 Report on February 20, 1996
61 Report on July 18, 1996

Part 2

Records, Operations,
and Organization

87 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS
87 Regulation D (Reserve Requirements of Depository Institutions)
88 Regulation E (Electronic Fund Transfers)




RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS—Continued
88 Regulation G (Securities Credit by Persons Other than Banks, Brokers, and Dealers),
Regulation T (Credit by Brokers and Dealers), and Regulation U (Credit by Banks
for the Purpose of Purchasing or Carrying Margin Stocks)
88 Regulation H (Membership of State Banking Institutions in the Federal
Reserve System)
89 Regulation H, Regulation K (International Banking Operations), and Regulation Y
(Bank Holding Companies and Change in Bank Control)
89 Regulation H and Regulation Y
90 Regulation K
91 Regulation L (Management Official Interlocks)
91 Regulation M (Consumer Leasing)
91 Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders
of Member Banks; Loans to Holding Companies)
92 Regulation R (Relations with Dealers in Securities Under Section 32, Banking Act
of 1933)
92 Regulation S (Reimbursement for Providing Financial Records; Recordkeeping
Requirements for Certain Financial Records)
93 Regulation T
93 Regulation V (Loan Guarantees for Defense Production)
93 Regulation Y
94 Regulation Z (Truth in Lending)
95 Regulation EE (Netting Eligibility for Financial Institutions)
95 Miscellaneous interpretations
95 Rules Regarding Availability of Information
96 Policy statements and other actions
97 1996 discount rates
101
101
103
103
105
106
106
124
132
140
152
159
168
177

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 30-31, 1996
Meeting held on March 26, 1996
Meeting held on May 21, 1996
Meeting held on July 2-3, 1996
Meeting held on August 20, 1996
Meeting held on September 24, 1996
Meeting held on November 13, 1996
Meeting held on December 17, 1996




187
187
188
189
192
194
197
198
199
203
204
208
208
210
212

CONSUMER AND COMMUNITY AFFAIRS
CRA reform
Fair lending
HMD A data and lending patterns
Community development
Other regulatory matters
Economic effects of the Electronic Fund Transfer Act
Compliance examinations
Agency reports on compliance with consumer regulations
Applications
Consumer complaints
Consumer policies
Consumer Advisory Council
Testimony and legislative recommendations
Recommendations of other agencies

213 LITIGATION
213 Bank Holding Company Act—review of Board actions
214 Litigation under the Financial Institutions Supervisory Act
215 Other actions
217 LEGISLATION ENACTED
217 Economic Growth and Regulatory Paperwork Reduction Act of 1996
223 National Securities Markets Improvment Act of 1996
224 Electronic Freedom of Information Act Amendments of 1996
224 Debt Collection Improvement Act of 1996
225
226
232
234
238
238
238
240
243
246
249
249

BANKING SUPERVISION AND REGULATION
Scope of responsibilities for supervision and regulation
International activities
Supervisory policy
National Information Center
Use of automation
Staff training
Federal Financial Institutions Examination Council
Regulation of the U.S. banking structure
Enforcement of other laws and regulations
Loans to executive officers
Federal Reserve membership

REGULATORY SIMPLIFICATION
251 Comprehensive reviews
252 Regulation D (Reserve Requirements of Depository Institutions)




254
254
255
255
256

REGULATORY SIMPLIFICATION Continued
Regulation E (Electronic Fund Transfers)
Regulation H (Membership of State Banking Institutions in the Federal Reserve
System)
Regulation K (International Banking Operations)
Regulation M (Consumer Leasing)
Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders)
Regulation S (Reimbursement for Providing Financial Records; Recordkeeping
Requirements for Certain Financial Records)
Regulation T (Credit by Brokers and Dealers)
Regulation Y (Bank Holding Companies and Change in Bank Control)
Regulation Z (Truth in Lending)
Regulation CC (Availability of Funds and Collection of Checks)
Rescission of Regulations R and V

251
258
262
263
267
268
268
268
270

FEDERAL RESERVE BANKS
Developments in Federal Reserve priced services
Developments in currency and coin
Developments in fiscal agency and government depository services
Income and expenses
Holdings of securities and loans
Volume of operations
Federal Reserve Bank premises
Pro forma financial statements for Federal Reserve priced services

275

BOARD OF GOVERNORS FINANCIAL STATEMENTS

283
284

STATISTICAL TABLES
1. Detailed statement of condition of all Federal Reserve Banks combined,
December 31, 1996
2. Statement of condition of each Federal Reserve Bank,
December 31, 1996 and 1995
3. Federal Reserve open market transactions, 1996
4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities,
December 31, 1994-96
5. Number and salaries of officers and employees of Federal Reserve Banks,
December 31, 1996
6. Income and expenses of Federal Reserve Banks, 1996
7. Income and expenses of Federal Reserve Banks, 1914-96
8. Acquisition costs and net book value of premises of Federal Reserve
Banks and Branches, December 31, 1996
9. Operations in principal departments of Federal Reserve Banks, 1993-96
10. Federal Reserve Bank interest rates, December 31, 1996
11. Reserve requirements of depository institutions, December 31, 1996

252
252
252
253
253
253

286
290
292
293
294
298
302
303
304
305




306
307
308
314
315

STATISTICAL TABLES—Continued
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, 1996 and 1995
14. Reserves of depository institutions, Federal Reserve Bank credit,
and related items—year-end 1918-96 and month-end 1996
15. Number of banking offices in the United States, December 31, 1995 and 1996
16. Mergers, consolidations, and acquisitions of assets or assumptions
of liabilities approved by the Board of Governors, 1996

329
330
332
333
334
335
336
338

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

339

Directors

359

MAPS OF THE FEDERAL RESERVE SYSTEM

363

INDEX




Parti
Monetary Policy and
the US. Economy in 1996




Overview
The economy performed impressively
in 1996. Solid advances in the real expenditures of households and businesses
led to sizable gains in output. Employment rose briskly, and the unemployment rate edged down to its lowest
level of the current expansion. Consumer price inflation increased because
of the probably temporary effects of
firmness in food and energy markets,
but some broader price measures
showed inflation holding steady or even
declining. With the economy strengthening, intermediate- and long-term interest rates rose on net, but credit continued to be amply available to businesses
and most households, and equity prices
soared.
Several factors helped to restrain
price increases in the face of high levels
of resource utilization. Workers' concerns about job security helped limit, to
some degree, the acceleration of wages,
and further success in controlling health
care costs helped to temper the rise in
benefits. Moreover, significant declines
in the prices of U.S. imports, resulting
from low inflation abroad and appreciation of the dollar on foreign exchange
markets, tended to hold down domestic
prices. Damped inflation expectations
probably contributed as well to the
favorable price performance: A lengthening run of years during which inflation has been in a more moderate range,
together with an understanding of the
NOTE. The discussion here and in the next three
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 1997). Data cited here and in the
next four chapters are those available as of midMarch 1997.



Federal Reserve's commitment to maintaining progress toward price stability,
may have discouraged aggressive pricing behavior. Business firms continued
to rely on cost control and gains in productivity, rather than on price increases,
as the primary channels for achieving
profit growth.
Still, the Federal Open Market Committee (FOMC) recognized the danger
that pressures emanating from the tight
labor market might trigger an acceleration of prices, which could eventually undermine the ongoing economic
expansion. Consequently, although conditions were not deemed to warrant
immediate policy action, the Committee's policy directives starting in mid1996 reflected a perception that the most
likely direction of any policy action
would be toward greater restraint in the
provision of reserves to the banking system. Forestalling a disruptive buildup of
inflationary pressures in the near term
and moving toward price stability over
time remained central to the System's
mission of promoting maximum sustainable growth of employment and
production.

The Evolution of Policy in 1996
The FOMC eased the stance of monetary policy twice around the beginning
of the year—in December 1995 and in
January—lowering the federal funds
rate Vi percentage point in total, to
5 lA percent. These actions were taken to
offset the effect on the level of the real
federal funds rate of declines in inflation
and inflation expectations in the second
half of 1995 and thereby to help ensure
the resumption of moderate economic

83rd Annual Report, 1996
growth after the marked slowdown and
inventory correction in late 1995.
By the spring, economic growth had
become more vigorous than either the
Committee or financial markets had
foreseen. In response, intermediate- and
longer-term interest rates as of mid-May
were up around a full percentage point
from the two-year lows reached early in
the year. In combination with some softening of economic activity abroad and
declines in interest rates in major foreign industrial countries, these developments contributed to a further appreciation of the dollar, building on the rise
that had started in mid-1995. The Committee anticipated that the increase in
the cost of credit, along with the higher
exchange value of the dollar, would be
sufficient to foster a downshift in economic expansion to a more sustainable
pace and contain price pressures; thus, it
left its policy stance unchanged at its
spring meetings.
By early summer, however, the continued momentum in demand and pressures on labor resources that were being
reflected in faster growth in wages were
seen as posing a threat of increased

inflation. Core inflation remained moderate, but in light of the heightened risk
that it would turn upward, the Committee in its early July directive to the Manager of the Open Market Account indicated its view that near-term economic
developments were more likely to lead
to a tightening of policy than to an easing. Labor markets continued to be taut
over the balance of the year, and this
bias toward restraint was included in
directives adopted at all of the Committee's remaining meetings in 1996.
After having peaked during midsummer, interest rates moved down on
balance through the fall, as expansion of
consumer spending and economic activity in general appeared to be moderating
and markets saw less likelihood of a
need for Federal Reserve firming action.
Equity prices fell back for a time during
the summer, reversing some of the substantial increase registered over the first
half of the year, but by autumn they had
reached new highs. Interest rates and
dollar exchange rates turned back up
late in the year when signs of rapid
growth and more intense use of the
economy's resources re-emerged.

Selected Interest Rates

Debt and the Monetary
Aggregates

Percent
30-year
Treasury

3-month
Treasury
I

1995

!

i

i

!

1 }

1996

NOTE. Small tick marks refer to dates in 1995 and
1996 on which the Federal Open Market Committee held
scheduled meetings. Dashed lines indicate dates of meetings at which the Committee announced a monetary policy action: July 6, 1995; December 19, 1995; and January 31, 1996. The data are daily.




For the nonfinancial business sector, the
effect of the higher intermediate- and
long-term interest rates on the overall
cost of funds in 1996 was offset to some
degree by an easing of lending terms at
banks and a narrowing of yield spreads
on corporate bonds over Treasuries, as
well as by declines in the cost of capital
in the equity market. Encouraged, perhaps, by the prospects of sustained economic expansion and low inflation,
banks, market lenders, and equity investors displayed a strong appetite for business obligations and seemed willing to
require less compensation for the pos-

Overview
sible risks entailed. Some households,
by contrast, faced a tightening of standards and terms with respect to credit
card debt and some other types of consumer debt as banks reacted to a rising
volume of delinquencies and chargeoffs on these instruments. However,
credit availability under home equity
lines increased, particularly from
finance companies but also from banks.
Overall debt growth was slightly above
the midpoint of its 3 percent to 7 percent
monitoring range. The growth rates of
M2 and M3 edged up and, as was anticipated in the monetary policy reports to
the Congress in February and July, both
aggregates ended 1996 near or above
the upper end of their growth ranges.
Again in 1996, the growth of M2 relative to nominal income and interest rates
was generally in line with historical relationships, in contrast to its behavior during the early years of the decade.
•




The Performance of the Economy in 1996
The economy turned in a remarkably
favorable performance in 1996. Real
GDP rose more than 3 percent, one of
the larger gains of the past several years
and appreciably more than the FOMC
was expecting early in the year. Employment rose substantially, and the unemployment rate declined further. Tightness of the labor market led to a moderate pickup in wage increases in 1996.
However, acceleration of prices was
confined largely to the food and energy
sectors; prices for other consumer
products decelerated, as did prices paid
by businesses for capital goods and
materials.

The Labor Market
The number of jobs on nonfarm payrolls
rose more than 2Vi million from December 1995 to December 1996, an increase
of about 2VA percent. At year-end, the
job count was up more than \2Vi million from the lows of the early 1990s.
Employment in the private serviceproducing sector, in which nearly
two-thirds of all nonfarm workers are
Change in Real GDP
Percent, Q4 to Q4

JHLJJKJ^HJJ^^^LLJL
1992

1994

1996

NOTE. The data are derived from chained (1992)
dollars and come from the Department of Commerce.




employed, increased about 3 percent
during 1996. Moderate employment
gains were posted in retail trade, transportation, and finance, and sizable gains
in hiring continued in some other
service-producing industries, such as
data processing, computer services,
and engineering and management. Job
growth at suppliers of personnel—a
category that includes temporary help
agencies—was more than 6 percent, a
touch faster than in 1995 but much
slower than it had been over 1992-94;
with the tightening of labor markets in
the past couple of years, longer-lasting
commitments in hiring may have come
back into greater favor among some
employers.
Employment changes among producers of goods were mixed in 1996.
In construction, employment climbed
about 5Vi percent, to a new high that
was almost 4 percent above the peak of
the last business expansion. In manufacturing, increases in factory jobs through
the latter part of 1996 were not sufficient
to reverse declines that had taken place
earlier in the year. On net, the loss of
factory jobs amounted to about Vi percent, a shade less than the average rate
of decline since 1979, the year in which
manufacturing employment peaked.
Manufacturers of durable goods boosted
employment slightly last year, but many
producers of nondurables implemented
further job cuts. As in many other recent
years, reductions in factory employment
were accompanied by strong gains
in worker productivity. Consequently,
increases in output were sizable—the
rise in the Federal Reserve's index of
manufacturing production cumulated to
more than 4 percent over the year.

8

83 rd Annual Report, 1996

Growth of output per hour in the nonfarm business sector as a whole picked
up in 1996, rising about 1 percent over
the year according to preliminary data.
However, coming after a three-year
period in which output per hour changed
little, this rise left the average rate of
productivity growth in the 1990s a bit
below that of the 1980s and well below
the average gains achieved in the first
three decades after World War II. The
sustained sluggishness in measured productivity growth this decade is difficult
to explain, as it has occurred during a
period when high levels of investment
in new capital and extensive restructuring of business operations should have
been boosting the efficiency of workers.
Of course, measurement problems could
be distorting the data. As a summary
measure that relates aggregate output to
aggregate input of labor, the nonfarm
productivity index is affected by whatever deficiencies might be present either
in adding up the nominal expenditures
for goods and services in the economy
or adjusting those expenditures for
price change. A considerable amount of
recent research suggests that growth
of output and productivity is in fact
understated, but whether the degree of
understatement has been increasing over
time is less clear.
In contrast to the experience of most
other recent years, the 1996 rise in employment was accompanied by a sustained pickup in the labor force participation rate. The rise in participation
boosted the labor supply and helped to
relieve pressures on the labor market.
Nonetheless, hiring during 1996 was
sufficient to reduce the civilian unemployment rate from a December 1995
rate of 5.6 percent to a December 1996
rate of 5.3 percent.
Tightness of the labor market appears
to have exerted some upward pressure
on the cost of labor in 1996, even as



some workers continued to express anxiety about job security. The employment
cost index (ECI) for the private nonfarm
sector of the economy snowed compensation per hour moving up 3.1 percent
over the year. The index had risen
2.6 percent in 1995. The step-up in
hourly pay increases was to some extent
the result of a hike in the minimum
wage that took place at the start of
October. More generally, however, businesses probably had to boost hourly
compensation either to attract workers
or to retain them at a time when alternative employment opportunities were perceived to be more widely available.
Labor Market Conditions
Millions of jobs, Dec. to Dec.
Net change in payroll employment
Total nonfarm

I . I

1

i
Percent

Civilian unemployment rate

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

Illllll
1990
1992
1994
1996
NOTE. The data are from the Department of Labor.
The break in data for the unemployment rate at January
1994 marks the introduction of a redesigned survey; data
from that point on are not directly comparable with those
of earlier periods.

The Performance of the Economy in 1996
As in 1995, increases in hourly compensation in 1996 came more as wage
and salary increases than as increases in
fringe benefits. According to the ECI,
the rise in wage rates for workers in the
nonfarm sector amounted to nearly
3 Vi percent after a rise of 23A percent in
1995. By contrast, the ECI measure of
the hourly cost of benefits rose only
2 percent, slightly less than it did in
1995 and much less than it rose on average over the past decade. Increases in
the cost of benefits have been held down
in recent years by reduced inflation for
medical services and by the actions that
many firms have taken to shift employees into managed care arrangements and
to require them to assume a greater portion of the cost of health insurance and
other medical benefits.

Prices
The consumer price index rose more
rapidly than in 1995, but the step-up
was concentrated in the food and energy
sectors—areas in which prices were
affected by supply limitations that
seemed likely to be of temporary duration. The CPI excluding food and
energy—often called the "core" CPI—
rose just a touch more than 2Vi percent
after having increased 3 percent during
1995. Both the total CPI and the core
CPI have been affected in the past two
years by technical improvements implemented by the Bureau of Labor Statistics that are aimed at obtaining more
accurate readings of price change; the
rise in the CPI in 1996 would have been
somewhat greater if procedures used
through 1994 had not been altered.
Other price indexes generally rose
less rapidly than the CPI. Like the overall CPI, the chain-type price index
for personal consumption expenditures
(PCE) accelerated somewhat in 1996,
but its rate of rise, shown in the accom


panying table, was significantly lower
than that of the CPI. The two measures
of consumer prices differ to some
degree in their weights and methods of
aggregation. They also differ somewhat
in their selection of price data, with the
PCE measure relying on alternative data
in some areas in which the accuracy of
the CPI has been questioned. The chaintype price index for gross domestic
purchases, which takes account of the
prices paid by businesses and governments as well as those paid by consumers, moved up 2lA percent during 1996,
about the same as the percentage rise
during 1995. By contrast, price measures associated with GDP decelerated
in 1996 to thirty-year lows of around
2 percent or less. Conceptually, the GDP
measures are indicative of price changes
for goods and services that are produced
domestically rather than price changes
for goods and services purchased
domestically—foreign trade accounting
for the difference.
The 1996 outcomes for all these measures reflected an economy in which
inflation pressures were muted. Sharp
declines in non-oil import prices during
the year lowered input costs for many
domestic firms and likely caused other
firms to restrain their product prices for
Alternative Measures of Price Change
Percent
Price measure

1995

1996

Fixed-weight
Consumer price index
Excluding food and energy

2.7
3.0

3.2
2.6

Chain-type
Personal consumption expenditures
Excluding food and energy
Gross domestic purchases
Gross domestic product

2.1
2.3
2.3
2.5

2.5
2.0
2.2
2.1

Deflator
Gross domestic product

2.5

l.:

NOTE. Changes are based on quarterly averages and
are measured to the fourth quarter of the year indicated
from the fourth quarter of the previous year.

10

83rd Annual Report, 1996

fear of losing market share to foreign
competitors. Also important, in all likelihood, were the favorable imprints that
several years of moderate and relatively
stable rates of inflation have left on
inflation expectations. Despite the uptick in hourly compensation and adverse
developments in the food and energy
sectors, survey data showed little change
in consumers' expectations of inflation,
and private forecasters' views of the
prospects for prices held steady. Businesses commonly described the situation as one in which competitive pressures were intense and the "leverage"
for raising prices simply was not
present.
Food and energy prices were the
exceptions. In the food sector, steep
increases in grain prices in 1995 and the
first few months of 1996 caused production adjustments among livestock farmers and substantial price increases for
some livestock products. Later in the
year, grain prices fell back, but livestock
production could not recover in time to
prevent significant price advances for
some retail foods. Consumer prices for
pork, poultry, and dairy products registered their largest increases in several
years. Retail beef prices also rose but
only moderately: Expansion of the cattle
herd in previous years had laid the
groundwork for a high flow of product
to consumers, and herd reductions that
occurred in 1996 augmented that flow.
Elsewhere in the food sector, acceleration was reported in the price index for
food away from home—a category that
has a weight of almost 40 percent in the
CPI for food; the rise in the minimum
wage appears to have been an important
factor in the acceleration. All told, the
1996 rise in CPI food prices amounted
to 41/4 percent, the largest increase since
1990.
The energy sector was the other
major part of the economy in which



significant inflation pressures were evident in 1996. Crude oil prices, which
had started firming in the latter part of
1995, continued on an upward course
through much of 1996, rising more than
30 percent in total. Stocks of crude oil
and petroleum products were tight
during the year, even after allowing for
an apparent downward trend in firms'
desired inventories. Inventory building
was forestalled by production disruptions at refineries, a string of weather
problems here and abroad that boosted
fuel requirements for heating or cooling,
and a reluctance of firms to take on
inventories that seemed likely to fall in
value once renewed supplies from Iraq
became available. Natural gas, too, was
in tight supply at times, and its price
surged. With retail prices of gasoline,
fuel oil, and natural gas all moving up
substantially, the CPI for energy rose
Change in Prices
Percent, Q4 to Q4
Consumer

Consumer excluding food and energy

1990

1992

1994

1996

NOTE. Consumer price index for all urban consumers.
Based on data from the Department of Labor.

The Performance of the Economy in 1996
about 7 xh percent over the four quarters
of 1996, the largest increase since the
Gulf War.
The CPI for goods other than food
and energy rose 1 percent during 1996,
one of the smallest increases of recent
decades. As in 1995, price increases for
new vehicles were moderate, and prices
of used cars turned down after several
years of sizable advances. Prices of
apparel and house furnishings also fell;
these prices, as well as the prices
of vehicles, may have been heavily
affected by the softness of import prices.
Moderate increases were the rule among
most other categories of goods in the
CPI. In the producer price index, prices
of capital equipment rose only Vi percent over 1996; computer prices continued to plunge, and the prices of other
types of equipment rose moderately, on
balance. Materials prices were weak:
Prices of intermediate materials excluding food and energy declined about
VA percent from the fourth quarter
of 1995 to the final quarter of 1996,
and the producer price index for crude
materials excluding food and energy
dropped more than 6I/2 percent over
that period. Productive capacity was
adequate among domestic producers of
materials, and supplies of many materials were readily available at competitive
prices on the world market.




11

The CPI for non-energy services
increased VA percent in 1996. The rise
was somewhat smaller than the
increases of most other recent years.
Prices of medical services decelerated
for a sixth consecutive year, and
increases in the cost of shelter were held
down by another year of moderate
advances in residential rent and owners'
equivalent rent. Large increases were
evident only in scattered categories:
Airfares posted a large increase, and
educational costs, maintaining a longestablished trend, continued to rise quite
rapidly relative to prices in general.
•

13

Domestic Spending and Finance in 1996
Aggregate spending of households,
businesses, and governments recorded a
sizable advance in 1996, rising a touch
faster than real GDP. Household expenditures picked up, and business investment expenditures surged, the latter bolstered by increases in business profits
and ready access to a variety of sources
of finance on quite favorable terms.
Government outlays for consumption
and investment rose moderately in real
terms.

The Financial Backdrop:
Interest Rates, Equity, and Debt
Declines in interest rates during the second half of 1996, elicited by evidence
that economic growth had moderated,
only partially reversed the increases
over the first half. Longer-term Treasury
rates rose on balance on the order of
I/2 percentage point over the year, and
intermediate rates were up somewhat
more. Spreads between most private
rates and Treasuries narrowed markedly,
reflecting the high quality of business
balance sheets. Municipal rates moved
Selected Treasury Rates

up comparatively little over the first half
of 1996, as earlier relative increases in
these yields associated with discussions
of fundamental tax reform were reversed
when the likelihood of such changes
to the tax code diminished. Movements
in interest rates over the year appeared
to be basically in their real component,
as inflation expectations were little
changed, according to surveys.
The substantial rise in equity prices in
1996 was only a bit below that registered in 1995. However, in contrast to
1995, when bond rates declined substantially, the equity gains came despite the
net rise in bond rates. Corporate earnings were robust, but their advance fell
short of share price increases, and priceearnings ratios rose to unusually high
levels; dividend-price ratios were even
more out of line with historical experience. Market participants appeared to
be anticipating further robust earnings
growth, and they also seemed to be requiring much less compensation for the
extra risk of holding equiti *,s compared
to, say, Treasury bonds. Such evaluations may have been based on a perceived environment of persisting low
inflation and balanced economic growth

Percent

Major Stock Price Indexes
Index. December 1995 = 100

1965 1970

1975

NOTE. The twenty-year Treasury bond rate is shown
until the first issuance of the thirty-year Treasury bond, in
February 1977.




1995
NOTE. The data are monthly.

1996

14

83 rd Annual Report, 1996

Total Domestic Nonfinancial Debt
Trillions of dollars
Actual
7%

15.0
14.5
14.0

1995

1996

NOTE. The range was adopted by the FOMC for the
period from 1995:Q4 to 1996:Q4.

that would lower the odds of disruptions
to economic activity.
Other asset prices were generally
subdued. Commodity prices were flat
to down. Commercial real estate prices,
although no longer falling, rose at little
more than the rate of inflation. Residential real estate prices increased
moderately.
Growth of the debt of nonfinancial
sectors in 1996, about 5Vi percent, was
similar to the rise in 1995. The growth
of household sector debt dropped from
SlA percent to VA percent, a deceleration accounted for entirely by a sharp
slowing of consumer credit. The expansion of business borrowing was held
below its 1995 pace by an increase
in internally generated funds, but at
43/4 percent it was faster than in any
other year since 1989. Its strength
reflected robust spending, extremely
favorable credit conditions, and financing needs associated with a high level of
mergers and acquisitions. Growth of
federal debt slowed a bit further in 1996.
State and local debt expanded slightly
after two years of contraction.

problems arose with greater frequency
in the household sector in 1996 and
may have restrained spending in some
instances, households also benefited
from healthy increases in real income
and another year of sizable gains in
wealth. Consumers were relatively optimistic about prospects for the economy
at the start of 1996, and they became
more so as the year progressed. Given
this upbeat view, households were willing to take on additional mortgage debt
at a brisk pace, but they did cut back on
expansion of consumer credit after very
large increases in 1994 and 1995.
Spending, Income, and Saving
After having risen less than 2 percent in
1995, real personal consumption expenditures moved up 23A percent in 1996.
Real outlays for consumer durables
rose more than 5 percent after a gain
of only VA percent the previous year.
As has been true for many years, real
expenditures on computers and electronic equipment outpaced the growth
of other household outlays by a wide
margin in 1996. Sizable increases were
also reported for most other types
of consumer durables. However, real
expenditures on vehicles changed little
Change in Real Income and Consumption
Percent, Q4 to Q4
Disposable personal income
Personal consumption expenditures

.1
1

6
4

I L

H

•

1

2

1
™

+
0

The Household Sector
Household expenditures picked up in
1996—both consumer spending and
residential investment. Although debt



1

t
1992

1

!
1994

1
1996

NOTE. The data are derived from chained (1992)
dollars and come from the Department of Commerce.

Domestic Spending and Finance in 1996
on net over the year, as gains achieved
during the first half were reversed after
midyear. Late in 1996, sales of light
vehicles may have been constrained to
some degree by supply shortages that
arose during strikes in the United States
and Canada. Consumer purchases of
nondurables rose PA percent in 1996
after having increased 1 percent during
1995. Spending for services rose nearly
23/4 percent, slightly more than the average gain in previous years of the
expansion.
After-tax personal income increased
5 percent in nominal terms over the four
quarters of 1996. Wages and salaries
rose briskly, and the income of farm
proprietors surged. Other types of
income generally exhibited moderate
gains. Given the low level of price inflation, the rise in nominal income translated into another significant advance in
real disposable income—about 23A percent over the year.
As in 1995, strong cross-currents
continued to shape individual households' willingness—and ability—to
spend from current income. Huge
increases in stock market wealth provided some households the wherewithal
to boost spending at a pace considerably
faster than the growth of disposable
income. But a number of households
were likely held back by the need to
divert income to the servicing of debt,
and according to some survey evidence,
households have become more concerned about saving for retirement.
Responding to these influences, the
annual average of the personal saving
rate was up slightly from that of 1995;
however, it remained relatively low
compared with its longer-run average.

15

4 percent in real terms over the four
quarters of 1996, more than reversing
a small decline in the previous year.
Demand for single-family housing was
especially strong. Although interest rates
on longer-term fixed-rate mortgage
loans moved up considerably in 1996, a
substantial number of homebuyers sidestepped at least the initial costs by using
adjustable-rate loans that were available
at lower rates. The effects of the rate
increases on the single-family market
were cushioned by other influences
as well, most notably the growth of
employment and income. Even for
fixed-rate loans, mortgage financing
costs held at a level that, by historical
standards, was low relative to household
incomes. All told, sales of new homes
surged to the highest annual total of the
current expansion, and sales of existing
homes established a historical high.
New construction of single-family
dwellings also rose but not so dramatically as sales, as builders apparently
chose to work off some of their inventories of unsold units, which had
climbed in 1995.
Construction of multifamily units
maintained a path of recovery from the
extreme lows of the early 1990s, moving up about 14 percent in terms of
annual totals. The number of multifamPrivate Housing Starts
Millions of units, annual rate

Single-family

Residential Investment
Outlays for residential investment
expenditures posted a gain of about



1990

1994

1996

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

16

83rd Annual Report, 1996

ily units started—about 315,000—was
double the number started in 1993,
when construction of these units was at
a low. However, compared with previous peaks, the 1996 total was less
impressive—starts were twice as high
in some years of the 1970s and 1980s.
Although market conditions for multifamily properties varied considerably
from city to city in 1996, the national
average vacancy rate for multifamily
rental units remained relatively high,
and demographic influences were probably less supportive of multifamily
housing than they were a decade or so
ago. Also, manufactured houses have
provided an increased number of families with an alternative to rental apartments in recent years.

Household Finance
Consumer credit grew 814 percent
in 1996, just a bit over half the pace
of the preceding two years. The sharp
retrenchment likely reflected the burdens associated with a substantial accumulation of outstanding consumer debt
over recent years as well as some tightening of lending terms and standards
by commercial banks, particularly with
respect to credit cards.

The slowing in consumer credit
growth also was associated with a shift
toward increased use of home equity
loans. These loans were marketed vigorously, particularly by finance companies, in part as a vehicle for consolidating credit card and other outstanding
consumer debt. Some of the growth in
home equity loans reflected moves by
finance companies and banks into the
"subprime" market—lending either to
higher-risk customers or on terms entailing unusually high loan-to-value ratios,
or both. The push to expand home
equity lending offset to some degree the
effect of tighter lending standards and
terms on credit cards and other forms of
consumer credit.
The shift toward home equity loans,
along with a strong housing market, led
to a pickup in mortgage debt growth in
1996 to a rate of 8lA percent, the largest
advance since 1990. Mortgage borrowing for home purchases was restrained
surprisingly little by the increase in
interest rates over the first half of the
year. As noted previously, many borrowers were able to put off, at least for a
time, much of the impact of the increase
in rates by shifting to adjustable-rate
mortgages, the rates on which rose much
less than those on fixed-rate mortgages.
Delinquency Rates on Household Loans
Percent

Household Debt-Service Burden
Percent

Auto loans at finance companies

Mortgages (more than 60 days)
1984

1987

1990

1993

1996

NOTE. AS a percentage of disposable personal income.
Debt is household mortgage and consumer debt, and debt
service is the sum of required interest and principal
payments on such debt. The data are quarterly.




I 1 1 1 I I I 1 1 1 i I 1 11 I
1981
1984
1987
1990
1993
1996
NOTE. The data for mortgages are from the Mortgage
Bankers Association; for auto loans and credit cards,
from the Federal Reserve. The data are quarterly.

Domestic Spending and Finance in 1996
Although the growth of household
sector debt fell off a bit from the pace of
recent years, it still exceeded that of
disposable income. With loan rates up
on average for mortgages and down only
a little on consumer loans, debt-service
burdens continued to rise, and some
households experienced difficulties servicing certain kinds of debt. Delinquency rates on banks' consumer loans,
particularly credit card loans, posted a
second year of considerable increase,
although they remained below levels in
the early 1990s. At finance companies
that are subsidiaries of automakers, auto
loan delinquency rates rose to very high
levels; but this rise apparently resulted
in large part from a business strategy
to compete in the vehicle market by
easing lending standards. Auto loan
delinquency rates at commercial banks
also rose but remained well within historical ranges. Delinquency rates on
residential mortgages turned up at some
lenders but remained low overall.
Despite the rise in delinquencies
on consumer debt, household balance
sheets appeared healthy overall, as
growth of household assets in 1995 and
1996 more than kept pace with the
growth of debt. Household net worth,
the sum of household financial claims
and tangible assets less liabilities,
rose approximately $5 trillion from
the end of 1994 to the end of 1996,
an amount that is equal to almost a
full year's personal disposable income.
Roughly two-thirds of that gain was
accounted for by the surge in the prices
of corporate shares, which lifted the
value of a wide range of household
investments, not only directly held
stocks but also assets held in other forms
such as pension plans. The ratio of
household net worth to personal disposable income continued to climb in
1996, moving to its highest level in
recent decades.



17

The Business Sector
The performance of the business sector
in 1996 was marked by continued rapid
growth of fixed investment, a further
increase in profits, and a conspicuous
absence of serious imbalances. In these
circumstances, businesses were able to
obtain credit on exceptionally favorable
terms. They also benefited from the rise
in share values, which lowered the cost
of obtaining finance through the equity
markets.
Investment Expenditures
Business fixed investment recorded a
fifth consecutive year of strong expansion in 1996, moving up about 9Vi percent. As in other recent years, investment was driven by rising profits,
favorable trends in the cost of capital,
and the ongoing efforts of businesses
to boost efficiency. Although much of
the investment spending was to replace
depreciated equipment, the net addition
to the aggregate capital stock appears to
have been substantial. The rate of rise in
the stock has picked up over the past
two or three years after subpar growth
through the latter half of the 1980s and
first few years of the 1990s; the resultChange in Real Business Fixed Investment
Percent, Q4 to Q4
Structures
Producer's durable equipment

20

II I

10

10

1992

1994

1996

NOTE. The data are derived from chained (1992)
dollars and come from the Department of Commerce.

18

83rd Annual Report, 1996

ing rise in the level of capital per worker
should enhance labor productivity and
potential output.
Equipment outlays moved up almost
93/4 percent in real terms in 1996. Business purchases of office and computing
equipment once again rose much faster
than the outlays for other types of equipment. Computer purchases were propelled by many of the same forces
that have been at work in other recent
years—most particularly, the expansion
of networks and the availability of new
models of computers embodying substantially improved computing power
at highly attractive prices. Outlays for
communications equipment also rose
quite rapidly in 1996. Gains for other
types of equipment were generally more
modest.
Investment in nonresidential structures also rose substantially over the
four quarters of 1996, posting the largest
advance in several years. Business
spending on structures went through an
extended contraction in the latter part
of the 1980s and early 1990s, and until
recently the subsequent recovery has
been relatively slow. That the 1996 gain
in nonresidential investment would be
so large was not evident until late in the
year, when incoming data began to trace
out sizable increases in new construcChange in Real Business Inventories

tion for many types of buildings. Investment in office buildings scored an especially large gain over the year, amid
widespread reports of firming market
conditions and reduced vacancy rates,
and real outlays for other commercial
structures moved up for a fifth consecutive year. Financing appeared to be in
ample supply for commercial construction, and according to reports from the
District Reserve Banks, speculative
office building projects—that is, those
without pre-committed tenants—were
becoming more common.
Inventory investment was relatively
subdued in 1996. The stock of nonfarm
business inventories rose only V/i percent over the four quarters of the
year, the smallest increase since 1992.
Businesses had been moving toward a
reduced rate of stockpiling over much of
1995, and the rate of accumulation came
almost to a halt in early 1996, when
stocks of motor vehicles plummeted in
conjunction with a strike at two plants
that manufacture auto parts. Thereafter,
inventory developments were relatively
uneventful. Stocks of vehicles changed
little on net over the final three quarters
of the year, and accumulation of inventories by other nonfarm businesses was
moderate on average. Stocks at year-end
generally appeared to be at comfortable
levels—or perhaps even a little tight—
relative to trends in sales.

Percent, annual rate

Corporate Profits and
Business Finance

• Illlll-I
1
J

J_

1992

J

1994

L

1996

NOTE. Total nonfarm sector. The data are seasonally
adjusted, derived from chained (1992) dollars, and come
from the Department of Commerce.




Business profits turned in another strong
performance in 1996, building on the
impressive gains of other recent years.
Economic profits earned by foreign subsidiaries of U.S. corporations fluctuated
from quarter to quarter but remained at
high levels, and returns from domestic
operations rose substantially for both
financial and nonfinancial firms. Domes-

Domestic Spending and Finance in 1996
tic profits of nonfinancial corporations,
measured in proportion to the nominal
value of these firms' output, reached the
highest levels of the current expansion.
Although many interest rates rose in
1996, businesses continued to find credit
readily available and at favorable terms.
This accommodation likely resulted in
part from the strong financial condition
of firms, reflected in minimal delinquency rates on bank loans to businesses and very low default rates on
corporate bonds, including those of
low-rated issuers. With securitization of
household debt instruments proceeding
apace and with high levels of capital,
banks appeared to have ample room on
their balance sheets for business loans.
This situation encouraged the development of a highly competitive lending
environment in which banks further
eased a variety of credit terms, such as
covenants and markups over base rates.
In capital markets, interest rate spreads
of private debt instruments over Treasuries narrowed, particularly in the
case of high-yield bonds. Surveys by
the National Federation of Independent
Business revealed a rising tendency of
small businesses to borrow over 1996,
with credit availability reported to be in
Corporate Profits before Taxes

19

a range more favorable than at any time
in the current economic expansion.
On a gross basis, a pickup in bond
issuance by nonfinancial firms in
1996 was accounted for mainly by
speculative-grade offerings, likely in
part a reaction to the improved pricing. In the fourth quarter, however,
investment-grade issuance was substantial, responding to the decline in interest
rates that began in late summer. Commercial paper declined in the final
months of the year, primarily because of
paydowns from bond proceeds, but bank
lending to businesses was strong, in
part because of robust merger activity.
Despite a marked increase in gross stock
issuance—with strong gains both for
initial public offerings and for seasoned offerings—equity continued to
be retired on net, as merger activity
remained brisk and businesses used
ample cash resources to repurchase their
outstanding shares.

The Government Sector
Real federal expenditures on consumption and gross investment—the part of
federal spending that is included in
GDP—rose about Wi percent, on net,
from the fourth quarter of 1995 to the
fourth quarter of 1996, but the rise was

Percent

12

Change in Real Federal Expenditures on
Consumption and Investment
Percent, Q4 to Q4

J
1984

i i
1987

i

1 I
1990

1

I i
1993

I

]
1996

NOTE. Profits of nonfinancial corporations from
domestic operations, with adjustments for inventory valuation and capital consumption, as a percentage of GDP
of nonfinancial corporate sector. Last observation is
1996:Q3.




1992

1994

1996

NOTE. The data are derived from chained (1992)
dollars and come from the Department of Commerce.

20

83 rd Annual Report, 1996

mostly an artifact of late-1995 real purchases having been pushed to especially
low levels by government shutdowns.
The underlying trend of federal consumption and investment expenditures
is probably better represented by the
23/4 percent annual rate of decline from
the fourth quarter of 1994 to the final
quarter of 1996. Reductions were apparent over this period both in real defense
purchases and in real nondefense
purchases.
Federal expenditures in the unified
budget increased about 3 percent in
nominal terms in fiscal 1996 after having increased 33A percent in fiscal 1995.
Slower growth was recorded across
many budgetary categories in fiscal
1996, and outright declines were reported in some. Combined expenditures
on health, social insurance, and income
security—items that account for more
than half of all federal outlays—moved
up 4Vi percent, the smallest increase this
decade. Defense spending was down
about 2]A percent in nominal terms, and
net interest outlays rose much less rapidly than in fiscal 1995. Measured relative to the size of nominal GDP, total
outlays in fiscal 1996 were the smallest
since 1979. Legislative restraint has
led to cuts in a number of discretionary programs in recent years, and the
Change in Real State and Local
Expenditures on
Consumption and Investment
Percent, Q4 to Q4

• lllll
1992

1994

1996

NOTE. The data are derived from chained (1992)
dollars and come from the Department of Commerce.




expanding economy has relieved pressure on those outlays that tend to vary
inversely with the strength of activity.
Federal receipts increased about
IV2 percent in fiscal 1996, the third year
in which growth of receipts outpaced
growth of nominal GDP by a significant margin. Receipts from individual
income taxes climbed more than 11 percent in the most recent fiscal year, in
conjunction with healthy increases in
households' taxable earnings from capital and labor. Taxes on corporate profits
also continued to rise rapidly, more or
less in step with the growth of business
earnings. The rapid growth of receipts,
coupled with the restrained growth of
expenditures, brought the unified budget
deficit down to $107 billion in fiscal
1996 from almost $165 billion in fiscal
1995. The deficit as a share of nominal
GDP was 1.4 percent, the smallest in
more than twenty years.
Federal government debt grew
33/4 percent, the lowest rate in more than
two decades. The growth of federal debt
was held down in 1996 by legislative
constraints on spending and by the boost
to tax receipts from both the stronger
economy and a booming stock market.
The aggregate consumption and
investment expenditures of state and
local governments rose slightly more
than 2 percent in real terms over 1996.
This gain was about the same as those of
the two previous years. Outlays for services, which consist mainly of employee
compensation and account for more than
two-thirds of all state and local purchases, rose roughly 1 Vi percent in real
terms. Investment expenditures, which
make up the next biggest portion of state
and local purchases, rose about AVi percent, according to preliminary data. In
the aggregate, the budget picture for
state and local governments was relatively stable in 1996, as the surplus of
nominal receipts over nominal current

Domestic Spending and Finance in 1996
expenditures changed little from the
positive readings of other recent years.
Two years of contraction of state and
local government debt ended in 1996.
The declines had occurred as issues that
were pre-refunded earlier in the decade, when interest rates were unusually
favorable, matured or became eligible to
be called. Pre-refunded debt continued
to be called in 1996, albeit at a reduced
pace, but this decline was just offset by
gross issuance, which picked up.
•




21

23

Depository Credit and
the Monetary Aggregates
The growth of credit supplied to the
economy by depository institutions
slowed in 1996, in part because of a
shift to greater caution in making loans
to consumers but also because of favorable conditions for selling loans in the
securities markets. Shifts in the way that
banks financed their credit growth in
1996 translated into an increased rate
of expansion of M3. Growth of M2 also
picked up, rising at a pace close to
that of nominal GDP, but Ml contracted
as sweep arrangements continued to
expand.

Depository Credit
The slower expansion of depository
credit in 1996 entirely reflected a slower
advance in bank credit. Growth at thrift
institutions picked up, benefiting from
strong demand for residential mortgages
and improved capital positions. Growth
of commercial bank loans moderated,
as loans to businesses and, especially,
consumers decelerated from elevated
rates of growth in 1995. Bank portfolio
expansion also appears to have been
damped somewhat by a faster pace of
asset securitization, likely spurred by
receptive capital markets. For example,
real estate loan growth at banks was
a subdued 4 percent, despite a robust
housing market and a pickup in commercial real estate. At the same time,
outstanding securities backed by mortgage pools expanded nearly $200 billion
in 1996, well above the pace of the
preceding year. Commercial banks are a
major source of securitized mortgages.
The outstanding amount of consumer



credit that had been securitized by banks
also rose at a brisk pace in 1996,
although not so rapidly as in 1995. As a
result of the slowing of bank credit, the
share of the 1996 advance in nonfederal
debt that ended up on the books of
depositories fell to about 38 percent,
down from around 44 percent in the
preceding two years.
Banks encountered an increased incidence of repayment problems on loans
to consumers in 1996, and charge-off
rates on these loans rose to around the
peak levels of the last recession, in
1990-91. According to Federal Reserve
surveys of senior loan officers, banks
had anticipated some deterioration in
the quality of their consumer loan portfolios, but they were surprised by its
extent. These surveys also showed that
banks considered the rate of charge-offs
to be high relative to the level of delinquencies and that the credit-scoring
models most banks use to evaluate consumer lending decisions have tended to
be too optimistic. An important reason
for the high level of charge-offs and
the apparent shortcomings of the creditscoring models was a 30 percent
increase in personal bankruptcies. This
surge stemmed in part from changes in
the bankruptcy code that became effective at the beginning of 1996 against
a backdrop of an apparently reduced
stigma associated with this method of
dealing with financial problems. Banks
responded to the deterioration in their
consumer loan portfolios by tightening
standards and terms, especially on credit
cards. In contrast, banks eased terms
and conditions on home equity loans.

24

83 rd Annual Report, 1996

The slowing of depository credit notwithstanding, growth of the broader
monetary aggregates strengthened in
1996: M3 expanded almost 7 percent,
up from the pace of 1995 and above the
upper end of its 2 percent to 6 percent

annual range. M2 grew 4l/z percent, up
Vi percentage point from 1995 and in
the upper portion of its 1 percent to
5 percent range. The ranges for monetary growth in 1996 had been chosen to
be consistent with approximate price
stability and a sustainable rate of real
economic growth, rather than as indicators of the range of money growth rates
likely to prevail under expected economic conditions.
The acceleration of M3 was caused
partly by a shift in the way banks
financed their credit—specifically, substituting issuance of large time deposits
for borrowings from offices abroad.
Both foreign and domestically chartered
banks paid down net borrowing from
foreign head offices and branches in
1996. For domestic banks, this pay down
may have been related to the reduction
to zero of insurance assessments on
deposits, beginning with the last quarter
of 1995. In addition, the greater growth
of M3 relative to that of M2 reflected
the need to fund particularly strong loan
growth at U.S. branches and agencies of
foreign banks, which do not offer the
retail accounts that dominate deposits
inM2.
Growth of both M2 and M3 was supported again in 1996 by continuing
robust advances in money market

Stock of M3

Stock of M2

Despite the rise in repayment problems on consumer loans, the balance
sheets and operating results of depositories remained strong in 1996. Bank
profits were at historically high levels
for the fourth consecutive year, a record
reflecting the maintenance of relatively
wide interest rate margins, further loan
growth, and substantial fee income
related to sales of mutual funds as
well as to securitization and other offbalance-sheet activities. At year-end,
almost 99 percent of commercial bank
assets were held at banks classified as
well capitalized. Underlying thrift profits were also stronger. However, profits
at thrift institutions and at banks with
deposits insured by the Savings Association Insurance Fund (SAIF) were held
down temporarily by a special assessment on deposits to recapitalize SAIF.
(Some bank deposits are SAIF-insured
because of mergers with thrift institutions or acquisitions of them.)

The Monetary Aggregates

Billions of dollars

Billions of dollars

Actual

3800

3700

1995

1996

NOTE. The range was adopted by the FOMC for the
period from 1995:Q4 to 1996:Q4.




1995

1996

NOTE. The range was adopted by the FOMC for the
period from 1995:Q4 to 1996:Q4.

Depository Credit and the Monetary Aggregates
mutual funds (MMMFs). Because the
yields on these funds are based on the
average return earned on their assets,
they lag changes in yields on new market instruments; thus, the funds tend to
attract additional inflows when market
rates are falling. Accordingly, MMMFs
advanced rapidly in the early part of
the year, when the monetary easings of
December and January pulled down
short-term rates, and also later in the
year, when short-term rates were again
declining. However, these instruments
expanded briskly even in the third quarter, when short-term rates were rising,
suggesting that part of the attractiveness
of MMMFs is the convenience they
offer those investors engaged in moving
funds in and out of stock and bond
mutual funds, which expanded at a
record pace last year. In addition,
institution-only funds seemed to have
considerable success in marketing cash
management programs that capture
excess cash of corporations and municipalities. Likely reflecting the attractiveness of money market and capital market mutual funds, deposits in M2
actually showed little growth in 1996.
Retail deposit growth also may have
been damped by a lack of aggressive
pricing of deposits on the part of banks,
as demand for their loans slipped and
they apparently found it cheaper to
finance a larger share of loan originations through securitizations and large
time deposits.
The behavior of M2 relative to
income, as summarized by its income
velocity, again bore a fairly systematic
relationship to M2's opportunity cost—
the return on M2 assets relative to yields
available on alternative instruments. The
relationship of velocity to opportunity
costs was reasonably stable historically,
but it broke down in the early 1990s,
a period characterized by extensive
restructuring of balance sheets by house


25

holds, businesses, and banks. In the process, M2 velocity rose substantially and,
apparently, permanently. Since 1993,
velocity no longer appears to be shifting
higher, and M2 velocity and opportunity
costs are moving together about as they
did before 1990. However, the recent
period of relative stability in this relationship has been too short for the Federal Reserve to place increased reliance
on M2 as a guide to policy.
Ml contracted 4l/z percent in 1996, as
the pace at which new arrangements
were established to sweep reservable
retail transactions deposits to nonreservable nontransaction accounts accelerated. The initial amounts removed from
transaction accounts by sweep arrangements established during the year
amounted to $116 billion, compared
with $45 billion in 1995. Ml continued
to be supported by currency growth, as
foreign demands, which were depressed
earlier in the year partly in anticipation
of the new $100 bill, picked up in the
second half. Adjusted for the initial
amounts removed from transaction
accounts by sweep arrangements, Ml
grew 5!A percent in 1996. The sweeping
of transaction deposits contributed to
M2 Velocity and M2 Opportunity Cost
Ratio scale

Percentage points, ratio scale
- 6

-4

17
.
t 1 t 1 I t t It I IA A it I f t
1984
1992
1980
1988
1996
NOTE. The velocity of M2 is the ratio of nominal gross
domestic product to the stock of M2. The opportunity
cost of M2 is a two-quarter moving average of the threemonth Treasury bill rate less the weighted average return
on assets included in M2.

26

83 rd Annual Report, 1996

Annual Rate of Change in Reserves, Money Stock, and Debt Aggregates
Percent
1996
Item

1993

1994

1995
Year

Ql

Q2

Q3

Q4

-7.9
-6.5
-8.5
1.5

-6.4
-7.6
-5.7
3.0

-16.4
-17.6
-16.6
5.4

-16.9
-16.0
-18.3
5.1

Depository institution reserves'
Total
Nonborrowed plus extended credit
Required
Monetary base 2

12.2
12.2
12.5
10.4

-1.2
-1.5
-1.1
8.4

Concepts of money3
Ml
Currency
Demand deposits
Other checkable deposits

10.6
10.2
13.5
8.6

2.5
10.2
.7

-1.6
5.4
1.4
-10.5

-4.6
5.7
2.7
-23.1

-3.5
2.7
8.6
-23.1

-1.4
4.4
8.7
-19.5

-6.5
7.6
-.9
-29.8

-7.3
7.7
-5.5
-29.4

M2
Non-Mi components
Savings (including MMDAs)
Small denomination time deposits . . .
Retail money market mutual funds ..

1.3
-2.6
2.9
-10.6

.6
-.3
-4.3
2.4
7.6

4.0
6.7
-3.2
15.4
18.7

4.6
8.8
11.7
1.3
17.1

5.3
9.3
13.9
1.2
14.6

4.5
7.0
10.4
-1.8
16.3

3.4
7.7
8.4
2.2
16.3

5.0
10.2
12.1
3.8
17.2

M3
Non-M2 components
Large-denomination time deposits . . .
Institution-only money market mutual
funds
Repurchase agreements
Eurodollars

1.1
*
-6.5

1.7
6.6
7.3

6.2
15.3
16.1

6.9
15.5
17.6

6.6
11.7
9.9

6.4
13.9
14.7

5.4
12.7
16.4

8.4
20.4
25.5

-2.4
23.4
-1.6

-4.9
13.4
23.4

24.0
5.7
12.2

19.8
4.1
17.4

21:4
2.8
11.8

12.1
16.2
11.0

20.6
-4.7
8.7

19.8
2.1
34.7

5.2
8.4
4.0

5.2
5.7
5.1

5.5
4.4
5.9

5.4
3.8
6.0

5.0
3.0
5.7

5.8
4.7
6.2

5.3
3.8
5.8

5.0
3.2
5.6

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.




-4.9 -11.4
-4.9 -11.4
-5.2 -11.7
4.1
3.8

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 (IRA^) 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.
*In absolute value, greater than zero and less than

0.05 percent.

Depository Credit and the Monetary Aggregates
a contraction of almost 12 percent in
required reserves—twice the rate of
decline of the previous year. The monetary base decelerated only a little, however, as growth of its major component,
currency, was little changed between
1995 and 1996.
The Federal Reserve continued to
monitor sweep activity closely, as persistent declines in the levels of required
reserves have the potential to impinge
on the Federal Reserve's ability to exert
close day-to-day control over the federal funds rate—the overnight rate on
reserves traded among depository institutions. Depositories hold balances at
Reserve Banks to meet daily clearing
needs in addition to satisfying statutory
reserve requirements. At low enough
levels, reserve balances may provide
inadequate protection against adverse
clearings, and banks' attempts to avoid
overdrafts could generate highly variable daily demands for balances at the
Federal Reserve and a volatile federal
funds rate. Through 1996, however, no
serious problems had emerged, in part
because the substantial drop in depositories' required reserve balances attributable to sweeps was partially offset by
increases in their holdings of required
clearing balances—an arrangement
whereby depositories pay for services
provided by the Federal Reserve through
the holding of specified amounts in
reserve account balances. In addition,
advances in banks' techniques of monitoring balances at the Federal Reserve
and gauging their clearing needs have
enabled them to operate efficiently and
smoothly at relatively low levels of
balances. Sweeps have had an effect
on Federal Reserve earnings and the
amounts it remits to the Treasury. The




27

decline in reserve balances of about
$12 billion attributable to sweeps must
be matched by an accompanying lower
level of Treasury securities on the books
of the Reserve Banks.
•

29

International Developments
Economic activity picked up in most
major foreign industrial countries in
1996, but the pace of expansion, while
brisk at times, was generally uneven
over the course of the year. Output
remained significantly below estimated
potential in most countries, and unemployment remained high or even rose
in much of Europe and in Canada.
These conditions helped keep inflation
in check; by the end of the year, the
average inflation rate in the major
foreign industrial countries was below
2 percent.
Growth in most of the major economies of Latin America rebounded in
1996 as the drag associated with the
collapse of the Mexican peso in late
1994 and early 1995 dissipated. Asian
Exchange Value of the Dollar
and Interest Rate Differential
Percentage points

Ratio scale, December 1973 = 100
Price adjusted
exchange value
of the dollar
Interest rate differential
U.S. minus foreign

1981

1984

1987

1990

1993

1996

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.




countries generally continued to enjoy
strong growth, although not as strong
as in 1995. While output continued to
decline in Russia and Ukraine, the pace
of contraction slowed further; most of
the other republics of the former Soviet
Union showed signs of growth. The
countries of Central and Eastern Europe
recorded moderate growth in line with
the recent average for these economies.
In Africa, growth for the region as a
whole reached 5 percent, significantly
higher than in recent years. Economic
activity picked up a bit in the Middle
East after several years of relatively
slow growth there.
The U.S. trade deficit in goods and
services widened to $114 billion in 1996
from $105 billion in 1995. Recent
movements in the exchange value of the
dollar had partly offsetting effects on net
trade flows during the year. The appreciation of the dollar that began in 1995
and continued during 1996 began to
boost imports and hold down exports of
services as the year progressed. Meanwhile, lagged effects of the 1994-95
depreciation of the dollar continued
to give a boost to merchandise exports.
In addition, with U.S. income growth
in 1996 close to the average for the
country's major trading partners, U.S.
imports increased more than exports, as
is typical when increases in income
among these countries are similar.
The current account deficit expanded
to $165 billion from its 1995 level of
$148 billion. As in 1995, a substantial
portion of the balancing net capital
inflows represented accumulations of
foreign official assets in the United
States. Recorded holdings of assets in
the United States by private foreigners

30

83 rd Annual Report, 1996

also increased rapidly in 1996, and
recorded U.S. private holdings of foreign assets likewise rose substantially.
The analysis of capital flows in 1996 is
complicated, however, by the statistical
discrepancy's wide swing from positive
to negative.
The foreign exchange value of the
dollar rose about 4 percent on balance in
1996 in terms of a trade-weighted average of the other G-10 currencies.1 The
dollar's appreciation was consistent with
the divergence in trends in economic
activity in 1996 between the United
States and most other major industrial
countries. Relatively strong growth here
combined with moderate and uneven
growth abroad was also reflected in a
widening differential between long-term
interest rates in the United States and
foreign countries. U.S. rates rose about
Vi percentage point, while a weighted
average of ten-year rates in foreign G-10
countries declined about 3A percentage
point on balance. Generally lower shortterm interest rates plus fiscal consolidation, especially in Canada and some
parts of Europe, also contributed to the
fall in foreign long-term rates.

in the year, activity slowed in France
and declined in Italy. In Switzerland,
economic activity again contracted over
the course of the year. Growth remained
sluggish in Canada over the first half
of the year but increased substantially
thereafter, partly in response to robust
U.S. growth. In Japan, an exceptionally
strong first quarter was followed by
two quarters of stagnation, but in the
fourth quarter, activity accelerated
again. Stimulated by the easy stance of
monetary and fiscal policies in recent
years, private investment strengthened,
Changes in GDP, Demand, and Prices
Percent, from previous year
Gross domestic product
U.S.

i

1

1

Total domestic demand

Foreign Economies
In Germany, domestic demand remained
fairly subdued during 1996, but net
exports made a strong contribution to
growth. Economic activity turned down
early in the year because frigid winter
weather restricted construction activity;
the pace of activity rebounded temporarily in the spring but then slowed
sharply at the end of the year. In the
United Kingdom, France, and Italy,
growth increased after midyear; but late
1. The Group of Ten consists of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom,
and the United States.




i
Consumer price index

1992

1994

1996

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
contributing to a rise in domestic demand over the year.
Weak growth in continental Europe
contributed to increased slack in the
labor market. The unemployment rate
rose to post-World War II records
in Germany, France, and Switzerland;
unemployment also remained high in
Italy and Belgium. By contrast, the rate
of unemployment continued to decline
steadily in the United Kingdom, where
expansion has been under way for
several years. In Canada, unemployment
rose slightly after falling a bit in 1995;
labor market conditions appeared to be
improving near the end of the year.
Japan's unemployment rate rose to a
postwar high of 3.5 percent in the second quarter and fell only slightly over
the rest of the year.
The deterioration of labor market conditions in several of the major foreign
industrial countries reflected sustained
or worsened shortfalls of actual output
from estimated potential output. With
growth at or slightly below its potential
rate in Germany, Canada, and France,
existing gaps were not narrowed; the
discrepancy widened in Italy, where
growth was significantly below its
potential rate. Persistent output gaps
continued to exert downward pressure
on inflation rates. On average, consumer
price inflation in the foreign G-10 countries continued to decline gradually,
reaching about VA percent by the last
quarter of 1996. In Italy, the rate of
consumer price inflation at the end of
the year, 2J/2 percent, was less than half
the year-earlier rate. An exception was
the United Kingdom, where growth
exceeded the rate estimated to be sustainable, and the underlying inflation
rate rose slightly above 3 percent. In
Japan, consumer prices were unchanged
on balance over the year; the yen's
depreciation raised import prices, offsetting ongoing domestic price deflation.



31

General government budget deficits
narrowed further in Canada and the
United Kingdom, partly as a result of
rising economic activity but also because of fiscal policy changes aimed at
reining in structural budget deficits.
France also experienced some improvement in its deficit. Despite the Maastricht objective, budget deficits widened
in Germany in 1996 to nearly 4 percent
of GDP and in Italy to 63A percent,
mainly as a result of slow growth.2 In
Japan, expansionary fiscal policy continued to widen the deficit significantly.
Long-term interest rates declined in
all foreign G-10 countries except the
United Kingdom. The drop was consistent with generally subdued economic
growth and related downward pressure
on inflation rates; fiscal consolidation
also contributed where it occurred.
Short-term interest rates fell as monetary policy eased in many countries in
response to slowing economic activity
and declining inflation. In Japan, the
rate on three-month certificates of deposit remained at Vi percent to maintain
support for economic recovery and to
facilitate restructuring in the Japanese
financial sector.
The current account surplus in Japan
fell to a six-year low, in part because of
lagged effects on exports from the yen's
appreciation in 1995, but also because
higher oil prices and the depreciation
of the yen in 1996 raised the cost of
imports denominated in dollars. Italy's
current account surplus widened; weak
domestic demand curbed imports, while
exports received a boost from the
restraints on labor costs that have
improved Italy's international com2. According to the Maastricht Treaty, only
those countries that had a general government
deficit of 3 percent of GDP or less in 1997 may
participate in the European Monetary Union upon
its scheduled commencement at the start of 1999.

32

83rd Annual Report, 1996

petitiveness over the past few years.
Canada's deficit was almost eliminated,
in part because of strong exports to a
healthy U.S. economy. The U.K. current
account deficit also declined significantly, mostly on account of rising
income from British investment abroad.
Mexico's economy bounced back
from the sharp decline in output associated with the crisis that followed the
December 1994 devaluation of the peso.
By the end of the year, economic activity had regained the pace achieved
before the crisis. With the currency
stable and inflation much lower than in
1995—albeit at just under 30 percent—
interest rates fell, helping investment
and other elements of domestic demand
take over from net exports as the driving
force in the recovery. Mexico's trade
balance remained in moderate surplus,
declining somewhat in the second half
of the year as imports accelerated and
the expansion of non-oil exports slowed.
The Argentine and Brazilian economies,
which had been adversely affected in
1995 by spillovers from the Mexican
crisis, grew at fairly rapid rates in 1996.
Monetary tightening and a decline in
copper prices slowed growth in Chile
from the high rate recorded in 1995.
Inflation in Venezuela exceeded
100 percent and, as noted, inflation
remained high in Mexico; elsewhere in
Latin America, it ranged from zero to
10 percent.
Economies in Asia slowed a bit on
average in 1996 after booming in 1995.
Earlier monetary tightening in some
countries had its intended effect of
moderating strong growth. In addition,
exports were dampened in many economies by strong appreciation in their
exchange rates in terms of the yen and
by a generally weak global electronics
market. Inflation remained low, ranging
from 2 percent in Singapore to 7 percent
in China.



U.S. International Transactions
Real imports of goods and services
in the United States rose rapidly over
the four quarters of 1996, increasing
slightly more than 8 percent after
expanding about 4 percent in 1995. The
pickup in U.S. economic activity
boosted the demand for imports, and
further impetus came from the dollar's
appreciation, which put downward pressure on prices of imported goods other
than oil in 1996. Most major categories
of merchandise trade showed sizable
increases in the volume of imports; oil
and semiconductors were the notable
exceptions. While rising faster than in
U.S. International Trade
Billions of dollars
Balances

Current account
J

i
I
I
1
L
L
Ratio scale, billions of chained (1992) dollars

Trade in goods and services
850

650

i

_„...!

L
Ralio scale. 1992 = 100

GDP price index (chain-type)
105
Total merchandise
100
Non-oil merchandise imports
95
i

}
1990

1
1992

[

i

1

1994

i

1996

NOTE. The data are from the Department of Commerce; they are quarterly and seasonally adjusted. Data
for trade are at annual rates.

International Developments
1995, imports of services grew less in
1996 than imports of merchandise.
Real exports of U.S. goods and services expanded IV2 percent over the
year, about the same pace as in 1995.
Merchandise exports were stimulated by
the pickup in growth in some important
U.S. trading partners and by lingering
effects of the dollar's depreciation in
1995. Exports to Mexico accounted for
most of the expansion, but exports to
Canada, South America, and Asia also
increased. Exports to Western Europe
were about the same in the fourth quar-

33

ter of 1996 as they were a year earlier.
Receipts from services exports grew
more slowly in 1996. Much of the slowdown was in fees and royalties and in
receipts from travelers to the United
States, spending that was dampened in
part by the appreciation of the dollar.
Foreign official assets in the United
States increased $122 billion in 1996.
A number of countries gained dollar
reserves as they attempted to counter the
domestic effects of large private capital
inflows. In addition, exchange market
intervention early in the year increased

U.S. International Transactions
Billions of dollars, seasonally adjusted
Quarter
Year
Transaction

1995

1996

1995

1996P

Q4

Ql

Q2

Q3

Q4

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

-105
787
576
211
892
749
142
-8
57
-65
-35

-114
836
612
224
950
799
150
-8
64
-73
-42

-19
204
149
54
223
187
36
-2
15
-17
-9

-25
205
150
55
230
193
37
*
17
-16
-11

-29
209
153
56
238
200
37
-2
15
-17
-9

-34
206
150
56
240
202
38
-4
15
-19

-26
216
158
57
242
204
38
-2
18
-21
-13

Current account balance

-148

-165

-30

-35

-41

-48

-41

17
-44
-99
195
99
82
13
-35
96
60

89
-90
-105
285
154
120
12
-4
88
84
3

-10
25
-33
29
2
17
10
-29
44
15
-3

-21
-34
-34
48
12
33
3
5
23
29
-6

37
2
-20
60
31
23
6
-9
26
17
4

38
-34
-23
78
43
33
2
12
9
21
5

36
-23
-27
99
67
31
1
-13
30
17
n.a.

Foreign official assets in United States (increase, +)

110

122

11

52

14

24

33

U.S. official reserve assets, net (increase, -)

-10

-22
-8
-13

-27
2
-29

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
Direct investment flows, net (outflows, -)
U.S. direct investment abroad
Foreign direct investment in United States
Other corporate capital flows, net

U.S. government foreign credits and other claims, net
Total discrepancy
Seasonal adjustment discrepancy
Statistical discrepancy
NOTE. Components may not sum to totals because of
rounding.
*In absolute value, greater than zero and less than
$500 million.




-1
-1

32
0
32

-53
0
-53

29
1
28

5
7
_2

—9
*
-9

n.a. Not available.
p Preliminary.
S O U R C E . Department of Commerce, Bureau of Economic Analysis.

34

83rd Annual Report, 1996

the holdings of certain industrial countries, and higher oil prices boosted the
reserves of oil producers.
Recorded foreign private assets in the
United States expanded even more rapidly than the record pace of 1995. Private entities abroad made net purchases
of U.S. Treasury securities amounting to
$154 billion, well in excess of purchases
in any other year. Net purchases of U.S.
government agency and corporate bonds
also surpassed previous sums, reaching
$120 billion, much of which represented
U.S. borrowing in the Eurobond markets. In contrast, foreign net acquisitions
of U.S. stocks were relatively restrained.
U.S. net purchases of foreign securities were also very strong in 1996, but
stocks were favored over bonds. Net
purchases of stocks in Japan were particularly large in the first half of the
year. Equities of firms in Central and
South America and in Asia also attracted
U.S. investors in 1996, but net purchases
in both these regions were still below
the peak reached in 1993.
Net capital outflows occurred through
banks and security dealers in 1996. With
credit issued by banks in the United
States slowing, lenders relied less on
foreign sources of funds. Repurchase
agreements with securities dealers in the
United States were used by foreign
investors to finance part of their very
large net purchases of U.S. Treasury
securities, contributing to the outflow.
Foreign direct investment in the
United States, swelled by mergers and
acquisitions, reached $84 billion in
1996, surpassing the previous record of
$68 billion, reached in 1989. U.S. direct
investment abroad was also strong
although somewhat lower than in 1995.
Investments in formerly state-owned
enterprises in some foreign countries,
along with mergers and acquisitions,
contributed to the large outflows.
The large negative statistical discrep


ancy in 1996 contrasts sharply with the
sizable positive figure of 1995. A negative discrepancy indicates net omissions
or understatements of capital outflows
and current account payments.

Foreign Exchange Developments
The dollar appreciated about 7 percent
in terms of the mark and the other currencies that were in the European
exchange rate mechanism (ERM)
throughout the year.3 The rebound was
consistent with growth in the United
States exceeding that in continental
Europe and with the associated widening of the differential between long-term
interest rates in the two regions. Downward pressure on the mark may also
have been related to uncertainties stemming from the scheduled introduction in
1999 of a single currency among the
initial members of the European Monetary Union. Nonetheless, the prospects
of a successful launch seemed to

3. The ERM linked the currencies of Austria,
Belgium, Denmark, France, Germany, Ireland, the
Netherlands, Portugal, and Spain throughout 1996.
In October, the Finnish markka was added, and in
November the Italian lira rejoined the ERM after
an absence of about four years.

Exchange Value of the Dollar
versus Selected Currencies
December 1995 = 100

Japanese yen
110

German mark

100

Canadian dollar
t

\

i

i

t

t

t

t

t

t

(

1996
NOTE. Foreign currency units per dollar. The data are
monthly.

International Developments
improve in the eyes of market participants, judging by the narrowing of longterm interest rate differentials between
Germany and other prospective EMU
members.
By contrast, the dollar declined in
value versus the pound and the Italian
lira. Solid growth in the United Kingdom led to a tightening of monetary
policy in late October, which in turn
boosted sterling 9 percent. The lira
strengthened 4 percent. Inflation in
Italy fell to its lowest rate in more
than twenty-five years, and prospects
emerged for a substantial improvement
in the country's fiscal deficit.
With weakness in economic activity
persisting in Japan, the yen depreciated
12 percent versus the dollar. Switzerland's recession likewise depressed the
Swiss franc, which fell 16 percent in
terms of the dollar. The Canadian dollar
moved only slightly compared to the
U.S. currency over the year.
Adjusted for changes in consumer
prices, the dollar declined about 1 percent on average measured against the
currencies of eight newly industrializing
countries in Latin America and Asia that
are major U.S. trading partners.4 The
dollar appreciated 2Vi percent in terms
of the Mexican peso on a nominal basis,
but adjusted for the inflation differential,
the dollar depreciated 17 percent. This
move was largely offset by the dollar's
appreciation of 8 percent versus the
Korean won in inflation-adjusted (and
nominal) terms.
4. The countries are Chile, Hong Kong, Korea,
Malaysia, Mexico, the Philippines, Singapore, and
Taiwan.




35

Foreign Exchange Operations
U.S. authorities did not intervene in
foreign exchange markets in 1996.
Reported net purchases of dollars by
major foreign central banks were
$46 billion in 1996, about $20 billion
less than in the year before. In January
the Bank of Mexico made a final payment of $650 million on its 1995 Federal Reserve swap drawing.
At the end of the year, the System
held $19,264 million of marks and yen
valued at current exchange rates. With
the dollar's appreciation versus both
currencies in 1996, the cumulative valuation gains on System foreign currency
holdings declined $1,668 million. In the
absence of transactions in foreign currency, the System realized no gains or
losses.
•

37

Monetary Policy Reports to the Congress
Given below are reports submitted to
the Congress on February 20 and July
18, 1996, pursuant to the Full Employment and Balanced Growth Act of 1978.

Report on February 20, 1996
Monetary Policy and the
Economic Outlook
The economy performed well in 1995.
Moderate economic growth kept the unemployment rate at a relatively low
level, and inflation, as measured by the
change in the consumer price index, was
in a range of 3 percent or less for the
fifth straight year, the first such occurrence in thirty years. This desirable
combination of low inflation and low
unemployment provided further substantiation of a fundamental point that
the Board has made in past reports—
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 in
1995 and early 1996, the Federal
Reserve found that promoting full employment and price stability required
several adjustments in its policy settings. Last 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
x
h percentage point, to 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 XA 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 and again at the end of
January 1996, reducing the federal funds
rate a total of Vi percentage point.
Monetary policy easings since mid1995 contributed to declines in shortterm market interest rates, which by
mid-February were down 1 to 2 percentage points from the highs reached early
last year. 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. As of mid-February,
these rates were VA to 23A 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 last year and have moved
still higher in early 1996. These finan-

38

83rd Annual Report, 1996

rial developments reduced the cost to
businesses of financing investment and
to households of buying homes and consumer durables; households were also
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 Group of Ten
(G-10) countries, fell about 5 percent,
on net, during 1995. The dollar appreciated substantially from the summer on
and has advanced further on balance in
1996 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 by less than the
decline in rates 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 in 1995 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. Total debt of domestic



nonfinancial sectors grew slightly more
than 5 percent last year, just 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 slowed a bit but remained
brisk; consumer credit continued to
grow quite rapidly. Federal debt growth
was relatively modest for a second year,
influenced by a lower deficit and constraints on normal seasonal borrowing at
year-end owing to the federal debt ceiling. Outstanding state and local government debt ran off 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 upper end 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 4lA 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 unchanged after having
increased during the previous three
years. Nonetheless, growth of the aggregate was erratic through the year, and

Monetary Policy Reports, February
the stability of its relationship to nominal spending remains in doubt. Ml
declined last year for the first time since
the beginning of the official 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.

Economic Projections for 1996
The relatively small amount of information that is available for 1996 indicates
that the economy has started off slowly
early this year, but fundamental conditions appear to be more encouraging
than recent data might seem to suggest.
Bad weather in a number of regions and
the partial shutdown of the federal
government have been disruptive to the
economy this winter. These influences
seem likely to leave only temporary
imprints on spending and production,
creating volatility in incoming data over
the near term while having little effect
on underlying trends.
The economy has also been slowed
by production adjustments in some

39

industries in which efforts are being
made to bring stocks into better alignment with sales. Inventory accumulation
apparently slowed in the fourth quarter,
and with financial conditions remaining
broadly conducive to growth of private
final sales, inventory problems of a
degree that might prompt a sustained
period of widespread production adjustments do not seem likely. In the household sector, the accumulation of financial wealth brought on by the rise in the
stock market has provided the wherewithal for increases in consumption
greater than would otherwise have been
expected—countering the potential
negative influences of more burdensome
levels of consumer debt. At the same
time, reductions in mortgage interest
rates have put the cost of financing a
house within reach of a greater number
of families and made it possible for a
significant number of households to ease
their debt-service burdens by refinancing their homes at lower rates. In the
business sector, reductions in the cost of
financing investment in new capital are
providing some offset to the slowing
tendencies that normally accompany a
cyclical moderation in the growth of
aggregate output. In addition, business

Economic Projections for 1996
Percent
Federal Reserve governors
and Reserve Bank presidents
Indicator

Administration
Range

Central
tendency

Change, fourth quarter
to fourth quarter1
Nominal GDP
Real GDP 2
Consumer price index3

4-5
l'/2-2'/2
2'/2-3

4'/4-43/4
2-21/4
23/4-3

5.1
2.2
3.1

Average level,
fourth quarter
Unemployment rate 4

5'/2-6

5'/2-53/4

5.7

1. Change from average for fourth quarter of preceding year to average for fourth quarter of 1996.
2. Chain-weighted.




3. All urban consumers.
4. Civilian labor force. Figure for the Administration
is an annual average.

40

83 rd Annual Report, 1996

investment in high-tech equipment
likely will continue to be boosted not
only by the ready availability of finance
but also by technological upgrades and
ongoing steep declines in the effective
price of real computing power.
In the U.S. external sector, growth of
exports strengthened after some sluggishness early in 1995. Expansion of
income abroad seems likely to pick up
this year, although the prospects still are
subject to some downside risk. Imports,
meanwhile, have slowed from the very
rapid pace seen earlier in the expansion.
On net, the underlying trends in exports
and imports of goods and services
appear to be essentially canceling out
in terms of their combined contribution
to growth of U.S. real gross domestic
product.
Against the backdrop of these developments, members of the Board of
Governors and the Reserve Bank Presidents, all of whom participate in the
deliberations of the Federal Open Market Committee, anticipate that the U.S.
economy will grow moderately, with
little change in underlying inflation
trends. The central tendency of the
participants' forecasts of real GDP
growth ranges from 2 percent to
2lA percent, measured as the cumulative change in output from the final
quarter of 1995 to the final quarter
of 1996. The rise in activity is expected
to be accompanied by further expansion of job opportunities and little
change, on net, in the civilian unemployment rate over the four quarters of 1996.
The central tendency of the unemployment rate forecasts for the fourth quarter
of 1996 is a range of 5Vi percent to
53/4 percent, compared with an average
of 5.6 percent in the final quarter of
1995. The Committee's forecasts of
economic growth and unemployment
are quite similar to those of the
Administration.



The central tendency of the Governors' and Reserve Bank presidents'
forecasts of the rise in the consumer
price index over the four quarters of
1996 is a range of 23A percent to 3 percent, a shade to the high side of the
actual outcome of 1995. At this early
point in 1996, with grain stocks exceptionally tight, there is some risk that
food price increases at retail could be
larger than those of recent years, especially if crop production should remain
subpar again this year; and, even though
recent upward pressures on energy
prices should diminish with the return of
normal weather, another year of declining prices cannot be taken as a given.
Nonetheless, the experience with inflation at high levels of resource utilization
was favorable in 1995, and with businesses still tightly focused on cost control and efficiency gain, broad tendencies toward increased rates of price
increase are not anticipated. The Administration forecast of inflation is higher
than the forecasts of the Federal Reserve
officials, but the difference is not
significant given the uncertainties of
forecasting.
Price increases like those being forecast for the coming year would leave
inflation no higher than it was in the first
year or so of the current economic
expansion, with the rate of increase
holding appreciably below the average
rate seen during the expansion of the
1980s. Although the Federal Reserve's
long-run goal of restoring price stability
has not yet been achieved, the capping
of inflation and its diminution over
recent business cycles is a clear indication of the substantial progress that has
been made to date.
Money and Debt Ranges for 1996
The Committee's intention to make further progress over time toward price sta-

Monetary Policy Reports, February
bility formed the basis for the selection
of the growth ranges for the monetary
aggregates in 1996. In reaffirming the
ranges that were adopted on a provisional basis in July, the Committee
noted that it viewed them as benchmarks for what would be expected
under conditions of reasonable price stability and historical velocity behavior.
The Committee set the range for M2 at
1 percent to 5 percent and the range for
M3 at 2 percent to 6 percent.
Given its expectations for inflation in
1996, the Committee anticipates that
nominal GDP will grow somewhat
faster this year than would be the case
if the economy already were at price
stability. If velocities of the aggregates
were to exhibit roughly normal behavior
this year and nominal income were to
expand as anticipated by the Committee,
M2 and M3 might grow near the upper
ends of their ranges. In assessing the
possible outcomes, the Committee noted
that considerable uncertainty remains
about the usefulness of the monetary
aggregates in guiding the pursuit of its
macroeconomic objectives. Although
the monetary aggregates have been
behaving more in line with historical
patterns than was the case earlier in the
decade, the effects of financial innovation and deregulation over the years
have raised questions about the stability
Ranges for Growth of Monetary
and Debt Aggregates
Percent
Aggregate
M2
M3
Debt2

1994

1995

1996

1-5

1-5
2-6 '
3-7

1-5
2-6
3-7

4-8

NOTE. Change from average for fourth quarter of preceding year to average for fourth quarter of year indicated.
1. Revised at July 1995 FOMC meeting.
2. Monitoring range for debt of domestic nonfinancial
sectors.




41

of the relationships between the aggregates and nominal GDP that have yet to
be resolved.
The Committee also reaffirmed the
3 percent to 7 percent growth range for
debt. Although there are indications that
lenders may no longer be easing terms
and conditions for granting credit to
businesses and households, the Committee anticipated that credit supplies would
remain ample and that debt would grow
at about the same pace as nominal GDP.
Such increases would be consistent with
containing inflation and promoting sustainable growth.

The Performance of the Economy
Measured in terms of the chain-type
indexes that are now being emphasized
by the Bureau of Economic Analysis,
growth of real GDP averaged slightly
less than l!/2 percent at an annual rate
over the first three quarters of 1995 after
a gain of 3!/2 percent in 1994. The rise
in aggregate output this past year was
accompanied by an increase in payroll
employment of P/4 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 51/2 percent to 53A 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
2 percent over the first three quarters of
1995 after an increase of 3 percent over
the four quarters of 1994. The slowing
of final sales was largely a reflection of

42

83 rd Annual Report, 1996

a downshifting in growth of the real
outlays of households and businesses,
from elevated rates of increase in 1994
to rates that were more sustainable. Real
government outlays for consumption
and investment edged down slightly, on
net, during the first three quarters of
1995. Increases in real exports and real
imports of goods and services were
smaller than those of 1994; their combined contribution to GDP growth in the
first three quarters was slightly negative.
The Household Sector
Real personal consumption expenditures
rose at an annual rate of about 2lA percent over the first three quarters of 1995
after having risen slightly more than
3 percent over the four quarters of 1994.
Available data suggest that growth of
real outlays slowed further in the fourth
quarter. 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
impetus to spending from this source
evidently was countered by other influences, such as increases in debt burdens among some households and an
apparent rise, according to survey
data, in consumers' concerns about job
security.
Real consumer expenditures for durable goods increased at an annual rate of
2lA percent over the first three quarters
of 1995, a slower rate of rise than in
other recent years. Consumer expenditures for motor vehicles declined
slightly, on net, over the first three quarters after having moved up nearly
20 percent over the three previous years;
in the fourth quarter, unit sales of cars
and light trucks, a key indicator of real
outlays for vehicles, were down slightly
from their third-quarter pace. Incentive
programs that provided price conces


sions of one sort or another to 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. Recent sales data do
not seem to point to any big shifts in
demand for vehicles around the turn of
the year: The average rate of sales of
cars and light trucks in December and
January was a touch above the average
for 1995 as a whole.
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 two
quarters, lifted in part by a rebound
in construction of new houses. Fourthquarter data on retail sales seem to
point to a further sizable increase in
outlays for household durables; according to most anecdotal accounts, spending for home computers and other
electronic gear, which has been surging in recent years, continued to move
up rapidly through the latter part of
1995.
Consumer expenditures for nondurables increased at an annual rate of
about 1V2 percent, in real terms, over the
first three quarters of 1995, a little less
than the average of the previous ten
years and considerably less than in
1994. The growth of real expenditures
on apparel slowed sharply after three
years of sizable advances. In the fourth
quarter, real outlays for nondurables
appear to have been lackluster.
Real expenditures for services—
which account for more than half of
total consumer outlays—increased at an
annual rate of about 23A percent over the
first three quarters of 1995, moderately
faster than in either 1993 or 1994. After
having declined in 1994, outlays for

Monetary Policy Reports, February
energy services increased sharply over
the first three quarters of 1995: The
unusually mild weather of late 1994
gave way, first, to more normal winter
conditions in early 1995 and, later on, to
hot summer weather that lifted fuel
requirements for cooling. Spending
gains for other categories of services
proceeded at an annual rate of about
214 percent over the first three quarters
of 1995, about the same rate of rise as in
the two previous years.
Real disposable personal income rose
at an average annual rate of about
2Vi percent over the first three quarters
of 1995, a gain that was about in line
with the previous year's increase.
Monthly data through November suggest that growth of real income may
have picked up a little in the fourth
quarter. Nominal personal income
appears to have increased slightly faster
in 1995 than it did in 1994, and growth
of nominal disposable income, which
excludes income taxes, apparently held
close to its 1994 pace. Inflation continued to take only a moderate bite from
increases in nominal receipts: The
chain-type price index for personal consumption expenditures rose at an annual
rate of 2Vi percent over the first three
quarters of 1995, matching, almost
exactly, the increases in each of the two
previous years.
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; 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



43

share prices and the rally in the bond
market provided a substantial boost to
the wealth of households holding large
amounts of those assets. However,
households holding few such assets benefited little from the rally in securities
prices, and some of these households
began to experience greater financial
pressure in 1995. Debts taken on earlier
proved to be difficult to repay in some
instances, and a rising number of households saw their loans fall into delinquency. Overall, however, the incidence
of financial stress among households
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 that is 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. In January of this year,
consumer assessments of labor market
conditions softened further, and the
broader indexes of sentiment also
declined. The January levels of the
indexes were on the low side of their
averages of the past couple of years but
were well above levels that were
reported through most of the first three
years of the expansion.

44

83rd Annual Report, 1996

Consumers tended to save a slightly
higher proportion of their income in
1995 than they had in 1994. Large
increases in financial wealth usually
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 third
quarter. 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
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 held firm.
The intrayear swings in the various
housing indicators left the annual totals
for these indicators at fairly elevated
levels. The average pace of sales of
existing homes over the first eleven
months of 1995 was well above the
average for the 1980s, even after having
adjusted for increases in the stock of
houses. Starts and sales of new singlefamily 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, as the rate of household formation has lagged—in part because many
young adults have delayed setting up
their own domiciles. However, an offsetting impetus to demand has come from
the improved affordability of housing,
brought about in particular by declines
in mortgage interest rates.
Construction of multifamily units,
after having taken a notable step toward
recovery in 1994, rose only moderately
further in 1995. Over the first eleven
months of 1995, starts of multifamily
units amounted to 280,000 at an annual
rate, compared with about 260,000 the
previous year and a low of 162,000 in
1993. Financing for the construction of
new multifamily projects appeared to be
readily available this past year. 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 were
not of a magnitude to provide much
incentive for 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

Monetary Policy Reports, February
in 1994, and growth overall was less
robust. The output of all nonfarm businesses rose at an annual rate of slightly
less than 2 percent over the first three
quarters of 1995, after a gain of 4 percent in 1994—a pace that 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, business profits remained high in 1995, as firms
continued to emphasize strategies that
have served them well throughout the
1990s—most notably, tight control over
costs and rapid adoption of new technologies, achieved by way of heavy
investment in high-tech equipment.
In total, real business fixed investment increased at an annual rate of
8 percent over the first three quarters of
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
having slowed sharply in the spring, it
then picked up somewhat in the third
quarter. Fragmentary data for the fourth
quarter suggest that investment in plant
and equipment recorded a gain of at
least moderate size in that period.
Businesses continued to invest
heavily in computers in 1995. In real
terms, these expenditures rose at an
annual rate of nearly 30 percent over the
first three quarters of the year, an
increase that was even more rapid than
that of 1994. Excluding computers, real



45

investment outlays increased less rapidly, on balance, than in 1994, and
growth after the first quarter was modest, on net. 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 but fell back a
little in the third quarter. Spending for
industrial equipment followed a roughly
similar pattern, with a small thirdquarter decline coming on the heels of
large gains in the first half of the year.
Real outlays for transportation equipment declined in the second quarter but
rebounded in the third. Real investment
in nonresidential structures moved up in
each of the first three quarters of 1995,
at an annual rate of more than 6 percent,
on average, after a gain of VA percent
during 1994; the most recent year
brought increased construction of most
types of nonresidential buildings.
In the industrial sector, elevated levels of investment in equipment and
structures in 1995 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 V/i 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 a choppy pattern during
1995 and rose less than V2 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
4V2 percent for this category was smaller
than the increases of other recent years.
Production of materials faltered temporarily in the second quarter, but production gains resumed thereafter, leading to
a rise of about 2XA percent over the four
quarters of the year.

46

83rd Annual Report, 1996

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 this past December, the
utilization rate in manufacturing was
about Vi percentage point above its
long-term average. In January of this
year, utilization rates fell noticeably:
Vehicle producers reduced assembly
rates last month, and winter storms
temporarily shut down manufacturing
operations more generally.
After having risen 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 5Vi 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, growth of inventories was roughly
in line with growth of business
final sales; consequently, aggregate
inventory-sales ratios held fairly steady
during this period. Although data on
inventory change in the year's final
quarter are not yet complete, the available indicators suggest that significant
imbalances probably were present in
only a few industries at year-end. Potential for wider inventory problems
appears to 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. Wholesalers reduced
their inventories in the final two
months of 1995, and manufacturers'
stocks rose only slightly; aggregate
inventory-sales ratios moved down in
both sectors.



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 VA 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 at nonfinancial corporations and a flattening of the rise in profits per unit of output both worked to
reduce the rate of growth in nominal
earnings 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.
The Government Sector
At the federal level, combined real outlays for investment and consumption fell
at an annual rate of about AlA percent
over the first three quarters of 1995,
dropping to a level about 13 percent
below its annual peak in 1990. Both
investment and consumption were cut
back over the first three quarters of
1995. Outlays for defense continued to

Monetary Policy Reports, February
contract, and nondefense expenditures
turned down, reversing a moderate
increase that took place over the four
quarters of 1994.
Federal outlays in the unified budget,
which covers items such as transfers and
grants, as well as consumption and
investment expenditures other than the
consumption of fixed capital, rose
33/4 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, the margin between insurance premiums and the payout for losses
increased). Proceeds from auctions of
spectrum rights also helped to hold
down expenditures; like the premiums
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—federal outlays were about
1 percent lower in nominal terms than in
the comparable period of fiscal 1995.
Nominal outlays for defense have continued to trend down this fiscal year,
and the spending restraint embodied in
recent continuing budget resolutions has
translated into sharp cuts in 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



47

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
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 V2 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 typically are provided by these governments continuing
to rise at a time when the public also
is expressing desire 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 \2Vi percent of
nominal GDP in the first three quarters
of 1995, up slightly from the percentages of the two previous years and
about PA percentage points higher than
the comparable figure for 1989. Total
receipts of state and local governments

48

83 rd Annual Report, 1996

were equal to about 133A percent of
nominal GDP in the first three quarters
of 1995, up just a touch from the comparable percentages of the two previous
years but about VA percentage points
higher than the percentage in 1989.
State and local outlays 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 at an annual rate of about
2Vi percent over the first three quarters
of 1995. Real investment expenditures,
which consist mainly of outlays for construction, moved up at an annual rate of
almost 7 percent. By contrast, consumption expenditures, which are about four
times the size of investment outlays,
rose only modestly in real terms—
at an average annual rate of about
1 Vi percent.
The External Sector
Growth of real GDP in the major foreign industrial countries other than
Japan slowed sharply in 1995 from the
robust rates of 1994. In Canada, where
economic activity had been particularly
vigorous through the end of 1994, the
slowdown reflected weaker U.S. growth
as well as macroeconomic policies
intended to achieve improved fiscal balance and to prevent the reemergence of
inflationary pressures. In Germany and
the other European economies, appreciation of their currencies in terms of the
dollar during the early months of the
year and efforts to reduce public sector
deficits contributed to the decline in the
rate of real output growth. In contrast,
Japan showed some tentative signs of
recovery late in 1995 after almost no
growth during the previous three years.



With the expansion of real GDP slowing in the foreign G-10 countries at a
time when some slack remained, inflation stayed low. The average rate of
consumer price inflation in these countries remained about 2 percent last year,
essentially the same as in 1994 and
somewhat less than in the United States.
Economic growth in the major developing countries slowed on average in
1995 from the strong pace recorded for
1994. The substantial contraction of
economic activity in Mexico had important effects on U.S. trade, but real output
also slowed in other developing countries, including Argentina. In response
to the December 1994 collapse of the
Mexican peso, the Mexican government
adopted a set of policies intended to
tighten monetary conditions, maintain
wage restraint, and reduce government
spending to mitigate the inflationary
impact of the peso's devaluation and to
achieve significant reduction in the current account deficit in 1995. Through
the third quarter, the Mexican current
account was approximately balanced; a
deficit of about $20 billion had cumulated during the comparable three quarters of 1994. The merchandise trade balance improved to moderate surplus in
1995 from a substantial deficit in 1994.
The improved trade performance in part
reflected a severe contraction in aggregate demand. Mexican real output fell
sharply early in the year but picked up
toward the end of the year, for an annual
decline of nearly 7 percent.
The newly industrializing economies
in Asia—for example, Malaysia, Korea,
and Taiwan—continued to grow rapidly
during 1995, at about the same rate as in
1994. Although growth in most of these
countries was driven by a strong expansion in internal demand, especially in
investment, most countries also benefited from very fast export growth. The
marked acceleration in exports was

Monetary Policy Reports, February
attributable at least in part to a real
depreciation of their currencies against
the yen and key European currencies
during the early part of the year.
In the first eleven months of 1995 the
nominal U.S. trade deficit in goods and
services reached about $115 billion at a
seasonally adjusted annual rate, a level
slightly greater than the $106 billion
recorded for 1994. U.S. income growth
in 1995 was similar to the average for
our trading partners, but as is typically
the case, comparable increases in
income seemed to bring forth an
increase in U.S. demand for imports that
was larger than the average increases in
demand for our exports by the foreign
countries with which we trade. Effects
of 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 dollar value of exports grew somewhat faster than the dollar value of
imports through November. Nonetheless, with the level of imports exceeding
the level of exports at the start of the
year, these growth rates translated into
a slightly larger deficit. The current
account deficit averaged about $160 billion at an annual rate during the first
three quarters of 1995. Both the trade
deficit and the deficit on net investment
income widened somewhat, resulting in
an increase from the $150 billion current account deficit experienced in 1994.
Real exports of goods and services
grew at an annual rate of about 5 percent
over the first three quarters of 1995.
Agricultural exports remained at elevated levels, and the volume of computer exports continued to rise sharply.
Other merchandise exports expanded in
real terms at a marginally slower rate
than did the total; within this broad category, machinery and industrial supplies
accounted for the largest increases.



49

Tabulation of the export data by country
of destination showed divergent patterns: Exports to Mexico dropped in
response to the economic crisis in that
country, but shipments to developing
countries in Asia rose sharply. Exports
to Western Europe, Canada, and Japan
increased as well.
Imports of goods and services
increased at an annual rate of about
6 percent in real terms during the first
three quarters, a slower rate of advance
than during 1994. Imports of computers
and semiconductors rose sharply, but
imports of other machinery, consumer
goods, and industrial supplies slowed.
Import prices increased about 2Vi percent in the twelve months ending in
December 1995. An end to the very
rapid rise in world non-oil commodity
prices and low inflation abroad helped
to restrain the rise in import prices.
In the first three quarters of 1995,
recorded net capital inflows into the
United States were substantial and
nearly balanced the deficit in the U.S.
current account. Sharp increases were
reported in both foreign assets in the
United States and U.S. assets abroad.
Foreign official asset holdings in the
United States increased almost $100 billion through September. These increases
reflected both intervention by certain
industrial countries to support the
foreign exchange value of the dollar
and very substantial accumulation of
reserves by several developing countries
in Asia and Latin America. Private foreign assets in the United States also rose
rapidly. Net purchases of U.S. Treasury
securities by private foreigners totaled
$97 billion, an amount far exceeding
previous records. Net purchases of U.S.
government agency bonds and corporate
bonds were also very large.
Direct investment inflows reached
almost $50 billion in the first three quarters of 1995; this total was about equal

50

83 rd Annual Report, 1996

to the inflow during all of 1994 and
almost matched the record pace of 1989.
Mergers and acquisitions added substantially to the inflow of funds from foreign
direct investors in the United States.
U.S. direct investment abroad was even
larger than foreign direct investment in
the United States and also approached
previous peak rates. U.S. net purchases
of foreign stocks and bonds were up
from 1994 but below the 1993 peak rate.
The bulk of the net U.S. purchases of
foreign securities were from the industrial countries; net purchases from
emerging markets played a relatively
small role.

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
Labor Markets
declined, on net.
The number of jobs on nonfarm payrolls
In most other sectors of the economy,
increased VA million over the twelve employment rose moderately last year.
months ended in December 1995. After The number of jobs in construction
a sharp rise during 1994, gains in increased 140,000 over the twelve
employment slowed in the first part of months ended in December, a rise of
1995, and the second quarter brought more than 3 percent. In the private
only a small increase. Thereafter, service-producing sector, which now
increases picked up somewhat. Nearly accounts for about three-fourths of all
450,000 jobs were added in the final jobs in the private sector, employment
three months of the year, a gain of about increased 1.7 million in 1995 after hav1 Vi percent at an annual rate. In January ing advanced 2.6 million in 1994. Estabof this year, with the weather keeping lishments that are involved in wholesale
many workers at home during the refer- trade continued to boost payrolls at a
ence week for the monthly survey of relatively brisk pace in 1995. Retailers
establishments, payroll employment fell also added to employment but at a consharply.
siderably slower rate than in 1994;
As in 1994, increases in payroll em- within retail trade, employment at apployment in 1995 came mainly in the parel outlets fell substantially last year,
private sector of the economy, but gains and payrolls at stores selling general
there were more mixed than those of merchandise dropped moderately after a
1994. In manufacturing, employment large increase in 1994. Providers of
fell about 160,000 over the twelve health services added slightly more jobs
months ended in December, reversing than in other recent years. At firms that
almost half of the previous year's gain. supply services to other businesses, emLosses were concentrated in industries ployment growth was sizable again in
that produce nondurables. A decline this 1995 but less rapid than in either of the
past year in the number of jobs at two previous years; in this category, proapparel manufacturers was one of the viders of computer services expanded
largest ever in that industry. Sizable their job counts at an accelerated pace




Monetary Policy Reports, February
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 rate reported
in December—5.6 percent of the labor
force—was near the midpoint of that
narrow range. In January of this year,
the unemployment rate ticked up to
5.8 percent.
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 brought substantial net increases
in labor force participation, although
longer-term trends during the two
decades 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 sluggishness of labor force participation in the
current business expansion. But, with
the participation rate remaining sluggish as job opportunities have continued
to expand, the evidence is pointing
increasingly toward a slower rate of
rise in the trend of participation. Slower
growth of participation will 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.



51

The average unemployment rate for
all of 1995 was about V2 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 back 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. The current expansion, in contrast, has remained relatively free of
increased inflation pressures working
through the labor markets. 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 the
start of the 1980s. 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
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.

52

83rd Annual Report, 1996

Prices
Early in 1995, inflation pressures that
had started building in 1994 seemed to
be gaining in 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 of the largest monthly
increases of the past decade and a half.
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 core CPI
slowed in May; thereafter, increases
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 CPI excluding food
and energy 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 23A percent, the
fifth consecutive year in which it has
been in a range of 3 percent or less.
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 13A percent over the
four quarters of 1995 after increases of



V/i 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
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 2lA 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 five years ago,
in 1990. In the intervening years, production adjustments by farmers and
weather problems of one sort or another
have caused temporary surges in the
prices of some farm commodities, but
these surges have not resulted in widespread pressures on food prices at the
retail level. Moderate rates of increase
in the costs of nonfarm inputs that contribute heavily to value added have been
an important anchor in the setting of
food prices at the consumer level. Also,
if only by chance, years of poor crops—
like that of 1995, when grain and
oilseed production plummeted—have
tended to be interspersed with years of
good crops, a pattern that has prevented
sustained upward pressures on farm and
food prices. In the energy area, prices
at the consumer level fell VA 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 natu-

Monetary Policy Reports, February
ral gas also declined appreciably. However, some upward pressures developed
in late 1995 and early this year, largely
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,
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 are still in check in
the current expansion.

Financial, Credit, and Monetary
Developments
In 1995 and early 1996, 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, raising the intended federal
funds rate Vi percentage point, to 6 percent, thereby extending the episode of
policy firming that had begun one year



53

earlier. As time passed, it became clear
that these policy tightenings had been
successful in containing inflationary
pressures, and the System initiated
l
A point reductions in the federal funds
rate in July and December 1995 and
January 1996.
Most market interest rates had peaked
before the policy tightening last 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 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
during 1995, interest rates dropped 1 to
IVi percentage points, with the largest
declines registered on intermediate- and
long-term securities. This year, shortand intermediate-term interest rates have
fallen somewhat further, while longterm rates are unchanged to a little
higher.
During the first part of last year,
expectations of lower U.S. interest rates
relative to other G-10 countries and
other factors such as the crisis in Mexico
contributed to a 10 percent depreciation
of the trade-weighted exchange value of
the dollar. By year-end, though, the dollar had retraced about half of these
losses, and it has appreciated further on
balance in 1996.
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 5lA per-

54

83rd Annual Report, 1996

cent, a bit above the midpoint of its
annual growth range. Initially, household and nonfinancial business credit
demands were concentrated in floatingrate or short-term debt instruments. As
the yield curve flattened, credit demands
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 upper part of its annual range, and
M3 was at the upper end of its range. In
contrast, Ml declined for the first time
since the beginning of the official series
in 1959, as many banks introduced retail
sweep accounts that shifted deposits
from interest-bearing checking accounts
to savings-type accounts in order 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 21/2 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, absent a firmer pol


icy, excessive demands on productive
resources and resulting higher inflation
would have produced strains, threatening economic expansion.
In early February the policy actions
taken in 1994 did not appear to be sufficient 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
V2 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
in the neighborhood of the economy's
potential. 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, substantial evidence had accumulated that the threat of
rising inflation had lessened. Economic
growth had slowed; although the adjustment to inventory imbalances that had
developed earlier in the year was contributing to the slowdown, the underlying trajectory of final sales was still

Monetary Policy Reports, February
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, issuing a
symmetric directive to the Account
Manager.
Intermediate- and long-term interest
rates had fallen throughout the winter
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 had
declined about lA percentage point from
its level at the beginning of the year,
while 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 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




55

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 longterm averages on a real, inflationadjusted 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 P/4 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 mid-December,
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 having
posted a strong third quarter. With both
inflation and inflation expectations more

56

83 rd Annual Report, 1996

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 lA percentage point, bringing
it to 5 ^percent.
The data available at the time of the
FOMC meeting in late January gave
stronger evidence of slowing economic
expansion. This development reduced
potential inflationary pressures going
forward and raised questions about
whether monetary policy might unduly
restrain the pace of expansion. The
Committee believed that a further slight
easing in monetary policy was consistent with keeping inflation contained
and fostering sustainable growth, given
that price and cost trends were already
subdued. In these circumstances, the
Committee lowered the intended federal funds rate lA percentage point, to
5lA percent, and the Board approved an
equivalent reduction in the discount rate,
to 5 percent.
Partly as a consequence of the System
actions in December and January, shortand intermediate-term interest rates have
fallen lA to x/i percentage point since
mid-December. However, on balance,
longer-term rates are unchanged to a
little higher. The absence of a firm
agreement to reduce the federal budget
deficit, and some tentative signs most
recently that the economy might not be
so sluggish as some market participants
had feared, have held up longer-term
rates.
Credit and Money Flows
On balance in 1995, the debt of the
domestic nonfinancial sectors grew at
about the same pace as in the previous
year, although within the year, debt
growth was much stronger in the first
half 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 33/4 percent in 1995,
slightly less than in 1994. The federal
government's demands for credit fell
largely because the budget deficit shrank
about 20 percent for the calendar year.
Federal debt growth also slowed toward
year-end as the Treasury drew down its
cash balance to keep borrowing within
the $4.9 trillion debt ceiling.

Growth of Money and Debt
Percent

Ml

M2

M3

Domestic
nonfinancial
debt

8.7
9.0

9.6
12.4

9.5
10.2

1982
1983
1984

7.5
5.4
2.5 2
8.8
10.3
5.4

8.8
11.8
8.1

9.7
9.5
10.8

9.8
11.9
14.6

1985
1986
1987
1988
1989

12.0
15.5
6.3
4.3
.5

8.6
9.2
4.2
5.7
5.2

7.7
9.0
5.9
6.3
4.0

14.3
13.3
9.9
9.0
7.8

1990
1991
1992
1993
1994
1995

4.2
7.9
14.3
10.5
2.4
-1.8

4.1
3.1
1.8
1.4
.6
4.2

1.8
1.2
.6
1.0
1.6
6.1

6.8
4.6
4.7
5.2
5.2
5.3

Quarter
(annual rate)3
1995:Q1
Q2
Q3
Q4

-.1
-.5
-1.5
-5.1

1.4
4.3
7.0
4.0

4.8
6.7
8.0
4.4

5.3
7.0
4.6
3.9

Measurement
period
Year'
1980
1981

1. From average for fourth quarter of preceding year to
average for fourth quarter of year indicated.
2. Adjusted for shift to NOW accounts in 1981.
3. From average for preceding quarter to average for
quarter indicated.

Monetary Policy Reports, February
State and local government debt fell
5Vi 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 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 effect on demands for
tax-free municipal debt of proposals for
changes in federal taxation that would
sharply reduce the tax advantages of
holding municipal bonds.
Household borrowing remained robust in 1995, moderating only a bit from
1994, 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 there were signs of deterioration. 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 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. This
measure of debt burden has now



57

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 longerterm debt. Despite the increase in credit
demands, interest rate spreads of
investment-grade private 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 belowinvestment-grade 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
Distribution of Bank Assets
by Capital Status
Percentage of industry assets
1990:Q4
Undercapitalized
Adequately capitalized ...
Well capitalized

1995:Q3

31.3
38.6
30.1

.5
2.9
96.6

NOTE. Adjusted for examiner ratings.

58

83rd Annual Report, 1996

Banks and thrift institutions funded a
balance sheets. Banks funded a portion
of the loan increase by reducing their large share of their asset growth with
securities holdings, although higher deposits, and M3 grew 6 percent. The
market prices of securities and off- non-M2 portion of M3 was especially
balance-sheet contracts left reported strong, in part as depository institutions
securities holdings slightly higher for substituted large time deposits for nonthe year. In fact, bank security holdings deposit sources of funds. The sharp
relative to the size of their balance reduction in deposit insurance premisheets remained elevated and, together ums, which made large time deposits a
with banks' strong capital positions, more attractive source of funds, probindicated that late in the year banks were ably contributed to this shift. Late in the
well positioned to continue accommo- year, branches and agencies of Japanese
dating the credit demands of households banks, facing some resistance in U.S.
and businesses. Although qualitative funding markets, ran off time deposits
information suggested that banks were while continuing to increase their fundno longer reducing the standards busi- ing from overseas offices.
nesses needed to meet to qualify for
M2 rose as lower market interest rates
loans, some easing of credit terms and a flatter yield curve increased the
continued, with interest rate spreads relative attractiveness of retail deposits.1
on business loans narrowing further. As is typical, deposit interest rates, and
Growth of real estate loans held by to a lesser extent returns on money marbanks slowed over the year as the share ket mutual funds, adjusted slowly to
of fixed rate mortgages in total origina- declines in market rates last year. Falltions rose with the decline in long-term ing interest rates for comparable maturates. Banks tend to securitize fixed rate rity market instruments were not the
mortgages more than adjustable rate whole story for the growth of M2, howloans. Consumer loans on the books of ever. As the yield curve flattened, the
banks began the year growing at very relative gains from holding longer-term
high rates; this growth decelerated assets with less certain price behavior
throughout 1995 as the volume of securitization increased. In response to rising
1. In February 1996 M2 was redefined to
delinquency rates, some banks tightened exclude overnight repurchase agreements (RPs)
terms and standards for consumer loans and overnight Eurodollars; these instruments will
remain in M3. These items were first included in
toward the end of 1995 and early 1996.
M2 in 1980 because they were being substituted
Total assets of thrift institutions are for demand deposits as businesses were in the
estimated to have risen slightly last year. process of managing their cash holdings more
Growth at healthy thrift institutions closely. Since then, other uses of overnight RPs
more than offset a substantial transfer of and Eurodollars have come to dominate movements. Moreover, while RPs and Eurodollars are
thrift assets to commercial banks only 3 percent of M2, they contribute substantially
through mergers. The revival of growth to the short-run volatility of that aggregate. Rein thrift assets, along with the strong moving these components from M2 should make
showing of bank credit, helped to nudge the weekly levels of the aggregate less volatile and
reduce
burden on banks
up depository credit as a share of had to the reportingbetween overnight that have
distinguish
and term
domestic nonfinancial debt for the sec- RPs and Eurodollars. On a monthly and quarterly
ond straight year after fifteen years of basis, the relationships of the two measures of M2
declines. Banks and thrift institutions to income and interest rates are almost indisstill account for more than one-third of tinguishable. The historical M2 data presented in
this report exclude overnight RPs and overnight
all credit to nonfinancial sectors.
Eurodollars.



Monetary Policy Reports, February
fell, and this probably strengthened
household demand for components of
M2. Even so, M2 velocity was about
unchanged after having increased for
four years.
Ml fell almost 2 percent in 1995, the
first annual decline since the beginning
of the Board's official series in 1959.
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. In 1991, after the cut in
reserve requirements at the end of 1990,
unusually low levels of required reserve
balances were associated with greater
variability in the federal funds rate, as
banks' volatile clearing needs began to
dominate the demand for reserves, making daily reserve demand more difficult
to estimate.
The run-off in reserve balances held
down the growth of the monetary base
to 4 percent in 1995. In addition, currency growth slowed, primarily owing
to reduced shipments abroad. Foreign
demand moderated with the stabilization of financial conditions in some
countries where dollars circulate widely.
Indeed, reduced demands from abroad



59

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.
Foreign Exchange Developments
The weighted-average foreign exchange
value of the dollar in terms of the other
G-10 currencies declined about 5 percent on balance last year. The dollar fell
sharply through April and reached a low
almost 10 percent below its value at the
end of 1994. The downward pressure
against the dollar was sparked by indications of some slowing of the pace
of U.S. real output growth, which contributed to expectations that further
increases in U.S. interest rates were
unlikely, and by the acrimony surrounding the ongoing trade dispute between
the United States and Japan. The crisis
in Mexico also weighed on the dollar.
On several occasions in March and early
April the Trading Desk at the Federal
Reserve Bank of New York, joined by
some other central banks, intervened to
buy dollars on behalf of the Department
of the Treasury and the Federal Reserve
System in an effort to counter the pressure for dollar depreciation.
The release by the G-7 officials of the
communique from their meeting in late
April supporting an orderly reversal of
the dollar's decline and the signing of
a trade agreement between the United
States and Japan at the end of June
helped to stabilize the dollar, which had
fluctuated narrowly until early August.
The dollar then rebounded somewhat
and remained within a narrow range
through the end of the year. The recovery of the dollar stemmed, in part, from
perceptions that its earlier decline, par-

60

83rd Annual Report, 1996

ticularly in terms of the yen, had been
excessive in light of the underlying fundamentals. Moreover, weakness in the
economies of some other major industrial countries began to emerge, reducing prospective returns available abroad.
At times from May through August, the
Trading Desk again entered the market
in conjunction with other central banks
to intervene in support of the dollar,
reinforcing the view that U.S. authorities
were committed to a strong dollar.
In all of the major foreign industrial
countries, long-term interest rates
declined during 1995, nearly reversing
the increases that had occurred during
the previous year. On average, rates on
foreign government issues with maturities of ten years fell about 150 basis
points in the twelve months to December, somewhat less than the decline that
occurred in the comparable U.S. rate.
In Canada, where economic activity
slowed sharply, the drop in long-term
rates nearly matched that in the United
States, while in Italy, where political
uncertainty remained a concern throughout the year, rates fell only 100 basis
points. During the first few weeks of
this year, long-term rates abroad generally moved down somewhat more but
then most recently returned to their
December average levels. An important
exception is Japan, where rates have
risen from their late-December levels,
apparently reflecting market perceptions
that the stage is set for a Japanese economic recovery. Short-term market rates
in the major foreign industrial countries
were mixed, but on average rates moved
down.
On balance, the dollar depreciated
about 8 percent in terms of the German
mark during 1995 and by similar
amounts in terms of most other currencies participating in the Exchange Rate
Mechanism of the European Union.
After substantial depreciation against



the mark early in the year, the dollar
stabilized and then partly recovered as
economic indicators revealed significant
softening in economic activity in Germany. Easing by the Bundesbank during
the second half of the year reinforced
the view that mark interest rates were
not likely to rise and might fall further.
The dollar depreciated slightly, on balance, in terms of the Canadian dollar,
despite periods of selling pressure on
the Canadian dollar during the year
related to Canada's fiscal situation and
possible secession by Quebec.
Although the dollar did fall to a
record low, below 80 yen to the dollar in
mid-April, by year-end the dollar had
appreciated slightly in terms of the yen
from its level at the end of 1994. So far
this year, the dollar has appreciated
somewhat further against the yen. Resolution of the trade dispute and repeated
episodes of exchange market intervention by the Bank of Japan, sometimes in
conjunction with U.S. and foreign monetary authorities, contributed to the
appreciation of the dollar in terms of the
yen during the second half of the year.
However, the fundamental cause of the
yen's decline during that period probably was the easing of monetary policy
by the Bank of Japan that pushed shortterm market interest rates to extremely
low levels.
In terms of the Mexican peso, the
dollar appreciated sharply from the
onset of the crisis in late December 1994
to March. The dollar subsequently
retraced some of those gains, and the
peso-dollar rate fluctuated narrowly
through the middle of the year. Uncertainty about the prospects for Mexican
economic performance and macroeconomic policy sparked renewed appreciation of the dollar in terms of the peso in
November. Since November, data indicating that the decline in Mexican real
economic activity may have ended,

Monetary Policy Reports, July

61

lift to job growth. Looking ahead, the
members of the Federal Open Market
Committee (FOMC) anticipate that economic activity will grow more moderately, on average, in coming quarters
and that the unemployment rate will
remain around the level it has averaged
over the past year and a half.
Although overall consumer price
inflation was boosted by higher energy
prices during the first half of the year,
the underlying trend of prices still
appears to have been well contained.
Over the past twelve months, the consumer price index excluding food and
energy items has risen 23A percent—
near the lower end of the narrow range
that has prevailed since early 1994.
Moreover, the deflator for personal consumption expenditures on items other
than food and energy derived from data
reported in the national income and
product accounts (NIPA) has continued
to show a slowing trend.
The combination of brisk growth and
favorable underlying inflation so far this
year has, of course, been welcome.
Report on July 18, 1996
Nonetheless, mounting pressures on
resources are apparent in some segments
of the economy—most notably in the
Monetary Policy and the
labor market—and these pressures must
Economic Outlook
be monitored closely. Allowing inflaThe U.S. economy performed well in the tionary forces to intensify would ultifirst half of 1996. In early February, mately disrupt the growth process. The
when the Federal Reserve prepared its Federal Reserve recognizes that its conlast report on monetary policy, there was tribution to promoting the optimal persome concern about the strength and formance of the economy involves condurability of the current economic taining the rate of inflation and, over
expansion: The economy was operating time, moving toward price stability.
at a relatively high level of resource
utilization, but it was not exhibiting a
great deal of forward momentum. As the Monetary Policy, Financial
year has unfolded, however, economic Markets, and the Economy
activity has proved quite robust. After over the First Half of 1996
rising only fractionally in the fourth Information available around the turn of
quarter of 1995, real gross domestic the year suggested that the economy had
product posted a solid gain over the first downshifted after posting a strong gain
half of 1996, providing a considerable in the third quarter of 1995. The growth

some intervention by the Bank of
Mexico in support of the peso, and a
perception that the decline in the peso
may have gone too far given the underlying fundamentals have contributed to
some rebound of the peso. During the
year, the Mexican authorities drew
$3 billion on short-term swap lines with
the Federal Reserve and the Exchange
Stabilization Fund (ESF) of the U.S.
Treasury and $10.5 billion on a
medium-term swap facility provided by
the ESF. By the end of January 1996,
the short-term drawings had been
entirely repaid.
Adjusted for relative consumer price
inflation, the dollar was little changed,
on balance, against a multilateral-tradeweighted average of the currencies of
eight developing countries that are
important U.S. trading partners. The dollar's 30 percent real appreciation against
the Mexican peso was about offset
by real depreciations against the other
seven currencies.




62

83 rd Annual Report, 1996

of final demand appeared to have
slowed, reflecting importantly a deceleration of consumer spending. In addition, hesitant growth abroad and a
strengthening in the foreign exchange
value of the dollar relative to the levels
prevailing at mid-1995 were seen as limiting the prospects for further growth in
exports. The slowdown in the growth of
final demand had given rise to inventory
buildups in some industries; in turn,
the production cutbacks undertaken in
response to those buildups were having
a further damping effect on economic
activity. Meanwhile, data on prices
and wages suggested that inflation
performance continued to be fairly
satisfactory—indeed, better than many
members of the FOMC had expected
as of midyear 1995. To keep the stance
of monetary policy from becoming
effectively more restrictive owing to
the slowdown in inflation in the second
half of last year and to promote sustainable growth, the Committee eased
the stance of policy in December 1995
and again at the end of January 1996,
bringing the federal funds rate down
a half percentage point in total, to
514 percent.
Most participants in financial markets
were unsurprised by these policy adjustments, given the economic backdrop.
Moreover, they anticipated that there
would be scope for additional easing
steps in the coming months. Thus,
between mid-December and the end of
January, interest rates on Treasury securities generally moved lower, especially
at short and intermediate maturities, and
stock price indexes edged higher on balance. The dollar strengthened slightly
on net against the currencies of the other
Group of Ten (G-10) countries, reflecting, in part, disappointing news about
the pace of activity in Europe and consequently larger declines in interest rates
there than in the United States.



The underlying trends in the economy
early in the year were obscured to a
degree by extraordinarily adverse
weather that affected a significant part
of the country. Through the course
of the next few months, however, it
became increasingly clear that the economy had regained vitality. Consumer
spending perked up after a lackluster
holiday season and was only temporarily depressed by the severe winter.
Business demand for equipment proved
quite strong, as did housing demand.
The strengthening in sales facilitated
businesses' efforts to control their inventories, and as that situation improved,
industrial production rebounded smartly.
Overall employment growth was brisk,
and by June the unemployment rate
reached its lowest level in six years.
Inflation during the first half of
the year was generally well behaved.
Energy prices surged, mainly in
response to a run-up in the world price
of oil, and bad news about grain crops
raised the prospect of higher food prices
down the road. However, price inflation
for consumer items other than food and
energy held steady or moved a bit lower.
Labor costs presented a mixed picture.
The increase in total hourly compensation over the first three months of the
year, as measured by the employment
cost index (ECI), was in line with its
recent moderate trend. However, within
total compensation, the wage and salary
component of the ECI surged in the first
quarter, and further signals of wage
acceleration came from a more rapid
increase in average hourly earnings in
the second quarter.
Against the backdrop of stronger
activity but subdued inflation trends, the
Federal Reserve made no adjustments
to its policy stance after January. With
economic activity more clearly on the
upswing, however, and prospects for a
breakthrough on the federal budget

Monetary Policy Reports, July
seeming to fade, intermediate- and longterm interest rates reversed course in
February and trended up over subsequent months. Since the end of December, the yield on the thirty-year Treasury
bond has increased about 1 percentage
point, on net, while the yield on the
five-year note has risen about VA percentage points over the same period.
The rate on three-month bills has edged
up only slightly. Despite the backup in
bond yields, major stock-price indexes
rose considerably further through the
first half of the year; most of those gains
were erased in late June and the first half
of July, however, as company reports
raised questions about the pace of earnings growth. The rise in bond yields has
boosted the dollar in foreign exchange
markets; since mid-April, the dollar has
generally traded against an average of
the currencies of the other major industrial countries about 4 percent above its
level at the end of December.
During the first half of the year, credit
remained easily available to most household and business applicants. Interest
rate spreads on private debt over Treasury securities remained narrow. In
response to the recent increase in delinquencies on credit card accounts, many
banks have tightened their standards for
approval of new accounts, but this
appears to have only partially reversed a
marked relaxation of such standards earlier this decade, and banks overall
remain aggressive in the pursuit of new
borrowers, especially business clients.
The debt of all domestic nonfinancial
sectors combined expanded at about a
43A percent annual pace, placing this
aggregate near the middle of its monitoring range. M2 and M3 are currently near
the 5 percent and 6 percent upper
boundaries of their respective growth
ranges, in line with the FOMC's expectation as of last February. In contrast
to the experience of the early 1990s,



63

growth in the monetary aggregates relative to nominal gross domestic product
has been broadly in line with historical
relationships, given the structure of
interest rates.
Economic Projections for
1996 and 1997
As noted previously, 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 think it
likely that economic activity will return
to a moderate growth path in the second
half of 1996 and in 1997 after the larger
gains in the first half of this year. The
resulting increase in real GDP over 1996
as a whole would be in the range of
2V2 percent to 23A percent, somewhat
above the forecasts in the February
report on monetary policy. For 1997, the
central tendency of the forecasts spans a
range of 13A percent to 2V4'percent. The
civilian unemployment rate, which averaged around 5Vi percent in the second
quarter of 1996, is expected to stay near
this level through the end of this year
and perhaps to edge higher during 1997.
Economic activity clearly retains considerable momentum. The trend in final
demand is positive, and inventories
appear to be well aligned with the current pace of sales—perhaps even a bit
lean. Accordingly, the members of the
FOMC recognize the possibility that
growth could remain elevated a while,
with the potential for putting greater
pressure on resources. Nonetheless,
most members think that some slowing
from the rapid growth pace recorded, on
average, in the first half is the most
likely outcome. Housing construction
and other interest-sensitive activity
should be restrained to some degree by
the rise in long-term interest rates over
the past several months. And although

64

83rd Annual Report, 1996

some of the lagging economies abroad
are expected to perform better this year,
there are still concerns about the solidity
of that acceleration and the associated
lift to U.S. exports. In addition, growth
in real business fixed investment appears
to be tapering off, although spending
will likely remain buoyant because of
the rapid rate of product innovation and
dramatic price declines in the computer
area. Consumer spending is also
expected to grow less rapidly in coming
quarters. Household wealth has been
boosted substantially by the run-up
in stock prices over the past year and a
half, but for many households, debt burdens have risen significantly in recent
years and may represent a constraint on
purchases of big-ticket items.
Most members of the FOMC expect
the rise in the consumer price index over
the four quarters of 1996 to be in the
range of 3 percent to 3lA percent, about
l
A percentage point higher than they

predicted last winter. The projected
increase in the consumer price index is
also somewhat larger than that recorded
in 1995. However, that step-up would
mainly reflect developments in the food
and energy sectors, which are likely to
add to overall inflation in 1996 after
having damped it in 1995. Apart from
these volatile sectors, inflation has
remained in check so far this year
despite high levels of resource utilization and reports that tightness in some
parts of the labor market is placing
upward pressure on wages. Assuming
no further adverse shocks to food and
energy prices, and in the context of
the Federal Reserve's intent to keep
trend inflation well contained, the Committee believes that overall CPI inflation
should recede. Accordingly, the central
tendency of the FOMC's forecasts
shows CPI inflation dropping back to
the range of 23/4 percent to 3 percent in
1997.

Economic Projections for 1996 and 1997
Percent
Federal Reserve governors
and Reserve Bank presidents
Measure

Administration
Range

Central
tendency
1996

Change, fourth quarter to fourth quarter*
Nominal GDP
Real GDP
Consumer price index2

43/4-53/4
2'/2-3
3-3'/ 4

5-51/2
2'/2-23/4
3-3 »/4

5.0
2.6
3.2

Average level, fourth quarter
Unemployment rate 3

5'/4-53/4

About 5Vi

5.6

1997
Change, fourth quarter to fourth quarter'
Nominal GDP
Real GDP
Consumer price index2

4-5'/ 2
V/2-V/2
2'/2-3'/4

4'/ 4 -5
VA-VA
23/4-3

5.1
2.3
2.8

Average level, fourth quarter
Unemployment rate 3

5'/2-6

5'/2-53/4

5.7

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. Figure for the Administration
is an annual average.

Monetary Policy Reports, July

65

In setting the ranges for M2 and M3,
the Committee intended to communicate its expectation as to the growth of
these monetary aggregates that would
result under conditions of approximate
price stability, assuming that the aggregates exhibit the same trends relative to
nominal spending that prevailed for
many years until the early 1990s and
that seem to have reemerged after an
intervening period of marked deviation.
Based on that reemergence and on Committee members' expectations for the
growth of nominal GDP in 1996 and
1997, the Committee anticipates that
both M2 and M3 will probably finish
near the upper boundaries of their respective ranges each year. The Committee expects that the debt of the domestic
nonfinancial sectors will remain near the
middle of its monitoring range in 1996
and 1997. In light of the rapid pace of
Money and Debt Ranges
technological change and innovation
for 1996 and 1997
still occurring in the financial sector—
At its meeting earlier this month, the and the attendant uncertainty about the
Committee reaffirmed the ranges for future behavior of the aggregates—the
1996 growth of money and debt that it Committee will continue to rely on a
had established in February: 1 percent to wide range of other information in deter5 percent for M2, 2 percent to 6 percent mining its policy stance.
for M3, and 3 percent to 7 percent for
the debt of the domestic nonflnancial
sectors. In addition, the Committee Economic and Financial
set provisional growth ranges for 1997 Developments in 1996
at the same levels..
Economic activity has increased substantially thus far this year. Real gross
domestic product grew at an annual rate
of about 2!/4 percent in the first quarter
Ranges for Growth of Monetary
of 1996, and the available data point to a
and Debt Aggregates
much larger increase in the second quarPercent
ter. The increases in activity have been
Provisional
facilitated by generally supportive finanAggregate
1995
1996
for
1997
cial conditions: Although long-term
interest rates have risen considerably on
M2
1-5
1-5
1-5
M3
2-6
2-6
2-6
net since early 1996, intermediaries
Debt
3-7
3-7
3-7
have continued to supply credit to most
NOTE. Change from average for fourth quarter of
borrowers on favorable terms, and interpreceding year to average for fourth quarter of year
est rate spreads on corporate securities
indicated. Figures for debt of the domestic nonfinancial
over Treasury securities have remained
sector are monitoring ranges.
The Committee's inflation projections
incorporate the technical improvements
the Bureau of Labor Statistics is making
to the CPI in 1996 and 1997; they are
expected to shave a little from inflation
in both years. The Committee also recognizes that the remaining biases in the
CPI are not negligible and may not be
stable over time. Thus, it will continue
to monitor a variety of alternative measures of price change as it attempts to
gauge progress toward the long-run goal
of price stability.
The Administration has just released
its midyear update to its economic and
budgetary projections. Its forecasts for
real growth and inflation in 1996 and
1997 are broadly in line with the central
tendencies of the forecasts of Federal
Reserve policymakers.




66

83 rd Annual Report, 1996

narrow. In the foreign exchange markets, the dollar has appreciated, on average, against the currencies of the other
major industrial countries.

Economic Developments
The Household Sector
After a sluggish performance in late
1995, spending by households has
picked up noticeably this year. Consumer expenditures increased about
3Vi percent at an annual rate in real
terms in the first quarter and appear to
have posted another sizable gain in the
second quarter. In addition, according
to indexes such as those compiled by the
Survey Research Center at the University of Michigan and the Conference
Board, consumer sentiment has generally been relatively upbeat. In the
real estate market, sales of new singlefamily dwellings have posted an average level well above that of last year,
thus encouraging builders to boost housing starts.
Outlays for durable goods have continued to be the strongest component of
spending, extending the long-standing
uptrend in the share of durables in total
real consumption. Declining relative
prices and the availability of innovative
products have continued to lift demand
for home electronic equipment and software products. In addition, sales of light
motor vehicles, bolstered by relatively
generous incentives and perhaps by the
cash freed up by the surge in mortgage
refinancings last winter, averaged a
healthy 15 million unit annual rate in the
first half of 1996.
After a lackluster performance in
1995, real outlays for nondurable goods
have also risen this year; the average
level of these expenditures in April and
May was nearly 3 percent at an annual
rate above that recorded in the fourth



quarter. Meanwhile, spending on services has remained on a moderate
uptrend, with short-run variations reflecting the effects of weather on household energy use.
Consumer spending has been supported by brisk gains in wage and salary
income associated with the better pace
of hiring this year. However, other components of before-tax income, taken
together, have risen less rapidly than
they did in 1995, and gains in after-tax
income were restrained by larger-thanusual tax bills (final payments less
refunds) this spring. Accordingly, the
level of the personal saving rate in May
was somewhat below that recorded in
late 1995, although fragmentary data
suggest that saving rose sharply in June.
In any event, taking a longer perspective, spending and income have grown
at roughly similar rates over the past
few years, and the saving rate has generally fluctuated in a fairly narrow band
between 4 percent and 5 percent since
1993—a low level historically.
The recent developments in financial
markets may have had an important
influence on the spending decisions of
individual households. In particular,
households holding large stock portfolios have enjoyed sizable increases in
wealth over the past year and a half,
which may be inducing them to consume greater fractions of their incomes
than they would otherwise. At the same
time, a growing number of households
are apparently finding it difficult to meet
their debt-service obligations, judging
from the appreciable rise in delinquency
rates on consumer loans in recent years.
In addition, it is possible that job insecurity and longer-run concerns about
retirement income have caused many
households to raise their targets for
asset accumulation. However, the relative stability of the saving rate over
the past few years suggests that the

Monetary Policy Reports, July
net effect of these factors on overall
consumption—at least to date—has
been limited.
Residential construction has, on the
whole, been robust this year. Private
housing starts averaged nearly 1.5 million units at an annual rate through June,
a pace appreciably above that in 1995.
In addition, the volume of shipments
of mobile homes ("manufactured housing"), which has doubled over the past
five years, now stands around 350,000
units at an annual rate, the highest level
since 1974.
In the single-family sector, starts and
sales of new homes were surprisingly
firm in the face of severe weather in
early 1996, and they moved still higher
in the second quarter. Moreover, the
regular survey of the National Association of Homebuilders continued to indicate solid demand through early July,
and the Mortgage Bankers Association
reported that loan applications for home
purchases remained brisk through midyear.
Relative to the lows reached in early
1996, the rate on thirty-year conventional fixed-rate home mortgages has
risen nearly Wi percentage points and
has been fluctuating around 814 percent
in recent weeks. However, a number of
factors seem to have cushioned the
effects of these higher mortgage rates. In
particular, rates on adjustable-rate mortgages have risen only about half as
much as have those on thirty-year fixedrate loans. Also, house prices have
firmed somewhat, which may have
raised confidence in the investment
value of residential real estate and thus
contributed to the recent rise in the
homeownership rate, which is now at its
highest level since the early 1980s.
Probably more important in this regard,
however, is the trend in the affordability
of housing. One simple measure of
affordability is the monthly mortgage



67

payment on a new home having a given
set of attributes, divided by average
monthly household income. Despite the
increase in mortgage rates this year, this
measure suggests that the cash-flow burden of homeownership is still only modestly above the lows of the past thirty
years.
Construction of multifamily housing
averaged about 300,000 units at an
annual rate in the first half of 1996, a
rate somewhat above that in 1995 but
a fairly low one historically. Market
conditions vary geographically, but the
rental vacancy rate for the nation as a
whole seems to have tilted back up,
after generally trending down between
mid-1993 and mid-1995. Also, the
absorption rate, which measures the percentage of apartments that are rented
within three months of their completion,
edged back down in 1995 after several
years of increases.
The Business Sector
Developments in the business sector
were quite favorable in the first half
of 1996. After decelerating in 1995,
real business fixed investment rose at a
12V2 percent annual rate in the first quarter of 1996, with sizable advances for
both equipment and structures. And,
although real investment appears to have
decelerated again in the second quarter,
it probably posted an appreciable gain.
Over the past four years, real investment
has grown around 8 percent per year, on
average, and now stands at a level that
implies quite substantial growth in the
capital stock. The updating of capital
and the increase in capital per worker
are key to lifting productivity growth
and living standards.
Outlays for producers' durable equipment rose at an annual rate of about
14 percent in real terms in the first quarter, after a IV2 percent rise over the

68

83rd Annual Report, 1996

course of 1995. As has been true
throughout the expansion, much of the
first-quarter growth was in real outlays
for computers and other informationprocessing equipment; such investment
received particular impetus from extensive price cutting in virtually all segments of the computer market and from
a push to acquire the state-of-the-art
equipment needed to take full advantage of popular new software and
opportunities for information transfer.
However, incoming orders data and
recent anecdotal reports suggest that the
growth in real outlays for computers
may be slowing. Meanwhile, demand
for other types of capital equipment,
which had softened in 1995, firmed
somewhat in the first quarter.
In the nonresidential construction
area, real investment continued to
expand in the first quarter. However, the
monthly data suggest that outlays softened in the second quarter, an occurrence that is consistent with the downturn in contracts—a forward-looking
indicator of construction outlays—since
late 1995.
Trends within the construction sector
have been divergent. In the office sector,
the modest recovery that seemed to be
under way appears to have waned even
though vacancy rates have continued to
fall and transactions prices have continued to rise. Outlays dropped noticeably
in the fourth quarter of 1995 and the first
quarter of 1996, and preliminary data
suggest that they remained at a fairly
low level in the second quarter. In contrast, spending for commercial structures other than office buildings, which
has been rising briskly since 1992, continued to advance through the first
quarter—although further gains may be
limited by an emerging excess of retail
space in some parts of the country and
the recent leveling out of transactions
prices. Elsewhere, outlays for industrial



construction, which had moved up over
1994 and the first half of 1995, have
been nearly flat over the past few quarters, while construction of hotels and
motels, which account for less than
10 percent of structures outlays, has
boomed.
Investment in nonfarm business
inventories slowed dramatically in the
fourth quarter of 1995 after running at a
fairly rapid pace over much of last year,
and it nearly ceased in the first quarter
of 1996 as motor vehicle stocks plummeted. Automotive stocks had risen
appreciably over the second half of
1995, and some reduction was in train
even before a March strike at General
Motors curbed production; with the
strike, dealer stocks were drawn down
sharply. In addition, although firms outside motor vehicles apparently made
considerable progress in rectifying
inventory imbalances in late 1995, many
continued to restrain production in
response to continued weak orders in
early 1996; producers of household
durables and textiles are notable
examples.
Inventory investment evidently rebounded in the second quarter, mainly
because motor vehicle stocks stabilized
as sales and production returned to
rough balance. Outside of motor vehicles, stocks accumulated moderately, on
balance, in April and May. As of May,
inventory-sales ratios for all major sectors were noticeably below their levels
in late 1995; the decline in the ratio for
retailers was especially steep.
Economic profits of all U.S. corporations continued to surge in the first quarter, extending the steep climb that began
in the early 1990s. The strength in profits in recent quarters has been attributable in large part to robust earnings
growth at domestic financial institutions
and a rebound in profits at foreign subsidiaries of U.S. corporations. In the

Monetary Policy Reports, July
domestic nonfinancial corporate sector,
the profit share—pretax profits divided
by the sector's GDP—has been hovering around 10 percent since mid-1994,
after having risen appreciably over the
preceding few years; its current level is
similar to the levels attained in the mid1980s but well below the highs of the
1960s and 1970s. About half of the
increase in the sector's profit share since
the early 1990s has reflected a reduction
in net interest expenses.
The Government Sector
Although the nation continues to grapple
with the prospect of growing federal
budget deficits in the years ahead, the
incoming news on the budget for fiscal
1996 has been extremely favorable. The
deficit in the unified budget over the first
eight months of the fiscal year—the
period from October to May—was only
$109 billion, $27 billion less than during the comparable period of fiscal
1995. The improvement in the deficit
primarily reflected exceptionally rapid
growth in receipts; outlays continued to
rise at about the same pace as had been
recorded, on average, over the preceding four years. If present trends continue, the fiscal 1996 deficit, when measured as a percentage of nominal GDP,
will be the smallest since 1979.
Federal receipts in the first eight
months of fiscal 1996 were 8 percent
higher than in the same period a year
earlier; the rise was considerably greater
than that of nominal GDP. Boosted by
the upswing in business profits, corporate taxes have been increasing at
double-digit rates since fiscal 1993, and
that path has extended into fiscal 1996.
Individual income taxes have also risen
sharply this year; little information is
available on the factors behind the surge
in individual payments, but it may have
resulted, at least in part, from capital



69

gains realizations associated with the
strong performance in financial markets
last year.
In total, federal outlays in the first
eight months of fiscal 1996 were 4 percent higher than during the corresponding period of fiscal 1995. Outlay growth
was damped by the reductions in discretionary domestic spending implied by
this year's appropriations legislation.
However, expenditures for "mandatory"
programs continued to rise rapidly, and
net outlays for deposit insurance were
less negative than in 1995 (that is, insurance premiums and the proceeds from
net sales of thrift assets declined). In
addition, net interest payments increased
moderately, reflecting the growth in the
stock of outstanding federal debt.
Federal expenditures on consumption
and investment—the part of federal
spending included directly in GDP—
increased at an annual rate of about
6 percent in real terms in the first quarter
of 1996 after declining about 13 percent
in the fourth quarter of 1995. In part,
real spending rose in the first quarter
because the government shutdowns that
occurred during the budget crisis depressed real spending less in the first
quarter than in the fourth. Even so,
given the enacted appropriations, the
first-quarter increase was almost surely
a transitory spike.
The fiscal position of states and
localities has been relatively stable in
the aggregate over the past few years.
As measured in the NIPA, the surplus
(net of social insurance funds) in the
sector's operating accounts has fluctuated in the range of $30 billion to
$40 billion (annual rate) since the beginning of 1994; it stood around the middle
of that range in the first quarter. On the
whole, these governments are in considerably better shape than they were in the
early 1990s. Even so, the sector remains
under pressure to balance rising demand

70

83rd Annual Report, 1996

for services—especially in education,
corrections, and health care—against the
public desire for tax relief.
Real expenditures on consumption
and gross investment—the part of state
and local spending included directly in
GDP—declined somewhat in the first
quarter of 1996. However, the decrease
reflected primarily the effects of the
unusually adverse winter weather, and
spending appears to have rebounded
in the second quarter. State and local
employment posted a respectable gain,
on net, over the first six months of the
year. In addition, outlays for construction rose about 2>Vi percent in real terms
over the year ending in the first quarter,
reflecting higher spending on highways and schools; monthly construction data through May suggest that
spending rose substantially in the second quarter.
Receipts of state and local governments rose about 4 percent in nominal
terms over the year ending in the first
quarter, about matching the rise in nominal GDP. The sector's own-source general receipts, which comprise income,
corporate, and indirect business taxes,
rose about 1 percentage point faster,
with solid gains in all major components. Federal grants have changed little,
on net, over the past four quarters.
The External Sector
The nominal trade deficit in goods and
services widened from its low fourthquarter level of $78 billion at an annual
rate to $97 billion in the first quarter of
1996, slightly less than the deficit of
$105 billion for 1995 as a whole. The
current account deficit stood at $142 billion (annual rate) in the first quarter,
about the same as the figure for 1995 as
a whole. In April, the trade deficit
increased from the average level for the
first quarter.



After expanding very slowly during
the second half of 1995, the quantity of
U.S. imports of goods and services rose
about 10 percent at an annual rate in the
first quarter, and preliminary data for
April show another sizable increase. The
rebound in imports largely reflected the
strengthening of U.S. economic activity.
In addition, non-oil import prices have
declined somewhat since last fall, after
having risen sharply in late 1994 and
early 1995. A turnaround in imported
automotive vehicles, consumer goods,
and non-oil industrial supplies, following more than six months of declines,
accounted for most of the increase in
imports during the first four months of
1996.
The quantity of U.S. exports of goods
and services expanded at a 2 percent
annual rate during the first quarter; it
also appears to have expanded at about
this pace in April. The somewhat subdued pace of export growth so far this
year reflects, in part, a bunching of shipments, particularly of machinery, that
resulted in an unusually strong increase
in exports in the fourth quarter of last
year.
Trends in economic activity have varied across the major foreign industrial
countries so far in 1996. In Japan, economic recovery appears to have taken
hold, although the underlying pace of
real GDP growth is clearly less than the
nearly 13 percent annual rate reported
for the first quarter; the first-quarter
growth rate was boosted, in part, by
a temporary surge in government
spending and measurement practices
associated with the leap year.2 In Canada, growth remained subdued in the
2. Although the statistical agencies in many
countries take the number of working days in the
quarter into account when seasonally adjusting
data, the statistical agencies in Japan, France, and
Italy among the G-10 countries do not make
working-day adjustments.

Monetary Policy Reports, July
first quarter as real GDP rose only
1V4 percent at an annual rate despite
much stronger growth in domestic
demand; indicators for the second quarter suggest some strengthening.
Economic performance so far this
year in Europe has been mixed. In Germany, real GDP declined another
1V2 percent at an annual rate in the first
quarter, largely because severe weather
caused a substantial contraction in construction spending; preliminary data
suggest that construction activity rebounded in the second quarter with the
return to more normal weather. In contrast, French real GDP expanded nearly
5 percent at an annual rate in the first
quarter, supported by a very sizable
rebound in consumption as well as leapyear effects; strikes during the fourth
quarter of last year depressed economic
activity and contributed to a decline in
private consumption spending. Indicators for the second quarter suggest that
output growth moderated from its firstquarter pace. In the United Kingdom,
real GDP grew at an annual rate of
IV2 percent during the first quarter,
somewhat more slowly than during the
second half of 1995. On the policy front,
most European countries are seeking to
rein in their fiscal deficits during 1996
and 1997, in part to comply with the
criterion in the Maastricht Treaty that
countries participating in the third stage
of the European Monetary Union, now
scheduled to begin on January 1, 1999,
not have excessive fiscal deficits. As a
reference value, the treaty specifies that
deficits greater than 3 percent of a country's GDP are excessive, but it also provides scope for accepting deficits above
that level in some circumstances.
In Mexico, robust growth of real GDP
in the first quarter extended the recovery
in economic activity that began in the
second half of 1995. Through June,
the Mexican trade balance remained



71

roughly stable at the level reached
toward the end of last year after having
improved markedly over the course
of 1995. Argentina also appears to be
emerging from the steep declines in output experienced during the first half of
1995, while Chile continues to enjoy
steady growth. Activity in Brazil has
begun to expand again in recent months,
following a sharp contraction in mid1995.
Economic growth in our major Asian
trading partners (other than Japan)
appears to have picked up again this
year after slowing noticeably during the
second half of 1995 from the extremely
rapid rates recorded in 1994 and the first
half of 1995. The recent pickup in activity was associated with an easing of
monetary policy in some of these countries in the second half of last year and
the early part of this year. In China,
output appears to have expanded during
the first quarter at around the 10 percent
annual rate recorded in 1995, with a
pickup in consumption spending compensating for weaker growth in the
external sector.
Consumer price inflation generally
stayed low in the major foreign industrial countries and declined or remained
moderate elsewhere. In Japan, prices
in the second quarter, on average, were
slightly above their year-earlier levels
because of the effects of yen depreciation on import prices; this upturn followed a year of deflation. In western
Germany, inflation slowed through June
to only about \lA percent. Inflation in
Italy remained higher than in the other
major foreign industrial countries but
slowed to below 4 percent through June.
In Canada, inflation also moved down
further this year, to about 1 Vi percent in
May.
Inflation trends in Latin America have
been mixed. In Mexico, the twelvemonth change in consumer prices dimin-

72

83rd Annual Report, 1996

ished to about 32 percent in June, compared with a reading of 52 percent for
the twelve months ending in December
1995. Consumer price inflation has also
declined further in Brazil and remained
low in Argentina. In contrast, prices
have picked up in Venezuela in response
to the depreciation of its currency associated with the adoption of a program of
macroeconomic stabilization. In Asia,
inflation has decreased so far in 1996 in
China and remained moderate to low
elsewhere.
Labor Market Developments.
Labor demand was strong over the first
half of 1996. Growth in nonfarm payroll
employment exhibited considerable
month-to-month variability but averaged a hefty 235,000 per month. In addition, the civilian unemployment rate
remained low, holding in the narrow
range around 5Vi percent that has prevailed since late 1994.
Employment gains were fairly
broadly based over the first half of the
year. The services sector, which now
accounts for nearly 30 percent of nonfarm employment, continued to be a
mainstay of job growth, showing
increases of nearly 120,000 per month,
on average, over the first half. Within
services, growth in employment in business services remained rapid, with large
gains at computer and data processing
firms as well as at temporary help agencies, and employment in health services
trended up further. In addition, construction payrolls rose a brisk 30,000 per
month, on average—an annual rate of
about 7 percent. Elsewhere, payrolls at
wholesale and retail trade establishments continued to increase at about the
same pace as that in 1995, and employment in the finance, insurance, and real
estate category picked up after having
been nearly flat over 1994 and 1995.



Developments in manufacturing were
uneven but showed some improvement
in the second quarter. As 1996 started,
firms were still adjusting employment to
the slower path of output that had been
evident since early 1995, and payrolls—
especially at firms producing nondurable goods—were reduced further. In the
past three months, manufacturing employment has held fairly steady, buoyed
by the pickup in industrial activity, and
the average factory workweek, which
had contracted appreciably in 1995,
trended up through June.
For the nonfarm business sector as a
whole, productivity rose at an annual
rate of about 2 percent in the first quarter of 1996, echoing the acceleration in
output. However, productivity had
posted an outright decline in the fourth
quarter of 1995; all told, productivity
rose about 1 percent over the year ending in the first quarter of 1996, in line
with the average pace this decade. In the
manufacturing sector, productivity rose
AXA percent over the past year, although
the reported increase was probably overstated because firms in this sector have
been relying increasingly on workers
supplied by temporary help firms, who
are counted as service industry employees rather than as manufacturing employees in the establishment survey of
the Bureau of Labor Statistics.
Labor force participation
has
remained sluggish this year. The participation rate, which measures the percentage of the working-age population that
is either employed or looking for work,
did retrace the dip that occurred in late
1995. But taking a longer perspective,
the overall participation rate (adjusted
for the redesign of the household survey
in 1994) has changed little, on net, since
1989 after rising fairly steadily from the
mid-1960s to the late 1980s. The flattening reflects mainly a marked deceleration in women's participation, owing

Monetary Policy Reports, July
both to a leveling off in the percentage
of women who are in the labor force for
at least part of a given year and slower
growth in the average number of weeks
they spend in the labor force that year.
Moreover, with the average number of
weeks these women spend in the labor
force having risen to a level only slightly
below the average for men, a significant
rebound in participation does not seem
very likely over the near term. The sluggishness in participation tends to restrain
the growth of potential output unless it
is offset by a better productivity performance or by faster growth in the
working-age population—neither of
which has yet been in evidence.
Despite the tightness in labor markets
in recent quarters, the broad trends in
hourly compensation appear to have
held fairly steady. The employment cost
index for private industry—a measure
that includes wages and benefits—rose
at an annual rate of about 3 percent over
both the first three months of 1996
and over the twelve months ending
in March; the ECI had also increased
about 3 percent over the twelve months
ending in March 1995. Compensation
growth has continued to be damped
by a marked deceleration in employerpaid benefits—especially payments for
medical insurance, which have been
restrained by the slowing in medical
care costs, the switch in insurance
arrangements from traditional indemnity plans to health maintenance organizations and other managed care plans,
and changes in the provisions of health
plans (including greater sharing of
health care costs by employees). On the
whole, wages also seem to have been
held in check, although the most recent
data may be hinting at some acceleration. Notably, the wage and salary component of the ECI rose sharply in the
first quarter; although the data are volatile and the first-quarter figure likely



73

overstates current wage trends, the
twelve-month change in the series
moved up to 314 percent, nearly xh percentage point larger than the increases
in the preceding two years. Separate
data on average hourly earnings of
production or nonsupervisory workers
also show a recent acceleration in
wages; the twelve-month change in this
series moved up to about 31/2 percent in
June.
Price Developments
The underlying trend of prices has
remained favorable this year—notably,
the CPI excluding food and energy rose
at an annual rate of 23/4 percent over the
first six months of the year, near the
lower end of the narrow range than has
been evident since early 1994. Developments in food and energy markets
boosted overall inflation, however, and
the total CPI rose at an annual rate of
3!/2 percent over the first half; this pattern was the reverse of that seen in 1995,
when a small drop in energy prices,
combined with only a modest increase
in food prices, held the rise in the total
CPI to just 2!/2 percent. Meanwhile, the
producer price index for finished goods
rose about 23A percent over the twelve
months ending in June; excluding food
and energy, the PPI rose Vh percent, a
bit less than over the preceding year.
Consumer energy prices picked up
around the turn of the year and rose at
an annual rate of about 12 percent, on
net, over the first six months of 1996.
With crude oil stocks drained by strong
worldwide demand for heating oil and
weather-related supply disruptions in the
North Sea and elsewhere, the spot price
of West Texas intermediate (WTI)
soared from around $18 per barrel, on
average, in the second half of 1995 to a
high of around $25 per barrel in midApril; the WTI price has since retraced

74

83rd Annual Report, 1996

much of that run-up. Reflecting the
surge in crude oil prices, retail prices of
refined petroleum products rose sharply
through May, on balance. However, they
fell markedly in June, and private surveys of gasoline prices imply a further
decrease in early July.
Retail food prices rose at an annual
rate of about 4 percent over the first six
months of 1996, somewhat above the
pace of the preceding few years. At the
farm level, prices of grains and other
commodities rose to exceptionally high
levels as adverse crop conditions in
some parts of the country exacerbated
an already tight stock situation. For
some foods—notably, dairy products,
cereals and bakery products, poultry,
and pork—the pass-through tends to
occur relatively rapidly, and retail prices
of such items have already risen appreciably. Beef prices fell through May as
producers sold off herds in response to
higher feed costs and poor range conditions; they turned around in June and
will likely rise further over the next
several quarters as the selloff of breeding stock will eventually lead to tighter
supplies.
Price increases for consumer goods
other than food and energy slowed to
1 percent at an annual rate over the first
half of 1996, after averaging about
1 l/i percent per year over the preceding
three years. Increases in goods prices
have been restrained, in part, by the
uptrend in the dollar since mid-1995,
which has helped to damp import prices.
In addition, with the operating rate in
the manufacturing sector having fallen
to about its long-term average, pressure
from the materials side has been limited.
Indeed, the PPI for intermediate materials (excluding food and energy) actually
fell a bit over the past twelve months,
after having risen IV2 percent over the
preceding year. Looking ahead, however, the latest report from the National



Association of Purchasing Managers
suggests that vendor performance deteriorated markedly in June, a development that could portend some firming of
prices of materials and supplies over the
near term.
Prices of non-energy services rose
33/4 percent at an annual rate over the
first half, about the same as the rise over
1995 as a whole. Airfares accelerated
significantly in the first half. However,
shelter costs increased less rapidly than
they had in 1995, and prices of medical
care continued to decelerate; over the
six months ending in June, the CPI for
medical care services rose at an annual
rate of only about 3lA percent, roughly
1 percentage point below the 1995 pace.
Moreover, there is some evidence that
the CPI may be understating the recent
slowing in medical care inflation, in part
because it does not fully capture the
discounts negotiated between medical
providers and insurers, including managed care plans. The price measure used
to deflate consumer expenditures on
medical care in the NIPA better reflects
such factors; it rose less than 2 percent
over the year ending in the first quarter
of 1996 after having risen 4l/z percent
over the preceding year.
Judging from the various surveys of
consumers and forecasters, expectations
of near-term CPI inflation deteriorated
slightly in the first half of 1996. Notably, although both the University of
Michigan and the Conference Board had
reported a noticeable drop in their oneyear-ahead measures in the second half
of 1995, that improvement was not sustained in 1996; the recent monthly readings have bounced around, but the June
results from both surveys were similar
to those recorded, on average, in the first
half of 1995. In contrast, longer-run
inflation expectations, which have presumably been less affected by the recent
news in food and energy markets, have

Monetary Policy Reports, July
held fairly steady. Smoothing through
the monthly data, the University of
Michigan's measure of expected CPI
inflation over the next five to ten years
has not changed much since late 1994,
and the survey of professional forecasters conducted by the Federal Reserve
Bank of Philadelphia during the second
quarter of 1996 produced the same
expectation for the succeeding ten years
as that in the survey taken in the fourth
quarter of 1995.

Financial Developments
Credit
Financial conditions in the first half of
1996 supported the pickup in the growth
of spending. For the most part, lenders
continued to pursue credit applicants
aggressively as reflected, for example,
in narrow spreads of interest rates on
corporate securities over those on Treasury securities. The debt of domestic
nonfinancial sectors increased about
43/4 percent at an annual rate from the
fourth quarter of 1995 through May of
this year, a pace that was a bit slower
than last year but still sufficient to place
the level of this aggregate in the middle
of its monitoring range for 1996.
The Government Sector
Federal debt outstanding increased
about 4 percent at an annual rate over
the first half of 1996, a shade below the
average rate of increase last year. The
impasse over the debt ceiling disrupted
the timing and size of some Treasury
auctions but did not alter the longerterm trajectory of federal debt.
The pattern of net borrowing by state
and local governments in the past several years has been heavily influenced
by their efforts to retire debt issued at



75

relatively high interest rates in the mid1980s. They have pursued these efforts
through a strategy of advance refunding:
In the early 1990s, when bond yields
were seen as especially favorable, state
and local governments issued new debt,
even before call provisions on the older
bonds could be exercised, and placed
the proceeds in escrow accounts. As it
became possible to do so, the issuing
governments began calling the older
debt, using the contents of the escrow
accounts to complete the transactions.
Reflecting these retirements, the amount
of state and local government debt outstanding declined about 4 percent per
year in 1994 and 1995. This process is
still in train but evidently on a smaller
scale; available information suggests
that state and local government debt outstanding declined only marginally during the first half of this year.
The Household Sector
The pace of borrowing by households
appears to have moderated somewhat
from the elevated rates of 1994 and
1995, but it remains substantial. In particular, consumer credit expanded at a
9!/2 percent annual rate from the fourth
quarter of 1995 through May of this
year, a rate that was down from
\AVi percent over the four quarters of
1995. Mortgage debt actually expanded
somewhat more rapidly during the first
quarter than in 1995 (73A percent at an
annual rate versus 6*/2 percent), and
available indicators suggest that growth
during the second quarter dropped back
only to about last year's pace. The
recent backup in mortgage rates, which
only began in February, has had little
effect on borrowing thus far and might
even have increased it temporarily by
accelerating transactions.
The rapid growth in household debt
during the past few years has resulted in

76

83rd Annual Report, 1996

a sizable increase in the estimated ratio
of scheduled payments of principal and
interest to disposable personal income.
This measure of debt-servicing burden
has trended up over the past two years,
and as of the first quarter of 1996, was
approaching—but still short of—the levels attained toward the end of the last
business cycle expansion.
Several other recent indicators suggest that some households are experiencing financial strains. For example,
the Consolidated Report of Condition
and Income shows that the delinquency
rate on credit-card receivables at commercial banks has increased significantly in recent quarters, retracing about
one-third of the improvement that took
place during the first few years of the
current economic expansion. The delinquency rate on auto loans at the finance
companies affiliated with the major
manufacturers moved up sharply beginning about two years ago and since late
last year has hovered around historically
high levels. Anecdotal evidence suggests that the rise in both credit card and
auto-loan delinquency rates reflects a
strategy to liberalize lending standards
as part of an overall marketing effort.
The auta loan delinquency rate has also
been boosted a bit by the increased
prevalence of leasing. Lease customers
tend to be better credit risks than the
average conventional borrower, and the
shift toward leasing has had the effect of
skimming the more financially secure
car buyers and thus degrading somewhat the remaining pool of people
financing their purchases through conventional loan contracts.
The personal bankruptcy rate also
surged to a new high this year. The
extent to which this development
reflects mounting financial difficulties
of households is clouded, however, by
changes in federal law (effective at the
start of 1995) that may have increased



the attractiveness of bankruptcy by
increasing the value of assets that can be
protected from liquidation in bankruptcy
proceedings. The "cost" of bankruptcy
to households has also been effectively
lowered by the greater willingness of
lenders to extend credit to riskier
borrowers—even those with a previous
bankruptcy on their records.
Other indicators are less suggestive of
a deterioration in the financial condition
of households. For example, the delinquency rate for mortgage loans sixty
days or more past due at all lenders is
near its lowest level in two decades,
while the rate on closed-end consumer
loans—despite having moved up over
the past eighteen months—remains low
by historical standards. Moreover, the
aggregate balance sheet of the household sector clearly is in very good
shape; owing in large part to the surge in
equity prices over the past year and a
half, the ratio of household net worth to
disposable personal income moved up
into record territory recently.
Apparently in response to the recent
run-up in delinquency and charge-off
rates on consumer loans, banks have
selectively tightened their standards
for consumer lending. These actions
reversed steps taken earlier in the decade, when many card issuers increased
the growth of their credit card receivables by offering accounts to customers
who previously would have been denied
credit. The belief was that more sophisticated credit-scoring techniques would
control risks adequately, but it appears
that some "adverse selection" occurred
and that the uptick in delinquencies has
been larger than at least some banks had
planned. About 20 percent of the respondents in the Federal Reserve's most
recent survey of senior loan officers
reported having tightened standards for
approving applications for credit cards,
and 10 percent reported tightening stan-

Monetary Policy Reports, July
dards for other consumer loans. Notwithstanding the recent tightening of
standards, supply conditions for loans
from banks to consumers still appear
accommodative.
The Business Sector
The debt of nonfinancial businesses also
appears to have expanded somewhat less
rapidly during the first half of 1996 than
it did last year. In part, the moderation in
borrowing can be traced to the behavior
of the financing gap for incorporated
nonfinancial enterprises—the excess of
their capital expenditures (including
inventory investment) over their internally generated funds. During 1995, this
gap narrowed quite substantially, reflecting strong profits and a marked reduction in inventory investment. Available
indications are that the gap has remained
small this year.
External funding for business spending has been in plentiful supply thus far
this year. One piece of evidence on
this point is that interest rate spreads
on investment-grade bonds have edged
down slightly since the beginning of the
year. Additionally, spreads on high-yield
bonds have declined markedly and are
as low as they have been in at least a
decade. Also, supply conditions for
loans from banks to businesses continue
to look quite favorable. According to the
Federal Reserve's most recent survey
of bank lending officers, standards for
approval of commercial and industrial
loans were about unchanged from January to May of this year, and terms on
such loans were eased on net. Surveys
by the National Federation of Independent Business indicate that small businesses have not faced difficulty getting
credit, and stories abound of new smallbusiness lending programs of banks.
Gross offerings of long-term bonds
by nonfinancial corporations have been



11

running about in line with last year's
pace. However, the mix of issuers has
shifted somewhat, reflecting the changing structure of rates. Late last year and
early this year, investment-grade corporations were issuing a hefty volume of
bonds to pay down commercial paper
and to refinance existing long-term debt.
As the rates on investment-grade bonds
increased this year, issuance of such
debt dropped off. Rates on high-yield
bonds moved up less, however, and issuers of those bonds continued to offer
new debt at a rapid pace.
Gross issuance of equity shares by
nonfinancial corporations has been exceedingly strong this year. Indeed, total
offerings in each of the three months
of the second quarter set successive
monthly records. This activity has been
fueled by initial public offerings and
other equity issuance by relatively
young companies. Share retirements by
nonfinancial corporations have also been
very heavy. Announced stock buybacks
by such firms in both the first and second quarters ran at $28 billion per
quarter—the fastest pace since the late
1980s. On net, available information
suggests that nonfinancial corporations
retired even more equity during the first
half of 1996 than they had in 1995.
Share retirements and merger activity
have generated much less issuance of
debt recently than they did in the 1980s.
Recent share repurchases have been
undertaken mostly by companies seeking to return the excess cash on their
balance sheets to stockholders. And
recent mergers and acquisitions have
mainly been accomplished through
stock swaps between companies in similar lines of business, rather than the
leveraged transactions commonplace in
the 1980s. In line with the limited extent
of debt financing, the mergers executed
thus far in 1996 have resulted in little
net change in bond ratings—again in

78

83rd Annual Report, 1996

marked contrast to the experience of the
1980s.
Depository Intermediation
The growth of credit provided by
depository institutions slowed sharply in
the fourth quarter of last year and first
quarter of this year, and commercial
bank credit—a component of total
depository credit for which more recent
data are available—slowed further in the
second quarter. The share of thrift institutions in total depository credit has continued to decline in recent quarters. This
long-standing trend may have been
given additional impetus last summer by
the opening up of a differential between
the premium rates paid by banks and
thrifts for their deposit insurance; this
differential has reduced the cost of funds
for banks relative to the cost of funds for
thrift institutions.
The reduction and subsequent elimination of the deposit insurance premium
for financially sound banks probably
played a role in shifting bank funding
toward deposits. During the first half
of 1996, banks increased their deposit
liabilities more rapidly than their nondeposit liabilities—a contrast from
the preceding few years when banks
relied disproportionately for their funding on nondeposit sources, including
borrowing from their foreign offices.

The Monetary Aggregates
The increased reliance on deposit
sources of funding by banks has helped
support the growth of the broad money
aggregates of late. Between the fourth
quarter of last year and June of this year,
M3 expanded at an annual rate of about
6 percent, putting it at the upper boundary of its annual growth cone. As in
1995, the growth in M3 this year was
led by those components not included in



M2. In the aggregate, these components
increased about 11 percent at an annual
rate between the fourth quarter of last
year and June of this year, only moderately below the 1995 average pace of
\AVi percent. Institution-only moneymarket mutual funds increased about
18 percent at an annual rate over this
period. This component of the money
stock increased especially rapidly during the first three months of the year.
Often, the yields on these funds lag
changes in short-term market interest
rates, making them particularly attractive investments when short-term market rates are declining, as they were

Growth of Money and Debt
Percent
Measurement
period
Year1
1980
1981

Ml

M2

M3

Domestic
nonfinancial
debt

8.7
9.0

9.6
12.4

9.5
10.2

1982
1983
1984

7.5
5.4
2.5 2
8.8
10.3
5.4

8.8
11.8
8.1

9.7
9.5
10.8

9.8
11.9
14.6

1985
1986
1987
1988
1989

12.0
15.5
6.3
4.3
.6

8.6
9.2
4.2
5.7
5.2

7.7
9.0
5.9
6.3
4.0

14.4
13.3
10.0
8.8
7.9

1990
1991
1992
1993
1994

4.1
7.9
14.3
10.5
2.4

4.1
3.1
1.8
1.4
.6

1.8
1.2
.6
1.0
1.6

6.8
4.6
4.7
5.2
5.2

1995

-1.8

4.0

5.9

5.6

Quarter
(annual rate)3
1995:Q1
Q2
Q3
Q4

-.1
-.5
-1.5
-5.1

1.0
3.3
6.9
4.1

4.5
6.3
7.9
4.5

5.4
7.1
4.9
4.7

1996:Q1
Q2

-2.7
-.5

5.9
4.1

7.2
5.3

4.7
n.a.

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, July
around the turn of the year when the
Federal Reserve eased policy.
M2 increased 43A percent at an annual
rate between the fourth quarter of 1995
and June of this year, leaving it near the
upper boundary of its growth range. For
many years before the early 1990s, the
velocity of M2 (defined as the ratio of
nominal GDP to M2) moved roughly
in tandem with the opportunity cost of
holding M2—that is, the interest earnings forgone by holding M2 assets rather
than market instruments such as Treasury bills. This relationship implied that
M2 tended to move in proportion to
nominal GDP, except as it was influenced by changes in the opportunity cost
of holding it. When the opportunity cost
rose, owners of M2 tended to economize
on their holdings, driving up the velocity of M2.
Beginning around the early 1990s,
however, this historical relationship
began to break down. Indeed, in 1991
and 1992, the velocity of M2 rose
sharply even as the opportunity cost of
holding M2 declined. A number of reasons for this development have been
adduced, including the unusually steeply
sloped yield curve and very low level of
short-term interest rates, which helped
to attract the public out of liquid balances and into more readily available
long-term mutual funds; the credit
crunch at banks and the resolution of
troubled thrift institutions, which reduced the aggressiveness with which
these institutions sought retail deposits;
and household balance-sheet restructuring, which entailed in part repayment of
loans out of liquid money balances. The
divergent movement of the velocity of
M2 and its opportunity cost continued
until the end of 1992. More recently, the
variables have once again been moving
essentially in parallel. In light of the
rapid ongoing pace of innovation and
technological change in financial ser


79

vices, however, it is impossible to know
whether the new parallel movement of
velocity and the opportunity cost will
persist.
Ml declined about 13A percent at an
annual rate during the first half of 1996,
just as it had done over the four quarters
of 1995. The recent sluggish behavior of
Ml reflects the ongoing spread of socalled sweep programs, under which
idle reservable deposits are "swept"
into money-market-deposit accounts
(MMDAs). (The appendix provides
additional information on sweep
accounts.) Estimates based on initial
amounts swept suggest that Ml would
have expanded at about a 7 percent
annual rate during the first half of 1996
in the absence of these programs.
Another factor contributing to the recent
weakness in Ml has been the growth of
currency, which has been sluggish by
the standards of the early 1990s. Foreign
demand for currency apparently has
tailed off somewhat. In large part, the
slackening in net foreign demand owes
to substantial reflows from Argentina
and Mexico, where earlier worst-case
fears about the stability of the financial
system have not been realized. Reflows
from Western Europe and Asia have
also been significant, but net shipments
to the former Soviet Union remain sizable. On the whole, demand for the new
$100 bill has been substantial, but this
has not had any detectable effect on the
stock of currency outstanding.
The sluggish growth of currency has
held down expansion of the monetary
base to only about 2 percent at an annual
rate thus far this year. The other restraint
on the growth of the base has been the
turnaround in the behavior of required
reserves. After surging at double-digit
rates in 1992 and 1993, required
reserves have been on a downward
trend, and at an increasing rate. Thus far
this year, required reserves have con-

80

83rd Annual Report, 1996

tracted about IV2 percent at an annual
rate. The emergence of this trend is perhaps the most direct consequence of the
spread of sweep programs. Absent such
programs, required reserves probably
would have increased about 10 percent
over the same period, owing to strong
growth in demand deposits. Continued
spread of sweep programs could affect
the federal funds market, perhaps leading to greater volatility like that experienced in early 1991 following the
elimination of reserve requirements on
nontransactions deposits. Thus far, such
instabilities have not been realized, but
the Federal Reserve is monitoring the
situation carefully.

Interest Rates, Equity Prices,
and Exchange Rates

The spread on investment-grade utility
bonds continued to drift upward, but this
appeared to reflect the market's increasing perception that some firms in that
industry might become riskier as a result
of deregulation and new competitive
pressures. The rate spread on high-yield
bonds over the comparable Treasury
notes narrowed sharply, reversing the
upward drift of 1995, and returning this
measure to the low end of its range over
the past decade. The continuing low
level of spreads on most investmentgrade securities, as well as the marked
decline of the spread on high-yield
securities, appeared to reflect in part
market participants' increasing confidence in the durability of the economic
expansion and consequent optimism
about the creditworthiness of corporate
borrowers.

Interest Rates

Equity Prices

Interest rates on Treasury securities rose
over the first half of 1996, with the most
pronounced increases occurring for
intermediate-term securities. Between
the end of December 1995 and the
middle of July, the rate on three-month
bills increased somewhat less than
l
A percentage point, the rate on five-year
notes rose about 1 lA percentage points,
and the rate on thirty-year bonds rose
about 1 percentage point. Despite these
increases, nominal Treasury rates overall continued to be relatively low by the
standards of the past twenty years.
The spread between interest rates on
investment-grade private bonds and
those on comparable-maturity Treasury
securities remained narrow during the
first half of the year. In particular, the
average spread on Baa-rated industrial
bonds over thirty-year Treasury bonds
continued to fluctuate near where it has
been for the past several years and well
below the levels typical of the 1980s.

Share prices have fallen in recent weeks,
most notably those of "high-tech" companies whose ability to maintain steep
earnings trajectories has come into question. On net, though, broad indexes of
equity prices have held steady or moved
up slightly since the end of 1995. As of
July 16, the S&P 500 composite index
of stock prices had increased 2 percent
thus far this year, while the NASDAQ
index had returned to its beginning-ofyear level. Even this performance has
been impressive, given that it occurred
in the face of appreciable upward movement in long-term interest rates.




Exchange Rates
Since mid-April, the weighted-average
value of the dollar in terms of the other
G-10 currencies has generally been
about 4 percent above its level at the end
of December, although the dollar has
moved down somewhat in mid-July.

Monetary Policy Reports, July
When compared with an index of currencies from a somewhat broader group
of U.S. trading partners, the dollar has
appreciated 3 percent since December
after adjustment for changes in relative
consumer prices. The dollar has risen on
balance about 4 percent in terms of the
German mark and about 6 percent in
terms of the Japanese yen.
The dollar has been supported by perceptions of a disparity in the performance of the U.S. economy relative to
that of many of our major trading partners and the resulting expectations for
the course of relative interest rates. Specifically, while data suggesting robust
growth in the United States caused interest rates to rise, questions remained
about the strength of expansions in a
number of other industrial countries,
particularly in Europe. Average longterm (ten-year) interest rates in the other
G-10 countries have risen only slightly,
about 20 basis points, since the end of
December. With U.S. rates rising substantially more than that, the appreciation of the dollar over this period is
consistent with the shift in the long-term
interest differential in favor of the dollar. In addition, the dollar was lifted to
an extent against the yen by data early in
the year showing that the Japanese
external surpluses were narrowing.
Despite a weak output performance,
long-term interest rates in Germany
have risen about 50 basis points, with
much of that increase coming during the
first quarter. Long-term interest rates
have actually fallen since the end of last
year in some European countries, such
as France and Italy, where political and
economic policy uncertainties have been
reduced. In Japan, long-term interest
rates have risen about 30 basis points,
on balance. Short-term market interest
rates abroad are generally lower than
they were at the end of last year. German short-term market rates are down



81

nearly 50 basis points, while rates in
France are down more than 100 basis
points and those in the United Kingdom
are down 70 basis points. Official lending rates have been reduced by the
central banks in Germany, France, the
United Kingdom, and several other
European countries in 1996. In Japan,
short-term market interest rates remain
near the historically low levels reached
during the second half of 1995 as the
Bank of Japan's official rates have been
unchanged. Stock markets in the foreign
G-10 countries have risen 3 percent to
15 percent since the end of December,
except in the United Kingdom, where
stock prices, on balance, are about
unchanged.
The Mexican peso traded during the
first half of 1996 in a range somewhat
stronger than that which prevailed at the
end of 1995. Mexican twenty-eight-day
treasury bill (cetes) rates have declined
from nearly 50 percent in December to
around 30 percent as the rate of inflation
has fallen. The economic positions of
Mexican households and firms have
improved since early 1995, but problems in the financial system remain, as
evidenced by increasing amounts of
nonperforming loans at banks. Stock
prices have risen, on balance, about
5 percent in peso terms since December,
buoyed by the interest rate declines and
evidence of recovery in the Mexican
economy.
The pace at which private foreigners
acquired U.S. assets increased markedly
in the first quarter. Although private net
purchases of U.S. Treasury securities
were small, there were large increases in
the private holdings of U.S. government
agency bonds and U.S. corporate bonds,
as U.S. corporations issued heavily in
the Eurobond market. In addition, direct
investment capital inflows surged to
almost $30 billion in the first quarter,
reflecting a pickup in foreign acquisi-

82

83rd Annual Report, 1996

tions of U.S. firms. Together, these gross
inflows totaled nearly $80 billion,
roughly twice the U.S. current account
deficit for the quarter. U.S. net purchases
of foreign stocks and bonds were also
sizable in the first quarter, with net purchases of foreign stocks from Japan particularly large. U.S. direct investment
abroad slowed somewhat between the
fourth quarter of 1995 and the first quarter of 1996 but remained near the record
pace for all of last year. In April and
May, private foreign interest in U.S.
securities continued to be strong while
U.S. investor interest in foreign stocks
cooled somewhat from the strong firstquarter pace.
Foreign official holdings in the United
States increased about $52 billion in
the first quarter of 1996 after a record $110 billion rise in 1995. These
increases reflected both intervention to
support the foreign exchange value of
the dollar by certain industrial countries
and substantial reserve accumulation by
several developing countries. Data for
April and May indicated continued
increases in official holdings in the
United States but on a much more modest scale.

Appendix: Sweeps of Retail
Transaction Deposits
In January 1994, depository institutions
began implementing sweep programs
for retail customers.3 In such programs,
balances in household transaction
accounts (typically NOW accounts, but
also some demand deposits, both of
which are included in Ml) are swept
into savings deposits, which are part of
3. Sweep accounts for business customers of
banks became widespread in the mid-1970s. They
involve sweeps of demand deposits into repurchase agreements or other money market instruments whose minimum sizes are too large to
accommodate households.




the non-Mi portion of M2. Such sweeps
shift deposits from reservable (transactions) accounts to nonreservable (savings) accounts without impairing
depositors' ability to access the funds
for transactions purposes. Depositories
have an incentive to establish these
programs because reserves held at the
Federal Reserve earn no interest. Retail
sweep programs reduce reported
reserves, the monetary base, and Ml.

Sweeps of Transaction Deposits
into Savings Accounts
Percentage of industry assets
Monthly
averages of
initial amounts

Cumulative
total

1994
January
February
March
April
May
June
July
August
September
October
November
December

5.3
2.2
.0
.0
.0
.0
.0
.0
1.5
.6
.3
.0

5.3
7.5
7.5
7.5
7.5
7.5
7.5
7.5
9.0
9.6
9.9
9.9

1995
January
February
March
April
May
June
July
August
September
October
November
December

.0
.0
.0
.0
5.0
7.3
.6
4.6
5.9
7.7
4.3
9.2

9.9
9.9
9.9
9.9
14.9
22.2
22.8
27.4
33.3
41.0
45.3
54.5

13.7
7.0
6.4
7.8
8.4

68.2
75.2
81.6
89.4
97.8

Period

7996
January
February
March
April
May

NOTE. Figures are the estimated total of transaction
account balances initially swept into savings accounts
owing to the introduction of new sweep programs.
Monthly totals are averages of daily data.
Regular monthly updates of initital amounts swept may
be obtained by email by sending an email address along
with a phone number to sweeps-frb @ frb.gov. Those
without access to email may request data by calling
(202) 872-7577.

Monetary Policy Reports, July
They have no effect on M2, because
both transactions and savings accounts
are in M2.
Retail sweep programs have been
established either as daily sweeps or as
weekend sweeps. Under a daily sweep,
a depositor's transaction balances above
a target level are shifted each night into
a special savings account created for the
purpose. If debits threaten to reduce the
remaining transaction account balances
below zero, enough funds are transferred back from the savings account to
reestablish the target level of transaction
balances. Because only six transfers are
allowed out of a savings account within
a statement month, on the sixth transfer,
the entire savings balance is returned to
the transaction account. Alternatively, in
a weekend sweep program, all affected
transaction account balances are swept
into the special purpose savings account
over the weekend and then returned on
Monday. Some "weekend sweep" programs undertake sweeps on certain holidays as well.
No information is available on the
current amounts of transaction balances
that are being swept into savings
accounts. The Federal Reserve has
obtained data from depositories only on
the initial amounts swept on the date
each program was established. The
table, which is updated and made available to the public on an ongoing basis,
shows that the initial amounts swept
under programs implemented through
May 1996 have cumulated to $98 billion. With a marginal reserve requirement of 10 percent on most of these
balances, the cumulative reduction of
required reserves attributable to the initial amounts swept has been nearly
$10 billion.
.




83

Part 2
Records, Operations,
and Organization




87

Record of Policy Actions
of the Board of Governors
Regulation D
Reserve Requirements
of Depository Institutions
November 20, 1996—Amendments
The Board amended Regulation D to
increase the amount of transaction
balances to which the lower reserve
requirement applies.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley, Lindsey, and
Meyer, and Mses. Phillips and Yellen.
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. The act
directs the Board to annually adjust the
amount subject to the lower reserve
requirement to reflect changes in transaction balances nationwide. Recent
decreases in transaction balances warranted a decrease to $49.3 million, and
the Board amended Regulation D
accordingly.
The Garn-St Germain Depository
Institutions Act of 1982 establishes 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. Recent growth in deposits warranted an increase to $4.4 million,
and the Board amended Regulation D
accordingly.




The amendments are effective with
the reserve computation period beginning December 31, 1996, for institutions
reporting weekly and December 17,
1996, for institutions reporting quarterly.
To reduce reporting burden for small
institutions, depository institutions with
total deposits below specified levels are
required to report their deposits and
reservable liabilities quarterly or less
frequently, while larger institutions must
report weekly. To reflect increases in
the growth rate of total deposits at
all depository institutions, the Board
increased the deposit cutoff levels used
in determining the frequency and detail
of deposit reporting, to $59.3 million for
nonexempt depository institutions and
to $48.2 million for exempt depository
institutions, beginning in September
1997.
December 23, 1996—Amendments
The Board amended Regulation D to
simplify and update the regulation and
reduce regulatory burden, effective
April 1, 1997.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley, Lindsey, and
Meyer, and Mses. Phillips and Yellen.
After a review in accordance with
its policy of regular review of regulations and the requirements of the Riegle
Community Development and Regulatory Improvement Act of 1994, the
Board adopted a revision of Regulation
D to simplify and clarify the regula-

83rd Annual Report, 1996
tion and remove certain obsolete material from it.

Regulation E
Electronic Fund Transfers
March 20, 1996—Amendments
The Board amended Regulation E to
clarify, simplify, and update the regulation, effective May 1, 1996, with compliance mandatory by January 1, 1997.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Mses. Phillips
andYellen.1
The amendments change the exemptions for securities or commodities
transfers and for preauthorized transfers
to or from accounts at small institutions,
simplify the language and format of
the regulation, and delete obsolete
provisions.

Regulation G
Securities Credit by Persons Other
Than Banks, Brokers, or Dealers
Regulation T
Credit by Brokers and Dealers
Regulation U
Credit by Banks for the Purpose
of Purchasing or Carrying Margin
Stocks
November 20, 1996—Interpretation
The Board approved an interpretation of
Regulations G, T, and U to implement
requirements of the National Securities
Markets Improvement Act of 1996,
effective November 19, 1996.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley, Lindsey, and
Meyer, and Mses. Phillips and Yellen.
1. Throughout this chapter, note 1 indicates that
two vacancies existed on the Board when the
action was taken.



The National Securities Markets
Improvement Act of 1996 removes the
Board's authority to regulate certain
loans by registered broker-dealers
unless the Board finds that such rules
are in the public interest or necessary for
the protection of investors. The Board
issued an interpretation to clarify that it
had not made such a finding and that
provisions of its margin regulations for
which it no longer had general authority
were not in effect. The interpretation
also identified regulatory provisions the
Board had adopted to implement section
8(a) of the Securities Exchange Act of
1934, which had been repealed by the
1996 act, and concluded that those
provisions were no longer in effect. In
connection with this action, the Board
sought public comment on proposed
amendments to its margin regulations to
implement the requirements of the act.
Regulation H
Membership of State Banking
Institutions in the Federal Reserve
System
August 5, 1996—Amendments
The Board amended Regulation H to
improve compliance with certain flood
insurance requirements, effective October 1, 1996.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley and Meyer,
and Mses. Phillips and Yellen. Absent and
not voting: Mr. Lindsey.
The Board and five other federal
agencies adopted rules to implement the
National Flood Insurance Reform Act of
1994. The rules did not change the basic
flood insurance requirements but were
designed to improve compliance with
requirements concerning mandatory
purchase of flood insurance and notice
of flood hazards.

Board Policy Actions

December 23, 1996—Interim
Amendment
The Board approved an interim amendment to Regulation H to revise the
guidelines for determining the frequency
of examinations for banks, effective
January 30, 1997.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley, Lindsey, and
Meyer, and Mses. Phillips and Yellen.
The Board, along with the other federal banking agencies, revised the criteria for determining the frequency of
examinations to implement provisions
of the Riegle Community Development
and Regulatory Improvement Act of
1994 and the Economic Growth and
Regulatory Paperwork Reduction Act
of 1996. Under the new criteria, wellmanaged banks with a composite rating
of 2 and with assets of $250 million or
less are eligible to be examined once
every eighteen months instead of once
every twelve months. In connection with
this action, the Board sought public
comment on the revised guidelines.

Regulation H
Membership of State Banking
Institutions in the Federal Reserve
System
Regulation K
International Banking Operations
Regulation Y
Bank Holding Companies and
Change in Bank Control
January 29, 1996—Amendment
The Board amended Regulations H, K,
and Y to simplify the process for reporting suspected crimes and suspicious
activities by banking organizations



89

supervised by the Federal Reserve,
effective April 1, 1996.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, and Lindsey and Mses.
Phillips and Yellen.2
The new rule, which was developed
by the Federal Reserve, the other federal
banking agencies, and the Financial
Crimes Enforcement Network of the
Department of the Treasury, significantly reduces burdens while enhancing
the ability of law enforcement authorities to investigate and prosecute criminal offenses involving U.S. financial
institutions.
Regulation H
Membership of State Banking
Institutions in the Federal Reserve
System
Regulation Y
Bank Holding Companies and
Change in Bank Control
August 7, 1996—Amendments
The Board amended Regulations H and
Y to incorporate a measure of market
risk in its risk-based capital guidelines
for state member banks and bank holding companies, effective January 1,
1997, with compliance mandatory by
January 1, 1998.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley and Meyer,
and Ms. Phillips. Absent and not voting:
Mr. Lindsey and Ms. Yellen.
The Board, along with the other federal banking agencies, revised the riskbased capital standards to set forth a
supervisory framework for measuring
2. Throughout this chapter, note 2 indicates that
one vacancy existed on the Board when the action
was taken.

90

83rd Annual Report, 1996

market risk of debt and equity positions
in institutions' trading accounts and all
foreign exchange and commodity positions, wherever located. The amendments require banks and bank holding
companies with significant exposure to
market risk to measure that risk using
their own internal value-at-risk models,
as specified in the rule, and hold commensurate amounts of capital.

Regulation K
International Banking Operations
January 19, 1996—Amendment
The Board approved an amendment to
Regulation K to permit certain foreign
banks to establish representative offices
in the United States through advance
notice, effective January 24, 1996.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Mses. Phillips
andYellen.1
The amendments permit foreign
banks that meet certain requirements to
establish representative offices without
filing a formal application. The amendments clarify that only those foreign
banking organizations subject to the
International Banking Act and the Bank
Holding Company Act may take
advantage of general consent procedures
to establish a representative office to
engage in limited administrative functions in connection with their existing
U.S. banking operations. The Board
also decided to review on a case-bycase basis inquiries by special-purpose
government banks seeking exemptions
from regulation under the Foreign Bank
Supervision Enhancement Act on the
basis that they do not fall within the
definition of a foreign bank under Regulation K.



February 7, 1996—Amendment
The Board approved an amendment to
Regulation K to establish criteria for
evaluating the operations of certain foreign banks, effective March 25, 1996.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Mses. Phillips
andYellen.1
The amendment sets out the criteria
under which the Board will assess the
U.S. operations of foreign banks that are
not subject to comprehensive, consolidated supervision or regulation by their
home country supervisors. The Board
will take the criteria into account in
deciding whether and under what terms
such banks can continue to operate in
the United States.
May 9, 1996—Amendments
The Board amended Regulation K to set
a date by which certain foreign banks
must select a home state and to update
the regulation, effective May 9, 1996.
Votes for this action: Messrs. Greenspan
and Kelley and Mses. Phillips and Yellen.
Absent and not voting: Mr. Lindsey.1
The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994
removed geographic restrictions on
interstate banking by foreign banks and
required certain foreign banks without
U.S. deposit-taking offices to select a
home state. The Board amended Regulation K to require those banks to select a
home state by June 30, 1996; remove
outdated restrictions on certain mergers
by U.S. bank subsidiaries of foreign
banks outside their home states; and
delete obsolete and superseded provisions concerning selection of a home
state.

Board Policy Actions

July 17, 1996—Amendment
The Board approved an amendment to
Regulation K to establish rules governing the management of offshore banking
offices by U.S agencies and branches
of foreign banks, effective August 28,
1996.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley, Lindsey, and
Meyer, and Ms. Yellen. Absent and not
voting: Ms. Phillips.
The amendment prohibits foreign
banks from using their U.S. branches or
agencies to manage types of activities
through offshore offices that could not
be managed by a U.S. bank at its foreign
branches or subsidiaries. The amendment implements a provision of the
Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994.

91

Regulation M
Consumer Leasing
September 18, 1996—Revision
The Board revised Regulation M to simplify and clarify required disclosures for
car leasing and other types of consumer
lease transactions, effective October 1,
1997.
Votes for this action: Messrs. Greenspan,
Kelley, Lindsey, and Meyer and Mses.
Phillips and Yellen. Absent and not voting: Ms. Rivlin.
The revision included additional
requirements for early disclosure of
termination charges; requirements for
disclosure of the gross cost of a lease,
the residual value of the leased property,
and the estimated lease charge; a
requirement that certain leasing disclosures be segregated from other information; and new provisions concerning
advertising on radio and television.

Regulation L
Management Official Interlocks
July 10, 1996—Amendments
The Board amended Regulation L to
conform rules on management interlocks to recent statutory changes and
to update the regulation, effective October 1, 1996.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Ms. Yellen.
Absent and not voting: Ms. Phillips.1
The Board revised its rules on management interlocks to implement certain
requirements of the Riegle Community
Development and Regulatory Improvement Act of 1994. The revisions also
clarify the rules and reduce unnecessary
regulatory burden.



Regulation O
Loans to Executive Officers,
Directors, and Principal
Shareholders of Member Banks;
Loans to Holding Companies and
Affiliates
November 1, 1996—Amendments
The Board amended Regulation O to
permit insiders of a bank and its affiliates to obtain loans under benefit plans
available to all company employees and
to simplify a procedure, effective
November 1, 1996.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley and Meyer,
and Mses. Phillips and Yellen. Absent and
not voting: Mr. Lindsey.

92

83rd Annual Report, 1996

The amendment implements a requirement in the Economic Growth and
Regulatory Paperwork Reduction Act of
1996. The Board also simplified the procedure under which a bank's board of
directors can exclude executive officers
from the policymaking functions of the
bank and, therefore, from the restrictions of the regulation.

Regulation R
Relations with Dealers in Securities
Under Section 32, Banking Act of
1933
October 30, 1996—Rescission of
Regulation and Related
Interpretation

Regulation S
Reimbursement for Providing
Financial Records; Recordkeeping
Requirements for Certain Financial
Records
March 26, 1996—Amendments
The Board amended Regulation S to
conform certain definitions in the regulation to the Uniform Commercial Code,
effective May 28, 1996, and deferred
certain other effective dates until that
date.
Votes for this action: Messrs. Greenspan and Lindsey and Mses. Phillips
and Yellen. Absent and not voting:
Mr. Kelley.1

The Board and the Department of the
Treasury jointly adopted amendments to
The Board approved rescission of Regu- their rules under the Bank Secrecy Act
lation R and a related interpretation, that require enhanced recordkeeping
related to certain funds transfers by
effective December 6, 1996.
financial institutions. The amendments
Votes for this action: Mr. Greenspan, revise definitions and conform the defiMs. Rivlin, Messrs. Kelley, Lindsey, and nitions of certain terms to their meanMeyer, and Mses. Phillips and Yellen.
ings under article 4A of the Uniform
Commercial Code. The two agencies
Regulation R implemented section 32 deferred the effective date of the recordof the Glass-Steagall Act, which prohib- keeping rules until May 28, 1996, and
its interlocks between member banks the Board also deferred the effective
and firms primarily engaged in under- date of subpart B of Regulation S until
writing and dealing in securities. A that date.
related interpretation clarified the applicability of the prohibitions of section 32 June 5, 1996—Amendments
to bank holding companies. After a
review of the regulation and interpre- The Board amended subpart A of Regutation as required by the Riegle Com- lation S to establish rates and conditions
munity Development and Regulatory under which payment would be made to
Improvement Act of 1994, the Board financial institutions for assembling or
determined that the regulation, which providing certain financial records,
restated the statutory language of sec- effective July 12, 1996.
tion 32, and the interpretation that
Votes for this action: Messrs. Greenspan,
applied the prohibitions to bank holding
Kelley, and Lindsey and Mses. Phillips
companies were no longer necessary. In
and Yellen.1
addition, certain other interpretations of
section 32 were moved to Miscellaneous
The Right to Financial Privacy Act
Interpretations.
requires that the Board establish the



Board Policy Actions
rates and conditions for reimbursement
of financial institutions for costs incurred in responding to requests for
records by government agencies. The
Board's amendments streamlined subpart A and updated the fees it specifies.
November 14, 1996—Amendment
The Board amended subpart B of Regulation S to clarify its applicability, effective December 20, 1996.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley, Lindsey, and
Meyer, and Mses. Phillips and Yellen.
Subpart B of Regulation S refers to
the substantive provision of a joint rule
adopted by the Board and the Department of the Treasury relating to recordkeeping requirements for funds transfers
and transmittals of funds under the Bank
Secrecy Act. The Board amended subpart B to clarify that the regulation does
not apply to any person or transaction
or class of persons or transactions that
the Department of the Treasury has
exempted from the joint rule.
Regulation T
Credit by Brokers and Dealers

93

number of domestic and foreign securities that can be bought on margin and
increases the loan value of some other
securities; removes Board rules on
options transactions and relies on the
margin rules of self-regulatory organizations; and reduces restrictions on
transactions involving foreign persons,
foreign securities, and foreign currency.
The new rule also includes certain technical changes.

Regulation V
Loan Guarantees for Defense
Production
October 1, 1996—Repeal
The Board repealed Regulation V, effective October 9, 1996.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley, Lindsey, and
Meyer, and Mses. Phillips and Yellen.
After a review required by section 303 of the Riegle Community
Development and Regulatory Improvement Act of 1994, the Board found
Regulation V to be obsolete. The
Board's action did not represent a
change in any policy.

April 24, 1996—Amendments
The Board updated Regulation T to take
into account developing trends in the
securities markets. The updates became
effective July 1, 1996, except for certain
provisions relating to options transactions, which become effective June 1,
1997.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Mses. Phillips
and Yellen.1
The final rule eliminates restrictions
on the ability of broker-dealers to
arrange for credit, increases the type and



Regulation Y
Bank Holding Companies and
Change in Bank Control
August 23, 1996—Amendment
The Board amended an interpretive rule
in Regulation Y to permit bank holding
companies under certain conditions to
purchase, as a fiduciary, securities of
investment companies they advise,
effective September 30, 1996.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley, Lindsey, and

94

83rd Annual Report, 1996

Meyer, and Ms. Phillips. Absent and not
voting: Ms. Yellen.
The condition on such purchases is
that they must be specifically authorized
by the terms of the instrument creating
the fiduciary relationship, by court order,
or by the law of the jurisdiction under
which the trust is administered. The
revision conforms the rule to those of
other federal banking agencies and the
standard in section 23B of the Federal
Reserve Act.

criteria: (1) risk-based capital thresholds
that are the same as those for determining that a state member bank is
well capitalized and (2) a modified
leverage ratio. The Board sought public
comment on the definition and how it
should be applied to foreign banking
organizations.

Regulation Z
Truth in Lending
January 24, 1996—Amendment

October 23, 1996—Interim Rule
The Board approved an interim amendment to Regulation Y to provide a definition of a well capitalized bank holding
company, effective October 23, 1996.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley and Meyer,
and Mses. Phillips and Yellen. Absent and
not voting: Mr. Lindsey.
The Board adopted the interim rule in
connection with easing provisions of
Regulation Y to eliminate the requirement that bank holding companies seek
the Board's approval before engaging
de novo in permissible nonbanking
activities. The easing would apply to
holding companies that are well capitalized and meet other criteria specified in
the Economic Growth and Regulatory
Paperwork Act of 1996. The interim
rule also implements provisions of the
act to establish expedited procedures for
qualified well capitalized bank holding
companies to be approved to acquire
smaller companies that engage in any
permissible nonbanking activities listed
in Regulation Y as well as to engage in
nonbanking activities that the Board has
approved only by order.
For purposes of determining the capital levels at which a bank holding company is considered well capitalized
under the act and Regulation Y, the
DigitizedBoard adopted, as an interim rule, two
for FRASER


The Board amended Regulation Z to
adjust the threshold amount of mortgage
points and fees that entails certain additional disclosures, effective January 1,
1996.
Votes for this action: Messrs. Greenspan, Blinder, Kelley, and Lindsey and
Mses. Phillips and Yellen.2
The Home Ownership and Equity
Protection Act of 1994 requires that
creditors make additional disclosures on
mortgages for which total points and
fees payable by the consumer exceed
the larger of $400 or 8 percent of the
total loan amount and requires that the
Board annually adjust the absolute dollar value of the threshold amount for the
forthcoming calendar year according to
the annual percentage change in the consumer price index as of June 1 of the
preceding year. On the basis of the CPI
on June 1, 1995, the Board increased the
threshold amount to $412 for 1996.
September 11, 1996—Amendments
The Board amended Regulation Z to
limit lender liability for disclosure errors
and to establish new rules for debt cancellation agreements, effective October 21, 1996.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley, Lindsey, and
Meyer, and Mses. Phillips and Yellen.

Board Policy Actions
The Truth in Lending Act Amendments of 1995 established new rules for
creditor liability for closed-end loans
secured by real property or dwellings
and consummated on or after September 30, 1995. The 1995 amendments
created several tolerances for accuracy
in disclosing the amount of the finance
charge; within those tolerances, creditors have no civil or administrative
liability. The 1995 amendments also
clarified requirements for disclosure of
certain fees connected with mortgage
loans. The Board revised Regulation Z
to implement the 1995 amendments and
established new disclosure rules for debt
cancellation agreements.
December 3, 1996—Amendment
The Board amended Regulation Z to
adjust the threshold amount of mortgage
points and fees that entails certain additional disclosures, effective January 1,
1997.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley, Lindsey, and
Meyer, and Mses. Phillips and Yellen.
Acting under the requirements of the
Home Ownership and Equity Protection
Act of 1994, the Board increased the
level of points and fees beyond which
mortgage creditors must disclose additional information (see Regulation Z
amendment of January 24, 1996, above).
On the basis of the CPI on June 1, 1996,
the Board increased the threshold
amount to $424 for 1997.

Regulation E E
Netting Eligibility for Financial
Institutions
January 3, 1996—Amendment
The Board amended Regulation EE with
regard to the definition of a financial
Digitized institution, effective February 20, 1996.
for FRASER


95

Votes for this action: Messrs. Greenspan,
Blinder, and Kelley and Mses. Phillips
and Yellen.1
The amendment clarifies that, for
purposes of qualifying as a financial
institution under Regulation EE, an
entity may declare itself, either orally
or in writing, to be a financial market
intermediary.

Miscellaneous Interpretations
April 15, 1996—Definition
The Board defined unimpaired capital
stock and surplus for purposes of section 23A of the Federal Reserve Act,
effective July 1, 1996.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Mses. Phillips
and Yellen.1
The new rule adopts the definition of
unimpaired capital and unimpaired surplus used to calculate the limits in Regulation O (Loans to Executive Officers,
Directors, and Principal Shareholders of
Member Banks) for insider lending and
used by the Office of the Comptroller of
the Currency to calculate the limit on
loans by a national bank to a single
borrower.
Rules Regarding Availability
of Information
November 20, 1996—Interim
Amendment
The Board approved an interim amendment to its Rules Regarding Availability
of Information to increase certain fees
associated with requests under the Freedom of Information Act, effective January 1, 1977.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley, Lindsey, and
Meyer, and Mses. Phillips and Yellen.

96

83rd Annual Report, 1996

The amended fee schedule reflects
increases in the cost of conducting
searches and reviewing and copying
documents. The Board also requested
comment on the new fee schedule.

Policy Statements and
Other Actions
March 19, 1996—Uniform Rules
of Practice and Procedure for
Administrative Hearings
The Board amended its Uniform Rules
of Practice and Procedure for Administrative Hearings, effective June 5, 1996.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Mses. Phillips
andYellen.1
The Board, along with the other federal banking agencies, clarified certain
provisions of the rules and made other
changes that are expected to increase the
efficiency and fairness of administrative
hearings.
October 22, 1996—Amendment
As required by the Debt Collection
Improvements Act of 1996, the Board
amended its Rules of Practice for Hearings to increase the maximum amount
of each civil money penalty under its
jurisdiction to account for inflation,
effective October 24, 1996.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley and Meyer,
and Mses. Phillips and Yellen. Absent and
not voting: Mr. Lindsey.

January 24, 1996—Fedwire Policy
Statement
The Board set rules for access to Fedwire by a service provider located
outside the United States, effective February 1, 1996.



Votes for this action: Messrs. Greenspan,
Blinder, and Lindsey and Mses. Phillips
and Yellen. Absent and not voting:
Mr. Kelley.2
The revisions make the arrangements
for a foreign service provider subject to
the conditions applicable to the arrangements for a domestic service provider
and to several additional conditions
related to access to examination information and other data.
May 7, 1996—Standards for Safety
and Soundness
The Board approved guidelines prescribing safety and soundness standards
for the asset quality and earnings of
depository institutions, effective October 1, 1996.
Votes for this action: Messrs. Greenspan
and Kelley and Mses. Phillips and Yellen.
Absent and not voting: Mr. Lindsey.1
As required by section 132 of the
Federal Deposit Insurance Corporation
Improvement Act of 1991, the Board,
along with the other federal banking
agencies, prescribed safety and soundness standards for the asset quality and
earnings of depository institutions. The
guidelines require that institutions
(1) establish and maintain systems to
identify problem assets and prevent their
deterioration and (2) evaluate and monitor earnings to ensure that they are sufficient to maintain adequate capital and
reserves.
May 23, 1996—Interest Rate Risk
Policy Statement
The Board provided guidance on sound
practices for managing interest rate risk,
effective June 26, 1996.
Votes for this action: Messrs. Greenspan
and Kelley and Mses. Phillips and Yellen.
Absent and not voting: Mr. Lindsey.1

Board Policy Actions
The policy statement, which was
issued in conjunction with the other federal banking agencies, identifies the key
elements of interest rate risk management and describes prudent principles
and practices for each element. It
emphasizes the importance both of a
comprehensive risk-management process and of adequate oversight by the
boards of directors and the senior management of banks. The statement also
describes the critical factors affecting
the agencies' evaluation of interest rate
risk when making determinations of
capital adequacy.
April 24, 1996—Uniform Cash
Access Policy
The Board approved a new cash access
policy for the Federal Reserve Banks
that provides for greater consistency in
cash service levels at Reserve Banks,
effective May 1, 1998.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Mses. Phillips
andYellen.1
The revised policy provides for a base
level of free-of-charge access to currency for all depository institutions but
restricts the number of offices served
and the frequency of access. Depository
institutions that meet volume thresholds
will be able to obtain more frequent free
access. Access beyond the free service
level will be priced.

October 22, 1996—Policy
Statement on Payments System
Risk
The Board modified its procedures for
measuring daylight overdrafts to take
into account posting times for Treasury
investments resulting from electronic
tax payments, effective November 18,
1996.



97

Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley, Lindsey, and
Meyer, and Mses. Phillips and Yellen.

October 30, 1996—Announcement
of Date of Expansion of Fedwire
Operation Hours and Establishment
of Daylight Overdraft Posting Time
The Board set December 8, 1997, as
the effective date of its previously
announced expansion of operating hours
for the Fedwire on-line funds transfer
service and established a posting time
for certain nonwire transactions.
Votes for this action: Mr. Greenspan,
Ms. Rivlin, Messrs. Kelley and Meyer,
and Ms. Phillips. Absent and not voting:
Mr. Lindsey and Ms. Yellen.
The Board announced that beginning
December 8, 1997, the Fedwire on-line
funds transfer service will operate from
12:30 a.m. to 6:30 p.m., eastern time,
Monday through Friday. The Board also
established 8:30 a.m. eastern time as the
daylight overdraft posting time for certain nonwire transactions that had been
based on the 8:30 a.m. opening time of
the Fedwire funds transfer service.

1996 Discount Rates
The Board approved one change in
the basic discount rate during 1996, a
decrease from 5lA percent to 5 percent
in late January. In addition, the Board
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 market-related formulas and those rates exceeded the basic
discount rate by varying amounts during
the year.

98

83rd Annual Report, 1996

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 part 1 of
this REPORT and in the minutes of the
1996 meetings of the FOMC that also
appear in this REPORT.
The Board's approval of a XA percentage point reduction in the basic discount
rate, to 5 percent, on January 31, 1996,
followed the FOMC's decision on the
same day to ease reserve conditions
slightly, an action that was expected to
foster a decrease of about lA percentage
point in the federal funds rate. The
complementary policy actions were
taken against the backdrop of a potential
reduction in inflationary pressures associated with the moderation in economic
growth in previous months. In an environment of already subdued price and
wage trends, a slight easing of monetary
policy was deemed to be consistent with
containing inflation and encouraging
further economic expansion at a sustainable pace.
Over the remainder of 1996 the Board
considered further requests to change
the basic rate but took no action on
them. All those requests called for
increases of lA or Vi percentage point.
The initial requests to increase the rate
were submitted by two Federal Reserve
Banks during the first half of May, and
the number of outstanding requests rose
gradually to a maximum of eight during
September and again from mid-October
to early November. All but one had been
withdrawn by year-end. In reaching its
decisions not to approve the requests,
the Board took account of the favorable
performance of inflation, including the
persistence of subdued increases in labor
compensation and overall prices despite



high levels of resource use as reflected
especially in low unemployment. In
these circumstances, the Board concluded that there was no clear case for
raising the discount 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 approved by the
Board.
Under the seasonal program, whose
purpose is to assist smaller institutions
in meeting regular needs arising from a
clear pattern of intra-yearly movements
in their deposits and loans, funds may
be provided for periods longer than
those permitted under adjustment credit.
Since its introduction in early 1992, the
flexible rate charged on seasonal credit
has been closely aligned with shortterm 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. In appropriate circumstances, borrowings of extended credit could be
at the basic rate for up to thirty days,
but any further borrowings would be
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

Board Policy Actions
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 1996 the structure of
discount rates was as follows: a basic
rate of 5 percent for short-term adjustment credit, a rate of 5.35 percent for
seasonal credit, and a rate of 5.85 percent for extended credit. During 1996
the flexible rate on seasonal credit
ranged from a low of 5.15 percent to
a high of 5.50 percent, and the flexible rate on extended credit ranged
from a low of 5.65 percent to a high of
6 percent.

Board Votes
Under the provisions of the Federal
Reserve Act, the boards of directors of
the Federal Reserve Banks are required
to establish rates on loans to depository
institutions at least every fourteen days
and to submit such rates to the Board of
Governors for review and determination. Federal Reserve Bank proposals on
the discount rate include requests to
renew the formulas for calculating the
flexible rates on seasonal and extended
credit. 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 1996 were
unanimous.
Vote on the Basic Discount Rate
January 31, 1996. Effective this date,
the Board approved actions taken by the
directors of the Federal Reserve Banks
of New York, Philadelphia, Cleveland,
Atlanta, Minneapolis, Dallas, and San
Francisco to reduce the basic discount
rate ]A percentage point, to 5 percent.



99

Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Mses. Phillips
and Yellen. Votes against this action:
None. Absent and not voting: Vice Chairman Blinder.2
The Board subsequently approved
similar actions taken by the directors of
the Federal Reserve Banks of Boston,
Richmond, Chicago, and Kansas City,
effective February 1, 1996, and by the
directors of the Federal Reserve Bank of
St. Louis, effective February 5, 1996. •

101

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 minutes. When
members dissent from a decision, they
are identified in the minutes 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 Federal 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
1996. Changes in the instruments during
the year are reported in the records for
the individual meetings.
Authorization for D o m e s t i c O p e n
Market Operations
In Effect January 1, 1996
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

102 83rd Annual Report, 1996
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 US. Government securities held in the System Open
Market Account to Government securities
dealers and to banks participating in Government securities clearing arrangements conducted through a Federal Reserve Bank,
under such instructions as the Committee
may specify from time to time.
3. In order to ensure the effective conduct
of open market operations, while assisting in
the provision of short-term investments for
foreign and international accounts maintained at the Federal Reserve Bank of
New York, the Federal Open Market Committee authorizes and directs the Federal
Reserve Bank of New York (a) for System
Open Market Account, to sell U.S. Government securities to such foreign and international accounts on the bases set forth in
paragraph l(a) under agreements providing
for the resale by such accounts of those
securities within 15 calendar days on terms
comparable to those available on such transactions in the market; and (b) for New York
Bank account, when appropriate, to undertake with dealers, subject to the conditions
imposed on purchases and sales of securities
in paragraph l(c), repurchase agreements in
U.S. Government and agency securities, and
to arrange corresponding sale and repurchase
agreements between its own account and
foreign and international accounts maintained at the Bank. Transactions undertaken
with such accounts under the provisions of
this paragraph may provide for a service fee
when appropriate.

Minutes of FOMC Meetings

Domestic Policy Directive
In Effect January 1, 19961
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
1. Adopted by the Committee at its meeting on
December 19, 1995.



103

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
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.

Authorization for Foreign
Currency Operations
In Effect January 1, 1996
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:

104 83rd Annual Report, 1996
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
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 1(A) above
shall, unless otherwise expressly authorized
by the Committee, be at prevailing market
rates. For the purpose of providing an investment return on System holdings of foreign
currencies, or for the purpose of adjusting
interest rates paid or received in connection
with swap drawings, transactions with foreign central banks may be undertaken at
non-market exchange rates.
4. It shall be the normal practice to
arrange with foreign central banks for the
coordination of foreign currency transactions. In making operating arrangements
with foreign central banks on System holdings of foreign currencies, the Federal
Reserve Bank of New York shall not commit
itself to maintain any specific balance, unless
authorized by the Federal Open Market
Committee. Any agreements or understandings concerning the administration of the
accounts maintained by the Federal Reserve
Bank of New York with the foreign banks
designated by the Board of Governors under
Section 214.5 of Regulation N shall be
referred for review and approval to the
Committee.

Minutes of FOMC Meetings
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, 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



105

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, 1996
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:

106 83rd Annual Report, 1996
A. In close and continuous consultation and cooperation with the United States
Treasury;

change in the System's net position in that
currency might be less than the limits specified in I.B.

B. In cooperation, as appropriate, with
foreign monetary authorities; and

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.

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, 1996
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 clearance
with the Committee, the Foreign Currency
Subcommittee, and the Chairman of the
Committee. All operations undertaken pursuant to such clearances shall be reported
promptly to the Committee.
1. The Manager shall clear with the Subcommittee (or with the Chairman, if the
Chairman believes that consultation with the
Subcommittee is not feasible in the time
available):
A. Any operation that would result in a
change in the System's overall open position
in foreign currencies exceeding $300 million
on any day or $600 million since the most
recent regular meeting of the Committee.
B. Any operation that would result in a
change on any day in the System's net position in a single foreign currency exceeding
$150 million, or $300 million when the
operation is associated with repayment of
swap drawings.
C. Any operation that might generate a
substantial volume of trading in a particular
currency by the System, even though the



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.

Meeting Held on
January 30-31, 1996
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.,
starting on Tuesday, January 30, 1996,
at 2:30 p.m. and continuing on Wednesday, January 31, 1996, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Boehne
Mr. Jordan
Mr. Kelley
Mr. Lindsey
Mr. McTeer
Ms. Phillips

Minutes of FOMC Meetings, January
Mr. Stern
Ms. Yellen
Messrs. Broaddus, Guynn, Moskow,
and Parry, Alternate Members
of the Federal Open Market
Committee
Messrs. Hoenig, Melzer, and
Ms. Minehan, Presidents of the
Federal Reserve Banks of
Kansas City, St. Louis, and Boston
respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. Lang, Lindsey, Mishkin,
Promisel, Rolnick, Rosenblum,
Siegman, Simpson, Sniderman,
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. Slifman, Associate Director,
Division of Research and
Statistics, Board of Governors
Mr. Rosine,2 Senior Economist,
Division of Research and
Statistics, Board of Governors
Mr. Reid,2 Economist, Division of
Monetary Affairs, Board of
Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
2. Attended portions of meeting relating to the
Committee's review of the economic outlook and
establishment of its monetary and debt ranges for
1996.



107

Mr. Beebe, Ms. Browne, Messrs. Davis,
Dewald, Goodfriend, and Hunter,
Senior Vice Presidents, Federal
Reserve Banks of San Francisco,
Boston, Kansas City, St. Louis,
Richmond, and Chicago
respectively
Mses. Krieger and Rosenbaum,
Vice Presidents, Federal Reserve
Banks of New York and Atlanta
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, 1996, and ending December 31, 1996, had been received and that
the named individuals had executed
their oaths of office.
The elected members and alternate
members were as follows:
William J. McDonough, President of the
Federal Reserve Bank of New York,
with Ernest T. Patrikis, First Vice President of the Federal Reserve Bank of
New York, as alternate;
Edward G. Boehne, President of the Federal
Reserve Bank of Philadelphia, with
J. Alfred Broaddus, Jr., President of the
Federal Reserve Bank of Richmond, as
alternate;
Jerry L. Jordan, President of the Federal Reserve Bank of Cleveland, with
Michael H. Moskow, President of the
Federal Reserve Bank of Chicago, as
alternate;
Robert D. McTeer, President of the Federal Reserve Bank of Dallas, with
Jack Guynn, President of the Federal
Reserve Bank of Atlanta, as alternate;
Gary H. Stern, President of the Federal
Reserve Bank of Minneapolis, with
Robert T. Parry, President of the Federal Reserve Bank of San Francisco, 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

108 83rd Annual Report, 1996
first meeting of the Committee after
December 31, 1996, with the understanding that in the event of the discontinuance of their official connection with
the Board of Governors or with a Federal Reserve Bank, they would cease to
have any official connection with the
Federal Open Market Committee:

By unanimous vote, the Authorization for Domestic Open Market
Operations
shown
below
was
reaffirmed.

Alan Greenspan
William J. McDonough

Chairman
Vice Chairman

Reaffirmed January 30, 1996

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.
Thomas C. Baxter, Jr.
Michael J. Prell
Edwin M. Truman

Richard W. Lang, David E. Lindsey,
Frederic S. Mishkin, Larry J. Promisel,
Arthur J. Rolnick, Harvey Rosenblum,
Charles J. Siegman, Thomas D.
Simpson, Mark S. Sniderman, and
David J. Stockton, 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, 1996.
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 as Manager was satisfactory to the board of directors of the
Federal Reserve Bank of New York.



Authorization for Domestic Open
Market Operations

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

Minutes of FOMC Meetingsy January
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 inter


109

national 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
shown below was reaffirmed.
Authorization for Foreign Currency
Operations
Reaffirmed January 30, 1996
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, for System Open Market
Account, to the extent necessary to carry out
the Committee's foreign currency directive
and express authorizations by the Committee
pursuant thereto, and in conformity with
such procedural instructions as the Committee may issue from time to time:
A. To purchase and sell the following
foreign currencies in the form of cable transfers through spot or forward transactions on
the open market at home and abroad, including transactions with the U.S. Treasury, with
the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve Act
of 1934, with foreign monetary authorities,
with the Bank for International Settlements, and with other international financial
institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks

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

110 83rd Annual Report, 1996
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
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

Amount
(millions of
dollars equivalent)
250
1,000
2,000
250
3,000
2,000
6,00
3,000
5,000

1. The additional temporary $3 billion swap arrangement with the Bank of Mexico, approved by the Committee on February 1, 1995, was allowed to lapse on Jan-




Any changes in the terms of existing swap
arrangements, and the proposed terms of any
new arrangements that may be authorized,
shall be referred for review and approval to
the Committee.
3. All transactions in foreign currencies
undertaken under paragraph LA. above
shall, unless otherwise expressly authorized
by the Committee, be at prevailing market
rates. For the purpose of providing an investment return on System holdings of foreign
currencies, or for the purpose of adjusting
interest rates paid or received in connection
with swap drawings, transactions with foreign central banks may be undertaken at
non-market exchange rates.
4. It shall be the normal practice to
arrange with foreign central banks for the
coordination of foreign currency transactions. In making operating arrangements
with foreign central banks on System holdings of foreign currencies, the Federal
Reserve Bank of New York shall not commit
itself to maintain any specific balance, unless
authorized by the Federal Open Market
Committee. Any agreements or understandings concerning the administration of the
accounts maintained by the Federal Reserve
Bank of New York with the foreign banks
designated by the Board of Governors
under Section 214.5 of Regulation N shall
be referred for review and approval to the
Committee.
5. Foreign currency holdings shall be
invested insofar as practicable, considering
needs for minimum working balances. Such
investments shall be in liquid form, and generally have no more than 12 months remaining to maturity. When appropriate in
connection with arrangements to provide

Foreign bank

Amount
(millions of
dollar equivalent)

Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs

3,000'
500
250
300
4,000
600
1,250

uary 31, 1996, in line with its original terms. See minutes
of the FOMC meeting of December 19, 1995.

Minutes of FOMC Meetings, January
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 For


111

eign Relationships of Federal Reserve Banks
dated January 1, 1944.
By unanimous vote, the Foreign
Currency Directive shown below was
reaffirmed.

Foreign Currency Directive
Reaffirmed January 30, 1996
1. System operations in foreign currencies shall generally be directed at countering
disorderly market conditions, provided that
market exchange rates for the U.S. dollar
reflect actions and behavior consistent with
the IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain
reciprocal
currency
("swap") arrangements with selected foreign central banks and with the Bank for
International Settlements.
C. Cooperate in other respects with
central banks of other countries and with
international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light
of probable future needs for currencies.
B. To provide means for meeting System and Treasury commitments in particular
currencies, and to facilitate operations of the
Exchange Stabilization Fund.
C. For such other purposes as may be
expressly authorized by the Committee.
4. System foreign currency operations
shall be conducted:
A. In close and continuous consultation and cooperation with the United States
Treasury;
B. In cooperation, as appropriate, with
foreign monetary authorities; and
C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange
arrangements under the IMF Article IV

By unanimous vote, the Procedural
Instructions with Respect to Foreign
Currency Operations shown below were
reaffirmed.

112 83 rd Annual Report, 1996

Procedural Instructions with
Respect to Foreign Currency
Operations
Reaffirmed January 30, 1996
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.
2. The Manager shall clear with the Committee (or with the Subcommittee, if the
Subcommittee believes that consultation
with the full Committee is not feasible in the
time available, or with the Chairman, if the
Chairman believes that consultation with the
Subcommittee is not feasible in the time
available):



A. Any operation that would result in a
change in the System's overall open position
in foreign currencies exceeding $1.5 billion
since the most recent regular meeting of the
Committee.
B. Any swap drawing proposed by a
foreign bank exceeding the larger of
(i) $200 million or (ii) 15 percent of the
size of the swap arrangement.
3. The Manager shall also consult with
the Subcommittee or the Chairman about
proposed swap drawings by the System and
about any operations that are not of a routine
character.

Agreement to "Warehouse"
Foreign Currencies
At its meeting on January 31-February
1, 1995, the Committee had approved an
increase from $5 billion to $20 billion
in the amount of eligible foreign currencies that the System was prepared to
"warehouse" for the Treasury and the
Exchange Stabilization Fund (ESF). The
purpose of the warehousing facility,
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 enlargement of the warehousing agreement 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 had agreed that it would review
each year the need to maintain this level
of warehousing authority in light of
the progress and requirements of the
program.
The Treasury and the Exchange Stabilization Fund had made no use of the
warehousing facility over the past year.
Nevertheless, consistent with Federal
Reserve support for the program of

Minutes of FOMC Meetings, January
assistance to Mexico, the members
agreed that it was appropriate to postpone consideration of an adjustment in
the overall size of the facility at least
until the end of the disbursement phase
of the Mexican program currently
scheduled for August 1996. Accordingly, the Committee reaffirmed the
warehousing authority by unanimous
vote.
By unanimous vote, the Program for
Security of FOMC Information was
amended to conform it to the treatment
of transcripts of FOMC meetings and
the procedures that the Committee had
been following for some time in regard
to redactions of confidential information
in transcripts and other documents that
are released to the public after five
years. In addition, the Committee agreed
to amend the program so that the automatic extension of Federal Reserve staff
access to confidential material after six
months could be suspended for certain
particularly sensitive documents.
On January 23, 1996, the continuing
rules, resolutions, and other instruments
of the Committee had been distributed
with the advice that, in accordance with
procedures approved by the Committee,
they were being called to the Committee's attention before the January 30-31
organization meeting to give members
an opportunity to raise any questions
they might have concerning them. Members were asked to indicate if they
wished to have any of the instruments
in question placed on the agenda for
consideration at this meeting, and no
requests for such consideration were
received.
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on December 19, 1995,
were approved.
The Manager of the System Open
Market Account reported on recent
developments in foreign exchange mar


113

kets. He indicated that the swap line
drawing by the Bank of Mexico had
been repaid in full on January 29, 1996.
The Committee ratified that transaction
by unanimous vote.
The Manager also reported on recent
developments in domestic financial
markets and on System open market
transactions in U.S. government securities and federal agency obligations
during the period December 19, 1995,
through January 30, 1996. By unanimous vote, the Committee ratified these
transactions.
The Committee then turned to a discussion of the economic and financial
outlook, the ranges for the growth of
money and debt in 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.
Only a limited amount of new information was available for this meeting
because of delays in government releases; that which was available, along
with anecdotal commentary, suggested
that the economy had been growing relatively slowly in recent months. Consumer spending had expanded modestly
on balance, growth in business investment in capital goods appeared to have
slackened somewhat recently, and housing demand seemed to have leveled out.
Slower growth in final sales was leading
to inventory buildups in a few industries, and these buildups, together with
the disruptions from government shutdowns and severe weather, were having
a restraining effect on economic activity.
The demand for labor was still growing at a moderate pace, though, and the
unemployment rate remained relatively

114 83rd Annual Report, 1996
low. The recent data on prices and
wages had been mixed, but there was no
firm evidence of a change in underlying
inflation trends.
Nonfarm payroll employment continued to expand moderately in December;
the gain was in line with the average
monthly increase for 1995. Employment
in manufacturing, boosted by the settlement of a strike at a major aircraft
manufacturer, reversed the declines of
October and November. Construction
payrolls rose further in December,
despite unfavorable weather in some
parts of the country. Job growth
remained solid in much of the services
industry, although employment at personnel supply firms was little changed.
The civilian unemployment rate
remained at 5.6 percent in December.
Industrial production edged up in
December and for the fourth quarter as a
whole advanced only slightly; industrial
activity remained sluggish in January
according to the limited statistical information that was available. In December,
manufacturing output rose a bit in association with an increase in motor vehicle
assemblies and aircraft production. Elsewhere in manufacturing, the growth of
output of office and computing equipment slowed somewhat from the rapid
pace of previous months, and the production of defense and space equipment
and of nondurable consumer goods
registered sizable declines. The output
of utilities was boosted somewhat in
December by the effect of colder-thanaverage temperatures on the demand
for heating services. Utilization of total
industrial capacity fell slightly but
remained at a moderately elevated level.
Retail sales continued to grow at a
relatively modest rate in December, and
the fourth-quarter increase was considerably smaller than those of the previous
two quarters. In the fourth quarter, lower
spending at general merchandisers off


set much of the sales gains registered at
automotive dealerships, furniture and
appliance stores, and building and supply outlets. Consumer surveys indicated
some deterioration in consumer confidence in January. Recent indicators
of housing demand and activity were
mixed. Sales of new homes edged still
lower in November (latest data available), and sales of existing homes
declined by a larger amount in December than in November. However, housing starts rebounded in November from
a sizable October decline, and conditions in mortgage markets remained
quite favorable, led by a further decline
in rates.
The sparse statistical data available
on business fixed investment, along with
anecdotal information, suggested a moderation recently in the expansion of business spending on capital goods, including some slowing of investment in
computers. Investment in transportation
equipment, however, apparently had
held up well in the fourth quarter.
Incoming data on construction contracts
pointed to some slowing in the growth
of nonresidential building activity from
a relatively brisk pace during most of
1995.
The information available on business inventories suggested that inventory imbalances might have emerged
in a few sectors in association with
weaker-than-expected sales. Motor vehicle inventories were at elevated levels
compared with sales in late 1995, and
manufacturers responded by offering
incentive packages on new cars and
trucks and by adjusting downward their
January production schedules. Data on
manufacturing and retail trade inventories for November had been delayed,
but published information on inventories
held by wholesale distributors indicated
a decline in that month, reversing part
of October's sizable run-up. Much of

Minutes of FOMC Meetings, January
the decline occurred in nondurable
goods, although machinery distributors
also reported a sizable liquidation. The
inventory-sales ratio for the wholesale
trade sector edged down in November
but remained near the high end of its
range in recent years.
The nominal deficit on U.S. trade in
goods and services narrowed in October
from its average rate in the third quarter.
The value of imports declined more than
the value of exports. Much of the contraction in imports reflected reductions
in oil and automotive products that more
than offset another strong rise in computer goods. For exports, an advance in
machinery exports to record levels was
outweighed by a reduction in shipments
of agricultural and automotive products.
Available data on economic activity in
the major foreign industrial countries
suggested that the pace of expansion in
Europe had slowed further on average
while growth in Japan had picked up a
little.
Recent data suggested little change in
underlying inflation trends. Consumer
prices increased slightly in December
after having been unchanged in November; food prices were quiescent over the
two-month period while energy prices
rose on balance, with a December
rebound more than offsetting a sizable
November drop. Excluding food and
energy items, consumer prices were up
modestly over the November-December
period and for all of 1995 advanced
slightly more than in 1994. Producer
prices of finished goods were up considerably in November and December after
having risen slowly in earlier months; in
large part, the price increases late in the
year reflected sharp upward movements
in both finished foods and finished
energy prices. For 1995, producer prices
of finished goods other than food and
energy rose at a subdued pace, though
somewhat more than in 1994. Commod


115

ity prices had been mixed recently after
having trended down earlier. Average
hourly earnings of production and nonsupervisory workers increased somewhat in December after having been
unchanged in November. Increases in
average hourly earnings had been trending up over the past several years.
At its meeting on December 19, 1995,
the Committee adopted a directive that
called for some slight easing in the
degree of pressure on reserve positions,
which was expected to result in a
decline in the federal funds rate from
around 53A percent to around 5Vi percent. The directive 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, 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 of M2 and M3 over coming
months.
After the meeting, open market operations were directed initially toward
implementing the slight easing in the
degree of reserve pressure that had been
adopted by the Committee and thereafter toward maintaining this new
reserve posture. Operations were complicated by large swings in reserve
demands associated with year-end pressures and the adverse effects of unusually severe winter weather on check
clearings. Although the federal funds
rate exhibited somewhat greater volatility than normal over the period, it
nonetheless averaged close to the
expected level of 5 xh percent. The occa-

116 83rd Annual Report, 1996
sional periods of firmness in reserve
market conditions contributed to higher
adjustment plus seasonal borrowing, on
average, over the period.
Most market interest rates had
declined somewhat further over the
period after the December 19 meeting.
Rates moved lower immediately after
the policy easing action, and most fell
still more on balance over the remainder
of the intermeeting interval in response
to incoming information about the economy and the prospects for fiscal policy,
at least in the near term. Both were seen
as suggesting slower economic expansion for a time and an increased likelihood of additional easing of monetary
policy in coming months. With bond
yields down on balance, and occasionally approaching two-year lows, major
indexes of equity prices advanced
sharply further.
The trade-weighted value of the dollar in terms of the other G-10 currencies
continued to rise over the intermeeting
period despite the decline in U.S. interest rates. The dollar's upward movement against the German mark and other
European currencies was associated
with increasing indications of further
weakening of economic expansion in
key European countries and greater
declines in interest rates in those countries than in the United States. The dollar's appreciation relative to the Japanese yen appeared to be related in part
to a narrowing of Japan's trade and current account surpluses. The dollar was
unchanged on balance against the Canadian dollar, while the Mexican peso rose
considerably in relation to the dollar.
Growth of M2 and M3 strengthened
in December and January. The pickup in
M2 growth partly reflected the effect of
recent declines in short-term interest
rates; those declines had made money
market instruments less attractive relative to household savings accounts in



M2, whose offering rates tend to be
adjusted downward with a considerable
lag. In addition, the flattening of the
term structure of interest rates had lessened the comparative attractiveness of
bond mutual funds, which had continued to experience only light inflows.
Faster growth of M3 in December and
January was associated with both the
pickup in M2 expansion and the issuance of additional large time deposits to
help finance a noticeable step-up in bank
loan demand in January. The expansion
of M2 from the fourth quarter of 1994
to the fourth quarter of 1995 was in the
upper half of the Committee's annual
range, and M3 grew at the upper end of
its range. Growth of total domestic nonfinancial debt had been moderate in
recent months, and for the year was near
the midpoint of this aggregate's monitoring range.
The staff forecast prepared for this
meeting suggested that economic activity would expand at a relatively slow
pace over the near term. This forecast
was not materially different from that
prepared for the December meeting,
except for a slightly weaker outlook
for the current quarter that was related
in part to an inventory correction and
the effects of unusually severe winter
weather on spending and output. Over
the remainder of the two-year forecast
horizon, the economy was expected
to grow generally along its estimated
potential. Consumer spending was
anticipated to keep pace with the growth
of disposable income; concerns about
job security remained and consumer
debt burdens had risen further, but the
still-ample availability of credit and the
substantial rise in the value of household equity holdings would support
additional increases in consumption.
The further decline in mortgage rates
recently from already-favorable levels
would help to sustain homebuilding

Minutes of FOMC Meetings, January
activity at a relatively high level. With
sales and profits projected to grow more
slowly, and with utilization of existing
capacity having eased considerably,
business investment in new equipment
and structures was expected to expand
at a more moderate rate. In light of the
recent strengthening of the dollar, the
external sector was expected to exert a
small restraining influence on real activity over the projection period as a whole.
Much uncertainty still surrounded the
fiscal outlook, but the recent impasse
in the budget negotiations between the
Administration and the Congress suggested a lower degree of fiscal restraint
over coming years than had been
assumed in the previous forecast. Given
the projected outlook, rates of utilization
of labor and capital resources and of
inflation were not expected to change
materially.
In the Committee's discussion of current and prospective economic activity,
members noted a number of temporary
factors that were retarding the expansion. The weakness in business activity
this winter was to some extent the result
of the partial shutdown of the federal
government and the severe storms in a
number of regions; both clearly were
transitory influences on the economy.
Growth of economic activity also was
being constrained by production cutbacks stemming from efforts to bring
stocks into better alignment with disappointing sales in a number of industries.
Even so, in the absence of major overhangs in inventories of business equipment and consumer durables, and given
favorable conditions in financial markets, members believed that a resumption of moderate, sustainable growth
after a relatively brief period of weakness was the most likely outlook for
the economy. At the same time, many
observed that the risks to such an outcome did not seem balanced. A number



117

of concerns, including the extent of the
damping effects of high debt loads and
employment uncertainty on consumption and questions about the sources of
further export growth, suggested the
possibility of sluggish expansion, while
possible developments on the upside
were more difficult to identify. With
resource use unlikely to vary appreciably, the members generally expected
no significant change in the underlying
inflation picture over the year ahead.
The recent performance of inflation had
some encouraging aspects, and the odds
on greater price pressures seemed relatively small at this time.
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 1996. Measured on the basis of
chain-weighted indexes, the forecasts of
the growth in real GDP had a central
tendency of 2 to 2lA percent and a full
range of \xh to 2xh percent for the
period from the fourth quarter of 1995
to the fourth quarter of 1996. The members and nonmember presidents generally anticipated that economic expansion in line with their forecasts would be
associated with employment growth
close to that of the labor force. Accordingly, their forecasts of the civilian rate
of unemployment in the fourth quarter
of 1996 were near the current level, with
a central tendency of 5*/2 to 53/4 percent
and a full range of 5lA to 6 percent.
Projections of the rate of inflation, as
reflected in the consumer price index,
had a central tendency of 23A to 3 percent; that central tendency was on the
high side of the outcome for 1995—
when the rise in the index was held

118 83rd Annual Report, 1996
down by damped increases in food
prices and declines in energy prices—
but a few of the forecasts anticipated a
slightly lower rate of inflation.
In their review of developments
across the nation, the Federal Reserve
Bank presidents reported modest growth
in most major areas of the country.
Many referred, however, to an admixture of strengths and weaknesses in
their local economies, and a majority
observed that on balance growth in
regional business activity appeared to
have slowed in the last few months. In
keeping with the data available for the
nation as a whole, the slowing seemed
to be concentrated in manufacturing and
especially at firms producing motor
vehicles and parts. Some presidents
referred to relatively negative, or at least
cautious, sentiment among many of their
business contacts.
Much of the recent softening in economic activity appeared to arise from
production cutbacks in various sectors
of the economy in which involuntary
accumulation of inventories seemed to
have occurred as a result of weaker sales
trends in the past few months. The members expected this inventory adjustment
process to have a relatively pronounced
effect on production and overall business activity in the current quarter and
perhaps to some extent in the second.
While a greater-than-expected inventory adjustment with spreading effects
through the economy could not be ruled
out, the underlying strength of demand
was likely to be sufficient to restore and
sustain moderate growth in overall economic activity as the current inventory
and production adjustments subsided.
With regard to consumer spending,
members referred to overall indications
of lackluster retail sales during the holiday season and into January. The anecdotal commentary on retail sales attributed some of the recent weakness in a



number of areas to the clearly temporary
effects of unusually severe winter
weather and the partial shutdown of
the federal government. The members
anticipated that moderate growth in
retail sales would resume, though some
felt that the consumer sector might
remain vulnerable on the downside. The
consumer spending outlook was complicated by a number of crosscurrents.
Negative factors cited by the members
included ongoing concerns about job
security that were being sustained by a
continuing stream of workforce reduction announcements by major business
concerns, increased consumer debt burdens that were showing up in rising
delinquency rates on some types of
loans, and the apparent satisfaction of
much of the earlier pent-up demand for
consumer durables. On the positive side,
reduced interest rates, still readily
available credit, and the accumulation
of financial wealth from the sharp rise
in stock and bond prices were seen as
likely to support continuing gains in
consumer spending.
Further increases in business fixed
investment were viewed as a likely
prospect for the year ahead, though the
growth of such investment probably
would be well below the strong pace
experienced earlier in the current cyclical expansion. Anecdotal reports indicated continuing strength in nonresidential construction in some parts of the
country, but declining rates of capacity
utilization augured reduced growth
going forward. The expansion of investment in producers' durable equipment
also was expected to slow, but from a
pace that had seemed unsustainable.
While appreciable further growth could
be expected in expenditures for hightech equipment as business firms continued to focus on improving the efficiency
of their operations in a highly competitive environment, spending for other

Minutes of FOMC Meetings, January
types of equipment was likely to be
sluggish. Members noted in particular
the prospects for weaker business spending for motor vehicles, especially for
heavy trucks. However, the fundamental
determinants of investment in business
equipment, including the reduced cost
of financing such investment, remained
positive and this sector of the economy
should continue to provide considerable
impetus to the expansion.
The members also viewed the considerable decline that had occurred in
mortgage interest rates and the ample
availability of housing finance as key
factors in their forecasts of sustained
residential construction at relatively
high levels. Adverse weather conditions
appeared to have retarded homebuilding activity in a number of areas in
recent weeks, but several members
commented that underlying trends in
housing demand were favorable and that
residential construction had remained
relatively strong in several parts of the
country.
The outlook for fiscal policy was
uncertain, especially with regard to
whether longer-term spending and taxation measures would be enacted to
implement the goal of a balanced federal budget by the year 2002. For the
year immediately ahead, however, the
members continued to anticipate considerable restraint in federal spending,
partly as a byproduct of the current
budget debate between the Congress and
the Administration. With regard to the
external sector of the economy, prospects for economic growth in major
trading partners—led by developments
in Europe—appeared to have weakened,
and the recent appreciation of the dollar
in the foreign exchange markets also
might tend to damp net exports. Consequently, several members saw downside
risks in the foreign trade sector over the
year ahead.



119

The members anticipated that inflation would remain contained in 1996,
but they did not expect significant
progress toward more stable prices.
They referred to crosscurrents bearing
on the outlook for wages and prices
in the year ahead. Factors pointing to
potentially higher inflation included
increased pressures on food prices stemming from disappointing harvests in
some areas and relatively low grain supplies. More generally, resource utilization was expected to remain high and
greater pressures could emerge in labor
and product markets. Members noted
that one broad measure of wages had
picked up and that there was a small rise
in the number of anecdotal reports indicating that labor shortages were contributing to higher wages in some parts
of the country. In addition, unusually
muted increases in the costs of worker
benefits had been holding down overall
compensation costs, and this pattern
might not persist. On the other hand,
high levels of resource utilization had
been associated for some time with
lower rates of growth in costs than
would have been anticipated on the basis
of historical experience. In particular, a
general sense of job insecurity in a
period of major business restructurings
was holding down increases in labor
compensation. In an environment of
strong competition, which was preventing many businesses from passing on
rising costs through higher prices, firms
continued to focus on efforts to control
costs by improving the efficiency of
their operations, and this was helping
to hold down inflation. An apparent
decline in inflationary expectations also
would provide a moderating influence
on inflation trends in the period ahead.
While most of the members saw little
reason to anticipate appreciably lower
inflation over the year ahead, they also
viewed the odds on a pickup in inflation

120 83rd Annual Report, 1996
as fairly low; they could see possible
reasons for optimism on the long-run
trend in inflation; and they generally
remained confident that further progress
toward price stability would be made
over the longer term.
In keeping with the requirements of
the Full Employment and Balanced
Growth Act of 1978 (the HumphreyHawkins Act), the Committee reviewed
the ranges for growth of the monetary
and debt aggregates in 1996 that it had
established on a tentative basis at its
meeting in July 1995. The tentative
ranges included expansion of 1 to 5 percent for M2 and 2 to 6 percent for M3,
measured from the fourth quarter of
1995 to the fourth quarter of 1996. The
monitoring range for growth of total
domestic nonfinancial debt was provisionally set at 3 to 7 percent for 1996.
The tentative ranges for 1996 were
unchanged from the actual ranges for
1995. In July, the range for M3 had been
raised 2 percentage points to reflect
developments that seemed to be fostering a return to the historical pattern of
somewhat faster growth in M3 than in
M2.
In their discussion, the members took
note of a staff analysis which indicated
that monetary expansion consistent with
the moderate growth of nominal GDP
that the members were projecting for
1996 most likely would be around the
upper ends of the tentative ranges
adopted last July. M2 and M3 velocity
over the past couple of years had conformed more closely on balance with
historical patterns, and the projections
assumed that this behavior would continue in 1996. In light of the experience
of earlier years, however, when the
velocities of these aggregates had exhibited pronounced atypical behavior, substantial uncertainty still surrounded any
projections of monetary expansion and
the linkage between particular rates of



money growth and the basic objectives
of monetary policy.
Most members endorsed a proposal to
adopt the relatively low ranges for
growth of M2 and M3 in 1996 that the
Committee had set on a tentative basis
in July 1995. These members favored
retention of the tentative ranges because
they could be viewed as benchmarks for
money growth that would be associated
with price stability, assuming behavior
of velocity in line with historical experience, and a reaffirmation of those ranges
would underscore the Committee's commitment to a policy of achieving price
stability over the longer term. Some
members also noted that any adjustment
of these ranges to align them more fully
with projections of money growth consistent with the Committee's expectations for expansion of the economy and
prices in 1996 could be misinterpreted.
Such an action might be seen as suggesting that the Committee had a greater
degree of confidence in the relationship
between money growth and broad measures of economic performance than was
warranted by its current understanding
of that relationship or that the Committee was now placing greater emphasis
on the broad monetary aggregates as a
gauge of the thrust of monetary policy.
Two members favored somewhat
higher growth ranges for M2 and M3 in
1996. They noted that the expansion of
these broad aggregates was anticipated
to be around the upper ends of their
tentative ranges, and perhaps even
higher, given the Committee's expectations for the performance of the economy and prices. In their view, the higher
ranges would be more consistent with
what they saw as the Committee's obligations under the Federal Reserve Act
to set ranges consistent with expected or
desired economic outcomes for the year,
and the reasons for establishing those
ranges could easily be set forth and

Minutes of FOMC Meetings, January
understood as an appropriate technical
adjustment that would not imply any
lessened commitment to the Committee's price stability goal.
The Committee unanimously preferred to retain the 3 to 7 percent range
for total domestic nonflnancial debt in
1996. This position took account of a
staff projection indicating that the debt
aggregate was likely to continue to grow
at a rate generally in line with the expansion of nominal GDP, although some
moderation in private credit demands
was anticipated and there were indications that lenders were no longer easing
their terms and conditions for granting
credit to consumers and businesses.
At the conclusion of its discussion,
the Committee voted to approve without
change the tentative ranges for 1996 that
it had established in July of last year.
In keeping with its usual procedures
under the Humphrey-Hawkins 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 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 2 to 6 percent
respectively, measured from the fourth quarter of 1995 to the fourth quarter of 1996. The
monitoring range for growth of total domestic nonflnancial debt was set at 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.



121

Votes for this action: Messrs. Greenspan,
McDonough, Boehne, Jordan, Kelley,
McTeer, Ms. Phillips, and Mr. Stern. Votes
against this action: Mr. Lindsey and
Ms. Yellen.

Mr. Lindsey and Ms. Yellen dissented
because they preferred somewhat higher
ranges for M2 and M3. They recognized
that the relationships between the ranges
for the monetary aggregates and broad
measures of economic performance
were subject to substantial uncertainty,
but ranges higher than those adopted on
a tentative basis in July 1995 were more
likely to encompass monetary expansion consistent with the central tendency
of members' current forecasts of nominal GDP growth for 1996. Raising the
ranges for M2 and M3 would in their
view conform those ranges more closely
with the provisions in the Federal
Reserve Act that require the System to
communicate to the Congress its objectives and plans for the growth of the
aggregates for the calendar year. They
believed the Committee could readily
explain that such an adjustment to the
ranges did not represent a lessened commitment to its price stability goal or an
increased emphasis on the monetary
aggregates in policy formulation.
The Committee also discussed alternatives to the monetary aggregates
for communicating its intentions with
regard to the course of inflation over the
longer run. Some members thought that
explicit numerical goals or forecasts for
inflation over a period of years would
have several important benefits, including enhanced credibility that could
reduce the costs of achieving price stability and greater flexibility to respond
to the emergence of economic weakness
by easing policy for a limited period
of time without arousing inflation concerns. Other members, while endorsing
fully the long-term goal of price stabil-

122 83 rd Annual Report, 1996
ity, had a number of reservations about
implementing such proposals, especially
at this time. Based on experience in the
United States and elsewhere, many were
skeptical about the payoff in terms of
greater credibility or flexibility in policy
implementation. Moreover, they believed that substantially more study and
deliberation were required to explore
fully the alternatives and the consequences of changes in the way the Committee formulated and communicated
its objectives. They also thought that
any such assessment would need to take
account of the prospects for, or disposition of, closely related legislation that
was now being considered in the Congress. The Committee did not take any
action on this issue at this meeting, but
it recognized that the matter would need
to be revisited from time to time.
In the Committee's discussion of policy for the intermeeting period ahead,
the members supported a proposal calling for some slight easing in reserve
conditions. Although a pickup to an
acceptable rate of expansion was seen as
the most likely course for the economy
in coming quarters, the risks of a shortfall in growth were believed to be significant. At the same time, while most
members were forecasting high levels of
resource use and little change in the rate
of inflation this year, they saw only a
very limited risk that a slight easing
move might foster higher inflation under
prevailing circumstances, and some felt
that there were favorable prospects for a
slightly improved inflation performance.
Under the circumstances, a slight
decrease was warranted in the real federal funds rate from a level that a number of members considered still a bit to
the firm side—a stance that seemed less
appropriate in light of the reduced threat
over the last year of a pickup in inflation. One member pointed out that such
a decrease would tend to counter the



effects on aggregate demand of the
recent rise in the foreign exchange value
of the dollar, which might continue to
move higher if interest rate declines
expected by the markets were not forthcoming. It was noted that postponing a
decision in this uncertain economic climate could be defended on the ground
that more evidence was needed to ascertain whether the weakness in the economy was quite temporary or more lasting; if it was the former, inflationary
pressures could re-emerge at lower
interest rates. On the other hand, a few
members commented that the currently
sluggish performance of the economy
could be read as calling for a more
pronounced easing move, but they preferred a cautious approach to policy
in light of current inflation trends and
the uncertainties that surrounded their
forecasts of some strengthening in the
economy.
The Chairman informed the Committee that he had asked the members of the
Board of Governors to convene immediately after this meeting to consider a
reduction of lA percentage point in the
discount rate. Such a reduction had been
proposed by a total of six Federal
Reserve Banks at this point. Given the
easing in reserve markets favored by the
Committee and the possibility of a lower
discount rate, the members did not
believe that a further policy move was
likely to be needed during the intermeeting period. Accordingly, they favored an
unbiased directive that did not incorporate a presumption about the likely
direction of any adjustments to policy
during the next several weeks. In keeping with its usual practice, the Committee did not rule out the possibility of an
intermeeting policy change on the basis
of unanticipated economic or financial
developments.
At the conclusion of the Committee's
discussion, all the members supported a

Minutes of FOMC Meetings, January
directive that called for a slight reduction in the degree of pressure on reserve
positions and that did not include a bias
about the likely direction of an adjustment to policy during the intermeeting
period, should unanticipated developments warrant a change in policy.
Accordingly, the Committee decided
that in the context of its long-run objectives for price stability and sustainable
economic growth, and giving careful
consideration to economic, financial,
and monetary developments, slightly
greater or slightly lesser reserve restraint
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.
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 economy has been growing
rather slowly in recent months. Nonfarm
payroll employment continued to expand
moderately in December, and the civilian
unemployment rate remained at 5.6 percent.
Industrial production increased only slightly
further in the fourth quarter. Growth of consumer spending was modest, on balance,
over the past several months. Housing starts
rebounded in November from a sizable October decline. Orders for nondefense capital
goods point to a moderation in the expansion
of spending on business equipment, and nonresidential construction has risen appreciably
further. The nominal deficit on U.S. trade in
goods and services narrowed in October
from its average rate in the third quarter.
There has been no clear change in underlying inflation trends.
Most market interest rates have declined
somewhat since the Committee meeting on
December 19. In foreign exchange markets,
the trade-weighted value of the dollar in



123

terms of the other G-10 currencies has risen
further over the intermeeting period.
Growth of M2 and M3 strengthened in
December and January. From the fourth
quarter of 1994 to the fourth quarter of
1995, M2 expanded in the upper half of its
range and M3 grew at the upper end of its
range. Growth in total domestic nonfinancial
debt has been moderate in recent months,
placing this aggregate near the midpoint of
its monitoring range for the year.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability 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 2 to 6 percent
respectively, measured from the fourth quarter of 1995 to the fourth quarter of 1996.
The monitoring range for growth of total
domestic nonfinancial debt was set at 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
decrease slightly the existing degree of pressure on reserve positions, taking account of
a possible reduction in the discount rate. In
the context of the Committee's long-run objectives for price stability and sustainable
economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater reserve
restraint or slightly lesser reserve restraint
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 short-run policy: Messrs.
Greenspan, McDonough, Boehne, Jordan,
Kelley, Lindsey, McTeer, Ms. Phillips,
Mr. Stern, and Ms. Yellen. Votes against
this action: None.

It was agreed that the next meeting of
the Committee would be held on Tuesday, March 26, 1996.
The meeting adjourned at 12:00 p.m.
Donald L. Kohn
Secretary

124 83rd Annual Report, 1996

Meeting Held on
March 26, 1996
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 26, 1996, at
8:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Boehne
Mr. Jordan
Mr. Kelley
Mr. Lindsey
Mr. McTeer
Ms. Phillips
Mr. Stern
Ms. Yellen
Messrs. Broaddus, Guynn, Moskow,
and Parry, Alternate Members
of the Federal Open Market
Committee
Messrs. Hoenig and Melzer, and
Ms. Minehan, Presidents of the
Federal Reserve Banks of
Kansas City, St. Louis, and
Boston respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. Lang, Mishkin, Promisel,
Rolnick, Rosenblum, Siegman,
Simpson, Sniderman, and
Stockton, Associate Economists
Mr. Fisher, Manager, System Open
Market Account
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
Mr. Reinhart, Assistant Director,
Division of Monetary Affairs,
Board of Governors



Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Mr. Stone, First Vice President, Federal
Reserve Bank of Philadelphia
Messrs. Davis, Dewald, Goodfriend,
and Hunter, Senior Vice
Presidents, Federal Reserve
Banks of Kansas City, St. Louis,
Richmond, and Chicago
respectively
Mr. Judd, Ms. Rosenbaum, and
Mr. Rosengren, Vice Presidents,
Federal Reserve Banks of
San Francisco, Atlanta, and
Boston respectively
Mr. Bentley, Assistant Vice President,
Federal Reserve Bank of
New York
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on January 30-31,
1996, were approved.
The Manager of the System Open
Market Account reported on developments in foreign exchange markets during the period January 31,1996, through
March 25, 1996. There were no open
market transactions in foreign currencies 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
January 31, 1996, through March 25,
1996. 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

Minutes of FOMC Meetings, March 125
directive that was approved by the Committee and issued to the Federal Reserve
Bank of New York.
Much of the information reviewed at
this meeting had been influenced to an
uncertain degree by unusually severe
winter weather, industrial strikes, and
U.S. government shutdowns. On balance, however, growth of economic
activity appeared to have picked up after
having slowed appreciably in late 1995.
Growth in consumer spending seemed
to have resumed at a moderate rate in
the wake of January's storms; business
spending on durable equipment was
recording further healthy gains; and
housing demand was showing some
signs of strengthening. With businesses
making considerable progress in getting
their inventories under control, industrial production and employment had
rebounded briskly. The recent data on
prices gave little indication of any
change in underlying inflation trends.
A surge in nonfarm payroll employment in February considerably more
than offset a large weather-related drop
in January. Very large job gains were
recorded in February in the construction, retail trade, and services industries; however, some of these increases
reflected the reversal of the depressing
effects of January's severe winter storms
and the efforts of some firms to make
up for associated production losses. A
small rise in manufacturing employment
in February only partially offset a further loss of factory jobs in January. The
civilian unemployment rate fell to
5.5 percent in February.
Industrial production rose sharply in
February, more than offsetting a sizable
decline in January. Part of the net
increase in output over the JanuaryFebruary period reflected an upturn in
aircraft production after the settlement
of a strike at a major aircraft manufacturer. In addition, output of office and



computing machines continued to rise at
a rapid pace, and the production of other
types of business equipment picked up.
Output of consumer goods changed little
on balance over the two-month period.
Manufacturing, production expanded
about in line with capacity over the first
two months of the year, leaving the
overall rate of utilization of manufacturing capacity little changed.
Nominal retail sales increased briskly
in February after having registered little
change in January. The February spurt
was paced by strong motor vehicle purchases, but spending at general merchandise stores and apparel outlets also
was up considerably after a weak performance in previous months. Sales at
durable goods stores were less robust,
rising only slightly in February. Recent
indicators of housing demand and activity were generally favorable. Starts of
both single-family and multifamily units
moved higher on balance over January
and February, and sales of new homes
increased appreciably in January (latest
data available). By contrast, sales of
existing homes declined in January for a
fourth consecutive month.
Business demand for durable equipment apparently remained fairly robust
in early 1996. Incoming orders for
computing equipment were particularly
strong in January, and shipments of such
equipment posted further healthy gains.
With airline profits high and new models of airplanes being introduced, orders
for aircraft had climbed rapidly over
recent months. Orders for other types
of equipment also had picked up on
balance over the last several months,
although shipments of such equipment
dropped in January after a sizable rise
in the fourth quarter. Nonresidential
construction activity appeared to be
growing more slowly: Non-office commercial construction continued its
upward trend but office, institutional,

126 83rd Annual Report, 1996
and industrial building activity had
slowed noticeably in recent months, and
contracts for those categories also had
softened.
Business inventories rebounded
sharply in January from a large drop in
December. Much of the January buildup
in stocks occurred in manufacturing,
where part of the backup may have been
associated with delays in shipments as a
result of winter storms. The inventorysales ratio for the sector edged up in
January but was little changed on balance in recent months. Inventories at the
wholesale level also rose considerably
in January; the inventory-sales ratio
increased slightly but was still well
below the high levels of last fall. Retail
stocks recorded a modest rise in January
after a sharp decline in December. The
January increase was in line with the
advance in sales, and the inventorysales ratio for the sector as a whole
was unchanged from December and
remained well below levels seen over
most of 1995.
The nominal deficit on U.S. trade in
goods and services in December (latest
data available) was little changed from
its November level. On a quarterlyaverage basis, however, the deficit in the
fourth quarter was substantially smaller
than it had been in the third quarter. The
value of exports of goods and services
rose appreciably in the fourth quarter,
with the largest increases occurring in
machinery exports and foreign tourist
services. The value of imports declined
slightly, largely as a result of decreases
in imports of automotive products, consumer goods, and oil. The data available
on economic conditions in the major
foreign industrial countries in early 1996
suggested that a moderate recovery was
under way in Japan, and there were
some signs of a pickup in activity in
much of Western Europe, although the
German economy remained weak.



Inflation trends had remained stable
in recent months. At the consumer level,
food prices continued to edge up in
February and energy prices again were
under appreciable upward pressure.
Excluding the often-volatile food and
energy items, consumer prices advanced
in February at a slightly slower rate than
in January; and for the twelve months
ended in February, consumer prices rose
a little less than in the comparable yearearlier period. At the producer level,
prices of finished goods other than food
and energy were unchanged on balance
over January and February; the rise in
this measure of prices over the twelve
months ended in February was somewhat larger than in the comparable yearearlier interval. Average hourly earnings
of production and nonsupervisory workers edged down in February after a considerable increase in January. However,
for the twelve-month period ended in
February, average hourly earnings rose
more than in the year-earlier period.
At its meeting on January 30-31,
1996, the Committee adopted a directive
that called for a slight reduction in the
degree of pressure on reserve positions,
taking account of a possible reduction of
l
A percentage point in the discount rate.
The directive approved by the Committee did not include a presumption about
the likely direction of any adjustments
to policy during the intermeeting period,
should unanticipated developments warrant a policy change. Accordingly, the
directive stated that in the context of
the Committee's long-run objectives for
price stability and sustainable economic
growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater
reserve restraint or slightly lesser
reserve restraint would be acceptable
during the intermeeting period. The
reserve conditions associated with this
directive were expected to be consistent

Minutes of FOMC Meetings, March 127
with moderate growth of M2 and M3
over coming months.
On January 31, the Board of Governors approved a reduction of lA percentage point in the discount rate, to a level
of 5 percent. The decrease was made
effective immediately and was passed
through to interest rates in reserve markets. Open market operations during
the intermeeting period were directed
toward maintaining this new policy
stance, and the federal funds rate averaged around 5lA percent, the level
expected to be associated with that
stance.
Because the easing move had been
largely anticipated in financial markets,
the initial response was a small decline
in short-term rates and little change in
long-term rates. Over the remainder of
the period, however, most interest rates
moved higher in response to incoming
economic data that were seen as suggesting improved prospects for economic growth and, accordingly, a
reduced likelihood of further easings
in monetary policy. In addition, the
absence of much progress in federal
budget negotiations was viewed by the
markets as indicating that the chances a
major multiyear deficit-reduction plan
would be adopted this year were becoming more remote. Despite the increase in
bond yields, major indexes of equity
prices recorded sizable gains.
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. The dollar fell appreciably during the initial portion of the period—
before evidence of a more robust
U.S. economy emerged—while data on
the German money supply and the Japanese economy were suggesting upward
revisions to expected interest rates
abroad. In late February, emerging signs
that the U.S. economy was generally



stronger than expected and that economic conditions abroad were comparatively weaker than they had seemed earlier fostered a rebound in the value of
the dollar.
Growth of the broader monetary
aggregates strengthened considerably in
February and early March following the
decline in short-term interest rates in
late 1995 and early 1996. The acceleration of M2 reflected a surge in demand
deposits as well as larger inflows to
retail money market mutual funds,
whose yields tend to adjust with a lag to
changes in short-term market interest
rates. Larger inflows to institution-only
money market funds contributed to
M3's stronger performance. Growth of
total domestic nonfinancial debt slowed
somewhat in December and January,
reflecting reduced federal government
borrowing, but remained moderate on
balance.
The staff forecast prepared for this
meeting suggested that the pace of economic expansion would pick up over
coming months after a sluggish fourth
quarter. Other than a better performance
over the first half of 1996 associated
with a somewhat faster increase in final
sales, this forecast differed little from
that prepared for the previous meeting
and indicated that the economy was
expected to expand generally along its
estimated potential. Consumer spending
was projected to grow slightly more than
disposable income; the favorable effect
of higher equity prices on household
wealth and the still-ample availability of
credit were expected to outweigh persisting consumer concerns about job
security and the effects of already high
household debt burdens. Homebuilding
activity was projected to decline a little
in response to the recent backup in residential mortgage rates but to remain at a
relatively high level. A less rapid pace
of business investment in equipment and

128 83rd Annual Report, 1996
structures was expected in light of the
decline over the past year in the rate of
utilization of production capacity and
the moderate growth projected for sales
and profits. The external sector was
expected to exert a small restraining
influence on economic activity over
the projection period. The persisting
impasse in the federal budget negotiations suggested little further fiscal contraction in coming quarters. Given the
outlook for economic activity, rates of
utilization of labor and capital were not
expected to change materially and inflation was projected to increase modestly.
In the Committee's discussion of
current and prospective economic developments, members commented on the
resiliency of the economy, which
appeared to have strengthened appreciably after a period of subpar growth. The
latter had been induced to a large extent
by inventory adjustments whose effects
were exacerbated temporarily by government shutdowns, unusually severe
winter weather, and industrial strikes.
The adjustment in inventory investment
seemed to be nearing its completion,
and some members observed that the
settlement of the recent strike in the
motor vehicle industry might well
impart added impetus to the expansion
over the nearer term. Considerable volatility could be expected in the short-rui
performance of the economy, but the
members continued to view trend
growth at a pace near the economy's
potential as the most probable outcome.
Many also commented that the risks to
such a forecast appeared to have shifted
from being predominantly on the downside earlier in the year to better balanced
currently. Still, substantial uncertainties
attended the economic outlook, and a
number of members observed that an
economic performance that differed
considerably in either direction from
their current forecasts might well mate


rialize over the projection period.
Regarding the outlook for inflation,
members' assessments tended to center
on expectations of little change in average consumer price inflation over the
projection horizon.
The review of regional economic
developments by the Federal Reserve
Bank presidents pointed to moderate
expansion in economic activity across
much of the nation, though growth was
described as modest in a few regions
and relatively robust in some others.
Business conditions appeared to have
improved in a number of areas since
early in the year, but as had been true
previously, activity in various sectors of
the economy remained uneven. Manufacturing of most durable goods other
than motor vehicles and some defense
industry products displayed considerable strength, while the production of
many nondurable goods tended to lag.
In agriculture, high feed costs and low
market prices were depressing the cattle
industry, while elevated grain prices
were boosting the incomes of farmers
not subject to the effects of locally
adverse weather conditions.
The economy had displayed considerable resilience in the face of adjustments
to production associated with efforts by
many business firms to reduce inventories and a number of additional, albeit
temporary, developments that had
tended to retard the expansion in the
latter part of 1995 and at the start of this
year. Apparently, relatively low longterm interest rates and the related substantial appreciation in the value of
stock and bond market holdings had
been important factors helping to sustain spending in this period. In the context of continued underlying momentum
in final demand and some decline in
excess stocks of unsold motor vehicles
stemming from the recently ended strike
at a major domestic producer, inven-

Minutes of FOMC Meetings, March 129
tories now seemed to be in better balance with sales and the economy to
be better positioned to accommodate
sustained expansion. Some members
observed, however, that the recent
increase in intermediate- and long-term
interest rates would tend to blunt
demand in interest-sensitive sectors of
the economy. Moreover, stock market
prices had risen to comparatively high
levels in relation to earnings and interest
rates and might be vulnerable to further
weakness in the debt markets or to any
tendency for business profit margins to
erode.
In the course of their comments about
developments in key sectors of the economy, members referred to recent indications, including anecdotal reports, of
appreciable strengthening in retail sales
that tended to support forecasts of sustained growth in consumer spending in
coming quarters. In addition, surveys of
consumer sentiment, which had been
more favorable recently, and sharply
increased household net worth were
seen as positive factors in the outlook
for consumer expenditures. On the negative side, some members observed that
the rise in consumer indebtedness and
the recent increase in interest rates
would tend to damp consumer spending.
Given these financial crosscurrents, it
was suggested that growth in consumer
spending might approximate that of
disposable income over the forecast
horizon.
The prospects for business capital
spending remained a supportive element
in the outlook for further economic
expansion, but growth in such spending
was expected to slow considerably from
its rapid pace over the past few years.
The ready availability and fairly low
cost of business finance in equity and
debt markets and the continuing commitment of business firms to modernizing their facilities to hold down costs in



highly competitive markets would tend
to support growth in business fixed
investment. Profits and cash flows were
expected to remain reasonably strong,
though there were tentative signs of
some softening in profit margins. On the
other hand, the longevity of the current
expansion had resulted in the addition of
a good deal of production capacity in
recent years. This development in conjunction with some decline in capacity
utilization over the past several quarters
pointed to less need for expansion in
plant and equipment. The rise in outlays
for computers and related products was
likely to remain fairly robust in light of
the continuing advances in technology
and the marked downtrend in computer
prices, but the growth of computer
expenditures was projected to be well
below the extraordinary pace of the past
few years. The slowdown would reflect
factors that were expected to damp the
growth of overall business investment
spending and a greater saturation of
potential computer markets that might
lead to more emphasis on replacement
demand rather than the further expansion of capacity.
Housing activity generally was
expected to be well maintained in coming quarters, though likely to moderate
to some extent from current levels in
lagged response to the rise that had
occurred in mortgage interest rates. The
response of housing expenditures to rate
increases was uncertain, and a few
members commented that the prospective slowing in housing construction
could be fairly pronounced. For the
nearer term, however, recent data were
indicative of considerable underlying
strength in housing markets, especially
in light of the adverse effects of notably
unfavorable weather conditions in many
parts of the country this winter. Those
data tended to be supported by anecdotal reports of significant improvement

130 83rd Annual Report, 1996
in housing markets in several regions
over the course of recent months. Contributing to that performance, however,
might be a temporary acceleration of
purchases by homebuyers who anticipated further increases in mortgage
interest rates. The latter were viewed,
nonetheless, as still low in comparison
with their average level over the past
several years.
The outlook for fiscal policy remained
uncertain, especially for future years.
It was suggested that the stalemate
between the Congress and the Administration on major spending and tax issues
might not be resolved in coming months
or indeed during the current session of
the Congress. However, already legislated appropriations and current continuing resolutions still pointed to considerable restraint in federal spending this
year. With regard to the external sector
of the economy, projections of appreciable growth in exports tended to be
supported by anecdotal comments of
strong export demand for goods produced in various parts of the country,
including some improvement in exports
to Mexico. At the same time, imports
might well expand somewhat more rapidly than exports if the domestic economy strengthened as projected this year
from its reduced rate of growth in 1995.
The members did not differ greatly in
their assessments of the most probable
course of inflation. Their expectations
ranged from essentially unchanged to
slightly higher inflation in comparison
with 1995. At the same time, members
expressed somewhat differing views
about possible deviations of inflation
from their expectations. Those who
emphasized the risks of higher-thanprojected inflation tended to cite the
potential for increasing wage and price
pressures in an economy that already
was operating at or close to its estimated
capacity. Increases in labor costs had



been unusually subdued in light of the
relatively low unemployment nationwide and widespread anecdotal reports
of labor shortages. In this view the rise
in labor costs could well accelerate at
some point, though not necessarily in
the near term, with some feedthrough to
prices. Other developments that generated some concern about the outlook for
inflation included the rise in the costs of
medical benefits in the fourth quarter,
price pressures in the energy and food
sectors of the economy, and the possibility that the recent rise in intermediateand long-term interest rates might to
some extent reflect worsening inflationary expectations. Other members saw
only a limited risk of higher inflation,
and a few indicated that they did not
rule out some reduction in consumer
price inflation from that experienced in
1995. In this view there was sufficient
capacity in the economy to allow room
for moderate growth of economic activity in line with their forecasts without
fostering added inflation. Moreover,
there was only scattered evidence of
accelerating increases in worker compensation associated with labor shortages and little indication that possibly
diminishing worries about job security
would induce rising labor militancy.
Some members also stressed the persistence of strong competition in numerous markets that tended to preclude or
restrain raising prices.
In the Committee's discussion of policy for the intermeeting period ahead, all
the members endorsed a proposal to
maintain an unchanged degree of pressure in reserve markets. This policy
preference was based on expectations of
growth in business activity at a pace
averaging in the vicinity of the economy's potential, a perception among the
members that the risks to such an outlook were more balanced than earlier,
and anticipations that under these cir-

Minutes of FOMC Meetings, March 131
cumstances inflation would remain constrained. The economy seemed to have
adequate forward momentum and did
not appear to require any further stimulus, whose implementation might contribute to inflationary pressures in the
economy. Several members observed
that robust growth in broad money for
some months suggested that monetary
policy had been supportive of sustained
economic expansion. At the same time,
information on the economy and prices
did not seem to indicate developing
inflation pressures that needed to be contained by tightening policy at this juncture. Indeed, some members commented
that, judged from one perspective, financial conditions had tightened somewhat
as a consequence of the recent rise
in intermediate- and long-term interest
rates, though it was difficult to disentangle the real and the inflation components of the rate increases. Nonetheless,
a number of members noted that inflation was not expected to moderate further over the projection horizon and that
it could move higher and the Committee
would need to be particularly vigilant in
guarding against such an outcome.
Against this background, the members
favored an unbiased instruction in the
directive that did not prejudice possible
intermeeting adjustments to policy in
either direction.
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 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:
Many of the data for recent months
reviewed at this meeting were influenced to
an uncertain degree by unusually severe winter weather, industrial strikes, and U.S. government shutdowns. On balance, the expansion in economic activity appears to have
picked up after slowing appreciably in late
1995. Nonfarm payroll employment surged
in February, considerably more than offsetting a large drop in January, and the civilian
unemployment rate fell to 5.5 percent.
Manufacturing production increased sharply
in February after a sizable decline in January. Growth of consumer spending, which
had been sluggish earlier in the winter,
spurted in February, paced by strong motor
vehicle purchases. Housing starts rose in
January and February. Orders and contracts
point to continuing expansion of spending
on business equipment and nonresidential
structures. The nominal deficit on U.S. trade
in goods and services narrowed substantially
in the fourth quarter from its average rate in
the third quarter. There has been no clear
change in underlying inflation trends.
Changes in short-term market interest
rates have been mixed while long-term rates
have risen appreciably since the Committee
meeting on January 30-31. 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.
Growth of M2 and M3 has strengthened
considerably in recent months, while expansion in total domestic nonfinancial debt has
remained moderate on balance.
The Federal Open Market Committee
seeks monetary and financial conditions that

132 83rd Annual Report, 1996
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee at its meeting in January established ranges for growth
of M2 and M3 of 1 to 5 percent and 2 to
6 percent respectively, measured from the
fourth quarter of 1995 to the fourth quarter
of 1996. The monitoring range for growth of
total domestic nonfinancial debt was set at
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,
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, Boehne, Jordan, Kelley,
Lindsey, McTeer, Ms. Phillips, Mr. Stern,
and Ms. Yellen. Votes against this action:
None.

It was agreed that the next meeting of
the Committee would be held on Tuesday, May 21, 1996.
The meeting adjourned at 10:35 a.m.
Donald L. Kohn
Secretary

Meeting Held on
May 21, 1996
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 21, 1996, at 9:00 a.m.



Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Boehne
Mr. Jordan
Mr. Kelley
Mr. Lindsey
Mr. McTeer
Ms. Phillips
Mr. Stern
Ms. Yellen
Messrs. Broaddus, Guynn, Moskow,
and Parry, Alternate Members
of the Federal Open Market
Committee
Messrs. Hoenig and Melzer, and
Ms. Minehan, Presidents of
the Federal Reserve Banks of
Kansas City, St. Louis, and Boston
respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. Lang, Lindsey, Mishkin,
Promisel, Rolnick, Rosenblum,
Siegman, Simpson, and Stockton,
Associate Economists
Mr. Fisher, Manager, System Open
Market Account
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
Mr. Slifman, Associate Director,
Division of Research and
Statistics, Board of Governors
Mr. Madigan, Associate Director,
Division of Monetary Affairs
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Mr. Rives, First Vice President, Federal
Reserve Bank of St. Louis

Minutes of FOMC Meetings, May
Mr. Beebe, Ms. Browne, Messrs. Davis,
Dewald, Eisenbeis, Goodfriend,
and Hunter, Senior Vice
Presidents, Federal Reserve Banks
of San Francisco, Boston,
Kansas City, St. Louis, Atlanta,
Richmond, and Chicago
respectively
Mr. Altig, Mses. Chen and Rosenbaum,
Vice Presidents, Federal Reserve
Banks of Cleveland, New York,
and Atlanta respectively
By unanimous vote, the minutes of
the meeting of the Federal Open Market Committee held on March 26, 1996,
were approved.
The Manager of the System Open
Market Account reported on developments in foreign exchange markets
during the period March 26 through
May 20, 1996. There were no open market transactions in foreign currencies
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
March 26 through May 20, 1996. By
unanimous vote, the Committee ratified
these transactions.
The Committee then turned to a discussion of the economic and financial
outlook and the implementation of
monetary policy over the intermeeting
period ahead. A summary of the economic and financial information available at the time of the meeting and of
the Committee's discussion is provided
below, followed by the domestic policy
directive that was approved by the Committee and issued to the Federal Reserve
Bank of New York.
The information reviewed at this
meeting suggested that economic activity had expanded moderately on balance
in recent months. Final demand, which



133

had been quite robust early in the year,
was showing some signs of slowing
in recent data. Consumer spending
appeared to be growing at a moderate
pace; business expenditures on durable
equipment had registered further large
gains, though new orders had flattened
out; and housing demand seemed to be
holding up well despite the increase in
mortgage interest rates this year. Business inventories, most notably in the
automotive industry, had been brought
into better alignment with sales, and
industrial production and employment
had risen appreciably. Upward pressures
on food and energy prices accounted for
somewhat larger increases in consumer
prices.
Nonfarm payroll employment was
essentially unchanged in April after rising substantially in the first quarter;
part of the slowdown resulted from an
unwinding of special factors that had
boosted job growth in the first quarter.
Payrolls continued to expand in April
in retail trade; finance, insurance, and
real estate; and the services industries.
In contrast, employment in construction
fell sharply, reversing much of the large
first-quarter gain. In manufacturing,
employment declined further in April
despite the settlement of a major strike
in the automotive sector and the return
of affected workers to their jobs. The
civilian unemployment rate fell to
5.4 percent.
Industrial production rebounded in
April from an appreciable decline in
March. The changes in industrial output over the two-month period largely
reflected fluctuations in motor vehicle
assemblies associated with a strike and
its subsequent settlement. Manufacturing of products other than motor vehicles rose moderately in April on the
strength of further large advances in the
output of office and computing equipment and of construction supplies. Utili-

134 83rd Annual Report, 1996
zation of total industrial capacity, which
had varied in recent months in concert
with movements in production, climbed
in April to a rate slightly above that of
the fourth quarter of 1995.
Retail sales declined somewhat in
April after posting a strong gain in the
first quarter. Sales of durable goods,
which had increased substantially in the
first quarter, retraced part of that
advance in April; the drop more than
offset a further rise in sales of nondurable goods. Housing activity was well
sustained in April, with the run-up in
mortgage rates that began in February
having had little perceptible effect to
date. Single-family housing starts were
up considerably in April, and sales of
new and existing homes remained brisk
in March (latest data available).
Business fixed investment accelerated
sharply in the first quarter of 1996 following three quarters of relatively moderate expansion; however, recent data
on orders and contracts pointed, on balance, to some deceleration in business
spending on both durable equipment and
nonresidential structures. Much of the
first-quarter pickup reflected stronger
spending for durable equipment; purchases of computing equipment remained robust and spending on other
durable equipment increased. Nonresidential construction activity also
advanced further in the first quarter;
however, construction of office buildings continued to lag, and construction
of other commercial buildings slowed
after recording strong gains for several
years.
Business inventories declined in
March after rising appreciably on average over January and February; inventory accumulation over the quarter as
a whole was of modest proportions, as
firms sought to bring stocks into better
balance with sales. In manufacturing,
inventories changed little in March and



the ratio of stocks to sales was not far
above historical lows. In the wholesale
sector, inventories declined a little further in March, reflecting a reduction
in stocks of motor vehicles, and the
inventory-sales ratio remained near the
middle of its range in recent years.
Retail inventories also declined in
March, with cuts in stocks of motor
vehicles more than accounting for the
drop. The inventory-sales ratio for the
retail sector was near the low end of its
range in recent years.
The nominal deficit on U.S. trade in
goods and services in the first quarter
was substantially larger than in the
fourth quarter of last year. The value of
imports increased sharply in the first
quarter after declining in the two previous quarters. Moreover, growth in the
value of exports slowed considerably in
the first quarter from the pace of other
recent quarters. Available data indicated
that the performance of the economies
of the major foreign industrial countries
was mixed in the first quarter. The
recovery in Japan was still under way
while economic activity in continental
Europe remained generally weak, with
the German economy apparently having
contracted further and the French economy exhibiting signs of only a modest
upturn after a fourth-quarter decline.
Moderate further expansion in economic
activity evidently was occurring in Canada and the United Kingdom.
Rising crude oil and, to a lesser
extent, food prices led to somewhat
larger increases in consumer and producer price indexes in March and April.
For nonfood, non-energy items, however, consumer prices rose only slightly
in April after three months of somewhat
faster advances; over the twelve months
ended in April, this measure of consumer inflation increased a little less
than the rise over the comparable yearearlier period. At the producer level,

Minutes of FOMC Meetings, May
prices of finished goods other than food
and energy items recorded a third
straight small increase in April. Over the
twelve months ended in April, this measure of producer prices rose slightly less
than over the comparable year-earlier
period. Hourly compensation of private
industry workers expanded in the first
quarter at the average rate for all of
1995; the growth was associated with a
decline in benefit costs and a sharp rise
in wages and salaries.
At its meeting on March 26, 1996, 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, and the federal funds rate averaged near 5lA percent, the level expected to be associated
with that unchanged policy stance.
Other short-term market interest rates
changed little over the period, and
because the Committee's decision had
been largely anticipated in financial
markets, longer-term rates also were
little changed initially. Over the remainder of the period, however, intermediateand long-term rates came under upward
pressure when incoming economic data



135

were seen by market participants as
pointing to stronger growth in output
and employment and therefore to a
somewhat tighter monetary policy
stance than previously had been
expected. Despite the increase in bond
yields, most indexes of stock prices rose
on balance over the intermeeting period,
apparently reflecting generally favorable
first-quarter earnings reports and the
improved economic outlook.
In foreign exchange markets, the rise
of U.S. interest rates contributed to a
considerable appreciation of the tradeweighted value of the dollar in terms of
the other G-10 currencies. The dollar was
particularly strong against the German
mark, reflecting incoming data that suggested continued weakness in economic
activity in Germany and, accordingly,
a greater likelihood of further monetary policy easing by the Bundesbank.
The dollar rose less against the yen,
partly owing to information indicating a
strengthening of the economic recovery
in Japan and heightened market expectations of a near-term tightening of monetary policy by the Bank of Japan.
Growth of M2 and M3 slowed substantially in April after having recorded
sizable increases earlier in the year.
Weakness in demand deposits after
unusually rapid first-quarter expansion
and sluggishness in currency demand
were factors in the slowdown. In addition, the rise in market interest rates
in recent months, which had increased
the opportunity costs of holding retail
deposits, likely had a restraining effect
on these deposits. For the year through
April, both aggregates grew at rates
somewhat above the upper bounds of
their respective ranges for the year.
Expansion in total domestic nonfinancial debt remained moderate on balance
over recent months, and this aggregate
stayed near the middle of its monitoring
range for the year.

136 83rd Annual Report, 1996
The staff forecast prepared for this
meeting suggested that the economy
would remain generally around its estimated potential. Consumer spending
was expected to grow in line with disposable income; the favorable effect
of higher equity prices on household
wealth and the still-ample availability of
credit were expected to outweigh persisting consumer concerns about job
security and the influence of alreadyhigh household debt burdens. Homebuilding was projected to decline a little
in response to the recent backup in residential mortgage rates but to remain at a
relatively high level because of generally supportive employment and income
conditions and the still- favorable cash
flow affordability of homeownership.
Business spending on equipment and
structures was expected to grow less
rapidly in light of the projected moderate growth of sales and profits and the
lower rate of utilization of production
capacity now prevailing. The external
sector was projected to exert a small
restraining influence on economic activity over the projection period, even
though an anticipated firming of economic activity abroad would bolster
demand for U.S. exports. Little additional fiscal contraction was anticipated
over the projection period. Inflation
recently had been lifted by adverse
developments in the energy market and
was projected to remain above the levels
of recent years, given the high level of
resource utilization and the effects of
tight grain supplies on food prices. Further risks of inflationary pressure were
associated with a possible elevation of
the federal minimum wage.
In their discussion of current and prospective economic conditions, members
commented that the economy had been
stronger this year than they had anticipated and appeared to be growing at a
quite robust pace. However, they gener


ally expected the expansion to slow,
keeping the economy close to its potential. Views differed to some extent with
regard to the risks surrounding such an
outlook. Some saw those risks as fairly
evenly balanced, given prospective
restraint from the rise in bond yields and
the foreign exchange value of the dollar
since early this year. Others expressed
concern that economic growth might
continue at a pace that could increase
pressures on resources, with adverse
implications for inflation in an economy
already operating in the neighborhood
of its estimated long-term potential.
Moreover, faster increases in energy and
food prices could contribute to higher
overall inflation, both directly and by
boosting inflationary expectations, and
the proposed increase in the minimum
wage would add to cost pressures if it
were enacted into law. Nonetheless,
while the chances of a pickup in inflation later had risen to some extent, a
number of members emphasized that
no firm evidence had surfaced thus far
to signal that labor compensation was
increasing at a faster rate or that core
inflation was worsening, and even the
early signs of increased pressures on
costs and prices were mixed. The past
few years had witnessed significantly
lower cost pressures and more subdued
inflation than typically would have been
experienced in earlier years with similar
rates of resource utilization, but whether
this favorable outcome would persist
was an open question.
Members observed that the strongerthan-expected performance of the economy thus far this year reflected relatively rapid growth in final demand.
Favorable financial conditions, notably
the relatively low interest rates of the
latter part of 1995 and early 1996 and
increases in wealth stemming from sizable advances in stock market prices,
evidently were undergirding the expan-

Minutes of FOMC Meetings, May
sion. Indications of improving or continuing high levels of economic activity
were widespread across the nation
according to recent anecdotal reports
and regional data, though agricultural
conditions in many areas were cited as a
significant exception. While the economy appeared to have solid and balanced momentum that pointed to sustained growth, a number of factors were
seen as likely to foster more moderate
expansion beginning in the second half
of the year. These included the effects
of higher intermediate- and long-term
interest rates on interest-sensitive sectors of the economy such as housing,
consumer durables, and business fixed
investment. The appreciation of the
dollar over the past year and near-term
moderation in federal government
spending also were expected to exert
some restraint on economic activity over
the forecast horizon. Some members
also questioned the sustainability of the
performance of the stock market; a correction in this market would help to
restrain aggregate demand. Nonetheless,
the continued strength in economic
activity raised questions about whether
these developments would damp demand sufficiently to keep resource utilization at sustainable levels.
In their review of recent developments and the outlook for key sectors of
the economy, members noted that consumer spending had strengthened considerably this year after a period of sluggish growth in late 1995. The recent
data on consumer spending were reinforced by anecdotal reports from various parts of the country. The wealth
effects from the further gains that had
occurred in stock market prices, along
with sustained increases in employment
and a ready availability of consumer
financing, were seen as playing a
positive role in boosting consumer
expenditures. Barring changes in these



137

underlying factors, continued growth
in consumer spending seemed likely,
although members referred to developments that could begin to slow such
growth over the months ahead. The latter included the satisfaction of much of
the earlier pent-up demand for consumer
durables and fairly elevated levels of
consumer debt. On balance, moderate
expansion in consumer expenditures,
perhaps in line with the growth in
incomes, seemed likely over the projection period.
Business fixed investment was
believed likely to remain a source of
considerable strength in the expansion,
though growth in this sector of the economy also was expected to moderate
from the elevated pace thus far this year.
The desire of many business firms and
other users of capital equipment to take
advantage of new, more effective, and
less expensive computer and other technologies and more generally to add further to capital in an effort to reduce costs
in highly competitive markets would
continue to underpin investment spending. In addition, equity and other financing remained available on relatively
attractive terms. On the other hand, the
rise in business investment in recent
years had brought capital stocks into
more acceptable alignment with expected sales, damping the need for further sizable additions.
Business firms appeared to have completed, or nearly completed, their efforts
to bring inventories into better balance
with sales, including the rebuilding of
motor vehicle stocks after the strike at
a major manufacturer was settled in
March. On the basis of recent experience, subdued growth in inventories
could be anticipated in the context of the
projected expansion of overall economic
activity at a pace near the economy's
long-run potential. It was suggested,
however, that such an expectation

138 83rd Annual Report, 1996
implied relatively restrained inventory
investment in comparison with past
cyclical patterns. Accordingly, much
stronger growth in such investment
could occur, with concomitant effects on
incomes and the growth of overall
spending.
With regard to the outlook for housing, the rise in mortgage rates in the past
few months could be expected to retard
residential construction activity to some
extent. Thus far, however, increased
interest costs did not appear to have had
any perceptible effects on housing sales
or construction. Indeed, the housing sector was continuing to display a good
deal of strength in many parts of the
country. Some members observed that
the appreciable momentum in housing
activity reflected strength in the underlying fundamentals, including continued
affordability, that seemed likely to sustain a high level of housing construction
for a considerable period of time despite
somewhat higher mortgage rates.
In the area of fiscal policy, legislative
agreement had not yet been reached on
how to implement the objective of a
balanced federal budget over time, but
decisions covering the nearer term
implied continued budget restraint. On
the foreign trade side of the economy,
an anticipated firming of economic conditions abroad would provide impetus to
real net exports. At the same time, however, imports were expected to rise
appreciably in response to the expansion
of domestic economic activity and the
appreciation of the dollar, and on balance the external sector probably would
not be boosting real GDP.
The outlook for inflation was of key
importance to the formulation of monetary policy at this time, but it was
clouded by substantial uncertainty. One
source of uncertainty was the behavior
of food and energy prices. Increases in
these prices largely accounted for the



more rapid rise in consumer prices thus
far this year, and they likely would continue to add to inflation in the months
ahead. Retail energy prices had risen
appreciably, but at least some of that
increase was expected to be reversed
over the near term. Retail food prices
did not yet display any significant effects
from the sizable rise in grain prices in
recent months, and while some effects
on retail prices were likely, their extent
and duration were difficult to gauge at
this point. Moreover, it was difficult to
anticipate how much the higher food
and energy prices might affect inflation
expectations and wage demands and
thereby potentially become embedded
more generally in the price structure.
Also of concern to the members were
the possible effects on inflation of continued pressures on resources, especially
if the current pace of the expansion
should fail to moderate as much as projected. In recent years, the relationship
between resource use and inflation had
not followed earlier patterns. In particular, increases in labor compensation had
been comparatively subdued over an
extended period of what seemed to be
relatively full employment highlighted
by anecdotal reports of scarcities of various types of labor in numerous parts
of the country. In part, worker willingness to accept comparatively limited
increases in compensation could be
attributed to the apparent rise in insecurity about the permanence of jobs or the
availability of alternative jobs, but the
reasons were not fully understood. From
the standpoint of the inflation outlook, it
therefore was uncertain how long the
period of relatively restrained increases
in labor compensation would last.
Against this background, a number of
members indicated that they perceived
an appreciable risk of rising labor costs
and related inflation, even though there
was little evidence to date of such devel-

Minutes of FOMC Meetings, May
opments; others noted that they could
not rule out the possibility that the favorable experience would be extended.
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 in reserve markets. The members
agreed that the balance of risks on inflation had shifted substantially since early
in the year. At that time, the economy
had seemed sluggish and inflation was
seen as possibly easing, but more recent
developments indicated that the economy was stronger and rising inflation
down the road could not be ruled out.
Nonetheless, while policy might need to
be firmed at some point to head off
emerging inflation pressures, financial
conditions were not so obviously stimulative as to counsel a need for any
immediate tightening of policy. The real
federal funds rate probably was not
greatly out of line with its appropriate
level, and the rise in longer-term interest
rates and the exchange rate meant that
financial conditions were now exerting
more restraint than earlier this year.
More information might provide a better sense of how the higher interest
rates were affecting aggregate demand
and perhaps also help—to a small
degree—to shed light on the considerable uncertainties surrounding the relationship of output to inflation. In any
event, actual inflation data—apart from
food and energy prices—and many of
the usual early warning signs of mounting price pressures did not yet indicate a
pickup in the underlying trend of prices.
Accordingly, the members viewed policy as appropriately positioned under
current circumstances, though ongoing
developments would need to be reassessed at the upcoming meeting in early
July. Some members noted that the
Committee would need to anticipate,
and act to preclude, a rise in the core



139

rate of inflation that, if it were to materialize, would be difficult and costly to
reverse. In this regard, the view was
expressed that a firming in policy sooner
rather than later was likely to end up
promoting stability in output and prices.
In the Committee's discussion of possible intermeeting adjustments to policy,
all the members indicated at least some
preference for retaining a symmetric
directive. Members commented that the
probability of developments during this
period that would warrant a change in
policy before the next meeting was quite
low. Moreover, symmetry did not rule
out an intermeeting adjustment, and the
Chairman could call for a Committee
consultation should the incoming information raise questions about the stance
of monetary policy. Some members felt
that it was especially appropriate that a
policy action that represented a reversal
of the previous move be made with a
full discussion at a regular meeting.
Some members also commented that an
asymmetric directive toward restraint
would imply a predisposition on the part
of the Committee to tighten policy at
some point, possibly at the next meeting. While they would be prepared to
take such a step if the evidence warranted, their preference was to come
into the July meeting without such a
presumption.
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

140 83rd Annual Report, 1996
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.
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, on balance, economic activity
has grown moderately in recent months.
Nonfarm payroll employment changed little in April after rising substantially in the
first quarter; the civilian unemployment rate
fell to 5.4 percent. Industrial production
increased sharply in April, largely reflecting
a rebound in motor vehicle assemblies after
a strike in March. Retail sales declined somewhat in April after posting a strong gain in
the first quarter. Single-family housing starts
rose considerably in April. Orders and contracts point to some deceleration in spending
on business equipment and nonresidential
structures after a very rapid expansion in the
first quarter. The nominal deficit on U.S.
trade in goods and services widened significantly in the first quarter from its rate in the
fourth quarter of last year. Upward pressures
on food and energy prices have led to somewhat larger increases in the consumer price
index over recent months.
Short-term market interest rates have
changed little while long-term rates have
risen somewhat further since the Committee
meeting on March 26. In foreign exchange
markets, the trade-weighted value of the dollar in terms of the other G-10 currencies has
appreciated considerably over the intermeeting period.
Growth of M2 and M3 slowed substantially in April after recording sizable
increases earlier in the year. For the year
through April, both aggregates grew at rates
somewhat above the upper bounds of their
respective ranges for the year. Expansion in
total domestic nonfinancial debt remained
moderate on balance over 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 January established ranges for growth
of M2 and M3 of 1 to 5 percent and 2 to
6 percent respectively, measured from the
fourth quarter of 1995 to the fourth quarter
of 1996. The monitoring range for growth of
total domestic nonfinancial debt was set at
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,
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, Boehne, Jordan, Kelley,
Lindsey, McTeer, Ms. Phillips, Mr. Stern,
and Ms. Yellen. Votes against this action:
None.

It was agreed that the next meeting
of the Committee would be held on
Tuesday-Wednesday, July 2-3, 1996.
The meeting adjourned at 1:15 p.m.
Donald L. Kohn
Secretary

Meeting Held on
July 2-3, 1996
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.,

Minutes of FOMC Meetings, July
on Tuesday, July 2, 1996, at 1:00 p.m.
and continued on Wednesday, July 3,
1996, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Boehne
Mr. Jordan
Mr. Kelley
Mr. Lindsey
Mr. McTeer
Mr. Meyer
Ms. Phillips
Ms. Rivlin
Mr. Stern
Ms. Yellen
Messrs. Broaddus, Guynn, Moskow,
and Parry, Alternate Members of
the Federal Open Market
Committee
Messrs. Hoenig and Melzer, and
Ms. Minehan, Presidents of the
Federal Reserve Banks of
Kansas City, St. Louis, and Boston
respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. D. Lindsey, Mishkin, Promisel,
Rolnick, Rosenblum, Siegman,
Simpson, Sniderman, and
Stockton, Associate Economists
Mr. Fisher, Manager, System Open
Market Account
Mr. Winn,3 Assistant to the Board,
Office of Board Members,
Board of Governors
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
3. Attended portion of meeting concerning
issues relating to the long-run price objective for
monetary policy.



141

Messrs. Madigan and Slifman,
Associate Directors, Divisions of
Monetary Affairs and Research
and Statistics respectively, Board
of Governors
Mr. Brayton,4 Ms. Johnson,4
Messrs. Reinhart and Smith,5
Assistant Directors, Divisions
of Research and Statistics,
International Finance, Monetary
Affairs, and International Finance
respectively, Board of Governors
Ms. Kusko4 and Mr. Wilcox,4 Senior
Economists, Divisions of Research
and Statistics and Monetary
Affairs respectively, Board of
Governors
Ms. Garrett, Economist, Division of
Monetary Affairs, Board of
Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Ms. Holcomb, First Vice President,
Federal Reserve Bank of Dallas
Mr. Beebe, Ms. Browne, Messrs. Davis,
Dewald, Eisenbeis, Goodfriend,
and Hunter, Senior Vice
Presidents, Federal Reserve Banks
of San Francisco, Boston,
Kansas City, St. Louis, Atlanta,
Richmond, and Chicago
respectively
Messrs. Kos and Meyer, Vice
Presidents, Federal Reserve Banks
of New York and Philadelphia
respectively
By unanimous vote, the minutes of

the meeting of the Federal Open Market
Committee held on May 21, 1996, were
approved.
The Manager of the System Open
Market Account reported on recent
developments in foreign exchange markets. There were no open market trans4. Attended portion of the meeting relating to
the Committee's discussion of the economic outlook and its longer-run growth ranges for the
monetary and debt aggregates.
5. Attended portion of the meeting relating
to the Committee's review of its swap line
agreements.

142 83rd Annual Report, 1996
actions in foreign currencies for System
account during the period since the
meeting on May 21, 1996, and thus no
vote was required of the Committee.
The Manager also reported on recent
developments in domestic financial markets and on System open market transactions in U.S. government securities
and federal agency obligations during
the period May 21, 1996, through
July 2, 1996. By unanimous vote, the
Committee ratified these transactions.
The Committee then turned to a discussion of the economic and financial
outlook, the ranges for the growth of
money and debt in 1996 and 1997, 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 advanced considerably further in
the second quarter, although growth in
aggregate final demand showed some
signs of slowing. Consumer spending
continued to post sizable gains, but
business investment in equipment and
structures apparently was rising less
vigorously, and higher mortgage rates
evidently were starting to exert some
restraint on housing construction activity. Business inventories had been
brought into better balance with sales,
and production and employment had
risen appreciably. Upward pressures on
food and energy prices had led to somewhat larger increases in the consumer
price index over recent months.
Nonfarm payroll employment continued to expand briskly over April and
May. Job gains were concentrated in
the service-producing and construction



industries, while employment in manufacturing was stable on balance over the
April-May period after having declined
somewhat in 1995 and the first quarter
of 1996. The civilian unemployment
rate rose in May to 5.6 percent, which
was the average rate for the year to date.
Industrial production increased appreciably further in May. In contrast to
April's advance, much of which had
resulted from the resumption of operations at a major motor vehicle manufacturer after the settlement of a strike, the
May rise largely reflected gains in a
wide range of non-auto-related manufacturing industries as well as a weatherrelated jump in electricity generation.
The surge in overall output lifted total
utilization of industrial capacity somewhat above the average rate recorded
during the previous two quarters.
Total nominal retail sales surged in
May after having changed little in April;
the increase in sales, coupled with available information on prices, suggested
that real consumer spending on goods
had risen substantially on balance since
the first quarter. Recent data (available
through April) indicated that spending
on services had increased moderately on
balance in recent months. Single-family
housing starts fell considerably in May
from the relatively high April level. The
decline suggested that the rise in mortgage rates in recent months had begun
to damp construction activity, but indicators of housing demand, such as sales
of new and existing homes, remained
relatively robust.
Growth in business expenditures on
durable equipment and nonresidential
structures appeared to be slowing following a surge in outlays in the first
quarter. In May, shipments of nondefense capital goods rebounded from the
substantial decline in April; however,
excluding movements in the volatile aircraft category, shipments were down on

Minutes of FOMC Meetings, July
balance over the two months. Among
the major components, shipments of
both computing and communications
equipment fell sharply in April and
retraced only part of that decline in May.
Recent data on new orders pointed to
more modest increases in spending on
business equipment over the months
ahead. Nonresidential building activity
increased considerably further in April
(latest data available), but incoming
information on contracts suggested that
growth in nonresidential construction
would weaken somewhat in coming
months.
Businesses had made considerable
progress in recent months in bringing
their inventories into better alignment
with sales. In manufacturing, stocks rose
moderately in April after a decline in
March. The stock-to-shipments ratio
dropped further in April and was at a
low level. At the wholesale trade level,
inventory accumulation was appreciable
in April after several months of modest
growth. The inventory-to-sales ratio for
this sector edged up in April but
remained well below the elevated levels
of last fall. Retail inventories increased
slightly in April after a large decline
in March associated with a substantial
liquidation of motor vehicle stocks. The
aggregate ratio of inventories to sales
for retail establishments was around the
lower end of its range in recent years.
The nominal deficit on U.S. trade in
goods and services widened in April
from its rate in the first quarter, reflecting a slightly larger increase in the value
of imports than in that of exports. The
expansion in imports was concentrated
in oil as U.S. refiners sought to meet
growing domestic demand and rebuild
their inventories. The rise in exports was
broadly based, although exports of computers, semiconductors, and automotive
products edged off. Economic activity
in the major foreign industrial countries



143

appeared to have expanded moderately
on balance since the beginning of the
year. In the first quarter, economic performance ranged from unexpectedly
robust in Japan to further weakness in
Germany; the limited data available for
the second quarter suggested a slowdown in Japan, a bounceback in Germany, and moderate growth in other
major trading partners.
Although upward pressures on energy
prices continued to boost overall consumer prices in April and May, price
increases for nonfood, non-energy items
remained small. Over the twelve months
ended in May, the increase in core consumer prices was appreciably smaller
than in the previous twelve-month
period; much of the deceleration
reflected swings in automobile finance
charges. At the producer level, higher
prices for finished energy goods over
April and May were partially offset by
slightly lower prices for finished foods;
prices for nonfood, non-energy finished
goods were little changed over the twomonth period and rose less over the
twelve months ended in May than in the
comparable year-earlier period. Data on
average hourly earnings of production
and nonsupervisory workers indicated
that this measure of labor costs had
increased by a somewhat larger amount
in the year ended in May than in the
comparable year-earlier period.
At its meeting on May 21, 1996, 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

144 83rd Annual Report, 1996
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 near 5VA percent,
the level expected to be associated with
the unchanged policy stance. Because
the Committee's decision had been
largely anticipated in financial markets,
other market interest rates also were
little changed during the early part of
the period. However, market rates
increased appreciably following the
release of a strong employment report in
early June, though most of that rise was
later retraced as expectations of nearterm tightening of monetary policy
diminished. On balance, most market
rates were up a little over the intermeeting period. Major indexes of stock
prices were down on balance over the
period.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
depreciated slightly over the intermeeting period. The dollar declined against
the German mark and other European
currencies as growing indications of a
recent pickup in economic activity in
Germany damped market expectations
of any further easing of monetary policy
by the Bundesbank. By contrast, the
dollar rose against the yen in apparent
response to a series of statements by
Japanese officials suggesting that there
would be no near-term firming of Japanese monetary policy.
The broad monetary aggregates were
weak in May: M2 declined, and M3
expanded relatively sluggishly. The



weakness in M2 and M3 was associated
in part with the adverse effects of the
earlier rise in market interest rates on
the opportunity costs of holding deposits. Deposit balances also may have been
drawn down to meet unusually large
individual tax liabilities on the April 15
tax date. Partial data for June pointed to
a rebound in both aggregates. For the
year through June, these aggregates
were estimated to have grown at rates
around the upper bounds of their respective annual ranges. Expansion of total
domestic nonfinancial debt had slowed
somewhat in recent months, but the debt
aggregate had remained in the middle
portion of its annual range.
The staff forecast prepared for this
meeting suggested that, after a sizable
advance in economic activity in the second quarter, growth would moderate and
the economy would expand around or
perhaps a little above its estimated
potential. Consumer spending was projected to expand at a more moderate
pace, in line with disposable income; the
favorable effect of higher equity prices
on household wealth and the still-ample
availability of credit were expected to
balance persisting consumer concerns
about job and retirement security and
the restraining effect of high household
debt burdens. Homebuilding was forecast to slow somewhat in response to the
back-up in residential mortgage rates but
was expected to remain at a relatively
high level in the context of sustained
income growth and the still-favorable
cash flow affordability of home ownership. Business spending on equipment
and structures was projected to grow
less rapidly in light of the anticipated
moderate growth of sales and profits and
the reduced rate of utilization of production capacity now prevailing. The external sector was expected to exert a small
restraining influence on economic activity over the projection period, even

Minutes of FOMC Meetings, July 145
though an anticipated firming of economic activity abroad would bolster
demand for U.S. exports. Little further
fiscal contraction was forecast over the
projection period. Inflation recently had
been lifted by adverse developments in
energy markets and was projected to
remain above the levels of recent years,
given the still-high level of resource utilization and the effects of tight grain
supplies on food prices.
In the Committee's discussion of current and prospective economic developments, members commented on the
stronger-than-expected expansion in
overall economic activity in recent
months, but for a variety of reasons they
anticipated that growth would slow
appreciably over the second half of the
year to a pace more in line with the
growth in the economy's potential. Key
factors bearing on this outlook included
the prospective effects of the rise in
interest rates and the dollar that had
occurred since earlier in the year and the
waning influence of transitory factors
that had stimulated economic activity in
the second quarter. The members generally agreed, however, that, apart from
evidence of some moderation in the
growth of business investment expenditures from a very rapid pace, there were
few hard indications of a slowing in the
expansion and the risks were clearly to
the upside of their current forecasts.
Against that background, they were concerned that inflation could begin to rise.
Cost and price pressures had been surprisingly well contained at high levels
of resource utilization, but this unusually favorable performance might not
be sustained, and in any event even
greater resource utilization, as would
occur if growth did not moderate appreciably, carried substantial inflation risk.
There were some scattered indications
in statistical and anecdotal reports that
tended to suggest that wage inflation



might be trending higher, although key
measures of price inflation, excluding
their food and energy components, continued to display a flat or even a declining trend.
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 individual projections of the
growth in real and nominal GDP, the
rate of unemployment, and the rate of
inflation for the years 1996 and 1997.
(The ranges in this paragraph take into
account minor revisions made by a few
members subsequent to the meeting.)
The forecasts of the rate of expansion
in real GDP for 1996 as a whole had a
central tendency of 2V2 to 23A percent,
reflecting expectations of considerable
moderation in the rate of economic
growth over the second half of the year;
for 1997, the projections centered on
continued moderate growth of GDP in a
range of PA to 2XA percent. With regard
to the expansion of nominal GDP, the
forecasts were concentrated in growth
ranges of 5 to 5V6 percent for 1996 and
AXA to 5 percent for 1997. The civilian
rate of unemployment associated with
these forecasts was expected by most
members to remain around 5Vi percent
this year and to be in a range of 5Vi to
53/4 percent in 1997. This level of
resource utilization was expected to be
associated with a slightly higher rate of
inflation in 1996, as measured by the
consumer price index, than that recorded
in 1995 owing to developments in the
food and energy sectors, but a decline
was anticipated in 1997. Specifically,
the projections converged on rates of
3 to 3V4 percent in 1996 and 23A to
3 percent in 1997. The projections for
both 1996 and 1997 were based on individual views concerning what would be

146 83rd Annual Report, 1996
an appropriate monetary policy over the
projection horizon.
In their assessment of factors bearing
on the outlook for final demand, members commented that growth in consumer spending was likely to moderate
in coming quarters from its pace thus far
this year. This moderation would reflect
the projected slowing in income growth.
While overall employment conditions,
the buildup of household net worth, and
access to financing would bolster consumer expenditures, members also cited
a number of limiting factors. The latter included the increase in consumer
indebtedness, satisfaction of earlier
pent-up demand for consumer durable
goods, and continuing concern about job
security. Higher interest rates also were
expected to exert an inhibiting effect on
purchases of consumer durables, including those related to housing. Some
members observed that while slower
growth in consumer spending was the
most probable forecast, they saw an
upside risk from the wealth effects of
the large rise that had occurred in the
value of stock market holdings.
Business expenditures for plant and
equipment were expected to grow at a
slower though still appreciable pace.
Indeed, such spending already appeared
to be moderating. Contract data suggested that nonresidential construction
activity was on a slowing growth trajectory and expansion of outlays for
producers' durable equipment also appeared to have softened. Given the outlook for slower growth in final demand,
many businesses would not have to
add significantly to capacity. However,
spending for computing equipment,
while perhaps moderating from the
exceptional pace of recent quarters, was
thought likely to remain buoyant as continuing innovations and declining prices
stimulated further solid gains in this segment of business spending.



Housing was seen as another important sector of the economy that was
likely to exert a retarding effect on the
expansion as the rise that had occurred
in mortgage interest rates was felt
increasingly in housing markets. The
anecdotal information from around the
nation and the available statistics suggested, however, that those markets
generally had remained surprisingly
ebullient thus far, and there were only
limited indications of some softening in
home construction activity.
Business inventory investment was
viewed as a key upside risk in the economic outlook for coming quarters. An
inventory overhang at the end of last
year had been corrected in the first quarter, and inventory investment was indicated to have turned positive again in
the second quarter. However, current
inventory-to-sales ratios appeared to
be relatively lean, and final sales that
exceeded current expectations might
well induce a sharp upward adjustment
in inventory accumulation, especially if
lead times were to lengthen and producers perceived shortfalls in their safety
stocks.
Members viewed the outlook for
inflation as a source of substantial uncertainty in their forecasts, though many
saw reasonable prospects that a rate
of economic expansion in line with their
forecasts and associated levels of capacity utilization would prove to be consistent with little change in the core
rate of inflation. Some important measures of price inflation, after adjustment to exclude their volatile food and
energy components, had shown a flat
or even a declining trend in recent
quarters. The outlook for overall price
increases would remain contingent in
part on food and energy price developments, but more importantly on
underlying cost pressures in the
economy.

Minutes of FOMC Meetings, July 141
Several members commented that the
levels of utilization of capital and labor
resources that had prevailed over the
past couple of years would have been
expected, on the basis of historical patterns, to foster rising cost pressures and
greater inflation. However, labor compensation gains had been subdued in
relation to earlier cyclical experience,
likely as a consequence of increased
worker concerns about job security and
job opportunities. Despite the continued
low rate of unemployment and widespread anecdotal reports of tight labor
markets across the country, there were
only limited indications in national data
that wage inflation might be increasing.
Whether greater labor cost pressures
would emerge in the context of the
members' consensus forecast for economic activity was a critical issue in the
outlook for prices, though it was noted
that at least some of the rising costs
were likely to be absorbed in shrinking
profit margins. Even if greater price
inflation were averted under that scenario, the members saw a substantial
risk that if economic growth did not
slow in line with their current forecasts,
the resulting added pressures on resources would at some point translate
into higher price inflation. Accordingly,
the factors bearing on the outlook for
resource use and inflation needed to be
monitored with special care in this
period.
With regard to inflation over the long
run, the members agreed that it was
essential for the Committee to continue
to focus on reducing inflation over
time because the achievement of an even
less inflationary economic environment would foster a more productive
economy and maximum sustainable
economic expansion. The members
acknowledged that as inflation diminished to very low levels, questions about
the measurement of the overall price



level presented difficult problems for
assessing progress toward price stability. Some also observed that the precise
level of average price inflation that
might be compatible with the optimal
functioning of the economy was an
unsettled issue owing, for example, to
potential rigidities in labor markets.
Thus far, such rigidities had not
impeded the economy from functioning
at a very high level as inflation came
down, and continued adaptation to even
lower inflation rates was very likely.
However, the Committee would need to
pay careful attention to these potential
problems as inflation fell further. For
now, the members agreed that some
additional progress in reducing inflation
was very likely to improve the ultimate
performance of the economy, and that it
was particularly important at this juncture to resist firmly any tendency for
inflation to worsen.
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 that
it had established in January for 1996,
and it decided on tentative ranges for
those aggregates for 1997. The current
ranges set in January for the period from
the fourth quarter of 1995 to the fourth
quarter of 1996 were unchanged from
the ranges for 1995 and included expansion of 1 to 5 percent for M2 and 2 to
6 percent for M3. An unchanged monitoring range of 3 to 7 percent was set in
January for growth of total domestic
nonfinancial debt in 1996.
A majority of the members favored
retaining the current ranges for this year
and extending them on a provisional
basis to 1997. They anticipated that
growth of M2 and M3 probably would
continue at rates close to the upper limit
of their respective ranges in both years,

148 83rd Annual Report, 1996
given the Committee's expectations for
the performance of the economy and
prices. However, despite a degree of
concern about setting ranges that did not
more comfortably encompass expected
growth, these members preferred not to
change the ranges for a variety of reasons. The current ranges for the broad
monetary aggregates could be viewed
as anchors or benchmarks for money
growth that would be associated with
approximate price stability and sustained economic growth, assuming
behavior of velocity in line with historical experience. Accordingly, a reaffirmation of those ranges would underscore the Committee's commitment to a
policy of achieving price stability over
time; and in the view of some members,
higher ranges could raise questions in
this regard. Moreover, a change in the
ranges might be misinterpreted as a signal of greater reliance on the broad
monetary aggregates in the formulation
and conduct of monetary policy. In this
connection, the members noted that the
behavior of M2 in relation to nominal
GDP and interest rates had displayed
a pattern over the past two years or so
that was in line with historical norms
before the 1990s. However, in light
of difficulties in the early 1990s and
changes in financial markets, the prospective growth of M2 and its velocity
remained subject to considerable uncertainty and the members felt that it
would be premature for the Committee
to place increased reliance on M2 at this
point.
A few members preferred somewhat
higher growth ranges for M2 and M3
because such ranges would more comfortably surround the Committee's
expectations for monetary growth. The
higher ranges would be more informative for the Congress and the public as
to the money growth likely to be associated with the Committee's expected



economic outcomes for the period covered by the ranges. They believed that
the reasons for establishing the higher
ranges could readily be explained and
understood as appropriate technical
adjustments that did not imply any lessened commitment to the Committee's
price stability goal. For example, such
an explanation appeared to have been
accepted with little or no comment by
the public when the range for M3 was
increased in July 1995.
The Committee members were unanimously in favor of retaining the current
monitoring range of 3 to 7 percent for
growth of total domestic nonfinancial
debt in 1996 and extending that range
on a provisional basis to 1997. They
took account of a staff projection indicating that growth of the debt aggregate
was likely to slow somewhat from its
pace earlier this year in line with some
moderation in the expansion of nominal
income. According to the staff projection, growth in the debt measure would
be near the midpoint of the existing
range over the period through 1997.
At the conclusion of this discussion,
the Committee voted to reaffirm the
ranges for growth of M2 and M3 and the
monitoring range for expansion of total
domestic nonfinancial debt that it had
established in January for 1996. For the
year 1997, the Committee approved
provisional ranges for M2 and M3 and a
provisional monitoring range for total
domestic nonfinancial debt that were
unchanged from the 1996 ranges. In
keeping with its usual procedure under
the Humphrey-Hawkins Act, the Committee would review its preliminary
ranges for 1997 early next year, or
sooner if interim conditions warranted,
in light of their growth and velocity
behavior and ongoing economic and
financial developments. Accordingly,
the Committee voted to incorporate the
following statement regarding the 1996

Minutes of FOMC Meetings, July
and 1997 ranges in its domestic policy
directive:
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee reaffirmed
at this meeting the ranges it had established
in January for growth of M2 and M3 of 1 to
5 percent and 2 to 6 percent respectively,
measured from the fourth quarter of 1995 to
the fourth quarter of 1996. The monitoring
range for growth of total domestic nonfinancial debt was maintained at 3 to 7 percent for
the year. For 1997 the Committee agreed on
tentative ranges for monetary growth, measured from the fourth quarter of 1996 to the
fourth quarter of 1997, of 1 to 5 percent for
M2 and 2 to 6 percent for M3. The Committee provisionally set the associated monitoring range for growth of total domestic nonfinancial debt at 3 to 7 percent for 1997. 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, Boehne, Jordan, Kelley,
McTeer, Meyer, Mses. Phillips and Rivlin,
and Mr. Stern. Votes against this action:
Mr. Lindsey and Ms. Yellen.

Mr. Lindsey and Ms. Yellen dissented
because they preferred somewhat higher
ranges for M2 and M3 growth in 1996
and 1997. The central tendencies of the
members' forecasts of nominal GDP for
the two years were likely to be associated with growth of the broad monetary
aggregates at rates around the top of the
current ranges. Somewhat higher ranges
would more comfortably encompass the
anticipated growth of the monetary
aggregates and in their view would conform more closely with the provisions
and intent of the Federal Reserve Act
that require the System to communicate
its objectives and plans for monetary
growth to the Congress. They believed
the reasons for raising the ranges could



149

easily be explained and understood as a
technical adjustment that did not represent a reduced commitment to the goal
of price stability or an increased emphasis on the monetary aggregates in policy
formulation.
In the Committee's discussion of policy for the intermeeting period ahead,
all but one of the members supported
a proposal to maintain an unchanged
policy stance. These members also indicated that they preferred or could accept
an asymmetric directive that was biased
toward restraint. In their view, the most
likely outcome was a slowing of the
expansion to a more sustainable pace
and a continuation of subdued inflation.
Nevertheless, they were concerned that
the risks to that outcome were tilted
toward higher inflation. While a strong
economy generally was a welcome
development, at current levels of
resource use a continuation of rapid
growth was not likely to be sustainable
because it would have the potential for
adding significantly to inflation pressures. However, inflation had remained
relatively damped thus far, and the rise
in interest rates among other factors was
expected to curb demand. Moreover, any
tendency for price pressures to mount
was likely to emerge only gradually
and be reversible through a relatively
limited policy adjustment. The current
stance of monetary policy could not be
described in this view as clearly accommodative. While the federal funds rate
had been reduced appreciably in nominal terms over the past year, its current
level on an inflation-adjusted basis
seemed to be only marginally below its
peak prior to mid-1995. In the circumstances, the Committee could afford to
wait for more evidence to see whether
additional inflation pressures were likely
to develop. A number of key economic
data would become available over the
next several weeks that would provide a

150 83rd Annual Report, 1996
much better basis for assessing the
economy's momentum over the second
half of the year and the outlook for
inflation.
A differing view gave more emphasis
to prospects for rising inflation and the
need for immediate action to forestall
a buildup of cost and price pressures
before they undermined the expansion.
There was little firm evidence that economic growth was slowing and reports
of appreciable wage pressures were
increasing. Inflation expectations persisted in financial markets, and probably
in product and labor markets as well; if
they were allowed to worsen, the Committee's long-run goal of price stability
would become much more difficult to
achieve. Delaying action risked the need
for a greater adjustment in policy at a
later date with possible disruption to the
economy.
Members observed that an asymmetric directive would represent a shift from
the symmetric directives that had been
adopted over the past year but would be
in keeping with their assessments of the
risks of higher inflation. Several commented that an asymmetric directive did
not imply a commitment to tighten
monetary policy at some point, whether
during the intermeeting period or at a
future meeting, but it did imply the need
for special vigilance. Some noted that a
policy tightening action could tend to
have a more pronounced effect than
usual because it would indicate a shift in
the direction of policy and might generate expectations of further tightening.
Under the circumstances, the Committee would consult in some way before
any policy tightening was undertaken.
At the conclusion of the Committee's
discussion, all but one member indicated that they supported a directive that
called for maintaining the existing
degree of pressure on reserve positions
and that included a bias toward the pos


sible 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.
At the conclusion of the meeting, the
Federal Reserve Bank of New York was
authorized and directed, until instructed
otherwise by the Committee, to execute
transactions in the System Account in
accordance with the following domestic
policy directive:
The information reviewed at this meeting
suggests that economic activity advanced
considerably further in the second quarter,
but increases in final demand showed some
signs of moderation. Nonfarm payroll employment was up substantially in April and
May; the civilian unemployment rate rose to
5.6 percent in May. Industrial production
increased appreciably further in May, reflecting gains across a wide range of industries.
Real consumer spending rose substantially
on balance over April and May. Singlefamily housing starts fell considerably in
May from a relatively high level in April.
Orders and contracts point to some deceleration in spending on business equipment and
nonresidential structures after a very rapid
expansion earlier in the year. The nominal
deficit on U.S. trade in goods and services
widened in April from its rate in the first
quarter. Upward pressures on food and
energy prices have led to somewhat larger
increases in the consumer price index over
recent months.
Most market interest rates have edged
higher since the Committee meeting on
May 21. In foreign exchange markets, the
trade-weighted value of the dollar in terms

Minutes of FOMC Meetings, July

151

Phillips, Rivlin, and Yellen. Vote against
this action: Mr. Stern.

of the other G-10 currencies has depreciated
slightly over the intermeeting period.
M2 declined in May, though partial data
for June pointed to a rebound. Growth of M3
was relatively sluggish in May but also
appears to have turned up in June. For the
year through June, both aggregates are estimated to have grown at rates around the
upper bounds of their respective ranges for
the year. Expansion in total domestic nonfinancial debt has been moderate on balance
over recent months and has remained in the
middle portion of its 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 reaffirmed
at this meeting the ranges it had established
in January for growth of M2 and M3 of 1 to
5 percent and 2 to 6 percent respectively,
measured from the fourth quarter of 1995 to
the fourth quarter of 1996. The monitoring
range for growth of total domestic nonfinancial debt was maintained at 3 to 7 percent for
the year. For 1997 the Committee agreed on
tentative ranges for monetary growth, measured from the fourth quarter of 1996 to the
fourth quarter of 1997, of 1 to 5 percent for
M2 and 2 to 6 percent for M3. The Committee provisionally set the associated monitoring range for growth of total domestic nonfinancial debt at 3 to 7 percent for 1997. 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.

Mr. Stern dissented because he was
convinced that a modestly more restrictive policy was warranted. In his view,
the momentum of the economy and
strains on capacity in labor and some
other markets raised the possibility of
an acceleration of inflation that would
jeopardize the economic expansion. This
concern aside, Mr. Stern also believed
that current circumstances were favorable for policy action to reduce inflation further and thereby help to sustain the ongoing improvement in the
economy.
As a prelude to its formal review later
in the year, the Committee at this meeting considered its existing network of
swap arrangements with a number of
foreign central banks and the Bank for
International Settlements. From time to
time in recent years the Committee had
discussed a variety of issues relating
to its foreign exchange activities and
its financial arrangements with other
central banks. In this discusssion, the
Committee considered in particular
whether the swap arrangements, all
of which had been put in place in
the 1960s, remained an appropriate
approach to international financial cooperation among central banks in light
of the evolution of the international
financial system in recent decades, and
whether other approaches should be
considered. The Committee made no
decisions relating to these matters,
though it was understood that these
issues would be explored further.
It was agreed that the next meeting of
the Committee would be held on Tuesday, August 20, 1996.
The meeting adjourned at 12:50 p.m.

Votes for short-run policy: Messrs.
Greenspan, McDonough, Boehne, Jordan,
Kelley, Lindsey, McTeer, Meyer, Mses.

Donald L. Kohn
Secretary




152 83rd Annual Report, 1996

Meeting Held on
August 20, 1996
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 20, 1996, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Boehne
Mr. Jordan
Mr. Kelley
Mr. Lindsey
Mr. McTeer
Mr. Meyer
Ms. Phillips
Ms. Rivlin
Mr. Stern
Ms. Yellen
Messrs. Broaddus, Guynn, Moskow,
and Parry, Alternate Members
of the Federal Open Market
Committee
Messrs. Hoenig, Melzer, and
Ms. Minehan, Presidents of the
Federal Reserve Banks of
Kansas City, St. Louis, and Boston
respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Prell, Economist
Messrs. Lang, Lindsey, Mishkin,
Promisel, Rolnick, Rosenblum,
Siegman, Simpson, and Stockton,
Associate Economists
Mr. Fisher, Manager, System Open
Market Account
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors



Messrs. Madigan and Slifman,
Associate Directors, Divisions of
Monetary Affairs and Research
and Statistics respectively,
Board of Governors
Ms. Johnson, Assistant Director,
Division of International Finance,
Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Mr. Connolly, First Vice President,
Federal Reserve Bank of Boston
Mr. Beebe, Ms. Browne, Messrs. Davis,
Dewald, Eisenbeis, and
Goodfriend, Senior Vice
Presidents, Federal Reserve Banks
of San Francisco, Boston,
Kansas City, St. Louis, Atlanta,
and Richmond respectively
Ms. Krieger, Vice President, Federal
Reserve Bank of New York
Mr. Sullivan, Assistant Vice President,
Federal Reserve Bank of Chicago
Mr. Bryan, Consultant, Federal Reserve
Bank of Cleveland
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on July 2-3, 1996, were
approved.
The Manager of the System Open
Market Account reported on recent
developments in foreign exchange markets. There were no open market transactions in foreign currencies for System
account during the period since the
meeting on July 2-3, 1996, 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 U.S. government securities and
federal agency obligations during the
period July 3, 1996, through August 20,
1996. 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, August
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 economic
expansion had moderated somewhat
recently. Growth in consumer spending
appeared to be slowing, business purchases of equipment and structures were
rising less vigorously, and higher mortgage rates were beginning to exert a
restraining effect on housing construction. Business inventory accumulation
had been quite modest, and production
and employment were expanding less
rapidly. Increases in labor compensation
had been somewhat larger this year, but
consumer price inflation, adjusted for
food and energy prices, had remained on
a fairly steady trend.
Private nonfarm payroll employment
increased relatively rapidly in July,
though at a considerably slower pace
than in the second quarter. Job growth
in the services industry slowed sharply,
and manufacturing employment declined appreciably after having risen
somewhat in the second quarter. In contrast, the expansion in employment in
wholesale and retail trade picked up
slightly in July, and the number of jobs
in construction continued to increase at
about the second-quarter pace. The average workweek for private production or
nonsupervisory workers fell considerably in July, to a level a little below its
average for the second quarter, and the
civilian unemployment rate edged up to
5.4 percent.
Industrial production rose slightly
further in July after three consecutive
months of strong gains; manufacturing
production expanded less rapidly, and



153

electricity generation dropped sharply as
a result of unseasonably cool weather. A
substantial increase in the production of
motor vehicles and parts accounted for
most of the advance in manufacturing
output. Elsewhere, the manufacture of
office and computing equipment continued on its strong upward trend in July
while the production of other business
equipment slipped. The output of consumer goods edged lower after having
risen slightly in May and June. The rate
of utilization of total industrial capacity
declined a little in July but remained at a
relatively high level.
Retail sales weakened somewhat over
June and July following several months
of robust growth. Sales of motor vehicles were down in both months, and
spending on other goods rose sluggishly
on balance. Housing starts fell somewhat further in July, reflecting a sizable
decline in single-family starts that more
than offset a bounceback in multifamily
starts. The drop in housing starts,
coupled with lower sales of new and
existing homes in June (latest data available), suggested that the rise in mortgage rates was exerting a damping effect
on housing demand and homebuilding
activity.
Growth in business spending on durable equipment and nonresidential structures had slowed after a very rapid
expansion earlier in the year. Shipments
of nondefense capital goods were little
changed in June after a sizable increase
in May. Weakness in outlays for aircraft
more than offset persisting strength in
spending on office and computing equipment, and purchases of other types
of equipment, notably communications
and industrial equipment, continued to
advance briskly. Nonresidential construction activity rebounded in June
from an appreciable decrease in May.
The pace of office building picked up,
and construction of other commercial

154 83rd Annual Report, 1996
and industrial structures posted healthy
gains after May declines.
Business inventories increased by a
modest amount in June after having contracted in May. In manufacturing, inventories continued to run off in June,
reducing the sector's stock-sales ratio
to near its historical low. Wholesale
trade stocks also fell in June, and the
inventory-sales ratio was in the lower
portion of its range over recent years.
Retail inventories rose in June; larger
stocks at automotive dealers more
than accounted for the increase. The
inventory-sales ratio for the sector as a
whole edged higher but remained at a
relatively low level.
The nominal deficit on U.S. trade in
goods and services narrowed in June,
but on a quarterly average basis the deficit widened in the second quarter from
its rate in the first quarter. In June, the
value of exports declined slightly, but
the value of imports dropped by a considerably larger amount from a relatively high rate in May. Available information suggested that economic activity
in the major foreign industrial countries
continued to advance, but at an uneven
pace; in Germany, activity rebounded
from the contraction in the first quarter,
while in Japan a considerable slowing of
growth had occurred in the second quarter after very rapid expansion in the first
quarter.
Price inflation remained moderate on
balance in June and July, with declines
in energy prices essentially offsetting
increases in food prices. Over a somewhat longer horizon, consumer prices
for nonfood, non-energy items rose
slightly less in the twelve months ended
in July than in the previous twelvemonth period. Producer prices of finished goods other than food and energy
also increased more slowly in the twelve
months ended in July. In contrast,
growth in labor costs had picked up.



The employment cost index for private
industry workers advanced at a somewhat faster rate in the second quarter
than in the first quarter or in the second
half of 1995. Measured over the year
ended in June, the index rose by a
slightly larger amount than in the previous year.
At its meeting on July 2-3, 1996, 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. 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 and slightly
lesser reserve restraint might be acceptable during the intermeeting period. The
reserve conditions associated with this
directive were expected to be consistent
with moderate growth of M2 and M3
over coming months.
With economic growth moderating
and inflation quiescent, 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 little higher than the
level expected with an unchanged policy stance, in part because of unexpectedly high demand for reserves in late
July and early August. On balance, most
other short-term market interest rates
declined slightly, and intermediate- and
long-term rates fell somewhat more,
over the intermeeting period. In the days
immediately following the meeting,
rates rose sharply in response to incoming data, notably the employment report for June that market participants
viewed as indicating increasing pres-

Minutes of FOMC Meetings, August
sures on economic resources and labor
costs. Subsequently, however, that rise
was more than reversed when further
data releases were interpreted as suggesting that the economic expansion
might be slowing and that the upturn in
labor compensation was mild. Equity
prices also exhibited considerable volatility over the period since the Committee meeting on July 2-3, with major
indexes of stock prices falling steeply
through late July before recouping part
to most of their losses in association
with the bond market rally and favorable earnings reports.
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. The flow of information suggesting a slowing in U.S. economic growth
and reduced prospects for a near-term
tightening of Federal Reserve policy
weighed against the dollar. On the other
hand, the yen was bolstered by incoming data suggesting that the Japanese
current account surplus was again widening, and the German mark benefited
from the Bundesbank's inaction at a
time when market participants were
expecting a policy easing.
Growth of M2 and M3 moderated in
July. Much of the slowdown in the
expansion of M2 was associated with an
unexpected decline in demand deposits,
which had grown rapidly earlier in the
year. With bank credit expanding sluggishly, the funding needs of banks were
modest, and the slower growth of M2
showed through to M3. For the year
through July, both aggregates were estimated to have increased at rates somewhat below the upper bounds of their
respective ranges for the year. Expansion in total domestic nonfinancial debt
had been moderate on balance over
recent months and had remained in the
middle portion of its range.



155

The staff forecast prepared for this
meeting suggested that the expansion
would slow to a rate around, or perhaps
a little above, the economy's estimated
growth potential. Consumer spending
was projected to expand at a more moderate pace that would be in line with the
projected increase in disposable income;
the favorable effect of the earlier run-up
in equity prices on household wealth
and the generally ample availability of
credit were expected to balance continuing consumer concerns about the
adequacy of their savings and the
restraining effect of high household debt
burdens. Homebuilding was forecast
to slow somewhat in response to the
backup in residential mortgage rates but
to remain at a relatively high level in the
context of sustained income growth and
the still-favorable cash flow affordability of home ownership. Business spending on equipment and structures was
projected to grow less rapidly in light of
the anticipated moderate growth of sales
and profits. On balance, the external
sector was expected to exert a small
restraining influence on economic activity over the projection period. Only
modest fiscal restraint was anticipated
over the forecast horizon. Inflation
recently had been lifted by adverse
developments in energy markets and
was projected to remain above the levels
of recent years, given the high level of
resource utilization, the effects of tight
grain supplies on food prices, and a
noticeable step-up in labor compensation reinforced by the legislated rise in
the federal minimum wage.
In the Committee's discussion of current and prospective economic developments, members commented that on
balance the information received since
the July meeting, including anecdotal
reports from around the nation, pointed
to some slowing in the growth of economic activity from a very rapid pace

156 83rd Annual Report, 1996
during the spring. The extent of the
slowing remained uncertain, and it was
unclear at this juncture whether the
expansion would slow sufficiently to
contain pressures on labor and other
producer resources. Nonetheless, broad
measures of price inflation, adjusted to
exclude their volatile food and energy
components, did not exhibit any uptrend
despite robust growth in economic activity this year and high levels of resource
use. Indeed, some price measures suggested that inflation had trended lower
through the second quarter. Moreover,
there were no early signs of pressures
or imbalances in the industrial sector.
In labor markets, however, there were
increasing indications of tightness that
might at some point feed through to
greater inflation. Upward wage adjustments were becoming more evident and
increases in overall compensation had
edged up, suggesting the possibility of
further increases in labor costs at current
or higher levels of labor utilization even
before taking account of the effects of
the rise in the minimum wage. Although
increases in compensation might be
moderated by greater productivity or
absorbed for a time by lower profit margins, the risks seemed tilted toward
increases in inflation at some point,
especially if the growth of the economy
continued to outstrip its potential and
added to pressures on resources.
In the course of the Committee's discussion, members cited a variety of indications that economic growth was slowing from a very rapid pace, and they
pointed to a number of factors that in
their view should promote continued,
though more moderate, expansion in
economic activity. These included generally supportive financial conditions,
relatively high levels of consumer confidence, and the absence of major imbalances in the economy. It was noted that
much of the stimulus for the strong



expansion in the first half of the year
had been provided by large increases in
spending for consumer durables, housing, and business equipment; however,
growth in such spending could be
expected to slow in the context of
increasingly satisfied pent-up demands
and the lagged effects of earlier
increases in intermediate- and long-term
interest rates on these interest-sensitive
sectors of the economy. A key uncertainty in the outlook was the prospective
behavior of inventories. Should the
expansion in final demand fail to moderate to a sustainable pace, business firms
would be likely to intensify their efforts
to build their inventories, which currently were widely viewed as satisfactory or even relatively lean in relation to
sales. While some buildup in inventories
appeared to be occurring in the current
quarter, developments that might lead to
a sharp increase in inventory investment, such as shortages of various goods
and materials and lengthening delays
in securing deliveries, were not in
evidence at this time. Accordingly,
aggressive inventory accumulation
remained an upside risk to the projected
expansion but not one that was likely to
materialize unless final demand were to
exceed current forecasts by a significant
margin.
In their discussion of the outlook
for inflation, members observed that
increases in prices had remained
remarkably subdued for an extended
period in relation to measures of
resource utilization, notably the rate of
unemployment. Such behavior differed
markedly from the historical experience under similar circumstances. One
factor tending to hold down prices has
been highly competitive markets—
throughout the nation and internationally as well—that have made it very
difficult for business firms to raise
prices. Another key factor, though one

Minutes of FOMC Meetings, August
whose importance might now be starting to diminish, was the persistence of
comparatively small increases in labor
compensation, which remained appreciably below earlier norms in relation to
levels of unemployment. This development appeared to reflect worker concerns about job security in a period of
major business restructuring and downsizing activities as well as substantially
reduced increases in benefit costs, notably those relating to health care.
In assessing whether a relatively
favorable inflation performance was
likely to continue, the members focused
on a variety of issues. One was whether
the expansion would moderate sufficiently to keep pressures on labor and
other resources from intensifying.
Another was whether a rate of unemployment in the vicinity of its current
level would foster added wage pressures. Uncertainty also surrounded the
extent to which further increases in labor
compensation costs, should they materialize, would be passed through to higher
prices. Improvements in productivity
were likely to offset part of such
increases, but how much remained an
open question. In addition, profit margins were high, but the extent to which
they might narrow to absorb increasing
labor costs was difficult to predict. With
regard to the outlook for wages,
members observed that, though it was
too early to reach a firm judgment, the
acceleration of wage increases this year
might well augur faster advances that
were more in line with historical experience under essentially full employment
conditions. Moreover, the tendency
toward reduced increases in the costs of
benefits might tend to dissipate, though
some members commented that further
economies in the provision of medical
services might well be achievable for
some period. On balance, the inflation
risks in the outlook clearly seemed to



157

be to the upside, with the potential for
more inflation stemming from rising
labor compensation costs augmented by
a rise in the minimum wage and the
prospect of higher food prices and perhaps energy prices over the next several
quarters.
In the Committee's discussion of policy for the intermeeting period ahead,
members focused on indications that
the economy already was slowing, perhaps by enough to limit pressures on
resources, and they noted that broad statistical measures of prices and the anecdotal evidence did not suggest that a
pickup in inflation was already under
way. Consequently, all but one of the
members supported a proposal to maintain an unchanged policy stance. A number also commented that real interest
rates were not unusually low, suggesting
that any pickup in inflationary pressures,
should that occur, would be modest and
readily contained. One concern was that
policy tightening at this point might generate an excessive reaction in financial
markets, both because it was not generally expected and because it would represent a change in policy direction that
might well lead to expectations of further policy tightening. Such a development could have serious adverse consequences for economic activity if the
expansion was in fact already slowing to
a more sustainable and less inflationary
pace. These members therefore concluded that the prudent course at this
point was to await further developments
that would permit them to assess the
possible need for some tightening with
a higher degree of confidence. At the
same time, it was emphasized that the
Committee remained committed to a
policy that would resist a rise in inflation; such a policy would entail moving
in anticipation of greater price pressures
and before they showed through to
actual inflation. Accordingly, they also

158 83rd Annual Report, 1996
agreed on the desirability of a directive
that remained biased toward possible
tightening in the intermeeting period
ahead. Such a directive would imply
that any tightening should be implemented promptly if developments were
perceived as pointing to rising inflation. For now, the Committee should
remain particularly vigilant to incoming
information bearing on the outlook for
inflation.
A differing view gave more weight to
the risks of rising inflation. In this view,
while there were uncertainties, the
weight of the evidence suggested that a
prompt policy action was needed to contain inflation and set the stage for further
progress toward price stability. The possibility of an overreaction in financial
markets to a tightening move could not
be ruled out, but such a reaction was
likely to be short-lived. More importantly, a prompt action would reduce the
risk that inflation would worsen and
pose difficult problems for monetary
policy later.
At the conclusion of the Committee's
discussion, all but one member indicated that they supported 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.



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 growth in economic activity
recently has moderated somewhat. Private
nonfarm payroll employment grew less
rapidly in July, the average workweek fell
sharply, and the civilian unemployment rate
edged up to 5.4 percent. Industrial production increased slightly in July after three
months of strong gains. Real consumer
spending weakened somewhat on balance
over June and July following several months
of robust growth. Housing starts fell somewhat further in July. Growth in spending on
business equipment and nonresidential structures has slowed after a very rapid expansion
earlier in the year. The nominal deficit on
U.S. trade in goods and services widened in
the second quarter from its rate in the first
quarter. Increases in labor compensation
have been somewhat larger this year, but
consumer price inflation, adjusted for food
and energy prices, has remained on a fairly
steady trend.
Most short-term market interest rates have
declined slightly while intermediate- and
long-term rates have fallen somewhat more
since the Committee meeting on July 2-3,
1996. In foreign exchange markets, the
trade-weighted value of the dollar in terms
of the other G-10 currencies has depreciated
slightly over the intermeeting period.
Growth of M2 and M3 moderated in July.
For the year through July, both aggregates
are estimated to have grown at rates somewhat below the upper bounds of their respective ranges for the year. Expansion in total
domestic nonfinancial debt has been moderate on balance over recent months and has
remained in the middle portion of its 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 ranges it had established in January for growth of M2 and M3
of 1 to 5 percent and 2 to 6 percent respec-

Minutes of FOMC Meetings, August
tively, measured from the fourth quarter of
1995 to the fourth quarter of 1996. The
monitoring range for growth of total domestic nonfinancial debt was maintained at 3 to
7 percent for the year. For 1997 the Committee agreed on a tentative basis to set the same
ranges as in 1996 for growth of the monetary
aggregages and debt, measured from the
fourth quarter of 1996 to the fourth quarter
of 1997. 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, Boehne, Jordan, Kelley,
Lindsey, McTeer, Meyer, Mses. Phillips,
Rivlin, and Yellen. Vote against this
action: Mr. Stern.
Mr. Stern dissented because he believed that policy should become modestly more restrictive. He was concerned
that, in the absence of a substantial and
sustained improvement in productivity,
the prevailing pattern of demand might
engender an increase in inflationary
pressures, and that such pressures would
ultimately threaten the ongoing economic expansion. In Mr. Stern's judgment, it was prudent at this point to
resist such a development in order to lay
a foundation for the long-term health of
the economy.
It was agreed that the next meeting of
the Committee would be held on Tuesday, September 24, 1996.



159

The meeting adjourned at 12:45 p.m.
Donald L. Kohn
Secretary

Meeting held on
September 24, 1996
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 24, 1996, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Boehne
Mr. Jordan
Mr. Kelley
Mr. Lindsey
Mr. McTeer
Mr. Meyer
Ms. Phillips
Ms. Rivlin
Mr. Stern
Ms. Yellen
Messrs. Broaddus, Guynn, Moskow,
and Parry, Alternate Members
of the Federal Open Market
Committee
Messrs. Hoenig, Melzer, and
Ms. Minehan, Presidents of the
Federal Reserve Banks of
Kansas City, St. Louis, and Boston
respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. Lang, Lindsey, Mishkin,
Promisel, Rosenblum, Siegman,
Simpson, Sniderman, and
Stockton, Associate Economists

160 83rd Annual Report, 1996
Mr. Fisher, Manager, System Open
Market Account
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
Messrs. Madigan and Slifman,
Associate Directors, Divisions of
Monetary Affairs and Research
and Statistics respectively,
Board of Governors
Mr. Smith,6 Assistant Director,
Division of International Finance,
Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Ms. Pianalto, First Vice President,
Federal Reserve Bank of
Cleveland
Messrs. Beebe, Davis, Dewald,
Eisenbeis, and Hunter, Senior Vice
Presidents, Federal Reserve Banks
of San Francisco, Kansas City,
St. Louis, Atlanta, and Chicago
respectively
Messrs. Bentley, Hetzel, Ms. Krieger,
and Mr. Rosengren, Vice
Presidents, Federal Reserve
Banks of New York, Richmond,
New York, and Boston
respectively
Mr. Weber, Senior Research Officer,
Federal Reserve Bank of
Minneapolis

By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on August 24, 1996,
were approved.
The Manager of the System Open
Market Account reported on recent
developments in foreign exchange markets. There were no open market transactions in foreign currencies for System
account during the period since the
meeting on August 20, 1996, and thus
no vote was required of the Committee.

6. Attended portion of meeting relating to proposal to amend the Authorization for Foreign Currency Operations.



The Manager also reported on recent
developments in domestic financial
markets and on System open market
transactions in U.S. government securities and federal agency obligations
during the period August 20, 1996,
through September 23, 1996. By unanimous vote, the Committee ratified these
transactions.
The Committee then turned to a discussion of the economic and financial
outlook and the implementation of
monetary policy over the intermeeting
period ahead. A summary of the economic and financial information available at the time of the meeting and of
the Committee's discussion is provided
below, followed by the domestic policy
directive that was approved by the Committee and issued to the Federal Reserve
Bank of New York.
The information reviewed at this
meeting suggested that the expansion of
economic activity had moderated appreciably from an elevated second-quarter
pace. Growth in consumer spending had
slowed noticeably, and higher mortgage
rates seemed to be exerting some modest restraint on housing demand. While
business demand for durable equipment
remained strong, spending on nonresidential structures had weakened a little. Business inventory accumulation
appeared to have picked up, although
the level of inventories remained modest in relation to sales. Employment and
production had continued to post sizable
gains in recent months, but the increases
were somewhat below those recorded
earlier in the year. Consumer price inflation, excluding its food and energy
components, had edged lower this year
despite somewhat larger increases in
labor compensation.
Private nonfarm payroll employment
grew less rapidly over July and August
than it had in the second quarter; aggregate hours worked by private production

Minutes of FOMC Meetings, September 161
workers also expanded at a slower pace
over the two-month period. Job growth
in the services industries was somewhat
lower over the two months compared
with that of the second quarter. Manufacturing employment changed little on
balance over the July-August period,
and construction hiring was down considerably in August after a July increase
that was a little above the pace of the
second quarter. The civilian unemployment rate declined to 5.1 percent in
August.
Industrial production also advanced
somewhat less rapidly on average in
July and August after having recorded
strong gains in the previous few months;
slower growth was evident in mining
and utilities as well as in manufacturing.
Smaller increases in the output of motor
vehicles and parts accounted for part of
the slowdown in the expansion of the
manufacturing sector in August; in addition, the output of consumer goods other
than motor vehicles remained sluggish,
and the production of construction supplies declined significantly after having
surged in the second quarter. Elsewhere
in manufacturing, business equipment,
notably its office and computing component, continued its robust expansion
over July and August, and defense and
space equipment extended the upturn
that had begun in the second quarter.
The rate of utilization of total industrial
capacity was unchanged on balance
from June to August and remained at a
relatively high level.
Total retail sales rose slightly over
July and August after having declined
substantially in June. Decreased outlays
at food stores, gas stations, and furniture
and appliance stores in August were a
little more than offset by a sharp pickup
in sales at general merchandisers,
apparel stores, and outlets for durable
goods other than furniture and appliances. Housing starts rebounded in



August from a July drop and for the two
months were about unchanged on average from their second-quarter level;
however, permits for single-family housing were unchanged in August and had
fallen from their second-quarter level.
Sales of existing homes weakened in
June and July.
Demand for business equipment had
remained strong in recent months. Shipments of nondefense capital goods
declined in July, retracing part of a substantial second-quarter advance, but
recent data on new orders pointed to
further increases in business spending
for durable equipment, notably office
and computing equipment, in coming
months. Nonresidential construction
activity fell somewhat in July after having decreased a little in the second
quarter.
Business inventory investment picked
up sharply in July; most of the increase
occurred at retail establishments. Manufacturing inventories rose somewhat,
with the gain concentrated at manufacturers of producers' durable equipment.
The stock-sales ratio for the sector was
around its historical low. In the wholesale sector, inventories edged higher in
July despite a substantial drop in stocks
of farm products, and the inventorysales ratio for the sector fell to the low
end of its range over recent years. Retail
stocks expanded considerably at both
automotive dealers and non-auto establishments in July. Inventory-sales ratios
edged higher in most retail categories,
but they remained at relatively low
levels.
The nominal deficit on U.S. trade in
goods and services widened substantially in July from its June level and also
from its average rate for the second
quarter. Despite one-time service payments related to the Olympics and larger
inflows of imported oil, imports edged
down in July from the sharply increased

162 83rd Annual Report, 1996
rate recorded for the second quarter; the
latter largely reflected the strength of the
U.S. economy during the first half of
the year. Exports fell considerably more
in July than did imports; in addition to
decreased exports in such categories as
consumer goods, aircraft and parts, automotive products, and other industrial
supplies, part of the measured decline
may have reflected residual seasonality
in the data. Available information suggested that, on balance, the economies
of the major foreign industrial countries
had strengthened in recent months. In
Japan, a mild second-quarter pause after
very rapid first-quarter growth had
been followed by renewed expansion.
Economic activity in Germany had
rebounded sharply in the second quarter
from a first- quarter contraction, and
further expansion appeared to be in
train. Although economic growth had
been sluggish in Canada and the United
Kingdom in the second quarter, recent
indicators suggested a pickup in activity in those countries as well. By contrast, France and Italy had experienced
little, if any, growth since early in the
year.
Consumer price inflation remained
moderate on balance over July and
August; declines in energy prices offset
higher food prices. Excluding food and
energy, consumer prices recorded a
somewhat smaller advance over the
twelve months ended in August than
over the previous twelve months. Producer prices of finished goods other than
food and energy were unchanged on net
over July and August, and this index
rose at a significantly slower pace over
the twelve months ended in August than
over the preceding twelve months. Average hourly earnings of production or
nonsupervisory workers rebounded in
August, more than offsetting a small
July decline. Over the year ended in
August, this measure of labor costs



increased considerably more than it had
over the previous year.
At its meeting on August 20, 1996,
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. 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 and
slightly lesser reserve restraint might
be acceptable during the intermeeting
period. The reserve conditions associated with this directive were expected to
be consistent with moderate growth of
M2 and M3 over coming months.
With incoming information generally
confirming that economic growth was
moderating and that price inflation
remained subdued, open market operations were directed toward maintaining
the existing degree of pressure on
reserve positions throughout the intermeeting period. The federal funds rate
generally remained close to the level
expected with an unchanged policy
stance, but most other market interest
rates exhibited considerable volatility
and rose somewhat on balance over the
intermeeting interval. Despite the rise in
many market interest rates, equity prices
rebounded over the period, and most
major market indexes reached record
highs.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
appreciated slightly over the intermeeting period. The dollar's rise reflected in
part the increase in U.S. long-term interest rates over the period. Declines in
market rates abroad, both short- and

Minutes of FOMC Meetings, September 163
long-term, also contributed to the dollar's strengthening. In Japan, newly
released data led market participants to
lower their assessments of the strength
of that country's economic expansion
and of the prospects of any near-term
increase in official interest rates. In Germany, a reduction by the Bundesbank in
its repo rate in late August and subsequent statements by Bank officials
regarding possible additional declines in
official rates appeared to foster market
expectations that monetary policy might
be eased further.
Growth of M2 and M3 picked up in
August from sluggish rates in July but
remained below the average increases
over the first half of the year. A continuing, rapid runoff in the liquid deposit
components of these aggregates was offset in part by solid gains in retail money
market funds and small time deposits,
whose yields had not declined in step
with decreases in market interest rates
in early August. For the year through
August, both aggregates grew at rates in
the upper portions of their respective
annual ranges. Expansion in total
domestic nonfinancial debt had been
moderate on balance over recent months
and had remained in the middle portion
of its range.
The staff forecast prepared for this
meeting, which differed little from that
for the previous meeting, suggested that
the expansion would slow to a rate
around, or perhaps a little above, the
economy's estimated growth potential.
Expansion of consumer spending was
forecast to rebound from the sluggish
third-quarter rate in light of strong
income trends, the favorable effect of
the rise in the stock market this year on
household wealth, and the generally
ample availability of credit. Homebuilding was anticipated to slow somewhat in
response to this year's increase in residential mortgage rates but to remain at



a relatively high level in the context
of sustained income growth and the
still-favorable cash flow affordability of
home ownership. The expansion of business investment in equipment and structures was projected to slow gradually
in response to an easing of pressures on
capacity, a prospective slackening in the
growth of corporate cash flows, and the
rise in long-term interest rates that had
occurred this year. Only modest fiscal
restraint was anticipated over the forecast period. Inflation, which had been
boosted thus far in 1996 by adverse
developments in food and energy markets, was projected to remain somewhat
above that of recent years, given high
levels of resource utilization and a
noticeable step-up in labor compensation that would be reinforced by the
legislated rise in the federal minimum
wage.
In the Committee's discussion of current and prospective economic developments, members commented that the
incoming information had been mixed
since the August meeting but that on
the whole it continued to suggest appreciable slowing in the economic expansion from a rapid and unsustainable pace
in the second quarter. Data for many
components of final demand, notably in
the consumer sector, indicated that economic growth had moderated considerably in recent months. At the same time,
supply-side data including employment
and industrial production had remained
relatively robust, contributing to uncertainty about underlying growth and
suggesting that inventory accumulation
had picked up during the summer. While
the extent of the slowing in the overall
expansion remained unclear, there were
no indications of serious imbalances in
the economy, and the members generally viewed further growth at a pace
near that of the economy's potential as a
likely prospect. They continued to be

164 83rd Annual Report, 1996
concerned, however, about the outlook
for inflation, given the high level of
production. In that regard, some commented that labor markets appeared to
have tightened further in recent months
and that wages were rising at a somewhat faster pace. Even so, the rate of
price inflation had not picked up and the
prospects were good that inflation would
remain contained for some time.
Whether the factors that had contributed
to such a price performance would persist remained a key uncertainty in the
economic outlook, and the members
generally agreed that the risks continued
to be tilted to some extent in the direction of rising price inflation over the
forecast horizon.
In their discussion of the outlook for
spending in key sectors of the economy,
members commented that consumer
expenditures were likely to pick up after
their summer lull, though probably to a
pace appreciably below that in the first
half of this year. Favorable factors in the
outlook for consumer spending included
strong gains in employment and income,
the wealth effect stemming from the rise
that had occurred in the value of financial assets, and generally buoyant consumer sentiment. The improvement in
the consumer sector would tend to be
restrained, however, by the increase in
consumer debt burdens and the probable
satisfaction of much of the pent-up
demands for consumer durables during
the current expansion. Business fixed
investment likewise was expected to
provide considerable further stimulus
to the economy. Expenditures for business equipment, notably for office and
computing equipment, were expected to
expand substantially further, and recent
weakness in nonresidential construction
might well prove to be temporary, judging in part from anecdotal reports of
considerable strength in commercial
real estate markets in many areas. On



the whole, however, the completion of
numerous capital spending programs
in conjunction with slower projected
growth in overall demand could be
expected to temper the expansion of
business investment over coming quarters. In the housing sector, recent developments were somewhat mixed, but
they suggested on balance that housing
activity had held up better than expected
in the light of increased mortgage interest rates. It was suggested in this regard
that the retarding effects of higher rates
on fixed-rate mortgage contracts were
being blunted to some extent by shifts
toward adjustable rate mortgages. Even
so, and consistent with the softening
already observed in a number of areas,
residential construction was thought
likely to drift lower over time.
The outlook for inventory investment,
as is typically the case, was very difficult to assess. The moderation in the
expansion of final demand in recent
months, together with still relatively
robust growth in employment and production, suggested that inventory investment had picked up since the second
quarter. The strength in inventories in
July tended to confirm that assessment.
However, assuming moderate economic
growth in line with current forecasts,
there was no reason to anticipate substantial further strengthening in inventory investment over coming quarters.
Indeed, the recent rebuilding of inventories after little or no growth earlier in
the year made rapid expansion less
likely going forward. The members
acknowledged, nonetheless, that inventory developments needed to be monitored with care, including such indirect
signs as rising pressures on the prices
of intermediate goods and tightening
delivery schedules that might provide
incentives for a rapid buildup. With
capacity utilization already at high levels, relatively rapid growth in inventory

Minutes of FOMC Meetings, September 165
investment, if it were superimposed on
stronger-than-projected expansion in
final demand, could portend serious
pressures on resources and inflationary
consequences for the economy.
In their comments about the outlook
for inflation, members observed that the
recent behavior of price inflation was a
welcome though highly unusual development, given current pressures on
resources. The statistical and anecdotal
information provided evidence of increasingly tight labor markets that under
similar conditions historically had been
associated with considerable upward
pressure on nominal labor compensation
and, in turn, on prices. While wages,
and probably total labor compensation,
were rising more rapidly this year, the
acceleration in the latter still appeared to
be held down by worker insecurity and
relatively subdued increases in the cost
of benefits. Moreover, for a variety of
reasons rising labor costs were not currently being passed through to prices,
which by several key measures adjusted
for their volatile food and energy components exhibited a steady or even a
declining trend. Explanations tended to
concentrate on the intense competition
in many markets, which prevented firms
from raising prices to absorb cost
increases.
Competitive pressures also were
compelling firms to curb cost increases
through improvements in their productivity performance. Widespread reports
suggested major gains in productivity in
numerous industries, induced in recent
years by business restructuring and
related activities and by large capital
investments that had introduced increasingly productive equipment. Although
currently available measures of productivity for the economy as a whole
showed only weak gains, sectoral disaggregation of the data gave reasons to
question the productivity measurements.



Productivity had increased fairly sharply
in manufacturing, and the slowdown in
overall productivity since 1973 had been
concentrated in the service areas of the
economy. Indeed, measured productivity in noncorporate businesses—largely
services—had displayed a negative
trend for many years. This result was
implausible and suggested considerable
error in estimating output and prices for
many services. Consequently, it was
likely that actual productivity growth
was higher than the current measures
indicated. By the same token, the rate of
price inflation was lower than had been
reported, consistent with the findings of
a number of studies of distortions in
published price data.
The implications for the inflation outlook were not clear-cut. The key question was how long the favorable price
behavior would persist. Advances in
productivity had boosted profit margins,
and high margins were helpful in that
they could absorb some portion of any
cost increases for a time. However,
many business contacts indicated that
they would resist squeezes in profit margins, and continued acceleration in costs
would eventually feed through to greater
price inflation whatever the rate of productivity growth. The behavior of costs
and the ability of businesses to pass
along any greater increases over time
would depend on the extent to which the
expansion would slow and how much
associated pressure there would be in
labor and product markets. In this connection, some members observed that
even if the expansion were to slow to
a sustained pace around the rate of
increase of the economy's potential,
price inflation could well trend at least
modestly higher at current levels of
resource utilization. Others did not disagree that the odds might be tilted marginally in that direction, but they continued to believe that a great deal of

166 83rd Annual Report, 1996
uncertainty surrounded the outlook for
resource use and, in turn, the relationship between a given degree of pressure
on resources and overall price changes.
In sum, assuming economic growth generally in line with their forecasts, the
critical question for some was when and
how much inflation would rise; many
others were not persuaded of the inevitability of such an outcome.
In the Committee's discussion of policy for the intermeeting period ahead,
nearly all the members indicated that
they could support an unchanged policy
stance and the retention of a bias toward
restraint in the directive. The members
generally agreed that while the risks
were greater that price inflation would
rise than that it would fall, higher inflation was not a foregone conclusion and
most believed that the uncertainties in
the outlook made it prudent to hold
monetary policy on a steady course and
await further developments. The expansion appeared to be slowing substantially and broad measures of prices,
adjusted for fluctuations in their food
and energy components, still indicated a
steady or even slightly declining inflation trend. In these circumstances, the
Committee could wait for more information on the momentum of the expansion
and the degree of pressure on resources
and its implications for inflation. A
delay in adjusting monetary policy was
facilitated by its current positioning,
which did not appear to be far from a
desirable longer-term stance because
any pickup in inflation was likely to be
relatively small and gradual, and was
further supported by the possibility of
an excessive reaction in financial markets to a change in the direction of policy. A few members indicated that they
could vote for some slight tightening
in policy, although they did not feel any
urgency about such a move. They
observed that the decision was a close



one for them, and in light of the uncertainties that were involved, they were
willing to join the majority and wait for
further evidence bearing on the outlook
for inflation. With regard to possible
intermeeting adjustments to policy, the
members agreed that retaining an asymmetric directive that was biased toward
restraint would be consistent with their
assessments of the inflation risks in the
economy. Accordingly, information suggesting that the odds on higher inflation
had risen should be met with a prompt
policy firming.
A differing view focused on the
desirability of a prompt move toward
restraint to curb what were seen as
growing inflationary pressures in the
economy. Tight labor markets were
likely to exert continuing upward pressure on labor costs, barring unexpected
weakness in the economy, and at some
point those costs would begin to be
passed through to prices. In the circumstances, it was important for policy to be
forward-looking and to move promptly
to head off intensifying inflationary
pressures. Potentially, waiting could
require more disruptive policy tightening actions later and could risk the
credibility of the System's anti-inflation
policy.
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they could accept 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

Minutes of FOMC Meetings, September
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.
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 growth in economic activity
has moderated appreciably from an elevated
second-quarter pace. Private nonfarm payroll employment grew less rapidly over July
and August than in the second quarter, while
the civilian unemployment rate declined to
5.1 percent in August. Industrial production
increased somewhat less rapidly on average
in July and August than in the prior few
months. Total retail sales rose slightly over
July and August after having declined substantially in June. Housing starts in July and
August were unchanged on average from
their second-quarter level. Demand for business equipment has remained strong, while
spending on nonresidential structures has
changed little on balance in recent months.
The nominal deficit on U.S. trade in goods
and services widened substantially in July
from its average in the second quarter.
Increases in labor compensation have been
somewhat larger this year, but consumer
price inflation, excluding its food and energy
components, has edged lower.
Most market interest rates have risen
somewhat on balance since the Committee
meeting on August 20, 1996. In foreign
exchange markets, the trade-weighted value
of the dollar in terms of the other G-10
currencies has appreciated slightly over the
intermeeting period.
Growth of M2 and M3 picked up in
August, but they continued to expand at rates
below those in the first half of the year. For
the year through August, both aggregates are
estimated to have grown at rates in the upper
portions of their respective ranges for the
year. Expansion in total domestic nonfinancial debt has been moderate on balance over
recent months and has remained in the
middle portion of its range.



167

The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee at its meeting in July reaffirmed the ranges it had established in January for growth of M2 and M3
of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter
of 1995 to the fourth quarter of 1996. The
monitoring range for growth of total domestic nonfinancial debt was maintained at 3 to
7 percent for the year. For 1997 the Committee agreed on a tentative basis to set the same
ranges as in 1996 for growth of the monetary
aggregages and debt, measured from the
fourth quarter of 1996 to the fourth quarter
of 1997. 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, Boehne, Jordan, Kelley,
Lindsey, McTeer, Meyer, Mses. Phillips,
Rivlin, and Yellen. Vote against this action:
Mr. Stern.
Mr. Stern dissented because he believed that a modestly more restrictive
policy was appropriate. In his view,
historical precedents suggested that prolonged periods of taut labor markets
were eventually associated with rising
inflation. Given prevailing pressures
on resources, especially labor, Mr. Stern
was concerned about the distinct risk of
an acceleration of inflation. Should this
acceleration occur, he believed it would

168 83rd Annual Report, 1996
prove disruptive to the favorable performance of the economy, and he preferred
to begin to address this risk promptly.

Amendment to Authorization
for Foreign Currency Operations
At this meeting the Committee considered a proposal to replace the existing
twelve-month maturity limit on the
investment of foreign currency balances
with an eighteen-month average duration limit. The proposal was designed to
allow the Manager a wider choice of
maturities and hence somewhat greater
operational flexibility in the implementation of the System's primary portfolio
objectives of liquidity with respect to
investments in foreign government securities and limits on overall interest rate
and credit risks. At the conclusion of
their review, the Committee members
voted unanimously to amend section 5
of the Authorization for Foreign Currency Operations to read as follows:
5. Foreign currency holdings shall be
invested to ensure that adequate liquidity is
maintained to meet anticipated needs and so
that each currency portfolio shall generally
have an average duration of no more than
18 months (calculated as Macaulay duration). 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.

Liquidity Management and the
Maturity Structure of the SOMA
Portfolio
The Committee also reviewed, on a preliminary basis, its current practices with
regard to the maturity structure of the
System Open Market Account (SOMA)
portfolio of Treasury obligations. In
its last such review, at its meeting on



March 31, 1992, the Committee decided
that the enhanced liquidity of the SOMA
portfolio that had been achieved should
be maintained but that net additions to
System holdings should continue to
be spread across all maturity areas. In
the course of their discussion at this
meeting, the members agreed that the
primary objective in the management
of the SOMA portfolio was to ensure a
high degree of liquidity so that prompt
and effective adjustments could be made
without unduly affecting the market for
Treasury securities.
It was agreed that the next meeting
of the Committee would be held on
Wednesday, November 13, 1996.
The meeting adjourned at 1:40 p.m.
Donald L. Kohn
Secretary

Meeting Held on
November 13, 1996
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 13, 1996, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Boehne
Mr. Jordan
Mr. Kelley
Mr. Lindsey
Mr. McTeer
Mr. Meyer
Ms. Phillips
Ms. Rivlin
Mr. Stern
Ms. Yellen
Messrs. Broaddus, Guynn, Moskow,
and Parry, Alternate Members
of the Federal Open Market
Committee

Minutes of FOMC Meetings, November
Messrs. Hoenig, Melzer, and
Ms. Minehan, Presidents of the
Federal Reserve Banks of
Kansas City, St. Louis, and Boston
respectively
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. Lang, Lindsey, Mishkin,
Promisel, Rolnick, Siegman,
Simpson, Sniderman, and
Stockton, Associate Economists
Mr. Fisher, Manager, System Open
Market Account
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
Messrs. Madigan and Slifman,
Associate Directors, Divisions of
Monetary Affairs and Research
and Statistics respectively,
Board of Governors
Mr. Reinhart, Assistant Director,
Division of Monetary Affairs,
Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Mr. Moore, First Vice President,
Federal Reserve Bank of
San Francisco
Ms. Browne, Messrs. Davis, Dewald,
Eisenbeis, Goodfriend, and
Hunter, Senior Vice Presidents,
Federal Reserve Banks of Boston,
Kansas City, St. Louis, Atlanta,
Richmond, and Chicago
respectively
Messrs. Cox and Judd, Vice Presidents,
Federal Reserve Banks of Dallas
and San Francisco respectively
Ms. Perelmuter, Assistant Vice
President, Federal Reserve Bank
of New York

By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on September 24, 1996,
were approved.



169

The Manager of the System Open
Market Account reported on recent
developments in foreign exchange markets. There were no open market transactions in foreign currencies for System
account during the period since the
meeting on September 24, 1996, and
thus no vote was required by 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
September 24, 1996, through November 12, 1996. 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. The
amounts and maturity dates of the
arrangements approved for renewal are
shown in the table below.
The Committee then turned to a discussion of the economic and financial
outlook and the implementation of
monetary policy over the intermeeting
period ahead. A summary of the economic and financial information available at the time of the meeting and of
the Committee's discussion is provided
below, followed by the domestic policy
directive that was approved by the Committee and issued to the Federal Reserve
Bank of New York.
The information reviewed at this
meeting suggested that the growth of
economic activity slowed substantially
in the third quarter, and the limited
information available for the period
since then indicated continued moderate expansion. A marked softening in
the growth of consumer expenditures
accounted for much of the slowing in
the third quarter, but slight weakening

170 83rd Annual Report, 1996

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
Bank of Mexico
Bank of Canada
National Bank of
Belgium
National Bank of
Denmark
Bank of France
German Federal
Bank
Bank of Italy
Netherlands Bank ...

Amount
of
arrangement
(millions
of
dollars
equivalent)
250
3,000
5,000
250
300
4,000

Term
(months)

Maturity
date

12

12/04/96
12/04/96
12/04/96
12/04/96
12/04/96
12/04/96

600

12/04/96

1,250
3,000
2,000

12/04/96
12/13/96
12/15/96

1,000

12/18/96

250
2,000

12/28/96
12/28/96

6,000
3,000
500

1

12/28/96
12/28/96
12/28/96

in housing demand, net exports, and
federal purchases of goods and services
also exerted retarding effects. On the
other hand, a sizable increase in inventory investment, greater strength in business demand for durable equipment, and
an upturn in spending on nonresidential
construction helped foster moderate
further economic growth in the third
quarter. Employment posted sizable
increases over the third quarter and rose
substantially further in October, but on
balance the gains were somewhat below
those recorded earlier in the year. Industrial production had weakened somewhat recently. Consumer price inflation
had picked up this year because of larger
increases in food and energy prices.
Increases in labor compensation, though
moderating in the third quarter, also had
been somewhat larger this year.
Private nonfarm payroll employment
increased considerably in October after
a small rise in September; private pay


roll growth had moderated on balance
since midyear but nevertheless had
remained substantial. In October, job
gains were large in service industries;
construction employment registered
another moderate gain; and manufacturing payrolls edged up after a sizable
September loss. The civilian unemployment rate in October was unchanged at
5.2 percent.
Industrial production appeared to
have declined appreciably in October
after having grown briskly on balance
over earlier months of the year. Much of
the slackening in October resulted from
work stoppages in the motor vehicles
industry, but the output of other industries also apparently decreased slightly
on balance. The drop in production was
accompanied by a slight decline in
capacity utilization in manufacturing.
Total retail sales rose appreciably in
September after having changed little
on net over July and August; for the
third quarter as a whole, total retail sales
edged higher after having expanded
briskly in the first half of the year.
September sales totals were boosted
by strong spending at automotive dealers, food stores, and nondurable goods
outlets. However, expenditures for furniture, appliances, and other non-auto
durable goods fell, and apparel sales
weakened a little further. Housing starts
declined in September from the unusually high level recorded in August, and
permits moved lower for a second
straight month. Home sales were mixed,
with sales of new homes well sustained
in September while those of existing
homes continued on a downtrend.
Growth of business fixed investment
surged in the third quarter. Outlays for
durable equipment picked up sharply,
and new orders for business equipment
remained on an upward trend. Sales of
computers and communications equipment increased rapidly, but demand for

Minutes of FOMC Meetings, November 111
other capital goods was up only slightly
during the quarter. In the transportation
sector, expenditures on motor vehicles
and aircraft strengthened while sales of
heavy trucks continued to drift lower.
Spending on nonresidential structures
more than reversed a second-quarter
decline; however, incoming data on contracts pointed to a continuation of the
pattern of somewhat slower growth
recorded thus far in 1996.
The pace of inventory investment
picked up markedly after midyear,
but inventory-sales ratios nonetheless
remained relatively low. In manufacturing, inventories rose moderately in the
third quarter, more than offsetting a
small rundown in stocks in the previous
quarter; stock-shipments ratios for most
industries remained near the low end of
their recent ranges. In the wholesale sector, inventories declined sharply in September after having edged down in the
previous two months, and the aggregate
inventory-sales ratio for the sector fell
to the low end of its range over recent
years. At the retail level, substantial
inventory accumulation occurred over
the July-August period (latest data).
Although stock-sales ratios rose
slightly, inventories remained relatively
well aligned with sales.
The nominal deficit on U.S. trade in
goods and services narrowed somewhat
in August from a high rate in July; however, for the two months combined,
the deficit was considerably wider than
its average rate for the second quarter.
Exports declined appreciably over the
July-August period, with most of the
decrease occurring in nonmonetary gold
and aircraft. Imports rose only marginally on balance over the two months.
The limited available information suggested that, on average, economic activity in the major foreign industrial countries expanded moderately in the third
quarter.



Consumer price inflation had picked
up on balance this year as a result of
sizable increases in food and energy
prices. Over August and September,
however, increases in food prices were
offset by a net decline in energy prices,
and overall consumer prices rose more
moderately. For the twelve months
ended in September, the advance in consumer prices of items other than food
and energy was a little smaller than it
had been over the previous twelve
months. At the producer level, price
inflation also was moderate over August
and September despite appreciable
increases in the prices of food and
energy items; producer prices of items
other than food and energy rose considerably less over the twelve months
ended in September than they had over
the previous twelve months. Growth in
the employment cost index for private
industry workers slowed considerably in
the third quarter after having trended up
over the first two quarters of the year;
however, this measure of labor compensation was up slightly over the twelve
months ended in September compared
with the previous twelve months.
Average hourly earnings of production
and nonsupervisory workers were
unchanged in October, but the twelvemonth rise in this index through October
was a bit larger than the increase over
the previous twelve months.
At its meeting on September 24,
1996, 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. 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

172 83rd Annual Report, 1996
reserve restraint would be acceptable
and slightly lesser reserve restraint
might be acceptable during the intermeeting period. The reserve conditions
associated with this directive were
expected to be consistent with moderate
growth of M2 and M3 over coming
months.
With incoming information continuing to suggest moderate economic
growth and subdued price inflation,
open market operations during the intermeeting period were directed toward
maintaining the existing degree of pressure on reserve positions, and the federal funds rate generally remained close
to the level expected with an unchanged
policy stance. Market participants had
anticipated some tightening of monetary
policy at the September 24 meeting, and
the announcement of an unchanged
policy led to an immediate decline in
interest rates, with the larger decreases
occurring at the shorter end of the yield
curve. Interest rates, especially those
at intermediate and longer maturities,
dropped further over the remainder of
the period in response to information
indicating that price and labor cost pressures were lower than market participants had expected. Equity markets
responded to the declines in interest
rates as well as to favorable earnings
reports, and most major indexes reached
record highs.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
depreciated slightly on balance over the
intermeeting period. Interest rates in the
foreign industrial countries fell somewhat less on average than did U.S.
interest rates. The dollar changed little
against the German mark and most other
major continental European currencies,
but it rose against the yen as prospects
for a significant supplemental budget
package in Japan waned in the aftermath



of the recent elections in that country.
The dollar declined against the pound
sterling in response to the release of
favorable data on the U.K. economy as
well as an unexpected increase in the
Bank of England's minimum lending
rate.
M2 grew at a slower pace in September and October than it had over earlier
months of the year; the weaker expansion resulted from a continuing rapid
runoff in its liquid deposit components.
Nonetheless, M2 was estimated to have
grown for the year through October at a
rate in the upper half of the Committee's
annual range. By contrast, M3 expanded
at a substantially faster rate in September and October than it had earlier in the
year, reflecting a surge in its large time
deposit and other managed liability
components to meet business demand
for bank loans. For the year through
October, M3 was estimated to have
grown at a rate around the top of its
annual range. Total domestic nonfinancial debt had expanded moderately on
balance over recent months and had
remained in the middle portion of its
range.
The staff forecast prepared for this
meeting suggested that the expansion
would continue at a rate close to, or
perhaps a little above, the economy's
estimated growth potential. Consumer
spending was projected to rebound in
the current quarter and subsequently to
expand at a moderate pace in line with
the projected increase in disposable
income; the favorable effect on household wealth of the rise that had occurred
in stock prices and the ample availability of credit for most borrowers
were expected to balance continuing
consumer concerns about the adequacy
of their savings and the restraining effect
of high household debt burdens. Homebuilding was forecast to decline slightly
further in response to the previous

Minutes of FOMC Meetings, November
backup in residential mortgage rates but
to stabilize at a relatively high level in
the context of continued income growth
and a generally favorable cash flow
affordability of home ownership. Business spending on equipment and structures was projected to grow less rapidly
in light of the anticipated moderate
growth of sales and profits. On balance,
the external sector was expected to
exert a small restraining influence on
economic activity over the projection
period. A slight degree of fiscal restraint
was anticipated over the forecast horizon. Continued pressure on resources,
especially in labor markets, pointed to
a likely underlying tendency toward
higher inflation over the projection
period; however, it was expected that
improved supply conditions in food and
energy markets, as well as planned technical changes, would damp increases in
the consumer price index relative to the
elevated 1996 rate.
In the Committee's discussion, members commented that most recent developments bearing on the outlook for economic growth and inflation had been
favorable. The information on economic
activity since the September meeting
had confirmed earlier indications of
appreciable slowing in the expansion to
a sustainable pace close to the economy's potential. The outlook remained
subject, as usual, to considerable
uncertainty, but many of the members
observed that underlying trends in key
sectors of the economy along with generally supportive financial conditions
seemed consistent with further moderate
economic expansion. In this regard,
several focused on what they saw as the
promising prospects for a rebound in
the growth of consumer expenditures
following weak expansion in the third
quarter; the pickup would help sustain
moderate economic growth over the
nearer term despite some anticipated



173

retrenchment in inventory accumulation.
With respect to the outlook for inflation,
members emphasized that despite widespread indications of tight labor markets, the increase in wages had been
muted and somewhat less than anticipated, and there was no broad evidence
of rising price inflation. Indeed, many
major measures of inflation had exhibited a slight downtrend since 1993.
Looking ahead, views differed to some
extent regarding the most likely course
for inflation. Several members indicated
that, while recent developments were
encouraging, they continued to see the
risks as tilted toward some rise, even
assuming that the expansion settled
into a pattern of growth near the economy 's potential as they anticipated and
resource utilization remained near current levels; other members felt that the
risks surrounding the forecasts for both
economic growth and price inflation had
become more evenly balanced, but more
evidence was needed before a firm judgment could be reached.
In their review of developments in
key sectors of the economy, members
said that they anticipated a pickup in
consumer spending from its much
reduced rate of growth in the third quarter. While the factors relating to the
prospects for consumer expenditures did
not all point toward greater strength,
members tended to focus on those favoring an upturn. These included persisting
growth in employment and incomes
and clearly upbeat consumer sentiment
as evidenced by recent surveys and
anecdotal reports. Financial factors also
seemed likely on balance to accommodate continuing growth in consumer
spending, in particular the marked
increases that had occurred in the value
of stock holdings and a still-ample availability of credit to most households.
Supporting evidence included anecdotal
reports from retailers in a number of

174 83rd Annual Report, 1996
areas who were experiencing sizable
gains in sales and seemed optimistic
about the outlook for the upcoming holiday season. Among the developments
that would tend to limit growth in consumer spending, members emphasized
that the level of consumer indebtedness
had strained the liquidity of many
households. The growth of consumer
credit was now exhibiting a moderating
trend, possibly pointing to restrained
spending by many households because
of already heavy debt service burdens
and generally tightening credit standards
for consumer loans. Other negative factors cited in the outlook for consumer
expenditures were the possibility of a
correction in the stock market and the
probable satisfaction of much of the
earlier pent-up demand for consumer
durables. In balancing these conflicting
influences, the members generally concluded that a pickup in the growth of
consumer spending to a moderate pace
was a likely prospect for this critical
sector of the economy.
Business fixed investment was
expected to provide further but diminished impetus to the expansion. This
view took account of the continued
availability of debt and equity financing
on favorable terms but also of expectations of a more moderate growth trend
in sales and the substantial buildup that
had already occurred in stocks of equipment and structures. With regard to the
latter, some overbuilding of commercial
and other structures characterized conditions in a number of areas. Nonetheless,
members reported considerable nonresidential building activity in several parts
of the country, and nationwide such
activity was expected to help sustain
modest growth in overall nonresidential
construction in coming quarters.
Recent data, supported by anecdotal
reports from several though not all parts
of the country, suggested that residential



building activity was slowing somewhat,
apparently in lagged response to earlier
increases in mortgage interest rates.
However, in the context of the partial
reversal recently of the previous
increases in mortgage rates and sustained growth in employment and
incomes, the housing sector was viewed
as likely to exert only a minor constraint
on overall economic activity over the
forecast horizon. Another somewhat
negative factor in the outlook for economic activity was the prospect of some
widening in the nation's trade deficit
over the projection period.
Fiscal policy currently remained on a
mildly restrictive course, but the range
of potential developments was especially wide, injecting an element of
considerable uncertainty in the economic outlook. Legislation affecting the
federal budget could have marked beneficial or adverse effects not only directly
on spending and incomes but also on
business and consumer confidence and
financial markets.
The growth of nonfarm business
inventories in the third quarter had
exceeded earlier expectations, but members commented that the sizable rise
appeared to have been largely voluntary
and the overall level of inventories was
still historically low in relation to sales.
Against this background, inventory
accumulation was likely to continue but
at a slower pace in the current quarter.
Beyond the near term, inventory investment was expected to become a more
neutral factor in the performance of the
economy, given the absence of incentives to build stocks relative to sales in a
period of moderate growth in projected
demand. The members recognized, however, that the prospective behavior of
inventories remained subject to substantial uncertainties.
In their discussion of the outlook for
inflation, members again focused on

Minutes of FOMC Meetings, November
developments in labor markets and the
extent to which rising cost pressures in
those markets might be passed through
to higher prices. The statistical and
anecdotal information generally continued to point to tight labor markets and to
a somewhat faster rise in labor compensation costs this year. Even so, the
increases in such costs were still falling
short of those that would have been
anticipated on the basis of historical
experience under similar labor market
conditions. Moreover, the advance in the
overall employment cost index in the
third quarter, while perhaps understated
to some extent, was appreciably below
expectations. At the same time, business
firms generally were not raising their
prices sufficiently to compensate for
faster increases in their labor costs, to
the extent that the latter were occurring,
evidently because of the persistence
of intense competition in most markets.
Indeed, with the notable exception of
the overall consumer price index, the
rate of inflation as measured by various
broad price indexes had tended to ease
marginally or at worst to stabilize over
the past two years. Prices of farm commodities and industrial materials had
declined considerably recently.
Despite the recent encouraging reports on labor compensation and prices,
the members agreed that the risks of
rising inflation could not be dismissed,
and several continued to view slightly
higher inflation as a likely if not inevitable prospect. Much would depend, of
course, on the strength of the economic
expansion and the associated degree of
pressure on resources, notably in labor
markets which appeared to have comparatively little slack in relation to other
producer resources. It was suggested
in this regard that restrained increases
in labor compensation in comparison
with historical experience probably were
a transitory phenomenon, though one



175

could not predict when a more normal
relationship would re-emerge. A related
concern was whether the tightness in
labor markets would ease sufficiently
and quickly enough to prevent inflation
pressures from escalating significantly.
Some members mentioned a number of
favorable factors in the outlook for inflation that tended to attenuate such concerns, such as reduced pressures on food
prices as a result of better-than-expected
harvests and improved supply conditions in markets for energy. Relatively
restrained monetary growth in recent
months also was cited as a development
consistent with subdued inflationary
pressures. Moreover, the view was
advanced that recent developments in
bond markets could be read as suggesting some decrease in inflationary expectations. On balance, while the members
expressed varying degrees of concern
that tight labor markets and attendant
increases in wages might at some point
lead to rising price inflation, they agreed
that there was little or no evidence of
such a development at this point and the
outlook was far from certain.
In the Committee's discussion of policy for the intermeeting period ahead, all
the members indicated that they could
support an unchanged policy stance and
the retention of a bias toward restraint in
the directive. The slowing of the expansion to a sustainable pace near the
economy's growth potential and the
recent surprisingly favorable inflationary developments suggested lower risks
of strengthening price pressures and provided the Committee with a desirable
opportunity to pause and observe further
developments bearing on the course of
economic activity and inflation. Indeed,
to the extent that inflation expectations
had declined recently, short-term interest rates, which had changed little in
nominal terms, had edged higher in real
terms, implying slightly greater mone-

176 83rd Annual Report, 1996
tary restraint and reducing the odds that
inflation would pick up.
With regard to possible adjustments
to policy during the intermeeting period,
all the members indicated that they
could support a proposal to retain the
current bias toward restraint. Several
viewed such a bias as desirable because
they continued to believe that the risks
remained tilted, at least to some extent,
toward rising inflation over time. In the
circumstances, an asymmetric directive
would best reflect their views even if, as
seemed likely, intermeeting developments did not prompt a policy tightening adjustment. Other members commented that a shift to a symmetric
directive might be viewed as more consistent with the apparently diminished
inflationary pressures. They agreed,
however, that such a shift would be premature in the currently uncertain environment and might signal, inaccurately,
that the Federal Reserve was less concerned about the possibility of a a modest upward trajectory in price inflation.
At the conclusion of the Committee's
discussion, all the members indicated
that they supported a directive that
called for maintaining the existing
degree of pressure on reserve positions
and retaining 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 relatively strong
expansion in 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 that growth in economic activity
slowed substantially in the third quarter,
and the limited available information indicates continued moderate expansion more
recently. Private nonfarm payroll employment increased appreciably on balance over
September and October. The civilian unemployment rate remained at 5.2 percent in
October. Industrial production, which continued to rise in the third quarter, appears to
have declined in October owing in important
measure to work stoppages in the motor
vehicles industry. Total retail sales turned up
in September after slumping earlier in the
summer. Housing starts fell in September
from the exceptionally high level registered
in August. Outlays for business equipment
were strong in the third quarter and new
orders continued to trend upward; business
spending on nonresidential structures posted
a moderate advance. Inventory investment
was substantial in the third quarter, but
inventory-sales ratios remained relatively
low. The nominal deficit on U.S. trade in
goods and services widened considerably in
July-August from its average rate in the
second quarter. Increases in labor compensation, though moderating in the third quarter,
have trended up this year; consumer price
inflation also has picked up this year, owing
to larger increases in food and energy prices.
Market interest rates have moved lower
since the Committee meeting on September 24, 1996, with the largest declines occurring in intermediate- and long-term maturities. In foreign exchange markets, the tradeweighted value of the dollar in terms of
the other G-10 currencies has depreciated
slightly over the intermeeting period.
Growth of M2 in September and October
remained below its pace in the first half of
the year, while expansion of M3 was substantially higher over those two months. For
the year through October, M2 is estimated to
have grown at a rate in the upper half of the
Committee's annual range, and M3 at a rate
around the top of its range. Expansion in
total domestic nonfinancial debt has been

Minutes of FOMC Meetings, November 111
moderate on balance over recent months and
has remained in the middle portion of its
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 ranges it had established in January for growth of M2 and M3
of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of
1995 to the fourth quarter of 1996. The
monitoring range for growth of total domestic nonfinancial debt was maintained at 3 to
7 percent for the year. For 1997 the Committee agreed on a tentative basis to set the same
ranges as in 1996 for growth of the monetary
aggregages and debt, measured from the
fourth quarter of 1996 to the fourth quarter
of 1997. 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 relatively strong expansion in M3
over coming months.
Votes for this action: Messrs. Greenspan,
McDonough, Boehne, Jordan, Kelley,
Lindsey, McTeer, Meyer, Mses. Phillips,
Rivlin, Mr. Stern, and Ms. Yellen. Votes
against this action: None.

It was agreed that the next meeting of
the Committee would be held on Tuesday, December 17, 1996.
The meeting adjourned at 12:25 p.m.




Donald L. Kohn
Secretary

Meeting Held on
December 17, 1996
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 17, 1996, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Boehne
Mr. Jordan
Mr. Kelley
Mr. Lindsey
Mr. McTeer
Mr. Meyer
Ms. Phillips
Ms. Rivlin
Mr. Stern
Ms. Yellen
Messrs. Broaddus, Guynn, Moskow,
and Parry, Alternate Members
of the Federal Open Market
Committee
Messrs. Hoenig, Melzer, and
Ms. Minehan, Presidents of the
Federal Reserve Banks of
Kansas City, St. Louis, and Boston
respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. Lang, Lindsey, Mishkin,
Promisel, Rolnick, Rosenblum,
Siegman, Simpson, Sniderman,
and Stockton, Associate
Economists
Mr. Fisher, Manager, System Open
Market Account
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors

178 83rd Annual Report, 1996
Mr. Slifman, Associate Director,
Division of Research and
Statistics, Board of Governors
Mr. Reinhart, Assistant Director,
Division of Monetary Affairs,
Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Mr. Barron, First Vice President,
Federal Reserve Bank of Atlanta
Messrs. Beebe, Davis, Eisenbeis, and
Goodfriend, Senior Vice
Presidents, Federal Reserve Banks
of San Francisco, Kansas City,
Atlanta, and Richmond
respectively
Messrs. Gavin, Kos, and Rosengren,
Vice Presidents, Federal Reserve
Banks of St. Louis, New York,
and Boston respectively
Mr. Evans, Assistant Vice President,
Federal Reserve Bank of Chicago
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on November 13, 1996,
were approved.
The Manager of the System Open
Market Account reported on developments in foreign exchange markets since
the meeting on November 13, 1996.
There were no transactions in foreign
currencies 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
from November 13, 1996, through
December 16, 1996. By unanimous
vote, the Committee ratified these
transactions.
The Committee members discussed
certain changes in the procedures for
conducting domestic open market operations that the Manager of the System
Open Market Account had proposed for
implementation at the beginning of



1997. The changes included advancing
the normal time for initiating daily
operations by one hour to between
10:30 a.m. and 10:45 a.m. Moving to
the earlier time would place Desk operations closer to the period during the day
when the financing market was most
active and thus in a position to accommodate a larger volume of System transactions when necessary. As at present,
the Manager might choose to undertake
Desk operations at other times during
the day when special circumstances dictate. The Manager also indicated that
the normal time for domestic operations
might be moved to an even earlier hour
after expedited procedures were developed for assembling the necessary statistical information on a timely basis for
such operations. In the interest of making information about System operations available more promptly to market
participants and the broader public, the
Desk also would begin at the start of
1997 to announce the par amount of
its market transactions shortly after the
completion of the operations. With respect to purchases of Treasury coupon
securities for System account, the Desk
had adopted about one year ago the
practice of making such purchases in
separate maturity tranches but might at
its option in the future spread such purchases over a number of weeks rather
than over the course of several days.
This more flexible timing would allow
the Desk to inject reserves into the banking system through outright operations
as the need arose without waiting for
that need to accumulate to particularly
high levels.
All the members who commented
endorsed the changes, with several
noting that they were appropriate
responses to evolving market circumstances. Because the new procedures did
not involve any alterations in the Committee's current directives, authoriza-

Minutes of FOMC Meetings, December
tions, or rules, a formal vote was not
required.
The Committee then turned to a discussion of the economic and financial
outlook and the implementation of
monetary policy over the intermeeting
period ahead. A summary of the economic and financial information available at the time of the meeting and of
the Committee's discussion is provided
below, followed by the domestic policy
directive that was approved by the Committee and issued to the Federal Reserve
Bank of New York.
The information reviewed at this
meeting suggested that economic activity had continued to expand at a moderate pace in recent months. Consumer
spending had rebounded from its summer lull, but housing demand was somewhat weaker on balance and the growth
of business spending on durable equipment had slowed from a very rapid pace.
Although inventory investment had
picked up, stocks in most sectors had
remained well aligned with sales. Both
industrial production and employment
had recorded sizable advances. Increases
in labor compensation had trended up
this year, and consumer price inflation
also had picked up, but the faster rise in
overall consumer prices owed entirely
to larger increases in food and energy
prices.
Private-sector demand for labor
remained solid in November. Private
nonfarm payroll employment increased
appreciably further in November after
an October surge, and the average workweek of private production or nonsupervisory workers retraced more than half
of its October decline. Service industries
recorded another large gain in employment despite a sharp drop in payrolls at
help-supply firms, and the number of
jobs in retail trade expanded further in
November after a steep rise in October.
In the goods-producing sector, employ


179

ment in construction and manufacturing
rose moderately. The civilian unemployment rate increased slightly, to 5.4 percent, in November.
Industrial production rose sharply in
November after a small October decline.
A rebound in motor vehicle assemblies
from the disruptive effects of work
stoppages accounted for much of the
increase in production in November, but
output from utilities also surged in
response to unusually cool weather. The
production of nondurable consumer
goods and business equipment other
than motor vehicles also was up significantly in November, while the manufacture of consumer durables and defense
and space equipment decreased further.
Reflecting the strong advance in production, the utilization of total industrial
capacity picked up considerably in
November.
Consumer spending increased appreciably on balance in recent months after
a lackluster performance in the summer.
Total retail sales fell in November but
nonetheless were considerably above
their average in the third quarter. The
November decline reflected weakness in
auto sales; retail spending on other
items, notably nonauto durable goods,
rose significantly further. Spending on
services picked up in October (latest
data) following a relatively weak third
quarter. Housing starts rebounded in
November after having declined in September and October. Single-family starts
in November were a little below the
average pace of previous months in the
year, while multifamily starts surged to
a level not seen since late 1990. By
contrast, sales of both new and existing
homes dropped again in October (latest
data).
Growth of business fixed investment
appeared to have slowed to a moderate
pace in the fourth quarter after a sharp
rise in the previous quarter. Shipments

180 83rd Annual Report, 1996
of nondefense capital goods fell in October, reversing a sizable September gain;
however, recent data on orders pointed
to further increases in business spending
for equipment, especially for communications equipment where shipments
already were at a high level. Business
investment in transportation equipment
evidently weakened, as sales of heavy
trucks remained sluggish and production shortfalls held back fleet sales of
light vehicles. By contrast, nonresidential construction continued to expand at
a solid rate in October, with building
activity particularly strong in the office,
other commercial, institutional, and
industrial categories.
Business inventory investment picked
up sharply in October from the slow
September pace, but total stocks
remained at a low level in relation to
sales. Most of the October increase
occurred at the wholesale level; inventories of farm products turned up
sharply after months of sizable drawdowns, and petroleum stocks were built
up from unseasonably low levels. Despite the October rise, the ratio of
wholesale inventories to shipments
remained at the lower end of its range
over recent years. In manufacturing,
stocks increased at a pace in line with
shipments, and the aggregate inventoryshipments ratio stayed at a very low
level. Retail inventories were up moderately in October. The inventory-sales
ratio for the sector was unchanged and
remained in the middle of its range over
recent years.
The nominal deficit on U.S. trade in
goods and services was somewhat larger
in September than in August; exports
decreased slightly in September while
imports were little changed. For the
third quarter, the deficit widened substantially from its rate in the second
quarter as exports fell and imports rose
moderately. Nearly all of the decline in



exports reflected lower sales of aircraft
and gold. Increases in imports were
widespread but they were largely offset
by declines in imports of gold and semiconductors. Economic growth picked
up in most of the major foreign industrial countries in the third quarter, but
available indicators generally suggested
some slowing of growth in the fourth
quarter. In Japan, by contrast, economic
activity had been sluggish in the third
quarter but appeared to have picked up
more recently.
Consumer price inflation in October
and November was lifted slightly by
sizable advances in energy prices and, to
a lesser degree, increases in food prices;
however, consumer prices for items
other than food and energy rose modestly during the two months. The rise in
core consumer prices over the twelve
months ended in November was somewhat smaller than it had been over the
previous twelve months, although the
total index registered a bigger advance
as a result of larger increases in food
and energy prices. At the producer level,
prices of finished energy goods rose
sharply in October and November while
prices of finished foods advanced less
rapidly. Excluding food and energy,
prices of finished goods edged lower on
balance over October and November,
and in the twelve months ended in
November, these prices rose substantially less than in the previous twelve
months. Average hourly earnings of
production and nonsupervisory workers
were up considerably in November after
having edged down in October. The
twelve-month rise in this index was
somewhat larger than the advance over
the previous twelve months.
At its meeting on November 13,
1996, the Committee adopted a directive
that called for maintaining the existing
degree of pressure on reserve positions
but that included a bias toward the pos-

Minutes of FOMC Meetings, December
sible firming of reserve conditions during the intermeeting period. The directive stated that in the context of the
Committee's long-run objectives for
price stability and sustainable economic
growth, and giving careful consideration
to economic, financial, and monetary
developments, somewhat greater reserve
restraint would be acceptable and
slightly lesser reserve restraint might be
acceptable during the intermeeting
period. The reserve conditions associated with this directive were expected to
be consistent with moderate growth of
M2 and relatively strong expansion of
M3 over coming months.
Open market operations during the
intermeeting period were directed toward maintaining the existing degree of
pressure on reserve positions. However,
the federal funds rate tended to average
a little above the level expected with an
unchanged policy stance in apparent response to scattered operating problems
and occasional unexpectedly large clearing needs at banks. Other short-term
interest rates registered small mixed
changes since the November 13 meeting; Treasury bill rates drifted lower,
partly because of heightened demands
for safety and liquidity as asset markets
became more volatile during the period,
while year-end pressures boosted rates
on private instruments with maturities in
early 1997. At longer maturities, yields
drifted lower over most of the intermeeting period in response to incoming
data that suggested economic growth
would remain moderate and inflation
subdued, but they rebounded late in the
period in response to the release of
firmer economic data and growing concerns regarding the sustainability of current domestic asset prices. Despite these
concerns, most major indexes of equity
prices advanced further on balance.
In foreign exchange markets, the
trade-weighted value of the dollar in



181

terms of the other G-10 currencies rose
slightly over the intermeeting period.
The dollar rose even more against the
German mark and the French franc amid
increased market apprehension that the
European Monetary Union's common
currency, the euro, will not be as strong
a currency as the mark. The dollar also
might have been boosted by statements
by French and German officials that
suggested the dollar was undervalued
against their currencies.
Expansion of the broad monetary
aggregates was relatively strong in
November. Growth of M2 picked up,
reflecting a sharp increase in demand
deposits and smaller runoffs in other
checkable deposits. Inflows to retail
money market funds remained substantial. Expansion of M3 moderated somewhat from its brisk pace in October as
growth in business demands for credit
slowed and banks reduced their reliance
on large time deposits and other managed liability components. For the year
through November, M2 was estimated
to have grown at a rate in the upper half
of the Committee's annual range, and
M3 at a rate a little above the top of its
range. Total domestic nonfinancial debt
expanded moderately on balance over
recent months and remained in the
middle portion of its range.
The staff forecast prepared for this
meeting suggested that the expansion
would be sustained at a pace close to
the economy's estimated growth potential. Consumer spending was projected
to increase at a rate generally in line
with the anticipated rise in disposable
income; the favorable effects on household wealth of the advance that had
occurred in stock prices and the ample
availability of credit for most borrowers
were expected to balance the damping
effects of continuing consumer concerns
about the adequacy of their savings, the
security of their jobs, and the extent of

182 83rd Annual Report, 1996
their debt burdens. Homebuilding was
forecast to decline somewhat but to
stabilize at a relatively high level in the
context of continued income growth
and the generally favorable cash-flow
affbrdability of home ownership. Business spending on equipment and structures was projected to expand less rapidly in light of some anticipated slowing
in the growth of sales and profits. Fiscal
policy and the external sector were
expected to continue to exert small
restraining influences on economic
activity over the projection period. Consumer price inflation, excluding the relatively volatile food and energy components of the price index, was forecast
to rise slightly over 1997 and 1998 in
the context of anticipated high resource
use and an accompanying appreciable
pickup in the growth of labor compensation that would be augmented by the
legislated rise in the federal minimum
wage. Somewhat larger increases would
have been projected in consumer price
inflation in the absence of anticipated
technical measurement changes to the
index.
In the Committee's discussion of
current and prospective developments,
members commented that the information received during the relatively short
interval since the previous meeting had
not materially altered either their assessment that the economy was performing
quite favorably or their forecasts of further growth at a pace averaging near the
economy's potential. The economy currently displayed fairly solid underpinnings, with few imbalances of the kind
that historically had tended to create
problems. Against the background of
generally supportive financial conditions
and a high degree of consumer and
business confidence, further economic
growth was thought likely to be sustained by appreciable increases in consumer spending and business invest


ment. The overall pace of the expansion was expected to be restrained to an
extent, however, by declining federal
government outlays for goods and services and ongoing weakness in net
exports.
Despite the prospects for moderate
economic growth, members observed
that the risks on inflation still seemed to
be tilted toward some rise over time.
Measures of core inflation had displayed
little trend and even some decline over
the past year. However, wage increases
had moved higher over that period, a
development suggesting the possibility
that labor markets might be tighter than
could be sustained over the long term.
At some point accelerating labor compensation costs, were they to continue,
likely would spill over into higher inflation. Such an outcome remained subject
to a great deal of uncertainty, however,
in light of the relatively benign behavior
in recent years of both wages and prices
in comparison with historical experience at prevailing levels of resource
utilization.
In the Committee's discussion of
developments in major sectors of the
economy bearing on the outlook for
business activity, members noted that
consumer spending had picked up as
expected after a lull during the summer
months. Survey data and anecdotal
reports suggested that consumer confidence was currently high, and there
were widespread indications of robust
retail sales during the early weeks of the
holiday season, though holiday sales
were always difficult to read at this
stage. Thus far, however, sales of motor
vehicles had not strengthened to the
extent that was anticipated after full production was restored following a work
stoppage at a major manufacturer. Members cited a number of factors—the rise
in consumer debt burdens, tightening
consumer credit standards, continued

Minutes of FOMC Meetings, December
worker concerns about job security,
and the satisfaction of earlier pent-up
demands—that were tending to inhibit
the growth in consumer spending and
perhaps helped to explain why the sharp
increases in stock market wealth had not
been accompanied by stronger growth
in such spending. The behavior of the
stock market injected an additional note
of uncertainty into the forecast for consumer spending and the economy more
generally. The rise over recent years had
been extraordinary and had brought
market valuations to fairly high levels
relative to earnings and dividends. In
these circumstances, the members recognized the need to monitor with special
care price movements in the stock market and asset markets more generally
for their implications for consumer and
other spending. On balance, favorable
employment and income conditions
seemed likely to foster a level of
consumer spending that would provide
key support for sustained economic
expansion.
The members anticipated smaller
though still sizable gains in business
fixed investment over the year ahead.
Slowing growth in profit levels and cash
flows was likely to retard spending for
many types of business equipment, but
favorable prices, advancing technology,
and readily available financing probably
would continue to foster rapid expansion in office, computing, and communications equipment. The outlook for
nonresidential construction remained
uneven across the country, but such construction seemed likely to edge higher
on balance over the next several quarters. Members noted in this regard that
the construction of office buildings had
strengthened in a number of urban areas.
Business inventories currently seemed
on the whole to be at desired and sustainable levels in relation to sales. In the
circumstances, inventory accumulation



183

was projected to remain moderate and,
barring unexpected surges or declines in
final sales, was not likely to be a significant factor affecting the course of the
economy.
The recent information on residential
construction was mixed. Weakness in
late summer and early fall evidently
reflected the effects of earlier increases
in mortgage interest rates, but some
measures of housing activity in November indicated unexpected strength. In
addition, reports from around the country pointed to uneven conditions ranging
from further strength to some emerging
weakness in regional housing markets.
On balance, the statistical and anecdotal
information was interpreted, by some
members at least, as consistent with a
tendency for housing activity to stabilize. In this view, a level of housing
construction somewhat below the peak
reached earlier in 1996 was likely to be
sustained, buoyed in part by the recent
decline in mortgage interest rates and
the continuing rise in consumer incomes
and favorable consumer sentiment.
A modest degree of fiscal restraint
seemed likely over the next two fiscal
years. Some members expressed optimism with regard to the prospects for an
agreement between the President and
the Congress that would provide a basis
for reaching a balanced budget by the
year 2002. Such an agreement would
need to include controversial constraints
on the growth of entitlements, but
its achievement would have favorable
effects on financial markets and on business and consumer sentiment more generally, thereby tending to offset at least
in part any direct effects of reduced federal spending on aggregate demand.
Members anticipated that the external
sector of the economy would continue
to exert some restraint on domestic
economic activity, though perhaps to a
lesser extent than over the past year. In

184 83rd Annual Report, 1996
particular, the growth of U.S. exports
was expected to accelerate somewhat in
association with some strengthening on
average in the economies of the nation's
key trading partners. The economic
recovery in Mexico from its earlier
financial crisis was already providing a
considerable boost to exports from some
parts of the United States.
Inflation had remained subdued, but
the members continued to view the risks
as tilted toward increases in the future.
Labor compensation costs clearly were
rising at a faster pace in the context of
persistently tight labor markets, and an
upturn in core price inflation seemed
quite possible at some point in the
absence of some easing of pressures in
labor markets. However, the members
recognized that the increase in wage
inflation had been significantly less than
would have been anticipated on the basis
of historical relationships with labor
market conditions, and price performance also had been more favorable
than those relationships would have suggested. In the circumstances, there was a
good deal of uncertainty regarding the
outlook for inflation, including the
potential degree of utilization in labor
markets, the associated pressures on
labor costs, and the ability of firms to
pass higher labor costs into prices in
markets that generally continued to be
described as highly competitive. With
the economy operating in the neighborhood of its sustainable potential, relatively minor differences in overall economic growth could have a significant
effect over time on whether inflation
would tend to trend up or down.
In the Committee's discussion of policy for the intermeeting period ahead,
all the members supported a proposal
to maintain an unchanged policy stance
while also retaining a bias toward
restraint in the directive. An unchanged
policy was warranted by the quite satisDigitizedfactory performance of the economy and
for FRASER


inflation and the uncertainties surrounding the outlook. Thus, while the longerterm risks might point toward rising
inflation, there were reasonable prospects that inflation would remain contained, and any pickup in inflation,
should it occur, was likely to be limited
at least for a time. In the circumstances,
the members concluded that watchful
waiting remained the prudent course for
policy as they continued to assess ongoing developments. Because the risks of
waiting did not appear to be substantial
at this juncture, anticipatory tightening
was not yet called for.
In the Committee's discussion of possible adjustments to policy during the
intermeeting period, members agreed
that the retention of an asymmetric
directive toward tightening was consistent with their view that the risks
remained biased toward higher inflation.
Accordingly, while they were not suggesting that policy should be especially
quick to react to incoming information
over the intermeeting period, they did
view the next policy move as more
likely to be in the direction of some
firming than toward easing. In this connection, some members emphasized that
it would be especially important for the
Committee to act promptly to counter
any tendency for price inflation to rise
and for higher inflation expectations to
become embedded in financial markets
and economic decisionmaking more
generally.
At the conclusion of the Committee's
discussion, all the members indicated
that they supported a directive that
called for maintaining the existing
degree of pressure on reserve positions
and that retained 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 eco-

Minutes of FOMC Meetings, December
nomic, 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 relatively strong expansion in 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 that economic activity has continued to expand at a moderate pace. Private
nonfarm payroll employment increased
appreciably further in November, although
the civilian unemployment rate edged up
to 5.4 percent. Industrial production rose
sharply in November, in part because of a
rebound in motor vehicle assemblies that had
been depressed earlier by work stoppages.
Consumer spending has posted appreciable
gains over recent months after a summer lull.
Housing starts rebounded in November after
declining in September and October. Business fixed investment appears to be growing
moderately after a sharp rise in the third
quarter. The nominal deficit on U.S. trade in
goods and services widened substantially in
the third quarter from its rate in the second
quarter. Increases in labor compensation
have trended up this year, and consumer
price inflation also has picked up owing to
larger increases in food and energy prices.
Short-term market interest rates have registered mixed changes since the Committee
meeting on November 13, 1996, while longterm yields have risen slightly. In foreign
exchange markets, the trade-weighted value
of the dollar in terms of the other G-10
currencies has risen slightly over the intermeeting period.
Growth of M2 picked up in November,
while expansion of M3 moderated somewhat
from its brisk pace in October. For the year
through November, M2 is estimated to have
grown at a rate in the upper half of the
Committee's annual range, and M3 at a rate
Digitized a little above the top of its range. Total
for FRASER


185

domestic nonfinancial debt has expanded
moderately on balance over recent months
and has remained in the middle portion of its
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 ranges it had established in January for growth of M2 and M3
of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter
of 1995 to the fourth quarter of 1996. The
monitoring range for growth of total domestic nonfinancial debt was maintained at 3 to
7 percent for the year. For 1997, the Committee agreed on a tentative basis to set the same
ranges as in 1996 for growth of the monetary
aggregates and debt, measured from the
fourth quarter of 1996 to the fourth quarter
of 1997. 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 relatively
strong expansion in M2 and M3 over coming
months.
Votes for this action: Messrs. Greenspan,
McDonough, Boehne, Jordan, Kelley,
Lindsey, McTeer, Meyer, Mses. Phillips,
Rivlin, Mr. Stern, and Ms. Yellen. Votes
against this action: None.

It was agreed that the next meeting
of the Committee would be held on
Tuesday-Wednesday, February 4-5,
1997.
The meeting adjourned at 12:40 p.m.
Donald L. Kohn
Secretary

187

Consumer and Community Affairs
In 1996 the Board moved to administer
major changes under revised interagency regulations to carry out the Community Reinvestment Act (CRA). On
January 1, small banks became subject
to examination under the new rules;
large banks began data collection and in
some instances began developing strategic plans as the measure of their CRA
performance. The new rules, issued in
1995, emphasize performance in lending, service, and investment and will
help promote consistency in assessments
and reduce compliance burdens for
many banks.
The Board acted on a large number of
bank and bank holding company applications that involved CRA protests,
adverse CRA ratings, and issues of fair
lending and noncompliance with consumer regulations. Several applications
involved major bank mergers that elicited strong support and opposition from
members of the public, and all were
protested on CRA grounds. The Board
approved them after extensive analyses,
finding in each case that convenience
and needs factors were consistent with
approval.
In the fair lending area, the Board
referred discrimination cases regarding
state member banks to the Department
of Justice and also forwarded the results
of a major investigation into a mortgage
lender's overage-pricing practices. 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 continued to improve
the System's examination process for
fair lending, using enhanced statistical



techniques to test large institutions for
compliance.
Acting on behalf of the Federal
Financial Institutions Examination
Council and HUD, the Board met statutory deadlines with 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.
Subsequent to multiyear reviews of
Regulation M (Consumer Leasing) and
Regulation E (Electronic Fund Transfers), the Board completed rulemakings
that better match its consumer regulations to industry developments. In other
rulewriting, the Board published two
proposals, one governing "self tests"
that lenders may conduct under Regulation B (Equal Credit Opportunity) to
determine their compliance with fair
lending laws and another raising the
threshold for the coverage of small institutions under Regulation C (Home
Mortgage Disclosures) based on asset
size; the two proposals implement
amendments to the Equal Credit Opportunity Act and Home Mortgage Disclosure Act respectively.
These matters are discussed below,
along with other actions by the Board in
the areas of community affairs and consumer protection.

CRA Reform
During 1996 the Board began its implementation of a revised regulation under

188 83 rd Annual Report, 1996
the Community Reinvestment Act,
working closely 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
revised 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 reviewing data on the institution's lending, service, and investment
activities; requires larger institutions to
collect additional data for loans to small
businesses and small farms; and allows
alternative bases of evaluation for certain institutions to minimize the regulatory burden.
During 1996 the agencies began
using new examination procedures designed to make the examinations for
small institutions less intrusive and more
focused on performance. In addition, a
small number of banks elected to be
examined under the revised regulation's
lending, investment, and service tests.
The Board approved a strategic plan
submitted by a state member bank for
defining its program for addressing CRA
responsibilities, as provided by the regulation. Further, three banks were
granted designation as wholesale institutions under the revised regulation and
two were designated as limited-purpose
institutions.
Some measures taken by the Federal
Reserve will assist in implementing the
new CRA rules. A software program
was developed that assists examiners
in choosing a statistically reliable sample of loans for review; another program
prepares summaries of demographic and
economic information for use in CRA
examinations. In addition the Board,



in conjunction with the other federal
supervisory agencies, issued a document
that addresses many of the questions
more frequently encountered under the
new regulation. The agencies anticipate
adding to this document over time as
new questions arise and are addressed.

Fair Lending
Under the Equal Credit Opportunity Act
(ECOA), the Board is required to refer
to the Department of Justice violations
that it has reason to believe constitute a
"pattern or practice" of discrimination.
The Board made five referrals during
1996, three related to race discrimination and the others to marital status violations. Two of the cases involving
alleged race discrimination were under
active investigation by the Department
of Justice at the close of 1996. After
review, the three remaining matters
were returned for enforcement by the
Board.
Also in 1996, the Department of Justice reached a court-approved settlement
agreement with a lender on a matter
referred by the Board in late 1995. The
Board had forwarded information from
a major investigation of loan pricing
involving "overages" that were allegedly discriminatory. In the settlement,
which was based on evidence developed
by the Board and a Reserve Bank, the
lender agreed to steps that included paying $3.8 million to minority customers
identified by the Department of Justice
as having been overcharged on a discriminatory basis.
The ECOA also requires the referral
of certain types of violations of the act,
other than "pattern and practice," to
HUD. The three cases of that type
referred during 1996 involved alleged
discrimination on the basis of race,
national origin, and gender. At year-end,

Consumer and Community Affairs
all three were pending final resolution
by HUD.
The Board continued the refinement
of its specialized fair lending school during 1996. The two-week school comprises an extensive range of both conceptual and practical topics. Subjects
include a historical perspective on the
development of fair lending law; current
legal theories of lender liability; and an
introduction to fair lending examination
techniques, including off-site preparation, detection techniques for various
loan products, and methodologies for
analyzing examination findings. Class
work includes lectures, analysis of case
histories, and role-playing. During 1996,
eighty students attended the fair lending
school and received more than seventy
hours of training. An extensive revision
of this school, begun late in 1996 on the
basis of proposals from instructors and
students to make it more interactive, is
due for completion in 1997.
In evaluating compliance with fair
lending laws, bank examiners assess
decisions in relation to the underwriting
standards of the lending institution.
They sample 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 review underwriting
standards used by the institution in order
to identify standards that may raise
concerns in the context of fair lending
enforcement.
To facilitate fair lending reviews,
examiners often use data collected and
reported under the Home Mortgage Disclosure Act (HMDA). The HMDA data
do not include the wide range of financial and property-related factors that
lenders consider in evaluating loan
applications, and therefore these data
alone cannot determine the presence or



189

absence of discrimination. Nonetheless,
access to loan application files and related information enables examiners to
augment the data in making determinations regarding unlawful discrimination.
In addition, since 1994 the Federal
Reserve has used a two-stage statistical
analysis system to aid in the fair-lending
examination of large-volume mortgage
lenders. In the first stage of the analysis,
examiners use HMDA data recorded by
the institution on its loan-application
register to help determine whether race
appears to be a significant factor in a
bank's lending decisions. The Board
substantially enhanced the first-stage
system during 1996. Instead of basing
the initial assessment of racial disparities on a random sample of white and
minority applications, the first-stage
program now uses a sample of white
and minority applicants that have been
matched on the basis of characteristics
(such as income, loan amount, and property location) that are available from the
HMDA data.
When the first-stage analysis indicates a statistically significant difference
in the results for white applicants compared with those for minority applicants,
examiners will generally proceed to the
second stage of the analysis. In the second stage, examiners draw extensive
additional information from the bank's
loan application files. The augmented
information allows for a more sophisticated matched-pair statistical analysis
that identifies specific loan files for
examiners to review and discuss with
management during their on-site fair
lending evaluation.

HMDA Data and Lending
Patterns
The Home Mortgage Disclosure Act
requires covered mortgage lenders in
metropolitan areas to disclose data

190 83rd Annual Report, 1996
regarding mortgages for home purchase,
home improvement, and home refinancing. In 1996, depository institutions
and mortgage companies generally were
covered if they were located in metropolitan areas and had assets of more
than $10 million. Independent mortgage
companies were covered, regardless of
their asset size, if they originated 100 or
more home purchase loans in the preceding calendar year. In 1996, 9,539
lenders, consisting of 868 independent
mortgage companies and 8,671 other
mortgage lenders, reported data for calendar year 1995.l
Under HMDA, covered lenders submit geographic information about the
property related to a loan transaction,
the disposition of loan applications, and,
in most cases, 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).2
In 1996 the Board prepared roughly
36,600 disclosure statements. The 1995
data contained 11.2 million reported
loans and applications, an 8 percent
decrease from 1994 that is largely attributable to a decline in refinancing activity.3 In July, individual institutions made
1. In September 1996 the Congress amended
HMDA to raise the asset threshold for depository
institutions according to changes in the consumer
price index for urban wage and clerical workers
since 1975. Beginning in January 1997, a depository institution will be subject to HMDA if its
assets were greater than $28 million at year-end
1996. The asset-size measure that determines the
coverage for independent mortgage companies is
unchanged.
2. The member agencies are the Board, the
FDIC, the National Credit Union Administration,
the OCC, and the OTS.
3. A summary of the 1995 HMDA data appears
in a series of special tables included in the Federal
Reserve Bulletin, vol. 8 (September 1996),
pp. A68-A75.



these disclosure statements public, and
in August, aggregate reports that contain
data for all lenders in a given metropolitan statistical area (MSA) became available in printed form at a central depository in each of the nation's 330 MS As.
The FFIEC also makes the information
available on microfiche, magnetic tape
(reel and cartridge), PC diskette, and
CD-ROM.
Lending institutions tend to specialize
in different types of home loans. In
1995, depository institutions continued
to be the predominant source of home
improvement and multifamily loans.
Mortgage companies accounted for
about 52 percent of the conventional
home purchase loans reported and about
80 percent of the government-backed
home purchase loans.
Mortgage originators and institutions
in the secondary market for mortgages,
such as Fannie Mae (the Federal
National Mortgage Association) and
Freddie Mac (the Federal Home Loan
Mortgage Corporation) offer a variety of
home loan programs to benefit lowerincome and minority households and
neighborhoods. These programs may
account for a continued increase in loans
to these homebuyers. From 1993 to
1995 the number of conventional home
purchase loans extended to lowerincome borrowers increased 21 percent,
compared with a 10 percent increase for
higher-income homebuyers over the
same period.
Lending to minority homebuyers has
also increased markedly. From 1993 to
1995 the number of loans to black applicants increased 70 percent, to Hispanic
applicants 48 percent, and to Asian
applicants 24 percent. The increase for
white applicants was 12 percent over the
same period.
The 1995 data continue to show rates
of credit denial that are higher for black
and Hispanic loan applicants than for

Consumer and Community Affairs
Asian and white applicants even within
the same income brackets. In 1995 the
denial rates for conventional home purchase loans overall were 41 percent for
black applicants, 30 percent for Hispanic applicants, 13 percent for Asian
applicants, and 21 percent for white
applicants. These rates were all somewhat higher than in 1994. 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 applicants.
Consequently, the data alone do not
provide an adequate 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 their accuracy critically
important. 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.
Since lenders first began submitting
their HMDA data in case-by-case
(single-record) form rather than aggregated by census tract, the quality has
improved considerably. The proportion
of 1995 loan records containing detected
errors was less than 0.5 percent, down
from about 4.4 percent in 1991 (the first
year in which data were reported on a
case-by-case basis).
Other Uses of HMDA Data
Since 1990 the HMDA data reported
by lenders have included information
about the race, sex, and income of



191

borrowers and loan applicants. For
loans sold, lenders also identify purchasers by type of entity. These
expanded data provide opportunities
to assess the relative performance of
mortgage lending institutions in serving
the credit needs of lower-income and
minority homebuyers.4
In its oversight of housing activities
by government-sponsored entities, HUD
uses the expanded HMDA data to
help assess the efforts of Fannie Mae
and Freddie Mac in attaining goals
for supporting mortgages for low- and
moderate-income families and for properties in targeted communities. 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
state and local agencies; the data also
assist in the agencies' targeting of lenders for investigation.

Private Mortgage Insurance
The FFIEC also compiles HMDA-like
data pertaining to applications for private mortgage insurance (PMI) on
behalf of the nation's eight active PMI
companies. 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 PMI companies voluntarily submit their data to
the FFIEC, which prepares company4. See, for example, the discussion of which
institutions bear the credit risk of mortgages
extended to lower-income and minority homebuyers in Glenn B. Canner, Wayne Passmore, and
Brian J. Surette, "Distribution of Credit Risk
Among Providers of Mortgages to Lower-Income
and Minority Homebuyers," Federal Reserve Bulletin, vol. 82 (December 1996), pp. 1077-1102.

192 83 rd Annual Report, 1996
specific disclosure statements for each
of the firms and aggregate reports for
each metropolitan area. These reports
are available for public review at the
central depositories where HMDA data
are available. Like the HMDA data, this
information is also available from the
FFIEC in other formats, including data
tape, CD-ROM, and PC diskette.5

Community Development
The Federal Reserve System's Community Affairs programs identify community development and reinvestment
needs along with fair lending issues; and
they develop educational, informational,
and technical assistance programs to
facilitate constructive responses by
banks and their communities. During
1996 the System's Community Affairs
programs continued to expand and
enhance products and services to help
banks and community representatives
assess needs and implement fair lending, community development, and reinvestment programs.
Six Reserve Banks engaged in major
efforts to help identify and address barriers to equal access to credit for homebuyers. The Boston, New York, Cleveland, Chicago, St. Louis, and San Francisco Banks each identified key participants in the homebuying process in
their Districts and brought them together
with community representatives to
discuss problems affecting minority
and lower-income homebuyers and
forge collaborative solutions. These
community-targeted programs are based
on an effort pioneered by the Cleveland
Reserve Bank in its home city. The program generally includes the formation
of task groups that focus on key aspects
5. For an analysis of the 1995 private mortgage
insurance data, see appendix A of Canner, Passmore, and Surette, "Distribution of Credit Risk."



of the lending process and then develop
findings and action plans.
During 1996 the Community Affairs
programs sponsored or cosponsored
more than 200 conferences, seminars
and informational meetings on community development, reinvestment, and
fair lending topics. The programs were
attended by about 10,800 bankers, examiners, and representatives of small
businesses and community and consumer groups. In addition, staff members of the Community Affairs programs
at the Board and the Reserve Banks
made more than 260 presentations at
conferences, seminars, and meetings
sponsored by banking, governmental,
business, and community organizations.
The Reserve Banks' Community
Affairs programs helped design and conduct a wide variety of conferences and
training programs for bankers and community representatives that focused on
the revised regulations implementing the
Community Reinvestment Act. They
also participated in Federal Reserve and
interagency training for examiners who
conduct CRA assessments of financial
institutions.
The Reserve Banks of Boston, Philadelphia, Richmond, Atlanta, Chicago,
Dallas, Kansas City, Minneapolis, and
San Francisco held a variety of conferences and workshops on aspects of community development finance.
Several Reserve Banks developed
programs focused on the development
of small and minority businesses. The
Boston Reserve Bank sponsored a conference for Maine bankers, nonprofit
lenders, and public officials regarding
microenterprise lending and other
resources available to help the financing
of Maine's small and start-up businesses. In addition the Boston Bank
worked with Maine bankers to help
develop the new Maine Community
Reinvestment Corporation, a statewide

Consumer and Community Affairs
multibank lending consortium for
affordable housing; and the Dallas
Reserve Bank sponsored several seminars for small-business owners. The
San Francisco Reserve Bank held a conference to foster closer working relationships among bankers, small businesses,
and organizations providing technical
assistance to small firms.
A conference at the Kansas City
Reserve Bank targeted public policy
issues affecting rural capital markets,
and the New York Reserve Bank convened a conference on delivering capital
resources for economic development
in non-urban areas. The San Francisco
Reserve Bank sponsored a conference
on electronic banking that focused on
how technological changes affect the
relationship between consumers and
their financial institutions.
In response to a rising number of
requests for assistance and information
on community development investments
by financial institutions, the Community
Affairs programs developed or expanded
a variety of publications and other informational resources. The Board significantly expanded its annual compendium
entitled Directory: Community Development Investments, by adding discussions
of investments by state member banks
to those about investments made by
bank holding companies. The directory
now covers more than 150 existing community development corporations and
investments. The Board's Community
Affairs program also assisted other divisions at the Board in addressing community development policy issues.
Other informational products distributed by the System's Community
Affairs programs covered a broad array
of topics. The Dallas Reserve Bank published Texas Colonias: A Thumbnail
Sketch of the Conditions, Issues, Challenges and Opportunities. The report,
which received national recognition, de


193

scribes conditions in, and possibilities
for assistance to, low-income, unincorporated subdivisions that have sprung
up along the Texas-Mexico border. To
assist bankers and others, the Dallas
Reserve Bank also developed and published Banking on Partnerships: A
Digest of Community-Based Organizations in Houston, which profiles the
structure and activities of community
development organizations in the Houston area.
The Minneapolis Reserve Bank produced and distributed a new educational
video, Lending in Indian Country, which
focuses on the challenges and unique
opportunities in financing business and
real estate development on reservations.
The Minneapolis Reserve Bank also
played a leadership role in an effort to
bring together tribal and business leaders to explore economic development
initiatives for the economically distressed Pine Ridge Reservation, in
South Dakota.
The Federal Reserve Bank of Kansas
City developed and published Doing
the Undoable Deals: A Resource Guide
to Financing Housing and Economic
Development. The guide describes a
variety of financial and management
assistance programs available to community development projects.
All twelve Federal Reserve Banks
continued to expand and enhance their
Community Affairs newsletters. These
publications typically feature information on community development
lending and investment programs and
related CRA, HMDA, and fair lending policies and issues. During 1996,
Reserve Bank Community Affairs newsletters reached more than 74,000 representatives of financial institutions, community organizations, local government
agencies, and others interested in bank
involvement in community development
and reinvestment efforts.

194 83rd Annual Report, 1996
During 1996 the Banks' Community
Affairs staffs held more than 1,400
meetings with bankers, government
officials, and business and community
representatives to discuss community
development, community reinvestment,
and related programs being undertaken
by bankers and their communities. The
Richmond Reserve Bank issued community profiles highlighting community
needs and development organizations
and resources in the areas of Richmond; Columbia, South Carolina; and
Hagerstown, Maryland. The Philadelphia Reserve Bank published a profile on Williamsport, Pennsylvania. And
the St. Louis Reserve Bank issued
metropolitan-area profiles for Owensboro, Kentucky; Fayetteville-SpringdaleRogers, Arkansas; and Springfield,
Missouri.
To supplement its outreach activities,
the Boston Reserve Bank formed a
Community Development Advisory
Council, composed of lenders and representatives of public and nonprofit agencies who are knowledgeable about housing and economic development issues.
The council will meet three times each
year with the Reserve Bank President
and staff members of the Community
Affairs program to discuss regional
community development and reinvestment issues. The Atlanta Reserve Bank
developed an extensive database of
community contacts; and all of the federal banking regulators are considering
adoption of its database structure.
Another significant part of Board
and Reserve Bank Community Affairs
activities is assisting the Federal Reserve's bank supervisory units regarding
CRA and fair lending. The Board's
Community Affairs program helped
conduct consumer compliance and fair
lending schools, participated in interagency efforts to adapt policies for the
implementation of revised CRA rules,



and provided other briefings and educational training programs for examiners.
The Community Affairs programs at the
Atlanta, Richmond, and Kansas City
Reserve Banks helped develop and
implement an interagency training program on community development for
examiners located in the Southeast.
In 1996 the capacity and efficiency of
the computerized Community Lending
Analysis System (CLAS) was increased
in response to examiner feedback. The
system gives examiners detailed economic and demographic information on
a bank's community and helps increase
consistency in the development of CRA
assessments and ratings. In addition, the
federal banking agencies coordinated
with each other in reviewing examiner
experience with CLAS and developed
a consensus on which data elements
and report formats were most useful to
examiners.

Other Regulatory Matters
In December, the Board solicited comment regarding issues that the Board
will address in a study concerning the
public availability and use of sensitive
identifying information about consumers. The study is required by the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which sets
a March 1997 deadline for reporting to
the Congress. Other regulatory actions
taken during the year, some of them also
required by the 1996 act, are discussed
below.
Regulation B
(Equal Credit Opportunity)
In December the Board published proposed revisions to Regulation B to carry
out amendments to the Equal Credit
Opportunity Act. These amendments
create a legal privilege for information

Consumer and Community Affairs

195

developed by creditors as a result of
"self tests" that they voluntarily conduct to determine their level of compliance with the ECOA. (In January 1977
the Department of Housing and Urban
Development published a substantially
similar proposal to revise the regulations carrying out the Fair Housing Act.)
In December the Board withdrew a
proposed amendment to Regulation B
that would have eliminated a general
prohibition on collecting data relating to
an applicant's sex, race, color, religion,
or national origin. The proposed amendment would have allowed creditors to
collect these data for any credit product.
The Board determined that the issue of
data collection is more appropriate for
the Congress to consider.

Review program. The final rule contains
substantive amendments, including
changes to the existing exemptions for
securities or commodities transfers. Primarily, however, the revisions simplify
the language and format of the regulation and commentary and delete obsolete provisions.
The review of Regulation E served to
identify other issues that might warrant
regulatory changes. In April the Board
published proposed amendments to
Regulation E to govern stored-value
cards. The proposal also addresses
general provisions of the regulation,
providing longer error-resolution deadlines for new accounts and allowing
electronic disclosures to consumers in
place of printed notices.

Regulation C
(Home Mortgage Disclosure)

Regulation M
(Consumer Leasing)

In December the Board published proposed revisions to Regulation C to carry
out amendments to the Home Mortgage
Disclosure Act. Those amendments
require an increase in the exemption
threshold for depository institutions,
from $10 million to $28 million, based
on the increase in the consumer price
index for urban wage and clerical workers from 1975 to year-end 1996. Under
the statutory amendments, the Board
will make future changes to the asset
threshold annually as appropriate. The
amendments also modify the requirements applicable to disclosures for metropolitan areas in which an institution
has branch offices.

In September the Board published a
revised Regulation M following a multiyear review under the Board's Regulatory Planning and Review program.
Regulation M requires lessors to give
consumers uniform disclosures of cost
and other lease elements before the lease
becomes legally binding. In its review
the Board sought to identify ways that it
could simplify the regulation to fulfill
the Congress's intentions more effectively. The final rule modernized the
regulation to address changes that have
taken place in consumer leasing since
1976, the year the Congress passed the
Consumer Leasing Act,
The final rule adds disclosures, primarily in connection with motor vehicle
leasing. The Board determined that
these revisions were especially necessary given that about one-third of all
passenger cars now delivered to consumers are leased instead of purchased
and financed. The disclosures concern
charges a consumer might face for early

Regulation E
(Electronic Fund Transfers)
In April the Board published revisions
to Regulation E and the associated staff
commentary following a review under
the Board's Regulatory Planning and



196 83rd Annual Report, 1996
termination, for example, and how
scheduled payments are derived. The
Board also specified certain aspects of
the format of the disclosures. The Board
revised the advertising provisions to
carry out a statutory amendment, allowing toll-free numbers to substitute for
certain disclosures in radio and television advertisements. The Board also
provided that any disclosure or advertisement of a lease rate must inform the
consumer that the rate may not measure
the overall costs of the lease financing.
This limitation is meant to preclude
inappropriate and erroneous comparisons of lease costs based on rate information offered to consumers by different lessors.
In December the Board published
proposed revisions to Regulation M, primarily to implement amendments to the
Consumer Leasing Act, which had been
enacted in September. The proposed
revisions streamline the advertising disclosures and make several technical
amendments.
Regulation Z
(Truth in Lending)
In January the Board requested comment on whether, under the Truth in
Lending Act (TILA), cost disclosures
and other rules for open-end homesecured lines provide adequate consumer protection. In November the
Board reported to the Congress, as required by the Riegle Community Development and Regulatory Improvement
Act of 1994. The report describes the
regulatory framework for open-end
home equity lines of credit compared
with that for closed-end credit and discusses information drawn from consumer surveys. The report presents the
Board's analysis of issues and its findings that the current requirements provide adequate consumer protection.



The Board is required to adjust annually the dollar amount that triggers additional disclosure requirements under
TILA for mortgage loans that bear fees
above a certain amount. The Home
Ownership and Equity Protection Act of
1994 imposes restrictions and special
disclosure requirements when total
points and fees payable by the consumer
exceed the greater of $400 or 8 percent
of the total loan amount. Under the act,
the Board must adjust the dollar amount
each year according to the percentage
change in the consumer price index. In
January the Board adjusted the dollar
amount to $412 for 1996; in December
it adjusted the dollar amount to $424 for
1997.
In April the Board issued a report to
the Congress, required by the Truth in
Lending Act Amendments of 1995, that
discussed the feasibility of treating as
finance charges all costs required by
the creditor or paid by the consumer as
an incident of credit; the report also
addressed abusive refinancing practices.
The Board determined that, although
changing the definition of finance charge
may be desirable, changes affecting disclosure of the finance charge and the
annual percentage rate would be significant for both creditors and consumers.
The Board concluded that changes,
if any, should be preceded by further
deliberation and participation from the
public. The Board will consider regulatory revisions consistent with the report
in an upcoming review of Regulation Z.
In May the Board published proposed
revisions to Regulation Z to carry out
the statutory amendments enacted in
1995 that establish new creditor-liability
rules for closed-end loans secured by
real property or dwellings. The TILA
amendments created new tolerances for
accuracy in disclosing the amount of the
finance charge. The amendments also
clarify how lenders must disclose cer-

Consumer and Community Affairs
tain fees connected with mortgage loans.
In addition the Board proposed a new
rule regarding the treatment of fees
charged in connection with debt cancellation agreements. In September the
Board published a final rule adopting
the revisions.
In December the Board and HUD
issued a joint advance notice of proposed rulemaking to revise disclosures
that consumers receive under the
Real Estate Settlement Procedures Act
(RESPA) and TILA. Amendments to
RESPA and TILA require the agencies
to simplify and improve the disclosures
where possible and to provide a single
format for compliance with both RESPA
and TILA. The notice solicited public
comment on the specific regulatory and
legislative changes that might achieve
these goals.
Interpretations
In March the Board revised the official
staff commentary to Regulation Z (Truth
in Lending). The update gives guidance
on issues relating to reverse mortgages
and to home-secured loans bearing rates
above a certain percentage or fees above
a certain amount. The revisions also
address issues of general interest, such
as a card issuer's responsibilities when a
cardholder asserts a claim or defense
relating to a dispute with a merchant.
In November the Board published
proposed changes to the staff commentary to Regulation Z. The proposed revisions provide guidance on the treatment
of some fees paid for mortgage loans, of
tolerances for accuracy in disclosing the
finance charge and other costs, and of
debt cancellation agreements.
In May the Board withdrew a proposed amendment to the official staff
commentary to Regulation DD (Truth in
Savings) because of its narrow scope
and regulatory burden. The proposal



197

addressed technical matters such as the
effect of a leap year on the calculation of
interest, on the annual percentage yield,
and on the annual percentage yield
earned.
In September the Board revised the
official staff commentary to Regulation B (Equal Credit Opportunity). The
update gives guidance on issues such as
credit scoring and the regulation's
spousal signature rules.

Economic Effects of the
Electronic Fund Transfer Act
In keeping with statutory requirements,
the Board monitors the effect of the
Electronic Fund Transfer Act on the
compliance costs and consumer benefits
related to electronic fund transfer (EFT)
services.
The revisions to Regulation E made
in 1996 and discussed above reduce
somewhat the ongoing burden of compliance with the regulation without
materially affecting consumer benefits.
The revisions to Regulation E were limited because the original regulation
already followed closely the detailed
requirements of the law.
In 1996 the Congress amended the
Electronic Fund Transfer Act to exempt
needs-tested programs that are established or administered by state or local
governments for the electronic transfer
of benefits. (The Board expected to propose an implementing amendment to
Regulation E in January 1997.) The
exemption eliminates uncertainty about
potential fraud arising from the EFTA's
liability rules and will reduce the cost to
state and local governments of providing benefits electronically. Under the
exemption, benefit recipients may have
somewhat diminished protections, especially for unauthorized use. Electronic
delivery will, however, likely provide
benefit recipients greater overall secu-

198 83rd Annual Report, 1996
rity than the paper-based systems that
are now in use.
Some economic effects of the Electronic Fund Transfer Act, both consumer benefits and compliance burden,
can be traced to continued growth in the
use of EFT services. During the 1990s
the proportion of U.S. households using
EFT services has increased at an annual
rate of about 2 percent. Surveys indicate
that about 85 percent of households now
have one or more EFT features on their
deposit accounts.
Automated teller machines are the
most widely used EFT service. Nearly
two-thirds of all households currently
have ATM cards, and most of the
nation's depository institutions offer
consumers access to ATMs. Over time,
almost all ATM terminals have become
connected to one or more shared networks, which enhances their accessibility to consumers. The monthly average
number of ATM transactions increased
about 10 percent, from 807.4 million in
1995 to 890.3 million in 1996. During
the same period, the number of installed
ATMs rose 13 percent, to 139,134.
Direct deposit is another widely used
EFT service. More than one-half of all
U.S. households receive funds in their
accounts via direct deposit by the payer.
Direct deposit is particularly widespread
in the public sector, covering more than
one-half of social security payments and
two-thirds of federal salary and retirement payments. Although less common
in the private sector, direct deposit
has grown substantially in recent years.
The proportion of households receiving
either public-sector or private-sector
direct deposits has grown about 5 percent per year during the 1990s.
Nearly one-third of households now
have debit cards, which can be used
at the point of sale to debit a consumers' transaction account. Point-of-sale
(POS) systems still account for only a



small share of electronic transactions,
but rapid growth continued in 1996:
the number of POS transactions rose
nearly one-half, to about 96 million per
month; and the number of POS terminals rose about two-thirds, to around
875,000.
The incremental costs associated with
the EFT act are difficult to quantify
because no one knows how industry
practices would have evolved in the
absence of statutory requirements. The
benefits of the law are also difficult to
measure because they cannot be isolated
from consumer protections that would
have been provided in the absence of
regulation. The available evidence provides no indication of serious consumer
problems with electronic transactions at
this time.
The Board's database of consumer
complaints and inquiries is one source
of information on potential problems. In
1996, eighty of the complaints that were
received related to electronic transactions. The Board forwarded forty-five
complaints that did not involve state
member banks to other agencies for
resolution. Of the remaining thirty-five
complaints, three involved a possible
violation of the act or regulation. Examination data show that in 1996 about
94 percent of depository institutions
examined by federal agencies were in
full compliance with Regulation E.
Violations primarily involved failure
to provide all required disclosures to
consumers.

Compliance Examinations
Since 1977 the Federal Reserve System
has maintained a specialized program
for examining the compliance of state
member banks and of certain foreign
banking organizations with federal laws
governing consumer protections in
financial services. During the 1996

Consumer and Community Affairs
reporting period (from July 1, 1995, to
June 30, 1996), the Federal Reserve
examined 607 state member banks and
306 foreign banking organizations for
such compliance.6
The Oversight Section of the Board's
Division of Consumer and Community
Affairs coordinates compliance examinations, which are conducted by the
consumer affairs units of the twelve Federal Reserve Banks. The Oversight Section reviews a sample of the examinations for effectiveness, adherence to
System policy, uniformity of approach,
and the like.
New examiners from the Federal
Reserve Banks attend the System's
three-week basic consumer compliance
school; examiners with eighteen to
twenty-four months of field experience
attend a week-long advanced compliance school, a two-week fair lending
school, and a class in CRA examination
techniques.7
In the 1996 reporting period, the Federal Reserve System conducted three
basic consumer compliance schools for
a total of seventy-five students; five
advanced consumer compliance schools
for seventy-three students; and two fair
lending schools for sixty-two students.

6. 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
corporations and agreement corporations). Typically, in comparison with state member banks,
these institutions conduct relatively few activities
that are covered by consumer protection laws.
7. In 1996, Federal Reserve examiners attended
interagency training for the revised CRA in place
of the advanced CRA class. In addition, CRA
instruction was included in the advanced consumer compliance school while the CRA school
was being revised to reflect the requirements of
the CRA regulations published by the agencies in
May 1995.



199

The Reserve Banks supplement examiner training through departmental
meetings and special training sessions.
In addition the Board's resident examiner program gives the Reserve Bank
examiners added perspective through
several weeks' work at the Board, during which they can observe such matters
as 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 1996 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 covering
amendments to the Flood Disaster Protection Act and to the Home Mortgage
Disclosure Act.

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 regulations
that implement the Equal Credit Opportunity Act, the Electronic Fund Transfer
Act, the Consumer Leasing Act, the
Truth in Lending Act, the Community
Reinvestment Act, and the Expedited
Funds Availability Act; and compliance
with the prohibition in Regulation AA
against unfair and deceptive practices.8
The degree of compliance with these
laws and regulations varied widely in
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.

200 83rd Annual Report, 1996
1996 but, overall, showed improvement
over 1995. The following section summarizes compliance data for the period
from July 1, 1995, to June 30, 1996.

Equal Credit Opportunity Act
(Regulation B)
The five financial regulatory agencies
reported a level of full compliance with
Regulation B by institutions examined
in 1996, 78 percent, that was significantly higher than the 1995 level of
62 percent. The agencies reported that
77 percent of the institutions examined
that were not in full compliance with the
regulation had between one and five violations (the lowest frequency category),
compared with 74 percent in 1995. The
most frequent violations involved the
failure to take the following actions:
• Provide a written notice of adverse
action that contains a statement of
action taken, the name and address of
the creditor, an ECOA notice, and the
name and address of the federal
agency that enforces compliance
• Collect information, for monitoring
purposes, about the race or national
origin, sex, marital status, and age of
credit applicants (on applications for
the purchase or refinancing of a principal residence)
• Notify the applicant of the action
taken within the periods specified in
the regulation
• Give a statement of reasons for
adverse action that is specific and
indicates the principal reasons for the
credit denial or other adverse action
• Take a written application for credit
for the purchase or refinancing of a
principal residence.
The Board issued one cease-anddesist order addressing violations of
Regulation B. The OTS issued four for


mal enforcement actions that addressed
violations of Regulation B as well as of
other consumer compliance regulations.
The FDIC issued five 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; and the Grain Inspection,
Packers, and Stockyards Administration
of the Department of Agriculture—
reported substantial compliance among
the entities they supervise. The FCAs
examination and enforcement activities
revealed violations of the ECOA that
resulted in one formal action. The FCA
reported that the most frequent violations it found involved the failure to
collect monitoring information and the
timeliness or content of creditors' adverse action notices.
The Federal Trade Commission
(FTC) concluded an investigation of a
major retailer that resulted in the filing
of a consent decree against the company
for violating the notification provisions
of the ECOA. In addition, the 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 94 percent
of examined institutions were in compliance with Regulation E, a slight increase
over the level of compliance reported
for 1995. Financial institutions most frequently failed to comply with the following provisions:

Consumer and Community Affairs 201
• Provide a notice of the procedures for
resolving alleged errors at least once
each calendar year
• Investigate alleged errors 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 initial disclosures at the time
a consumer contracts for an EFT service or before the first transfer is made
• Provide customers with a statement
of all required information at least
quarterly, or monthly if EFT activity
occurred.
The OTS issued two formal enforcement actions addressing violations of
Regulation E, and the FTC accepted for
public comment a consent agreement
against a telemarketing company for
failing to obtain written authorization
from consumers for preauthorized transfers. If accepted, the FTC's proposed
order would be incorporated into settlement of a civil penalty action, currently
pending in federal district court, against
the telemarketer and its dealers. The
FDIC reported five formal enforcement
actions to deal with violations of Regulation E and other consumer compliance
regulations without specifying how
many of the five involved electronic
fund transfers.

Consumer Leasing Act
(Regulation M)
The FFIEC agencies reported substantial compliance with Regulation M for
the 1996 reporting period. As in the
1995 reporting period, more than 99 percent of the 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 reported that the institutions it supervises
were in substantial compliance with the
regulation. The agency found no violations through its examination and enforcement activities.
The FTC accepted for public comment five consent agreements with major automobile manufacturers addressing violations of both Regulation M and
Regulation Z (Truth in Lending). The
proposed orders would settle charges
that all five companies violated Regulation M in lease promotions that featured
low monthly payments or low down
payments in large, bold print while disclosing additional costs and sometimes
contradictory information in fine print
that was difficult or impossible to read.
The complaints in these cases also
charged the automobile manufacturers
with violations for failing to clearly and
conspicuously disclose various lease
costs and terms as required.
The FTC has continued its consumer
and business education efforts. To this
end, the FTC released two brochures
addressing leasing issues. The first highlighted points to consider when deciding
whether to lease or purchase a vehicle.
The second provided information to
consumers regarding the lease or purchase of residential telephones.
Truth in Lending Act
(Regulation Z)
The FFIEC agencies reported that nearly
70 percent of examined institutions were
in full compliance with Regulation Z, a
significant improvement over the 50 percent reported for 1995. The Board and
the OCC showed increases in compliance, and the NCUA reported a decrease, while the FDIC and the OTS
reported unchanged levels of compliance. Agencies indicated that, of the
examined institutions not in compliance,

202 83rd Annual Report, 1996
63 percent were in the lowest frequency
category (having between one and five
violations), compared with 58 percent in
1995.
The violations of Regulation Z most
often observed were the failure to accurately disclose the finance charge or to
disclose the payment schedule; to accurately disclose the annual percentage
rate on closed-end credit; to accurately
disclose the amount financed; and to
provide a disclosure that reflects the
terms of the legal obligation between
the parties.
The OTS issued five formal enforcement actions that addressed violations
of Regulation Z, and the FDIC reported
five formal enforcement actions involving consumer compliance regulations
without distinguishing which of those
actions involved Regulation Z.
Under the Interagency Enforcement
Policy on Regulation Z, 394 institutions
supervised by the Board, the FDIC, the
OCC, or the OTS were required to refund $2.8 million to consumers in 1996
for improper disclosures.
The Department of Transportation
issued a cease and desist consent order
against a travel agency and a charter
operator. The complaint in this case
alleged that the two organizations violated Regulation Z by routinely failing
to transmit requests for refunds to credit
card issuers within seven days of receipt
of fully documented credit refund
requests.
The FTC accepted for public comment two consent agreements with major automobile manufacturers addressing violations of Regulation Z. The
proposed orders would settle charges
that the companies violated Regulation Z in credit promotions by making
inadequate and misleading disclosures
comparable to those in promotions discussed above, in the section on consumer leasing. The FTC also accepted



for public comment a consent agreement with a mortgage banking company. The proposed order in this case
would settle charges that the company
failed to accurately calculate and disclose several items in its mortgage
agreements as required by Regulation Z.
In addition, the FTC dismissed a complaint against a department store alleging that the store had imposed "unreasonable burdens" on cardholders who
claimed their cards were used without
authorization.
The FTC released a brochure addressing the protections of TILA and Regulation Z for "high rate, high fee" loans.

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 threefaceted program for enforcing and fostering better bank performance under
the CRA:
• Examining institutions to assess compliance
• Disseminating information on community development techniques to
bankers and the public through community affairs offices at the Reserve
Banks
• Performing CRA analyses in connection with 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 per-

Consumer and Community Affairs 203
formance. During the 1996 reporting
period, the Federal Reserve conducted
596 CRA examinations: 2 banks were
rated as being in "substantial noncompliance" with the CRA, 4 were rated as
"needs to improve" in meeting community credit needs, 417 were rated
"satisfactory," and 173 were rated
"outstanding."9
Expedited Funds Availability Act
(Regulation CC)
The FFIEC agencies reported that
87 percent of the institutions they examined were in full compliance with Regulation CC, an increase over the level of
compliance in the 1995 reporting period.
Of the institutions not in full compliance, 83 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:
• Follow special procedures for large
deposits
• Adequately train employees and provide procedures to ensure compliance
with the regulation
• Provide immediate availability on
$100 of deposits not subject to nextday availability
• Make funds from certain checks,
including local or nonlocal checks,
available for withdrawal within the
times prescribed by the regulation
• Provide a disclosure of the institution's specific availability policy.
The OTS issued two formal enforcement actions regarding violations of
Regulation CC, and the FDIC reported
9. Foreign banking organizations and Edge Act
and agreement corporations accounted for 306 of
the institutions examined for compliance with consumer laws; they are not subject to the CRA.



five formal enforcement actions involving consumer compliance regulations
without identifying the 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 99 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.

Applications
The Federal Reserve System acted on
forty-nine bank and bank holding company cases that involved CRA protests
or adverse CRA ratings. The System
reviewed another thirteen cases that
involved fair lending and other issues
related to compliance with consumer
regulations.10 Among the forty-nine
cases that raised CRA concerns in 1996,
seven involved adverse CRA ratings,
forty-one were protested on CRA
grounds, and one involved both adverse
CRA rating issues and protests.
Several applications for major bank
acquisitions were filed and all were protested on CRA grounds. The Board
approved the applications, finding in
each case that the convenience and
needs factors involved were consistent
with approval.
10. In addition, seven cases involving CRA
issues and three involving other compliance issues
were withdrawn during 1996. The System also
reviewed comments submitted in connection with
three other applications (not reflected in the above
statistics), which were deemed to be more in the
nature of consumer complaints than protests.

204 83rd Annual Report, 1996
In January the Board approved the
application of Chemical Banking Corporation (New York) to acquire The Chase
Manhattan Corporation (New York). As
a result of the acquisition, The Chase
Manhattan Corporation became the largest banking organization in the nation.
The Federal Reserve had held public
meetings in New York City on the application in conjunction with the New York
State Banking Department in November
1995.
In January the Federal Reserve held
public meetings in Los Angeles and
San Francisco on the competing proposals by Wells Fargo & Company
(San Francisco) and First Bank System
(Minneapolis) to acquire First Interstate
Bancorp (Los Angeles). Among the
issues raised by the 311 parties that
commented in connection with these
meetings were branch closures in
low- to moderate-income neighborhoods, the availability of banking services in California, and potential job
losses.
First Bank System ultimately withdrew its application after the Securities and Exchange Commission raised
issues about the bank's planned stock
repurchase program, and in March the
Board approved Wells Fargo's application. The Board indicated in its approval
order that it would monitor the implementation of Wells Fargo's branch closing policy as well as the effect of its
branching strategy on the availability of
banking services in the communities
served by the bank. As a result of the
acquisition, Wells Fargo became the
seventh largest banking organization
in the nation and remained the second largest depository institution in
California.
In December the Board approved the
application of NationsBank Corporation
(Charlotte, N.C.) to acquire Boatmen's
Bancshares, Inc. (St. Louis), an acquisi


tion that made NationsBank the fourth
largest banking organization in the
nation. A number of individuals and
groups had protested the application,
alleging violations of fair lending laws
and weaknesses in NationsBank's CRA
performance. The Board's approval
order directed NationsBank to give the
Federal Reserve Bank of Richmond a
copy of any notices for branch closures
effected in connection with the acquisition; the order also requires NationsBank to notify the Reserve Bank of any
changes in its preliminary plan for closing branches.

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 accompanying table). The Federal Reserve also
monitors and analyzes complaints about
unregulated practices.
In 1996 the Federal Reserve received
2,955 consumer complaints: 2,378 by
mail, 568 by telephone, and 9 in person.
Complaints about State
Member Banks
In 1996 the Federal Reserve investigated 1,232 complaints against state
member banks (see accompanying
table). About 59 percent involved loan
functions: 5 percent alleged discrimination on a prohibited basis, and 54 percent concerned credit denial on nonprohibited bases (such as length of
residency) and other unregulated lending practices (such as release or use of
credit information). Another 27 percent
of the 1,232 complaints involved disputes about interest on deposits and
general deposit account practices. The
remaining 14 percent concerned dis-

Consumer and Community Affairs 205
putes about electronic fund transfers,
trust services, and miscellaneous bank
practices.
The System also received 2,609 inquiries about consumer credit and banking policies and practices. In responding
to these inquiries, the Board and Federal
Reserve Banks gave specific explanations 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 monitors
complaints about banking practices that
are not subject to existing regulations
and focuses on those complaints that
may be unfair or deceptive. Three categories accounted for 13 percent of the
2,002 complaints about unregulated
practices received in 1996 involving
both state member banks and other institutions: problems involving interest
rates and terms of credit cards (95 complaints), other problems involving credit
card accounts (94), and miscellaneous
unregulated practices (80). Each of these

categories accounted for a small portion
(5 percent or less) of all consumer complaints received by the System.
Many of the complaints about credit
card interest rates and terms raised concerns about interest rate increases;
allegations that banks charged an
interest rate higher than had been agreed
on transferred account balances; and
concerns about the interest rates charged
on cash advances. Complaints about
credit card accounts involved a variety
of customer service problems, including
financial institutions' failure to close
accounts as requested; failure to provide
requested account information; and
imposition of an annual fee after an
account is closed. The miscellaneous
category covered a wide range of issues
including check cashing, release of
liens, and customer service problems.
Complaints Referred to HUD
The Federal Reserve continued to refer
to HUD complaints that allege violations of the Fair Housing Act, as
required by a memorandum of understanding between HUD and the federal

Consumer Complaints to the Federal Reserve System Regarding State Member Banks
and Other Institutions, by Subject, 1996
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
Real Estate Settlement Procedures Act
Flood insurance
Holder in due course
Unregulated practices
Total

1. Complaints against these institutions were referred
to the appropriate enforcement agencies.




Other
institutions'

Total

63
35
2
144
3
18
26
30
9
1
1
1
1
898

42
45
0
351
3
41
31
70
11
0
19
2
4
1,104

105
80
2
495
6
59
57
100
20
1
20
3
5
2,002

1,232

1,723

2,955

State member
banks

206 83rd Annual Report, 1996
bank regulatory agencies. This memorandum establishes a set of procedures
for coordination and cooperation in the
investigation of lending discrimination
complaints falling under the scope of
the Fair Housing Act.
In 1996 the Federal Reserve referred
twelve complaints about state member
banks to HUD. Investigations completed
by the Federal Reserve for seven of
the twelve 1996 complaints (and for two
that had been pending from 1995)
revealed no evidence of unlawful discrimination; five of the twelve complaints received in 1996 were pending at
year-end.

Complaint Program Initiatives
To better understand 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. In 1995

the Board joined with the FDIC in
analyzing the agencies' respective systems for categorizing complaints and
researched ways to facilitate data
exchange and analysis. In mid-1996 the
Board initiated similar efforts with the

occ.
In recent years the Federal Reserve
has received an increasing number of
consumer complaints about credit card
mail solicitations that consumers allege
are misleading because they do not
clearly 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 for two successive months on the Survey of Consumer Attitudes conducted by the University of Michigan's Survey Research
Center. These survey data will help

Consumer Complaints Received by the Federal Reserve System, by Type and Function, 1996
Complaints against state member banks
Not investigated

Total

Investigated
Bank legally correct

Complaint
Number

Loans
Discrimination alleged
Real estate loans
Credit cards
Other loans
Discrimination not alleged
Real estate loans
Credit cards
Other loans
Deposits
Electronic fund transfers
Trust services
Other
Total




Percent

Unable
to obtain
sufficient
information

Explanation
of law
provided
to consumer

No reimbursement
or other
accommodation

Goodwill
reimbursement or
other
accommodation

12
25
32

1
2
2

0
1
0

0
0
3

5
12
17

0
6
0

82
396
181
337
35
12
120

7
32
15
27
3
1
10

6
8
4
8
1
1
4

7
34
18
33
4
1
16

26
117
82
155
12
39

14
115
25
33
5
2
10

1,232

100

33

116

470

210

5

Consumer and Community Affairs 207
define consumers' understanding of the
credit terms used in mail solicitations
and identify problems they have experienced. The Board expected to complete
analysis of this issue in 1997.
In 1996 the Consumer Complaints
Section implemented a comprehensive
system to replace and consolidate the
complaint program's current analysis
tools. Along with other management
tools, the Complaint Analysis Evaluation System and Reports (CAESAR)
provides the capability to analyze the
types of discrimination complaints received by the Federal Reserve, automatically generate response letters to the
individual complaints, and analyze complaint data to determine patterns and
trends.
In June the Board hosted the third
annual conference for consumer complaint officers, managers, and other staff.
The conference is an important forum
for obtaining Reserve Bank input into

the formation of policies and procedures
that affect the program. In 1996 it
focused on the investigation and analysis of complaints alleging unlawful discrimination (particularly those that may
involve appraisals), credit scoring, and
other fair lending issues; the effect of
the Right to Financial Privacy Act and
Trade Secrets Act on complaint investigations; and the System's jurisdiction in
investigating complaints about nonbank
subsidiaries of holding companies.
In September the Consumer Complaints section began quarterly conference calls with the complaint program
management and staff at the Reserve
Banks. These calls provide an opportunity to discuss policies and procedures and specific issues that have
arisen during the course of complaint
investigations.
The Consumer Complaints Section
and the Consumer Policies program
began a series of meetings with the

Consumer Complaints Received—Continued
Complaints against state member banks
Investigated

Customer
error

Bank
error

Factual or
contractual
dispute—
resolvable
only
by courts

Possible
bank
violation—
bank took
corrective
action

Matter in
litigation

Pending,
December 31

Referred to
other
agencies

Total
complaints

0
0
0

0
3
2

2
0
0

0
0
0

0
0
0

5
3
10

21
12
18

33
37
50

0
8
4
9
0
0
5

17
71
25
40
5
0
15

4
18
4
23
1
1
5

0
3
1
3
3
0
1

2
1
4
2
0
0
3

6
21
14
31
4
2
22

286
508
222
388
45
7
216

368
904
403
725
80
19
336

26

178

58

11

12

118

1,723

2,955




208 83rd Annual Report, 1996
offices of selected state attorneys general and with state and local county consumer protection agencies to share information about complaint procedures and
consumer education efforts. The goal of
this effort is to establish contact for sharing data and information at the state and
local levels and to expand the Board's
ability to refer consumers to the proper
authorities when they have issues that
do not fall under the Federal Reserve's
jurisdiction.
During 1996, 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. Eleven Reserve Banks participated in the program.

Consumer Policies
The Consumer Policies program explores alternatives to regulation for protecting consumers in retail financial
services, and it brings research information to bear more directly on policymaking. During 1996, Consumer Policies
participated in revising disclosures to
aid consumers in shopping for automobile leases and also provided research
analyses for reports on finance charges,
home equity lines of credit, funds availability, and credit card solicitations.
The program expanded efforts to
educate consumers about mutual funds,
annuities, and other uninsured bank
products. It produced public-service
video announcements and distributed
them to about 150 television stations in
the top 50 markets in the United States,
and at year-end it had plans to prepare
public-service radio announcements
for distribution to 2,200 stations. The
mutual funds education program won
the Outstanding Educational Program
Award for 1996 from the Association



for Financial Counseling and Planning
Education.
In 1996 the Consumer Policies staff
began to develop plans for a major consumer education initiative to complement the Board's issuance of a revised
Regulation M. The educational program,
which will be developed in cooperation
with industry organizations, regulatory
agencies, and consumer groups, is
expected to be fully operational by
October 1, 1997, when compliance with
the new rules becomes mandatory for all
lessors.

Consumer Advisory Council
The Consumer Advisory Council convened in March, June, and October 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 and
academic institutions, and state government. Council meetings are open to the
public.
The Council discussed the implementation of CRA at each of the three meetings. In March, members listed emerging issues related to the revised CRA
rules, including the degree to which
communities will be part of the examination process; the need for timely, easy
access to examination schedules and
CRA evaluations; difficulties in analyzing small banks' files for loan distribution by income because information is
not always available; and the possibility
that, because of the new emphasis
on lending numbers, some institutions
might give less attention to community
work. Members also expressed concerns
about the impact of mergers and acquisitions on communities and discussed
possible strategies for dealing with the
difficulties.

Consumer and Community Affairs 209
In the council's June meeting the
CRA focus was on small-bank examinations. Council members reported experience under the new rules that was
largely positive. They found that examinations were more performance oriented
and examiners' time on site had been
reduced. The council also discussed the
availability of data on small business
and farm loans. The council members
were reminded that data on a censustract basis remains at the financial institution and will be reported to the public
only on an aggregated basis.
In the October meeting, some members expressed concern that a greater
CRA emphasis on lending could create
a disincentive for financial institutions
to make important community development investments whereas, for some
neighborhood revitalization projects,
equity investments and loans to
moderate- and upper-income households
are essential to successful economic
integration. The council also discussed a
Board proposal to amend Regulation Y
(Bank Holding Companies) designed to
streamline the application process for
mergers and acquisitions. Consumer and
community group advocates voiced
strong concerns about proposed revisions that would shorten the times available for informal discussions with the
applicants.
In 1995 the council had established a
task force to explore ways to improve
the mortgage loan process for consumers and the industry in light of the vast
number of documents typically presented for the consumer to review and
sign at closing. The work was undertaken at a time when the Congress had
introduced bills to consolidate rulewriting authority for most mortgage-related
disclosures with the Federal Reserve
Board. In October 1996, after a yearlong study, the task force submitted its
final report to the council.



The report concluded that streamlining mortgage closings is easier in concept than in practice. The task force
found that, whereas the perception may
be otherwise, most closing or settlement
documents are in fact produced for reasons other than federal requirements.
Many result from lender practices, state
or local laws, or secondary market
requirements; others result from "an
abundance of caution" on the part of the
lender, and are meant to protect against
future legal claims from consumers.
Out of fifty-four documents associated with a conventional, fixed-rate,
thirty-year mortgage, for example, the
task force found that twelve were
required by federal laws or regulations
such as the Board's Regulation B (Equal
Credit Opportunity) and Regulation Z
(Truth in Lending) or HUD's Regulation X (Real Estate Settlement Procedures). These twelve, the task force
suggested, could possibly be reduced to
five—for example, by consolidating
notices about mortgage servicing, flood
hazard, right to an appraisal, and controlled business arrangement.
The report also suggested undertaking a broad study of consumer experiences to determine whether "information overload" at settlement is a concern
and whether required disclosures currently given at settlement are necessary
or should be provided earlier in the
application process. Other recommendations were to develop a single disclosure
based on good-faith estimates of closing
costs and other terms to be updated at
settlement; to prohibit addenda to the
good-faith estimate and the itemization
of the amount financed; and to develop
an educational piece identifying the
documents used in a typical loan
closing.
Council members discussed the
Board's approach to consumer leasing
disclosures in March and June. Leasing

210 83rd Annual Report, 1996
represents 25 percent to 30 percent of
retail sales of autos in the United States
and about 65 percent of retail sales of
luxury cars. Members discussed the
disclosures required under the Board's
Regulation M (Consumer Leasing),
including such issues as whether requiring disclosure of a lease rate (one not
entirely comparable to an annual percentage rate in credit transactions)
would be helpful to consumers; how
best to alert consumers to the financial
consequences of terminating a lease
early; and the need for consumer education to ensure that consumers understand the differences between leasing
and purchasing an automobile.
In June the council discussed the coverage of EBT (electronic benefit transfer) programs under the EFT act and
Regulation E. The council adopted a
resolution expressing concern that a
statutory exemption being considered by
the Congress could leave benefit recipients unprotected, and it urged the Board
to support provisions protecting recipients from losses. (The Congress subsequently enacted the Personal Responsibility and Work Opportunity Act of
1996, creating an exemption from Regulation E for needs-tested benefits if the
programs are established or administered by state or local governments.)
The council discussed the potential
coverage of stored-value cards at all
three meetings. In March, members
talked about the different kinds of cards
being developed and the types of protections that might apply. Overall, members agreed on the need for balance to
provide consumers with reasonable protections without putting domestic businesses at a disadvantage in a global market where the technology is changing
daily. In June, the council discussed the
Board's proposed rule to require disclosures for certain stored-value products,
mentioning potential security and other



risks to the banking system. In October,
members continued the discussion, noting the difficulty of developing rules
for products that do not yet exist or that
quickly evolve. Generally, members
supported a basic level of mandatory
disclosures for all stored-value cards.
Other topics on the council's agenda
during 1996 included home equity lines
of credit and the disclosure of finance
charges (and associated tolerances)
under the Truth in Lending Act; electronic banking and ATM surcharges and
fees; and issues arising from a proposed
substitution of a dollar coin for the dollar bill.
Roundtable discussions, known as
the Members Forum, were held at each
meeting and gave council members the
opportunity to offer their views on their
industries or localities.

Testimony and Legislative
Recommendations
The Board twice addressed issues
related to the coverage of electronic
benefit transfer (EBT) programs by the
Electronic Fund Transfer Act and Regulation E, submitting a statement in
March to the House Committee on
Banking and Financial Services and testifying in June before that committee's
Subcommittee on Financial Institutions
and Consumer Credit.
In 1995 the Congress had passed, but
the President had vetoed, a bill exempting from Regulation E any needs-based
benefits established or administered by
the states.11 In the absence of such legislation, Regulation E coverage of EBT
programs was to become mandatory on
March 1, 1997; and even though the
Board had established a modified set of
rules for EBT programs, many states
11. The President's veto of the bill was unrelated to the EBT provisions.

Consumer and Community Affairs 211
continued to express concern about the
potential impact.
In its invited statement the Board reiterated a belief that coverage of EBT
programs was required under the EFTA
but also suggested that a congressional
reexamination of the scope of the EFTA
could take account of developments
since its enactment in 1978 and balance
competing objectives in light of changing national priorities. The Board noted
also that if an exemption were limited
to particular categories or to stateadministered programs, the existence of
different rules could make it difficult to
implement the one-card, unified national
delivery system envisioned by the Federal Electronic Benefits Transfer Task
Force.
In its June testimony the Board reiterated its suggestion that to the extent the
Congress found it necessary to balance
the EFTA's consumer protection against
concern about compliance costs on the
nationwide delivery of EBT, the Congress might reexamine the scope of the
law's coverage. The Congress subsequently enacted the Personal Responsibility and Work Opportunity Act of
1996, which exempts needs-tested EBT
programs that are established or administered by state or local governments;
federal and other state programs remain
subject to Regulation E.
In April the Board testified before
the House Subcommittee on Financial
Institutions and Consumer Credit on
proposed legislation regarding the disclosure of fees imposed on ATM
transactions. The Board's testimony on
ATM fees focused on the current regulatory scheme regarding fee disclosures,
data about consumer complaints, the
level of compliance with the EFTA
found in bank examinations, and the
incidence and amount of ATM transaction fees reported in Federal Reserve
surveys.



Regulation E requires disclosure of
fees imposed by an institution on its
own customers but does not require the
institution to disclose ATM surcharges
imposed by others, since it would be
impractical to monitor and disclose the
dollar amount of a surcharge that might
be imposed at any given time by some
other institution nationwide. A surcharge imposed at an ATM must be
disclosed on a sign posted at the terminal or displayed on the screen, and institutions are encouraged to give customers the option to cancel the transaction
after receiving notice of the fee.
Data on examinations of financial
institutions show general compliance
with Regulation E and few violations of
fee disclosures. Consumer complaint
data suggest few problems with electronic transfers generally or with ATM
fees.
The Board commented on two bills.
The first, H.R. 3246, would have
required disclosure at ATMS of all fees
imposed in connection with a transaction, whether imposed by the ATM
operator, the account-holding institution,
or a national, regional, or local network.
The Board noted that Regulation E,
network operating rules, and laws in a
number of states already require fee
disclosures and therefore the proposed
legislation might be unnecessary. The
Board also questioned whether it is
operationally feasible for an operator of
an ATM to disclose fees imposed by the
thousands of account-holding institutions whose customers have access to
the ATM.
H.R. 3221 would have prohibited
ATM surcharges. Suggesting that substantive limitations on prices are better
left to state legislatures, the Board noted
that in fact few states have set limits on
ATM surcharges. The Board observed
that a prohibition might deter financial
institutions and other ATM operators

212 83rd Annual Report, 1996
from making ATMs widely available to
consumers. Also, a prohibition would
not necessarily keep costs down for consumers, as ATM operators could negotiate through the networks for an increase
in the amount they receive, and such
an increase could be passed on via
the account-holding institution to its
customers.

Recommendations
of Other Agencies
Each year the Board asks for recommendations from the federal supervisory
agencies for amending the financial
services laws or the implementing
regulations.
The OCC recommended that the Congress generally review and consider
alternatives for providing useful but less
burdensome disclosures, suggesting that
the current disclosures are unnecessarily
burdensome on banks and insufficiently
beneficial to consumers.
The agency also encouraged the
Board to clarify Regulation B's prohibition against discrimination based on
national origin and issues related to
credit scoring systems; and to clarify
whether creditors may follow agency
regulations for the voluntary collection
of restricted information without violating Regulation B. The OCC also asked
for Board reconsideration of its decision
not to modify the prohibition on collecting monitoring information in nonmortgage loans. Finally, the OCC asked the
Board to clarify the rule under Regulation Z for the treatment of fees paid by a
consumer for optional services; in the
agency's view, such fees should not be
included in the finance charge unless
expressly stated in the regulation.
The FDIC noted its 1996 testimony
on proposed amendments to the Equal
Credit Opportunity Act (implemented
by the Board's Regulation B), the



Electronic Fund Transfer Act (Regulation E), the Consumer Leasing Act
(Regulation M), and the Truth in Lending Act (Regulation Z). The testimony
supported allowing the voluntary collection of data for all credit transactions;
expressed concerns that open-end credit
plans generally and credit card lending
specifically raised safety and soundness
issues; and stated a need to address
solicitation and marketing practices that
may comply with the letter of the
requirements of consumer-protection
regulations but that, in the agency's
view, constitute "bait and switch"
tactics.
•

213

Litigation
Board order, dated March 25, 1996,
approving the acquisition by CoreStates
Financial Corp., Philadelphia, Pennsylvania, of Meridian Bancorp, Inc., Reading, Pennsylvania (82 Federal Reserve
Bulletin 430). On October 24, 1996, the
court of appeals dismissed the petition.
The Southeast Raleigh Community
Development Corporation v. Board of
Governors, No. 96-1054 (D.C. Circuit,
filed February 16, 1996), is a petition for
review of a Board order dated January
17, 1996, approving the merger of First
Bank Holding Company Act—
Citizens BancShares, Inc., Raleigh,
Review of Board Actions
North Carolina, with Allied Bank CapiIn The New Mexico Alliance v. Board of tal, Inc., Sanford, North Carolina (82
Governors, No. 96-9552 (10th Circuit, Federal Reserve Bulletin 232). Petitionfiled December 24, 1996), petitioners ers' motion for a stay was denied on
seek review of a Board order dated March 5, 1996. On December 19, 1996,
December 16, 1996, approving the petitioners filed a motion for voluntary
acquisition by NationsBank Corporation dismissal of the action.
and NB Holdings Corporation, both of
Inner City Press/Community on the
Charlotte, North Carolina, of Boatmen's Move v. Board of Governors, No. 96—
Bancshares, Inc., St. Louis, Missouri 4008 (2d Circuit, filed January 19,
(83 Federal Reserve Bulletin 221).
1996), is a petition for review of a Board
First Baird Bancshares, Inc. v. Board order dated January 5, 1996 (82 Federal
of Governors, No. 96-1426 (D.C. Cir- Reserve Bulletin 239) approving the
cuit, filed November 18, 1996), is a peti- merger of Chemical Banking Corporation for review of a Board order dated tion and The Chase Manhattan CorporaNovember 6, 1996, approving applica- tion, both of New York, New York. On
tions of First Commercial Corporation, March 26, 1996, the court denied petiLittle Rock, Arkansas; Arvest Bank tioners' motion for a stay. The case was
Group, Inc., Bentonville, Arkansas; and consolidated with Lee v. Board of GovTRH Bank Group, Inc., Norman, Okla- ernors, No. 95-4134.
homa, to acquire all the shares of The
Lee v. Board of Governors, No. 95Oklahoma National Bank of Duncan, 4134 (2d Circuit, filed August 22, 1995),
Duncan, Oklahoma (83 Federal Reserve is a petition for review of two Board
Bulletin 41). On November 20, 1996, orders, dated July 24, 1995, approving
the court denied petitioners' motion for certain steps of a corporate reorgania stay.
zation of U.S. Trust Corporation,
Kuntz v. Board of Governors, No. 96- New York, New York, and the acquisi1147 (D.C. Circuit, filed April 25, tion of U.S. Trust by The Chase Manhat1996), was a petition for review of a tan Corporation, New York, New York
During 1996 the Board of Governors
was a party in eighteen lawsuits filed
that year and was a party in eleven other
cases pending from previous years, for a
total of twenty-nine cases. In 1995 the
Board had been a party in a total of
twenty-two lawsuits. Five of the eighteen lawsuits filed in 1996 raised questions under the Bank Holding Company
Act. As of December 31, 1996, twentyone cases were pending.




214 83rd Annual Report, 1996
(81 Federal Reserve Bulletin 893). On
September 12, 1995, the court denied
petitioner's motion for an emergency
stay of the Board's orders.
Jones v. Board of Governors, No. 951359 (D.C. Circuit, filed July 17, 1995),
was a petition for review of a Board
order, dated June 19, 1995, approving
the application by First Commerce
Corporation, New Orleans, Louisiana,
to acquire Lakeside Bancshares,
Lake Charles, Louisiana (81 Federal
Reserve Bulletin 793). On November 15,
1995, the court granted the Board's
motion to dismiss the petition, and on
February 22, 1996, the court rejected
petitioner's motion for reconsideration.
Money Station, Inc. v. Board of Governors, No. 95-1182 (D.C. Circuit, filed
March 30, 1995), is a petition for review
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). On
April 23, 1996, a panel of the court of
appeals granted the petition for review
and vacated the Board's order. The full
court subsequently granted the Board's
request for rehearing en bane and
vacated the panel's judgment (94 F.3d
658). On Dec. 19, 1996, the parties filed
a motion for voluntary dismissal of the
action.
Jones v. Board of Governors, No. 951142 (D.C. Circuit, filed March 3,
1995), was a petition for review of a
Board order, dated February 2, 1995,
approving applications by First Commerce Corporation, New Orleans, Louisiana, to merge with City Bancorp, Inc.,
New Iberia, Louisiana, and First Bankshares, Inc., Slidell, Louisiana (81 Fed


eral Reserve Bulletin 379). Petitioner's
motion for injunctive relief and for a
stay of the Board's order was denied on
August 17, 1995. On March 26, 1996,
the court denied the petition for review
(79F.3dll68).

Litigation Under the Financial
Institutions Supervisory Act
Snyder v. Board of Governors, No. 961403 (D.C. Circuit, filed October 23,
1996), is a petition for review of a Board
order dated September 11, 1996, prohibiting petitioners from further participation in the banking industry (82 Federal
Reserve Bulletin 1067).
In Clifford v. Board of Governors,
No. 96-1342 (D.C. Circuit, filed September 17, 1996), petitioners seek review of a Board order dated August 21,
1996, denying petitioners' motion to
dismiss an enforcement action against
them.
Long v. Board of Governors, No. 969526 (10th Circuit, filed July 31, 1996),
is a petition for review of a Board order
dated July 2, 1996, assessing a civil
money penalty and imposing a cease
and desist order for violations of the
Bank Holding Company Act (82 Federal Reserve Bulletin 871).
In Board of Governors v. Scott, No.
96-7108 (D.C. Circuit, filed May 31,
1996), the appellants sought review of
an order of a magistrate judge enforcing
an administrative investigatory subpoena issued by the Board. On November 15, 1996, the court dismissed the
petition on appellant's motion.
In Interamericas Investments, Ltd. v.
Board of Governors, No. 96-60326 (5th
Circuit, filed May 8, 1996), petitioners
seek review of a Board order dated
April 9, 1996, imposing civil money
penalties and a cease and desist order
against petitioners (82 Federal Reserve
Bulletin 609). Petitioners' motion to stay

Litigation 215
Act relating to treatment of fees for debt
cancellation agreements (12 C.F.R. section 226.4 (d)(3)). On October 18, 1996,
the district court denied plaintiffs'
motion for a temporary restraining
order.
Artis v. Greenspan, No. 96-CV02105 (D. District of Columbia, filed
September 11, 1996), is a class complaint alleging race discrimination in
employment. A related employment discrimination case, Artis v. Greenspan,
No. 96-CV-02619 (D. District of
Columbia), was filed November 19,
1996.
Leuthe v. Board of Governors, No.
96-5725 (E.D. Pennsylvania, filed
August 16, 1996), is an action against
the Board and other federal banking
agencies challenging the constitutionality of the Office of Financial
Institution Adjudication.
In Esformes v. Board of Governors,
No. 96-1916 (S.D. Florida, filed
July 12, 1996), plaintiffs challenged the
Board's denial of an administrative
request for confidential supervisory
information. Plaintiffs' motion for an
expedited hearing was denied on
August 1, 1996. On October 22, the case
was dismissed on plaintiffs' motion.
Kuntz v. Board of Governors, No. 961079 (D.C. Circuit, filed March 7,
1996), is a petition for review of a Board
order, issued under the Federal Reserve
Act and the Bank Merger Act, approving the application of The Fifth Third
Bank, Cincinnati, Ohio, and The Fifth
Third Bank of Columbus, Columbus,
Ohio, to acquire certain assets and
Other Actions
assume certain liabilities of twenty-five
American Bankers Insurance Group, branches of NBD Bank, Columbus,
Inc. v. Board of Governors, No. 96-CV- Ohio (82 Federal Reserve Bulletin 366).
2383-EGS (D. District of Columbia,
In Research Triangle Institute v.
filed October 16, 1996), is an action Board of Governors, No. l:96CV00102
seeking declaratory and injunctive relief (M.D. North Carolina, filed February 12,
invalidating a new regulation issued by 1996), the plaintiff seeks reimbursement
the Board under the Truth in Lending of costs under a contract with the Board.
the order pending judicial review was
denied on August 20, 1996.
In Board of Governors v. Hotchkiss,
Adversary No. 95-3146 (U.S. Bankruptcy Court, N.D. Ohio, filed May 1,
1995), the Board sought a determination
that a restitution obligation arising from
a Board consent order (81 Federal
Reserve Bulletin 406) was nondischargeable in bankruptcy. On December 15, 1995, the court granted the
Board's motion for summary judgment.
The debtor's notice of appeal, filed on
December 22, 1995, was voluntarily dismissed on June 21, 1996.
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 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 disposition of the individual's assets. The order
has been extended by agreement.




216 83rd Annual Report, 1996
In re Subpoena Duces Tecum, Misc.
No. 96-MS^3 (TPJ) (D. District of
Columbia, filed February 7, 1996), was
an action seeking to compel production
of confidential Board documents relating to the supervision of Bankers Trust
Company. The case was dismissed on
the parties' stipulation on May 20, 1996.
Menick v. Greenspan, No. 95-CV01916 (D. District of Columbia, filed
October 10, 1995), was a complaint
alleging discrimination in employment.
On November 4, 1996, the action was
dismissed on the parties' joint motion.
Kuntz v. Board of Governors, No. 951485 (D.C. Circuit, filed September 21,
1995), is a petition for review of a Board
order issued under the Federal Reserve
Act and the Bank Merger Act approving
the application of the Fifth Third Bank,
Cincinnati, Ohio, to acquire certain
assets and assume certain liabilities of
twelve branches of PNC Bank, Ohio,
N.A., Cincinnati, Ohio, and to establish
certain branches (81 Federal Reserve
Bulletin 976).
Beckman v. Greenspan, No. 9 5 35473 (9th Circuit, filed May 4, 1995),
is an appeal of an order dismissing an
action against the Board and others
seeking damages for alleged violations
of constitutional and common law
rights.
In In re Subpoena Duces Tecum,
Misc. No. 95-06 (D. District of Columbia, filed January 6, 1995), the plaintiff
sought to enforce a subpoena for predecisional supervisory documents relating to an action by Bank of England
Corporation's trustee in bankruptcy
against the Federal Deposit Insurance
Corporation.
•




217

Legislation Enacted
Among the legislation enacted during
1996, the Economic Growth and Regulatory Paperwork Reduction Act, the
National Securities Markets Improvement Act, the Electronic Freedom
of Information Act Amendments, and
the Debt Collection Improvement Act
directly affect the Federal Reserve System or the institutions it regulates.

Economic Growth and
Regulatory Paperwork Reduction
Act of 1996
On September 30, 1996, the President
signed into law the Economic Growth
and Regulatory Paperwork Reduction
Act of 1996 (Pub. L. 104-208, 110 Stat.
3009). The following discussion summarizes the portions of the act that significantly affect the Federal Reserve and
the institutions it regulates.
Powers of State Member Banks
The act modifies the branching requirements for state member banks by eliminating the requirement that they maintain capital for their branches as if each
branch were a separately chartered bank.
The act also eliminates the requirement
that state member banks file a branch
application with the Federal Reserve
System before installing an automatic
teller machine (ATM) or remote service
unit by excluding such entities from the
definition of a branch.
In addition, the act eliminates the
requirement that state member banks file
branch closing notices for ATMs and
for branch relocations that are within
the immediate neighborhood and do
not substantially affect the nature of the



business or customers served; the act
also excludes the notice requirement for
a branch closing in an emergency acquisition or when assistance is provided by
the Federal Deposit Insurance Corporation (FDIC).
The act permits well-capitalized
banks rated CAMEL 1 or 2 to invest in
bank premises in amounts up to 150 percent of the bank's capital and surplus
as long as the bank provides the Board
with a thirty-day after-the-fact notice of
the investment.
The act also permits the Board to
conduct a full-scope, on-site examination of certain well capitalized, well
managed state member banks rated
CAMEL 1 or 2 every eighteen months
rather than every twelve months.
SAIF/BIF
The act capitalizes the Savings Association Insurance Fund (SAIF) at 1.25 percent of insured thrift institution deposits
through a one-time special assessment
on SAIF-assessable deposits held as of
March 31, 1995. Weak institutions, as
well as certain others, may be exempt
from the special assessment if the FDIC
determines it would reduce risk to the
SAIF. In addition, the act reduces the
special assessment by 20 percent for
certain Oakar banks (banks formed by
the merger of SAIF-insured and BIFinsured institutions) and would reduce
their assessments going forward.
The act also requires banks, after
December 31, 1996, to pay 20 percent
of the interest on the bonds that funded
the initial capitalization of SAIF (FICO
bonds), but banks would be required to
pay a full pro rata share of the interest

218 83 rd Annual Report, 1996
obligation beginning after the earlier
of December 31, 1999, or the date on
which the last savings association ceases
to exist.
The act merges SAIF and the Bank
Insurance Fund (BIF) on January 1,
1999, but only if no insured depository
institution is a savings association on
that date.
Previously, both the Bank Merger Act
and the Federal Deposit Insurance
Act (FDI Act) required advance written
approval from the appropriate federal
banking agency to form Oakar banks.
The act eliminates the duplicative requirement of advance written approval
under the FDI Act for Oakar transactions and retains only the requirement
of advance written approval under the
Bank Merger Act.
Under the act, the FDIC may refund
excess payments from an insured bank
or it may credit the excess toward future
payments from that bank. In addition, if
the balance in BIF exceeds the balance
required to meet the designated reserve
ratio applicable to such fund, the excess
shall be refunded to insured banks.
Bank Holding Company Act
The act allows well capitalized and well
managed bank holding companies
(BHCs) that control generally well capitalized and well managed depository
institutions, to engage de novo, without
advance Board approval, in nonbanking
activities approved by regulation. In
addition, to be eligible for this exception, the BHC or its subsidiaries must
not be subject to an administrative enforcement action or a cease and desist
order pursuant to section 8 of the FDI
Act during the preceding twelve-month
period. The act also establishes a
streamlined process for these well run
BHCs to obtain Board approval to
acquire companies (except thrift institu


tions) engaged in permissible nonbanking activities subject to certain investment limitations and to engage de novo
in nonbanking activities that have been
approved only by order.
Existing law allows the Board to permit a BHC to acquire shares of a company engaged in nonbanking activities,
including a savings association, if the
Board determined, after notice and an
opportunity for a hearing, that the company is engaged in activities so closely
related to banking that they are a proper
incident thereto. The act removes the
requirement that the Board provide an
opportunity for a hearing except in cases
in which a BHC acquires a savings
association.
The act exempts BHCs that own thrift
institutions from the provisions of the
Savings and Loan Holding Company
Act and requires the Board to solicit
comments from the Office of Thrift
Supervision (OTS) on any BHC acquisition of a thrift institution and to consult with the OTS on examinations and
enforcement actions for BHCs that own
thrift institutions.
The act eliminates notices of new
director or senior executive officers (914
notices) currently required for banks
chartered within the past two years or
that have undergone a change in control
within the past two years. However, the
act gives the Board discretion to require
notice in connection with the review
of a prompt corrective action plan or
otherwise. The act retains 914 notices
for undercapitalized and troubled banks
and allows an extension of up to ninety
days of the period to disapprove an officer or director.
The act eliminates the requirement
that Board approval be obtained to make
a divestiture of shares effective for purposes of the BHC Act.
The act permits the Board to allow
a BHC and its subsidiaries five years,

Legislation Enacted 219
instead of two, to dispose of stock
acquired in satisfaction of a debt previously contracted. It also grants the
Board authority to extend the five-year
period to ten years in certain situations.
The act amends the BHC Act to permit nonbank banks to grow more than
7 percent per year without losing their
exemption under the BHC Act. The act
also amends the definition of credit
card bank for purposes of the BHC
Act to permit these institutions to offer
credit cards secured by certain types of
deposits.
The act permits the Board to exempt
BHCs that control nonbank banks, trust
banks, credit card banks, Edge Act and
agreement corporations, and industrial
loan companies from the anti-tying provisions of the BHC Act. In addition, the
act permits the OTS to make exceptions
to the anti-tying provisions of the Home
Owners' Loan Act if the exceptions
would not be contrary to the purposes of
the anti-tying provisions and if they conform to the exceptions granted by the
Board.
The act excludes from the definition
of a BHC a qualified family partnership
(QFP). A QFP is defined as a general or
limited partnership that (1) does not control more than one registered BHC,
(2) does not engage (except indirectly)
in any business activity, (3) has no
investments other than those permitted
by a BHC, (4) is not obligated on any
debt (either directly or as a guarantor),
and (5) has partners, all of whom are
either individuals related to each other
by blood, marriage or adoption, or
is a trust for the primary benefit of
such individuals. The act requires
QFPs to file a statement with the Board
indicating, among other things, the
basis for their eligibility, the activities
and investments of the QFP, and an
agreement to be subject to limited
examinations.



Deposit Institution Management
Interlocks Act
Under the Deposit Institution Management Interlocks Act (DIMIA), the act
permits banks and BHCs with assets
of up to $2.5 billion (increased from
$1 billion) to have interlocking management with nonaffiliated institutions with
assets of up to $1.5 billion (increased
from $500 million) provided that the
institutions are not located in the same
community or metropolitan statistical
area. It also permits grandfathered interlocks to continue indefinitely and
restores the Board's authority to grant
exemptions under DIMIA, subject to
certain conditions.

Insider Lending Restrictions
The act permits the Board to exempt
from insider lending restrictions preferential loans to executive officers and
directors of a subsidiary of a company
that controls a state member bank under
the following conditions: the officer or
director does not participate in major
policy-making functions of the bank,
and the assets of the subsidiary do not
exceed 10 percent of the consolidated
assets of a company that controls the
bank and the subsidiary (and is not controlled by any other company).
The act also excludes from the insider
lending restrictions a state member
bank's company-wide benefit or compensation plan as long as it is widely
available to employees of the bank and
as long as it does not give any officer,
director or principal shareholder (or
related interest) preference over other
employees of the bank.
Examination Activities
To make examinations by federal banking agencies well coordinated, the act

220 83rd Annual Report, 1996
requires them to have their examiners
consult with each other, coordinate their
examinations of depository institutions,
and resolve any inconsistencies in their
exam recommendations. The act also
directs the federal banking agencies to
consider appointing an "examiner-incharge" to coordinate examinations of
depository institutions.

exemption to be adjusted annually in the
future in accordance with changes in the
CPI. The act also gives institutions an
alternative method for making HMD A
data publicly available by allowing information to be maintained at the bank's
home or branch offices as long as the
public notice states that such information is available upon request.

Audits

Equal Credit Opportunity Act

The act eliminates the requirement for
attestation by an independent auditor
under the FDI Act. The act also permits
the internal audit committees of certain
insured depository institutions to consist
of some (but not a majority) of inside
directors, rather than entirely outside
directors, if the appropriate federal
banking agency determines that the institution has encountered hardships in
retaining and recruiting a sufficient number of competent outside directors to
serve on the committee.

The act creates a legal privilege for
information developed by creditors
through "self-tests" that are conducted
to determine the level or effectiveness of
their compliance with the Equal Credit
Opportunity Act (ECOA), provided that
appropriate corrective action is taken to
address any possible violations.
Privileged information may not be
obtained by a government agency for
use in an examination or investigation
relating to fair lending compliance, or
by a government agency or credit applicant in any civil proceeding in which
a violation of ECOA is alleged. The act
also provides that a challenge to a creditor's claim of privilege may be filed in
any court or administrative law proceeding with appropriate jurisdiction. The
act directs the Board to promulgate final
regulations implementing these changes
within six months of enactment.

Truth in Savings
Five years after enactment, the act eliminates civil liability for violations Truth
in Savings Act. The act also repeals
the definition of 'indoor lobby sign,"
exempts certain credit unions from
the act and eliminates any disclosure
requirements for rollover certificates of
deposit with terms of less than thirty
days.
Home Mortgage Disclosure Act
With regard to the Home Mortgage Disclosure Act (HMDA), the act increases
the exempt asset level (the level below
which institutions are exempt from
HMDA) from $10 million to $28 million, a percentage rise equal to the
cumulative percentage increase in the
CPI since 1975. The act requires the



Real Estate Settlement
Procedures Act
The act directs the Board and the
Department of Housing and Urban
Development (HUD) to simplify and
improve the disclosure requirements on
transactions subject to both the Real
Estate Settlement Procedures Act
(RESPA) and the Truth in Lending Act
(TILA). This includes providing a
"single format" for such disclosures.
The Board and HUD must propose new

Legislation Enacted 221
regulations within six months of enactment or, when necessary, submit legislative recommendations to "simplify and
unify" RESPA and TIL A disclosures.
The measure also establishes less
onerous procedures for lenders to inform
borrowers that mortgage servicing may
be transferred by the lender to another
entity.
Truth in Lending Act
The act permits the Board to exempt
classes of transactions, except for certain high-cost mortgages, from coverage
under all or part of TILA if the Board
determines that coverage does not provide a meaningful benefit to consumers.
The act lists several factors the Board
must take into account in determining
whether to exempt transactions. In addition, the act allows "sophisticated borrowers" (which it defines as those with
an annual earned income of more than
$200,000 and net assets of more than
$1 million) to waive their rights to
receive TILA disclosures.
The act also provides an alternative
disclosure requirement for adjustablerate residential mortgages (ARMs). The
alternative may provide that payments
may "increase or decrease substantially" as long as the statement also
indicates the maximum future interest
rate and payments on a $10,000 loan
originated at a recent interest rate.
The act allows the Board and other
agencies to reduce or spread out restitution required for TILA violations in
cases where full, immediate restitution
would jeopardize the safety and soundness of the institution. The act also corrects an error in the 1995 TILA amendments that unintentionally provided
retroactive relief from civil liability for
certain TILA violations with regard to
"any" consumer credit transaction. The
act limits the relief to "closed-end home



secured" credit transactions. This
change is effective September 30, 1995.
Fair Credit Reporting Act
The act amends the Fair Credit Reporting Act (FCRA) and grants the Board
interpretive authority, in consultation
with the other federal banking agencies,
for determining how the provisions of
FCRA apply to banking institutions
regulated by the federal banking agencies (for example, national and state
member banks). The act also directs the
Board to report to the Congress by
March 31, 1997, on the availability to
the public of sensitive identifying information about consumers, the possibility
that such information could be used for
financial fraud and the potential for
fraud, or risk of loss, if any, to insured
depository institutions. The report is
also to include any suggestions for legislative change.
Electronic Fund Transfer Act
The act directs the Board to report to the
Congress no later than six months after
enactment on whether the Electronic
Fund Transfer Act (EFTA) could be
applied to electronic stored-value products without adversely affecting their
cost, development, and operation, and
whether alternatives to regulation can
better achieve the purposes of the EFTA.
In addition, the act prohibits the Board
from taking any regulatory action
regarding stored-value products for
either three months after the report to
the Congress or nine months after enactment, whichever is later.
Consumer Leasing Act
The act directs the Board to issue regulations updating and clarifying leas-

222 83rd Annual Report, 1996
ing requirements and definitions and
addressing other consumer leasing
issues. The Board must issue model disclosure forms for consumer leasing
which, if properly used by lessors, will
constitute compliance with required disclosure requirements.
The act modifies lease advertising
requirements. It eliminates three disclosures currently required in lease advertising: consumer liability at lease-end
for the difference between the property's anticipated fair market value and its
appraised actual value; the "amount or
method of determining the amount" of
any such liability; and the disclosure of
any purchase option, including the
option price.
Instead, lease advertisements that
contain certain "trigger terms" (such
as the amount of any payment) must
clearly and conspicuously state the following terms: that the transaction is a
lease; the total of initial payments
required on or before lease consummation and delivery of the property; any
required security deposit; the number,
amount and timing of scheduled payments; and, in leases in which the consumer has an end-of-term liability based
on the property's residual value, that
an extra charge may be imposed at
lease-end.

Foreign Banks
The act requires the Board to reduce
burden and avoid unnecessary duplication in examining branches and agencies
of foreign banks. It also eliminates the
requirement of annual on-site exams for
branches and agencies of foreign banks
and provides instead that they be examined as frequently as would a state member bank.
The act provides that, even if a foreign bank is not subject to compre


hensive supervision or regulation in
its home country, the Board may still
approve the bank's application to establish a U.S. office if the bank's home
country is actively working to establish
a system of bank supervision and if
all other factors are consistent with
approval. The act directs the Board, in
exercising this authority, to consider
whether the bank has implemented procedures to combat money laundering.
The act also imposes a processing deadline for such applications.
The act permits the Board to allow
banks to invest up to 20 percent of their
capital and surplus in an Edge or agreement corporation if the Board determines that an investment greater than
10 percent would hot be unsafe or
unsound.
|
The act eliminates the requirement
that banks (except foreign banks and
their affiliates) file consolidated reports
with the appropriate federal banking
agency if any of their extensions of
credit, in the aggregate, are secured
directly or indirectly by 25 percent or
more of any class of shares of the same
insured depository institution.
Bank Service Companies
The act expands the types of entities
included under the definition of a bank
service corporation (redefined as a bank
service company) to include limited liability companies. It defines "limited liability company" as a company, partnership, trust, or similar business entity that
provides that a member or manager of
the entity is not personally liable for a
liability of the entity solely because that
person is a member or manager of it.
This amendment allows bank service
companies to take advantage of the limited liability rules typically available to
corporations and the flow-through tax
benefits available to partnerships.

Legislation Enacted 223
Regulatory Relief
The act requires each federal banking
agency to review its regulations every
ten years to identify outdated or otherwise unnecessary regulatory requirements imposed on insured depository
institutions. The review must allow for
public comment. Each agency must publish in the Federal Register a summary
of the comments and the agency's
response and report to the Congress on
the comments and on any legislative
changes necessary to eliminate regulatory burdens.
In addition, the act amends the Riegle
Community Development and Regulatory Improvement Act of 1994 to
require each federal banking agency to
determine whether existing regulations
require insured depository institutions
and insured credit unions to produce
unnecessary internal written policies
and, if appropriate, to eliminate such
policies.

Reports Requirements
The act eliminates 12 U.S.C., section
251, which requires the Board to publish
an annual report on the availability of
credit to small businesses. However, the
act creates a new requirement that,
within twelve months of enactment and
every sixty months thereafter, the
Board—in consultation with other federal banking agencies, the Small Business Administration, and the Secretary
of Commerce—report to the Congress
on the availability of credit to small
businesses. The report should include a
description of the demand for, and availability of, credit, the range of credit
options and types of credit products
available, and the credit needs and types
of risks associated with lending to small
businesses.



The act requires the Board to submit
to the Congress, within 180 days of
enactment, a report on actions being
taken or to be taken to eliminate and
conform inconsistent and duplicative
accounting and reporting requirements,
as required by section 121 of the FDIC
Improvement Act. Section 121 requires
regulators to use uniform accounting
principles consistent with, or no less
stringent than, generally accepted
accounting principles (GAAP).
The act repeals 12 U.S.C., section
1833, which requires the Board to report
annually to the Congress on, among
other things, the number of formal and
informal supervisory, administrative,
and civil enforcement actions initiated
each year; the number of individuals
and institutions against whom civil
money penalties were assessed; and a
description of all other enforcement
efforts and initiatives relating to unsafe
and unsound practices, criminal misconduct, and insider abuse. The act also
repeals 12 U.S.C., section 3912, which
requires the Board to report annually to
the Congress on certain aspects of the
international lending operations of banking institutions.
Farmers and Ranchers in
Drought-Stricken Areas
The act declares the sense of the Congress to be that bank regulators should
work with farmers and ranchers in
drought areas to allow them to meet
their financial obligations to be met
without imposing burdens on them.

National Securities Markets
Improvement Act of 1996
The National Securities Markets Improvement Act of 1996 (Pub. L. 104290, 110 Stat. 3416) affects the Board's

224 83 rd Annual Report, 1996
authority in two ways. First, the Board
no longer has the authority to regulate
loans to certain registered brokerdealers unless it finds that such rules are
necessary or appropriate in the public
interest or for the protection of investors. Second, it repeals section 8(a) of
the Securities Exchange Act, which limited sources of broker-dealer funding
and required nonmember banks that
engage in such lending to file agreements with the Federal Reserve.

ing whether a FOIA request should
receive expedited processing and they
indicate when the agency must specify
the amount of information that was
withheld from the requestor.
The FOIA amendments also limit the
situations in which the Board may
obtain a stay of judicial proceeding on
the basis of a FOIA backlog, and they
modify the content, timetable, and procedures for filing annual reports to the
Congress under FOIA.

Electronic Freedom of
Information Act Amendments
of 1996

Debt Collection Improvement Act
of 1996

Under the Electronic Freedom of Information Act Amendments of 1996,
(Pub. L. 104-231, 110 Stat. 3048), federal agencies, including the Board, are
required to make any records processed
and disclosed in response to a request
under the Freedom of Information Act
(FOIA) routinely available for public
inspection and copying if the agency
determines that they "have become or
are likely to become the subject of subsequent requests." The act also requires
agencies to maintain reference material
or a guide to aid the public in making
a FOIA request. In addition, agencies
must make certain records created on or
after November 1, 1996, available to the
public by electronic means.
The act also increases the time limit
for responding to FOIA requests from
ten to twenty working days and encourages agencies that experience difficulties in meeting FOIA's time limits to
promulgate regulations providing for
"multitrack processing" of FOIA requests. In addition, the act allows additional time for responding to a FOIA
request if unusual circumstances are
involved, such as the volume of records
sought. The act defines the term "compelling need" for purposes of determin


On April 26, 1996, the Congress passed
the Debt Collection Improvement Act of
1996, (Pub. L. 104-134, 110 Stat. 1321376), which amended the Federal Financial Management Act of 1994 by requiring that all federal payments (defined as
federal wage, salary, retirement, benefit,
and reimbursement payments) be made
electronically within ninety days of
enactment. The act allows a waiver of
this requirement if the recipient of the
federal payment certifies in writing
that he or she does not have an account
with a financial institution. This general
waiver expires as of January 1, 1999, at
which time all federal payments must be
made electronically unless the Secretary
of the Treasury finds that compliance
would impose a hardship or that the
class or types of checks or other circumstance do not require electronic
payment.
•

225

Banking Supervision and Regulation
The 1990s have been a period of significant growth in the Federal Reserve's
responsibilities for banking oversight as
well as change in its approach to such
oversight. Much of the increased responsibility stems from 1991 legislation
in which the Congress expanded the
Federal Reserve's supervisory authority
over the U.S. activities of foreign banking organizations. The purpose of the
bill was to fill certain gaps in the supervision and regulation of such activities
and to ensure that U.S. banking policies
are applied fairly and consistently to all
entities that conduct banking in the
United States. The legislation, the Foreign Bank Supervision Enhancement
Act of 1991 (FBSEA), involved 400
institutions with assets of more than
$700 billion.1
All told, from 1990 through 1995,
aggregate assets under the Federal Reserve's supervision more than doubled,
and despite a dramatic consolidation
within the U.S. banking system during
that period, the number of institutions
the Federal
Reserve
supervised
remained relatively stable, at approximately 7,000. Among state member
banks, which account for a large portion
of the Federal Reserve's oversight
responsibility, the number of state
member banks remained at around 1,000
between 1990 and 1995, while the assets
1. Before passage of FBSEA, primary responsibility for supervising and examining the U.S.
branches and agencies of foreign banking organizations lay with the licensing agencies—the states
or the Office of the Comptroller of the Currency.
In carrying out its responsibilities for foreign
banking organizations before FBSEA, the Federal
Reserve relied mainly on examinations conducted
by the states.



of such institutions grew 77 percent.
And although the number of bank holding companies and their nonbank subsidiaries declined between 1990 and
1995, the assets of these groups grew
markedly over the period (54 percent);
most of the asset growth was in the
"section 20" companies, nonbank subsidiaries engaged in underwriting corporate securities.
The growth of the Federal Reserve's
supervisory responsibilities has increased the demands on the System's
resources. In response, the Federal
Reserve has, over the past few years,
adapted its approach to the supervisory
process to make it more focused on risk,
more sensitive to the burden it places on
institutions, and more cost-effective.
In the past, examinations and inspections have focused on regulatory compliance and on assessing the financial
strength of an institution by reconciling
accounts, reviewing individual transactions, and analyzing the institution's
financial condition. In recent years,
however, improved technology and
financial innovations have enabled
banks to develop financial products that
can quickly alter their balance sheets
and change their exposure to risk. As a
result, supervisory authorities can no
longer rely solely on periodic assessments of an institution's balance sheet
position at a point in time, but must
ensure that the institution has adequate
procedures to identify, measure, monitor, and control its risk exposure.
Important changes have been implemented or are in the process of being
adopted based on a fundamental review
of the Federal Reserve's examination
procedures. These changes include

226 83rd Annual Report, 1996
• Refocusing on the areas of greatest
risk to a bank and on an assessment
of the bank's risk-management procedures and capabilities
• Customizing examinations to fit the
size, activities, and risks of the
institution
• Developing a streamlined examination program for smaller institutions
• Adapting the existing approach to
examination, which is based on an
institution's legal structure, to a
framework based on the institution's
functional or business lines
• Conducting a greater portion of an
examination off-site
• Improving communications with examined institutions
• Cooperating more closely with internal auditors and outside accountants
• Placing greater emphasis on market
discipline, and using positive incentives to encourage prudent oversight
by management.
The Federal Reserve has adopted a
risk-focused approach to examinations
as the principal vehicle for implementing these changes. The risk-focused
approach highlights the importance of
the management process for identifying,
measuring, monitoring, and controlling
risk. It gives examiners more flexibility
in planning and conducting examinations. The risk-focused approach also
places more attention on an institution's
internal controls and on analysis and
planning before the on-site examination
begins.

Scope of Responsibilities for
Supervision and Regulation
The Federal Reserve is the federal
supervisor and regulator of all U.S. bank
holding companies and of statechartered commercial banks that are
members of the Federal Reserve Sys


tem. 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.2
The Federal Reserve also examines the
following specialized activities of these
institutions: information systems, 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.3
The Federal Reserve exercises important regulatory influence over the entry
into, and the structure of, the U.S. banking system through its administration
of the Bank Holding Company Act, the
Bank Merger Act for state member
2. 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 also check for safety and
soundness.
3. Edge Act corporations are chartered by the
Federal Reserve, and agreement corporations are
chartered by the states, to provide all segments of
the U.S. economy with a means of financing international trade, especially exports.

Banking Supervision and Regulation 227
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 Federal Reserve conducts examinations of state member banks, branches
and agencies of foreign banks, Edge Act
corporations, and agreement corporations. Because many elements reviewed
at bank holding companies and their
nonbank subsidiaries differ from bank
examinations, the Federal Reserve conducts inspections of holding companies
and their subsidiaries. Pre-examination
planning and on-site review of operations are integral parts of ensuring the
safety and soundness of financial institutions. Regardless of whether it is an
examination or inspection, the review
entails (1) an assessment of the quality
of the processes in place to identify,
measure, monitor and control risk exposures, (2) an appraisal of the quality
of the institution's assets, (3) an evaluation of management which includes an
assessment of internal policies, procedures, controls, and operations, (4) an
assessment of the key financial factors



of capital, earnings, asset and liability
management, liquidity, and sensitivity
to market risk, and (5) a review for
compliance with applicable laws and
regulations.
State Member Banks
At the end of 1996, 1,014 state-chartered
banks were members of the Federal
Reserve System (excluding nondepository trust companies and private banks).
These banks represented about 11 percent of all insured commercial banks
and held about 25 percent of all insured
commercial bank assets.
The guidelines for Federal Reserve
examinations 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, certain wellcapitalized and well-managed institutions with assets of less than $250 million may be examined every eighteen
months.
During 1996, the Federal Reserve
Banks conducted 606 examinations
(some of them jointly with the state
agencies), and state banking departments conducted 324 independent required examinations.
Bank Holding Companies
At year-end 1996, the number of bank
holding companies totaled 5,998. These
organizations controlled 7,213 insured
commercial banks and held approximately 93 percent of the assets of all
insured commercial banks in the United
States.

228 83rd Annual Report, 1996
Federal Reserve guidelines call for
annual inspections of large bank holding
companies and smaller companies with
significant nonbank assets. Small companies (those with assets 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 1996 the Federal
Reserve inspected 1,674 bank holding
companies. Altogether, Federal Reserve
examiners conducted 1,922 bank holding company inspections, 149 of which
were conducted off-site, and state
examiners conducted 73 independent
inspections.

Enforcement Actions, Civil
Money Penalties, and
Suspicious Activity Reporting
In 1996, the Federal Reserve Banks
recommended, and members of the
Board's staff initiated and worked on,
133 enforcement cases involving 285
separate actions, such as cease and
desist orders, written agreements, removal and prohibition orders, and civil
money penalties. Of these, 66 cases
involving 129 actions were completed
by year-end.
Of particular note was the action that
the Board of Governors took, in con


junction with state bank supervisory
authorities in New York and California,
against the Bangkok Metropolitan
Bank, PCL, Bangkok, Thailand, which
resulted in the bank's consent to terminate its U.S. banking operations. The
action arose from serious unsafe and
unsound banking practices and violations of law, including misleading and
false statements made to regulatory officials, creation of false records, diversion
of loan proceeds benefitting insiders,
and extensions of credits to nominee
borrowers.
In other significant matters, the Board
of Governors assessed civil money penalties totaling $5.9 million, including a
$3.5 million fine against a foreign bank
for violations, by its section 20 subsidiary, of the Board of Governors' revenue
limit, and a $300,000 fine against a foreign bank and one of its U.S. branches
based on their lack of compliance with
the Bank Secrecy Act and with an existing written agreement. Two cases involving fines totaling $1.7 million are
under appeal in federal courts.
The Board of Governors also continued to address the misconduct of some
former Bankers Trust officials who were
involved with improper transactions involving leveraged derivatives; the Board
issued consent orders limiting, among
other things, the individuals' ability to
market such transactions at other banking organizations and by assessing fines.
All final enforcement orders issued
by the Board of Governors and all written agreements executed by the Federal
Reserve Banks in 1996 are available to
the public. In addition to formal enforcement actions, the Federal Reserve Banks
completed eighty-four informal enforcement actions, such as memorandums of
understanding and resolutions from the
board of directors.
The Federal Reserve adopted an interagency rule, effective April 1, 1996, that

Banking Supervision and Regulation 229
simplifies the process for reporting suspected crimes and suspicious activities
involving money laundering or the Bank
Secrecy Act. The new reporting system
enables a banking organization to report
such activity by filing a single form, the
interagency Suspicious Activity Report,
with the Department of the Treasury's
Financial Crimes Enforcement Network.
The report goes into a computer database accessible by all appropriate federal and state banking and law enforcement authorities.

Specialized Examinations
The Federal Reserve conducts specialized examinations of banking organizations regarding electronic data processing, fiduciary activities, government
securities dealing and brokering,
municipal securities dealing, securities
clearing, and securities underwriting and
dealing through so-called section 20
subsidiaries. The Federal Reserve also
reviews state member banks and bank
holding companies that act as transfer
agents.
Electronic Data Processing
Under the Interagency EDP Examination Program, the Federal Reserve
examines the electronic data processing
(EDP) activities of state member banks,
U.S. branches and agencies of foreign
banks, Edge Act and agreement corporations and independent data centers that
provide EDP services to these institutions. During 1996, the Federal Reserve
conducted 411 EDP examinations. The
Federal Reserve also was the lead
agency on four examinations of large
Multiregional Data Processing Servicers
examined on an interagency basis with
the Federal Deposit Insurance Corporation (FDIC), the Office of the Comp


troller of the Currency (OCC), and the
Office of Thrift Supervision (OTS).
Fiduciary Activities
The Federal Reserve has supervisory
responsibility for institutions that hold
more than $7.3 trillion of discretionary
and nondiscretionary assets in various
fiduciary capacities. This group of institutions includes 319 state-chartered
member banks and trust companies,
83 nonmember trust companies that are
subsidiaries of bank holding companies,
and 13 entities which are branches or
agencies of foreign banking organizations or edge 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 include
(1) an evaluation of management, policies, audit and control procedures, and
risk management, (2) an assessment of
the quality of trust assets, (3) an assessment of earnings, (4) a review for conflicts of interest, and (5) a review for
compliance with laws, regulations, and
general fiduciary principles. During
1996, Federal Reserve examiners conducted 206 on-site trust examinations of
state member banks and trust companies, branches and agencies of foreign
banking organizations or edge corporation subsidiaries of domestic banking
institutions which held approximately
$6.6 trillion in fiduciary assets.
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-two state member

230 83rd Annual Report, 1996
banks and six state branches of foreign
banks have notified the Board that they
are currently government securities
dealers or brokers that are not otherwise
exempt from Treasury's regulations.
During 1996 the Federal Reserve conducted examinations of broker-dealer
activities in government securities at
state member banks and foreign banks.
Municipal Securities Dealers
and Clearing Agencies
The Securities Act Amendments of 1975
made the Board responsible for supervising state member banks and bank
holding companies that act as municipal
securities dealers or as clearing agencies. The Board supervises thirty-eight
banks that act as municipal securities
dealers and three clearing agencies that
act as custodians of securities involved
in transactions settled by booking
entries. In 1996 the Federal Reserve
examined all three of the clearing agencies and 21 of the banks that deal in
municipal securities.
Securities Subsidiaries of Bank
Holding Companies
Section 20 of the Banking Act of 1933
(the Glass-Steagall Act) prohibits the
affiliation of a member bank with a company that is "engaged principally" in
underwriting or dealing in securities.
The Board in 1987 approved proposals
by banking organizations to underwrite
and deal on a limited basis in specified
classes of bank "ineligible" securities
(that is, commercial paper, municipal
revenue bonds, conventional residential
mortgage-related securities, and securitized consumer loans) in a manner consistent with section 20 of the GlassSteagall Act and 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 section 20 securities subsidiary. This limit
was subsequently increased in September 1989 to 10 percent. In January 1993,
the Board 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 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 or firewalls, specified by the
Board. In approving this broader range
of activities, the Board also adopted
more restrictive firewalls than those contained in its 1987 approval order.
Based on its experience supervising
these section 20 subsidiaries and developments in the securities markets since
the revenue test was adopted, the Board
concluded in December 1996 that a section 20 firm could derive up to 25 percent of its revenue from underwriting
and dealing in ineligible securities. In
light of this action and an accounting
change concerning the treatment of
interest earned on securities that may
be held by a member bank, the Board
concurrently eliminated the optional
indexed revenue test. Also, during 1996,
the Board eased or eliminated three of
the firewalls imposed on the operations
of section 20 subsidiaries, and continued
work on an extensive review of all other
firewalls in order to eliminate unnecessary regulatory burden and enable section 20 subsidiaries to operate in an
efficient, effective manner. This effort
resulted in the publication for comment
early in January 1997 of a proposal to
eliminate most firewalls and to modify
the remaining ones to ease compliance
burdens. It was proposed that remaining

Banking Supervision and Regulation 231
firewalls be formally adopted as operating standards applicable to section 20
subsidiaries.
At year-end 1996 forty bank holding
companies held section 20 subsidiaries
authorized to underwrite and deal in
ineligible securities. Of these, twentytwo could underwrite any debt or equity
security; three could underwrite any
debt security; and fifteen 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 40 such inspections in 1996.
Transfer Agents
Federal Reserve examiners also conduct
examinations of state member banks and
bank holding companies that are registered transfer agents. Among other
things, transfer agents counter-sign and
monitor the issuance of securities, register their transfer, and exchange or convert such securities. During 1995, Federal Reserve examiners conducted onsite examinations at 77 of the 170 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
aggregate banking system as a whole to
identify areas of supervisory concern.
Reserve Banks and the Board use automated surveillance screening systems to
identify organizations with poor or deteriorating financial profiles and to identify adverse trends affecting the banking
system. Information from these surveillance activities is then used to intensify
analysis and allocate additional examination resources to institutions vulnerable to deterioration.



An integral part of the bank surveillance function is an automated system
which is used to estimate examination
ratings for all banks and to identify
banks with the potential to become critically undercapitalized over a two year
horizon. In 1996, the Federal Reserve
undertook a validation effort for this surveillance model.
The Federal Reserve also continued
to implement revisions and additions to
its bank holding company surveillance
system to further assist supervisory staff
in evaluating the financial profiles of
individual bank holding companies.
During 1996, quarterly screens evaluating capital markets activities and liquidity for consolidated bank holding companies were completed. These changes
were augmented by the development of
a set of "parent only' screens which
focus on the bank holding companies'
individual (nonconsolidated) operations.
Other efforts were undertaken during
1996 to support and enhance the effectiveness of Federal Reserve surveillance
and monitoring activities. For example,
the System introduced PRISM, Performance Report Information and Surveillance Monitoring. PRISM provides
access to National Information Center
(NIC) data on banks, bank holding companies, banking subsidiaries of bank
holding companies, and Off-Site Risk
Analysis (Surveillance). The Federal
Reserve also implemented a new internal system to access Uniform Bank Performance Reports in March, 1996.
The Federal Reserve also completed a
review of the definitions of commercial
banks, savings bank, and bank holding
companies used by various divisions of
the Board, the Reserve Banks, and the
FDIC. The result was standard definitions of these commonly selected institutional groupings to assist the Board
and Reserve Banks in providing consistent figures to division management, the

232 83rd Annual Report, 1996
Board, and the public. Automated monitoring systems continue to rely heavily
on the information in the regulatory
reports filed by banking organizations.
To ensure the timeliness and accuracy of
the reports, the Federal Reserve maintains the Regulatory Reports Monitoring
System to track domestic and foreign
banking organizations that file late or
inaccurately.
The Federal Reserve actively participates with other federal and state banking authorities in efforts to enhance surveillance tools; currently, the Federal
Reserve chairs the Federal Financial
Institutions Examination Council Task
Force on Surveillance.

International Activities
The Federal Reserve plays a critical role
in the supervision and regulation of the
international activities of U.S. banking
organizations and the U.S. activities
of foreign banking organizations. The
Board provides authorization and regulation of foreign branches of member
banks; overseas investments by member
banks, Edge Act corporations and agreement corporations, and bank holding
companies; and investments by bank
holding companies in export trading
companies. The Board also charters
Edge Act corporations. In addition, the
Board acts on applications by foreign
banking organizations to acquire U.S.
banks; to establish U.S. branches, agencies, representative offices, and commercial lending company subsidiaries; and
to engage in nonbanking activities in the
United States.
Foreign Office Operations of U.S.
Banking Organizations
The Federal Reserve examines the international operations of state member



banks, Edge Act corporations, and bank
holding companies, principally at the
U.S. head offices of these organizations,
where the ultimate responsibility for
their foreign offices lies. In 1996 the
Federal Reserve conducted on-site fullscope and targeted-scope examinations
of eleven foreign branches of state member banks and sixty-nine foreign subsidiaries of Edge Act corporations and bank
holding companies. All of the examinations abroad were conducted with the
cooperation of the supervisory authorities of the countries in which they took
place; when appropriate, the examinations were coordinated with the Office
of the Comptroller of the Currency.
Also, examiners made forty-nine visitations to the overseas offices of U.S.
banks to obtain financial and operating
information, and in some instances, to
evaluate their compliance with corrective measures or to test-check adherence
to safe and sound banking practices.
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 1996 the Federal Reserve approved the opening of
25 foreign branches of 15 banks. By the
end of 1996, 96 member banks were
operating 771 branches in foreign countries and overseas areas of the United
States; 66 national banks were operating 586 of these branches, and 30 state
member banks were operating the
remaining 185 branches. In addition,
23 nonmember banks were operating
34 branches in foreign countries.

Banking Supervision and Regulation 233
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 business, especially exports. An agreement corporation is a state-chartered or federally
chartered company that enters into an
agreement with the Board not to exercise any power that is impermissible for
an Edge Act corporation.
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 usually are 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 1996, the Federal Reserve
approved one new Edge Act corporation
and seven new agreement corporations.
At year-end, seventy-three Edge Act
and agreement corporations, with total
parent-only assets of $40 billion at yearend, were operating with forty-two
domestic branches. During the year, the
Federal Reserve examined all seventythree corporations.
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.
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.

U.S. Activities of Foreign Banks
The Federal Reserve has broad authority
to supervise and regulate the U.S. activities of foreign banks that engage in
banking and related activities in the
United States through branches, agencies, representative offices, commercial
lending companies, Edge Act corporations, banks, and certain nonbank companies. Foreign banks continue to be
significant participants in the U.S. banking system. As of year-end 1996,
281 foreign banks from 60 countries
operated 432 state-licensed branches
and agencies (of which 25 are insured
by the FDIC) as well as 66 branches and
agencies licensed by the OCC (of which
6 have FDIC insurance). These foreign

234 83rd Annual Report, 1996
banks also directly owned 10 Edge Act
corporations and 4 commercial lending
companies. In addition, they held an
equity interest of at least 25 percent in
90 U.S. commercial banks. Altogether,
these U.S. offices of foreign banks control approximately 20 percent of U.S.
banking assets. These foreign banks also
operated 138 representative offices. An
additional 115 foreign banks operated in
the United States solely through a representative office.
The Federal Reserve has acted to
ensure that all state-licensed 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 by a
state or other federal regulator. The Federal Reserve conducted or participated
with state and federal regulatory authorities in 704 examinations during 1996.
The Foreign Bank Supervision Enhancement Act of 1991 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 1996, the Federal
Reserve approved applications by
19 foreign banks from 12 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. The program has two
major parts. The first focuses primarily
on those FBOs that have multiple U.S.
operations and is intended to better coor


dinate 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, these two processes provide
critical information to the U.S. supervisors in a logical, uniform, and timely
manner. During 1996 the Federal
Reserve continued to implement program goals through coordination with
other supervisory agencies and the
development of financial and risk
assessments of foreign banking organizations and their U.S. operations.

Technical Assistance
In 1996 the System provided staff for
technical assistance missions and training sessions on bank supervisory matters to a number of central banks in
countries of the former Soviet Union,
Eastern Europe, Asia, the Caribbean,
and Latin America.

Supervisory Policy
The Federal Reserve amended its guidelines on risk-based capital by incorporating a measure for market risk. In addition, the Federal Reserve approved for
public comment two proposals to amend
the capital guidelines in other areas.
The Federal Reserve made substantial
progress in revising its examination and
inspection processes to enhance its
effectiveness and address changes in the
banking industry, and improving supervisory reporting and disclosure by the
banking industry. In concert with the
other agencies, the Federal Reserve also

Banking Supervision and Regulation 235
issued a major revision to the Uniform
Financial Institutions Rating System.
Risk-Based Capital Standards
The risk-based capital requirements
adopted by the Federal Reserve in 1989
remained in effect and were expanded in
1996. 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 Federal Reserve 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 1996 the Board adopted amendments to its risk-based capital guidelines
in the following areas.
Market risk. On September 6, 1996,
the Federal Reserve, together with the
FDIC and OCC, issued a final rule that
incorporated into the risk-based capital
framework a capital charge for market
risk associated with foreign exchange
and commodity activities and with the
trading of debt and equity instruments.
Regulated institutions with significant
market risk exposure must measure their
market risk exposure using an internal
risk measurement model subject to certain regulatory criteria and begin holding capital in support of their market



risk by January 1, 1998. The final rule
was based on a supplement to the Basle
Accord that was issued January 1996.
Interest rate risk. On June 26, 1996,
the Federal Reserve along with the
FDIC and OCC issued a Joint Agency
Policy Statement describing a common
framework for the supervision of interest rate risk in banking institutions. This
framework calls for a review of the
qualitative characteristics and adequacy
of an institution's interest rate risk management as well as an assessment of risk
to its earnings and the economic value
of its capital. The framework is consistent with 1995 revisions to risk-based
capital regulations that incorporated
the exposure of that economic value to
changes in interest rates as an important
element in the evaluation of capital
adequacy.
The policy statement describes sound
practices for managing interest rate risk,
emphasizing the importance of adequate
oversight by the board of directors and
senior management and a comprehensive risk management process that identifies, measures, and controls interest
rate risk. The agencies also indicated that
they are no longer pursuing a standardized supervisory measure for interest
rate risk, as had been proposed in 1995.
In lieu of any standardized measure,
the agencies will rely on surveillance
screens and, during the examination process, the bank's own measurement system to evaluate the level of a bank's
risk. Consistent with this framework,
some modest revisions are being made
to the Call Report in 1997 to enhance
supervisory monitoring capabilities with
respect to interest rate risk.
Proposed Rules
During 1996, the Federal Reserve
approved for public comment two pro-

236 83 rd Annual Report, 1996
posals to amend its capital adequacy
guidelines.
Collateralized
transactions.
On
August 16, 1996, the Federal Reserve,
together with the OCC, FDIC, and OTS,
issued a proposal to amend the riskbased capital standards to make uniform
the agencies' treatment for transactions
secured by qualifying collateral. Under
the proposal, regulated institutions
would be allowed to hold less capital
for certain transactions collateralized
with a positive margin by cash or qualifying securities. The comment period
for the proposal closed on October 15,
1996. A final amendment is expected in
1997.
Technical modifications. In November 1996 the Federal Reserve approved
a proposal to amend its risk-based
and leverage capital guidelines for
state member banks in order to eliminate inconsistencies among the capital standards of the banking agencies.
At the same time, the Federal Reserve
approved a similar proposal for bank
holding companies. The proposed
amendments pertain to the risk-based
capital treatment of presold one- to
four-family residential properties, junior
liens on one- to four-family residential
properties, and investments in mutual
funds. In addition, the proposals would
simplify the leverage capital guidelines. The Federal Reserve expects that
the proposals will be issued on a joint
basis with the other agencies in early
1997.

Risk-Focused Safety and Soundness
Examinations and Inspections
Over the last several years, a committee
of senior staff from the Federal Reserve
System has undertaken a review of the
examination and inspection processes to
identify near- and long-term opportunities for enhancing the effectiveness,
efficiency, and responsiveness of the
supervisory process and to address the
changing and ever complex banking and
financial environment. The committee
made a number of recommendations,
which the Federal Reserve has begun
to implement in its efforts to provide
a more risk-focused approach to the
supervision of banking organizations.
On May 24, 1996, the Federal
Reserve's Division of Banking Supervision and Regulation issued examiner
guidance to explain the changes now
being implemented in the examination
and inspection process and to outline
other areas where further changes will
occur. In summary, the Federal Reserve
has adopted a risk-focused approach to
examinations that places greater reliance on effective planning, as well as on
the tailoring of each examination to the
size and activities of the subject bank
or bank holding company. Under this
approach, examiners place greater
emphasis on evaluating the adequacy of
an institution's management process for
identifying, measuring, monitoring, and
controlling risk. When this process is
determined to be sound, the level of
transaction testing conducted by examiners can be reduced, commensurate
with the quality of management practices and the materiality of the activities
being reviewed.

Risk Management Guidance
Throughout 1996 the Federal Reserve
continued to focus on the adequacy of
risk management practices and controls
at banking organizations.



Coordination with Other
Supervisors
The Federal Reserve has also sought to
increase coordination with other bank-

Banking Supervision and Regulation 237
ing agencies and to improve supervision
in an environment of interstate banking. As part of these efforts, the Federal Reserve in April 1996 approved
two initiatives, the State/Federal Protocol and the Model Agreement, which
address the supervision of statechartered banks operating across state
lines.
The protocol is a statement of principles by the Federal Reserve, the FDIC,
and the Conference of State Bank Supervisors on behalf of the state banking
departments. It provides that the appropriate federal regulator and home state
supervisor will endeavor to coordinate
the supervision of interstate banks, particularly those with assets of $1 billion
or more, so as to reduce regulatory burden and minimize duplicative regulatory
actions, while fostering the safe and
sound operation of the banks.
The Model Agreement specifies the
actions that the appropriate federal regulator and the home state supervisor
would take to fulfill the goals of the
protocol, that is, the seamless supervision and examination of interstate, statechartered banks. Further, on November 14, 1996, the Federal Reserve along
with the FDIC and all of the state banking departments signed a Nationwide
State/Federal Supervisory Agreement,
which was based on the April 1996
Model Agreement.
Derivatives Disclosures
The Federal Reserve, the other federal
banking regulators, and industry groups
continued their efforts to improve the
quality of bank disclosures of derivatives activities to make these activities
more transparent to the public and regulatory authorities. In September 1996
the Division of Banking Supervision and
Regulation published in the Federal
Reserve Bulletin its second annual



analysis of derivatives-related disclosures of the top ten U.S. banks that deal
in derivatives. This analysis summarizes
the accounting standards that influenced
the 1995 disclosures in the annual
reports of these banks; it also reviews
the improvements since 1993 in qualitative and quantitative disclosures about
the credit and market risks of derivatives and about the earnings effect of
derivatives activities.
In November 1996 the Basle Committee on Banking Supervision and the International Organisation of Securities
Commissions issued their second joint
report on the public disclosure of trading and derivatives activities of banks
and securities firms worldwide. Using
an analytical framework developed by
the Federal Reserve, the report surveys
the trading and derivatives activities disclosed in the 1995 annual reports of a
sample of the largest, internationally
active banks and securities firms in the
G-10 countries and notes improvements
made since 1993.
Retail Sales of Nondeposit
Investment Products
On December 30, 1996, the Board the
OCC, and the FDIC published a notice
seeking comment on amendments to
Regulation H and Regulation K that
would establish professional qualification requirements for state member
banks and for branches and agencies of
foreign banks that engage in sales of
certain securities to retail customers.
The amendments are based on the professional qualification requirements for
registered representatives of brokerdealers.
The proposed regulation would
require that certain forms be filed with
the Board, including registration information for a bank employee who solicits, recommends, purchases, or sells cer-

238 83rd Annual Report, 1996
tain securities for retail customers. The
regulation also would require such
employees and their immediate supervisors to take one of two qualifying
examinatons given by the securities
industry as a precondition to selling.
Continuing education requirements also
would be imposed.

National Information Center
The Division of Banking Supervision
and Regulation has overall responsibility for the management of the National
Information Center (NIC). 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 agencies. 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 1996, software development
continued to improve the usefulness
of NIC through the use of distributed
technologies. This effort, begun in 1995,
is designed to exploit the Federal
Reserve System's recently implemented
intranet and the expanding use of client/
server applications. Implementation of
these improvements began in 1996 and
will be accomplished through several
phases through 1998. In addition, much
progress was made in 1996 toward
providing the public access to nonconfidential NIC information. In early 1997
a public Internet page will be available
to provide access to banking structure
information, balance sheets, and income
statements.



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,
efforts have been made to make NIC
data and software available to state
banking agencies for their use as a
supervisory tool.

Use of Automation
To increase efficiency in the examination of state member banks, the Federal
Reserve has applied new technology to
many routine aspects of an examiner's
work. This effort has led to development
of an automated system, referred to as
the Examiner Workstation, that automates much of the quantitative analysis
of banking organizations, including
sampling and evaluation of loan and
investment portfolios. Automation has
also been applied to the planning and
documentation of examinations. These
changes should help examiners identify
and evaluate risks more efficiently.
To assist in the supervision of U.S.
branches and agencies of foreign banking organizations (FBOs), the Federal
Reserve is developing an automated system, referred to as the FBO Desktop,
that provides information for use in
off-site reviews, including information
on foreign financial systems, foreign
accounting standards, and the financial
performance of FBOs with U.S. operations. Supervisory staff throughout the
System will be able to access this information electronically and will be able to
review and comment on performance
reports online.

Staff Training
The Supervisory Education Program
trains staff members having supervisory

Banking Supervision and Regulation 239
or regulatory responsibilities at the
Reserve Banks, at the Board of Governors, and at state banking departments.
Students from supervisory counterparts
in foreign countries attend on a spaceavailable basis. The program provides
training at the basic, intermediate, and
advanced levels for the four disciplines
of bank supervision: bank examinations,
bank holding company inspections,
surveillance and monitoring activities,
and applications analysis. Classes may
be conducted in Washington, D.C., or at
regional locations and may be held
jointly with regulators of other financial
institutions. The program is designed to
increase the student's knowledge of the
total supervisory and regulatory process

and thereby provide a higher degree of
cross training among staff members.
The System participates in training
offered by the Federal Financial Institutions Examination Council (FFIEC)
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, information
systems, activities of municipal securities dealers, capital markets, payment
systems risk, white collar crime, preparation and presentation of testimony,
real estate lending, management, and
instructor training. The System also

Number of Sessions of Training Programs for Banking Supervision and Regulation, 1996
Program

Total

Regional

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

10
15
8
6
19
22
19

6
10
5
3
19
19
19

Other schools
Real estate lending seminar
Specialized lending seminar
Senior forum for current banking and regulatory issues
Bank operations
Bank applications
Bank holding company inspections
Basic entry-level trust
Advanced trust
Consumer compliance examination I
Consumer compliance examination II
Fair lending
Information systems and emerging technology risk management
Information systems continuing education
Intermediate information systems examination
Capital markets seminars
Section 20 securities seminar
Internal controls
Seminar for senior supervisors of foreign central banks'

6
3
4
3
1
8
1
1
3
5
3
3
2
1
23
4
3
2

10
3
3
1

Other agencies conducting courses 2
Federal Financial Institutions Examination Council
Office of the Comptroller of the Currency
Federal Bureau of Investigation3

68
2
1

'V

NOTE. .. . Not applicable.
1. Conducted jointly with the World Bank.
2. Open to Federal Reserve employees.




11

3. Co-sponsored by the Federal Reserve, the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, and
the Resolution Trust Corporation.

240 83rd Annual Report, 1996
co-hosts the World Bank Seminar for
students from developing countries.
During 1996 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 1996 the Federal Reserve trained
3,730 students in System schools, 1,446
in schools sponsored by the FFIEC, and
124 in other schools, for a total of 5,300,
including 242 representatives from foreign central banks. The number of student days of training was 27,169 in
1996; 27,856 in 1995; 25,036 in 1994;
and 26,938 in 1993.
The Federal Reserve System also
gave scholarship assistance to the states
for training their examiners in Federal
Reserve and FFIEC schools. Through
this program 768 state examiners were
trained: 407 in Federal Reserve courses,
352 in FFIEC programs, and 9 in other
courses. During 1996 the Federal
Reserve also continued its participation
in joint core-supervision schools with
the FDIC.
Every staff member seeking an examiner's commission is required to pass
the Core Proficiency Examination,
which includes a core content area and a
specialty of the student's choice (Safety
and Soundness, Consumer Affairs,
Trust, or EDP). In 1996, 115 students
took the examination.

Federal Financial Institutions
Examination Council
The FFIEC prescribes uniform federal
principles and standards for the examination of depository institutions, promotes coordination of bank supervision
among the federal banking agencies, and
encourages better coordination of federal and state regulatory activities. During 1996, Federal Reserve staff members participated in the following FFIEC
projects.

Uniform Financial Institutions
Rating System
On December 9, 1996, the FFIEC recommended that the Federal Reserve and
the other banking agencies adopt revisions to update the Uniform Financial
Institutions Rating System (UFIRS).
UFIRS is an internal supervisory rating
system used by the federal banking
agencies to provide consistency among
them in their evaluation of financial
institutions and in their choice of institutions requiring special supervisory attention or concern. Adopted in November
1979, UFIRS is commonly referred to as
the CAMEL rating system, with each of
the letters of the word referring to one of
the five rating components of the system. On December 19, 1996, the Federal
Reserve adopted the revisions, which

Status of Students Registered for the Core Proficiency Examination, 1996
Specialty area
Student status

In queue, year-end 1995
Registrants added
Test taken
Passed
Failed
In queue, year-end 1996

Core

24
124
115
110
5
33

Safety and
soundness

Consumer

Trust

Electronic data
processing

20
106
100
79
21
26

3
14
13
11
2
4

0
4
3
3
0
1

1
0
1
1
0
0

NOTE. Students choose a test in one specialty area to accompany the core examination.




Banking Supervision and Regulation 241
are to be used in examinations beginning after January 1, 1997.
The revisions include the adoption of
a sixth rating component, which covers
a bank's sensitivity to market risks.
With the addition of this component,
the rating system will be referred to
as CAMELS: (C) capital adequacy,
(A) asset quality, (M) management,
(E) earnings, (L) liquidity, and (S) sensitivity to market risks. The revised system highlights a bank's processes to
identify, measure, monitor, and control
risks in each of the component and
composite ratings, particularly in the
management component. At community
banks, the sensitivity component will
primarily be used to indicate the examiner's assessment of the exposure to,
and management of, interest rate risk.
At larger regional and money center
banks, the component will also encompass price and foreign exchange risks
when these risks are significant to the
bank.

Disclosure of the Components of
the Supervisory Rating Systems
Acting upon a recommendation of the
FFIEC, the Federal Reserve in November instructed Reserve Bank staff members to disclose to a bank's management
and its directors, beginning January 1,
1997, the ratings given to the bank under
the various supervisory rating systems.
The Federal Reserve believes that such
disclosure will better focus management
attention on possible areas of weakness
and the need for timely corrective
action. The policy applies to the following rating systems: CAMELS for state
member banks, BOPEC for bank holding companies, CAMEO for Edge and
agreement corporations and overseas
subsidiaries of U.S. banks, ROCA for
U.S. branches and agencies of foreign



banking organizations, the Uniform
Interagency Trust Rating System, and
the Uniform Interagency Rating System
for Data Processing Operations.

Revisions to the Call Report
In December the Federal Reserve and
the other federal banking agencies
announced revisions to the bank Reports
of Condition and Income (Call Report)
to adopt generally accepted accounting
principles (GAAP) as the reporting basis
in areas of the Call Reports where they
were not already in effect, effective with
the March 1997 report date. The change
brings 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. The change is also
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 1996, the FFIEC also implemented several improvements to the
Call Report to focus on bank liquidity
ratios and certain capital and asset
amounts used in the calculation of regulatory capital ratios. The improvements,
effective with the March 1996 report,
provide the agencies with better data on
short-term liabilities and assets for
liquidity purposes and information necessary for the supervision of bank activities in other areas.
The FFIEC issued three substantially
revised report forms that improve the
ability of the banking agencies to monitor compliance with regulations that

242 83rd Annual Report, 1996
impose restrictions on the extension of
bank loans to certain insiders of another
bank and to provide better information
on the risk exposure to U.S. banks from
international lending. The FFIEC also
announced revisions to the Report of
Assets and Liabilities of U.S. Branches
and Agencies of Foreign Banks to adopt
GAAP and certain other disclosures to
maintain consistency with the bank Call
Report.
In December the FFIEC announced
that approximately thirty items deemed
unnecessary will be deleted from the
Call Report, effective with the
March 1997 reporting date. Also in the
announcement were new items to be
added to the Call Report; among them
are items related to the adoption of
GAAP, the potential level of bank exposures to interest rate risk, and the need
for better data on bank involvement in
credit derivatives.
Mortgage Servicing Rights
In June, the Financial Accounting Standards Board issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," thereby revising
the accounting and reporting standards
for all servicing assets, including mortgage servicing rights and related assets.
In response to this statement, the FFIEC
in December issued interim guidance on
reporting and capital treatment for servicing rights. The agencies are expected
to issue, in 1997, a proposed amendment to their capital adequacy rules with
regard to the treatment of servicing
rights and related assets.
Review of Regulations and Policies
In accordance with section 303(a)(2) of
the Riegle Community Development
and Regulatory Improvement Act of



1994, the federal banking agencies
reviewed their implementations of their
common statutory and supervisory
policies. Under the auspices of the
FFIEC, staff members of the agencies
formed sixty-five interagency working
groups to eliminate inconsistencies
and outmoded and duplicative requirements. The agencies submitted a joint
report to the Congress on September 23,
1996, that covered this work as well
as the results of the agencies' own internal reviews of their regulations and
policies to address the streamlining
requirements of section 3O3(a)(l) (for
further details, see chapter on Regulatory Simplification).
Appraisal Subcommittee
The FFIEC Appraisal Subcommittee
was established under title XI of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989, in
part to monitor the states' programs
for the licensing and certification of
appraiser for compliance with the statute. The subcommittee is made up of
one staff member from each of the
FFIEC agencies and the Department of
Housing and Urban Development.
Section 315 of the Riegle Community
Development and Regulatory Improvement Act of 1994 directed the subcommittee to encourage states to develop
reciprocity agreements with each other.
The agreements would allow appraisers
licensed or certified in one state to
perform appraisals in other states and
would determine appropriate fees and
requirements for temporary practice
provisions established by states for
appraisers. On October 21, the subcommittee issued a proposed policy statement with guidelines on temporary practice and reciprocity, and it expects to
take action on the proposal in early
1997.

Banking Supervision and Regulation 243

Regulation of the U.S. Banking
Structure
The Board administers the Bank Holding Company Act, the Bank Merger Act,
and the Change in Bank Control Act
for bank holding companies and state
member banks. In doing so, the Federal
Reserve acts on a variety of proposals
that directly or indirectly affect the
structure of U.S. banking at the local,
regional, and national levels. The Board
also has primary responsibility for regulating the international operations of
domestic banking organizations and the
overall U.S. banking operations of foreign banks, whether conducted directly
through a branch or agency or indirectly
through a banking or commercial lending subsidiary (treated above in the section on International Activities).

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. Once
formed, a bank holding company must
receive the Federal Reserve's approval
before acquiring additional banks or
nonbanking companies. The Bank Holding Company Act was amended in 1996
to permit bank holding companies that
are well run and satisfy specific criteria
to commence certain nonbanking activities on a de novo basis without prior
approval from the Board, and to establish an expedited prior-notice procedure for other activities and for small
acquisitions.
In reviewing an application or notice
filed by a bank holding company for
prior Board approval, the Federal
Reserve considers factors including the
financial and managerial resources of
the applicant, the future prospects of
both the applicant and the firm to be



acquired, the convenience and needs of
the community to be served, and the
potential public benefits and competitive effects of the proposal. In 1996 the
Federal Reserve acted on 1,528 bank
holding company and related applications or notices. The Federal Reserve
approved 336 proposals to organize
bank holding companies; approved
119 proposals to merge existing bank
holding companies; approved 331 proposals by existing bank holding companies to acquire or retain banks; approved
536 and denied 2 requests by existing
companies to acquire nonbank firms
engaged in activities closely related to
banking; and approved 204 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. During 1996, 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 assure comparable enforcement of the antitrust provisions of the act. The Federal Reserve
and those agencies have adopted standard terminology for assessing competitive factors in merger cases to assure
consistency in administering the act.
The Federal Reserve submitted 842
reports on competitive factors to the
other federal banking agencies in 1996.

244 83 rd Annual Report, 1996
Change In Bank Control Act
The Change in Bank Control Act
requires persons seeking control of a
bank or bank holding company to obtain
approval from the appropriate federal
banking agency before the transaction
occurs. Under the act, the Federal
Reserve is responsible for reviewing
changes in the control of state member
banks and of bank holding companies.
In so doing, the Federal Reserve must
review the financial position, competence, experience, and integrity of the
acquiring person; consider the effect on
the financial condition of the bank or
bank holding company to be acquired;
and determine the effect on competition
in any relevant market.
The appropriate federal banking agencies are required to publish notice of
each proposed change in control and
to invite public comment, particularly
from persons located in the markets
served by the institution to be acquired.
The federal banking agencies are also
required to assess the qualifications of
each person seeking control. During
1996 the Federal Reserve worked

with the FDIC, the OCC, and the OTS
to develop more uniform and streamlined procedures for implementing the
Change in Bank Control Act. As discussed further below, many of the proposed revisions became part of a broader
effort by the Board to improve and
revise Regulation Y. In 1996, the Federal Reserve acted on 162 proposed
changes in control of state member
banks and bank holding companies.

Public Notice of Federal Reserve
Decisions
Each decision by the Federal Reserve
that involves a bank holding company,
bank merger, or a change in control, is
effected by an order or announcement.
Orders state the decision along with
the essential facts of the application or
notice, and the basis for the decision;
announcements state only the decision.
All orders and announcements are released immediately to the public; they
are subsequently reported in the Board's
weekly H.2 statistical release and in
the monthly Federal Reserve Bulletin.

Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1996
Action under authority delegated
by the Board of Governors
Proposal

Direct action
by the
Board of Governors

Total

Office
of the
Secretary

Approved

Denied

15

0

0

0

18
2

0
0

49
147

0
2

0
0

0
0

9
29

0
15

0
0

0
47

0
0

246

2

47

0




0
0

3

0
0

Federal
Reserve Banks

Total

Approved Approved Permitted

Denied

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

Director of the
Division of Banking
Supervision and
Regulation

254

64

336

0

119
2

271
0

0
360

329
538

7
o

54
44

37
0

98
106

60

712

461

1,528

12
0

89
0

0

Banking Supervision and Regulation 245
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 1996, 96 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 1996, 80 percent of
the applications processed were acted
on under delegated authority.

Banking and Nonbanking Proposals
During 1996, the Board approved several merger proposals involving some of
the largest banking organizations in the
United States, including a proposal to
form the largest bank holding company.
As with similar prior cases, these proposals generated many comments from
the public, particularly with respect to



Community Reinvestment Act, fair
lending, and competitive issues.
In December of 1996, the Board
granted Federal Reserve membership to
a newly-formed state chartered uninsured trust company that proposed to
act as a clearinghouse for the multilateral netting of foreign exchange transactions. The clearinghouse was intended
to be a mechanism for reducing settlement risk in the global foreign exchange
market. At the same time, the Board
approved the related notices of eight
U.S. and Canadian banking organizations to invest in the uninsured trust
company.
During the year, the Board continued
to act on proposals involving the establishment and/or expansion of a section 20 subsidiary by a bank holding
company. In connection with one of
those proposals, the Board significantly
reduced the operating restrictions applicable to "riskless principal" activities.
In subsequent months, the Board took
several more actions to reduce further
the operating restrictions, or "firewalls," related to section 20 activities,
and raised the limit on a section 20
company's "ineligible revenue" from
10 percent to 25 percent. In connection
with one of the section 20 proposals, the
Board also permitted a bank holding
company to act as a primary clearing
firm for professional floor traders trading for their own accounts on two U.S.
futures exchanges. The Board had previously denied this activity for the same
bank holding company in 1991.
In the course of acting on various
other nonbanking proposals filed by foreign and domestic bank holding companies, the Board expanded the scope of
permissible data processing activities to
facilitate electronic banking and permitted one bank holding company to maintain stronger relationships with mutual
funds for which it planned to provide

246 83 rd Annual Report, 1996
investment advisory and administrative
services.
Applications by State
Member Banks
State member banks must obtain the permission of the Federal Reserve to open
new domestic branches, to make investments in bank premises that exceed
100 percent of capital stock, and to add
to their capital bases from sales of subordinated debt. State member banks
must also give six months' notice of
their intention to withdraw from membership in the Federal Reserve, although
the notice period may be shortened or
eliminated in specific cases.
Stock Repurchases by Bank
Holding Companies
A bank holding company sometimes
purchases its own shares from its shareholders. When the company borrows the
money to buy the shares, the transaction
increases the debt of the bank holding
company and simultaneously decreases
its equity. Relatively larger purchases
may undermine the financial condition
of a bank holding company and its bank
subsidiaries. The Federal Reserve may
object to stock repurchases by holding
companies that fail to meet certain standards, including the Board's capital
guidelines. In 1996 the Federal Reserve
reviewed fifty-four proposed stock
repurchases by bank holding companies,
all of which were acted upon under delegated authority either by the Reserve
Banks or by the Secretary of 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 specifi


cally 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 Federal Reserve's financial disclosure rules must be substantially similar to those issued by the Securities and
Exchange Commission (SEC). At the
end of 1996, thirty-six state member
banks, most of which are small or
medium-sized institutions, were registered with the Federal Reserve under the
Securities Exchange Act.
Bank Secrecy Act
The Currency and Foreign Transactions
Reporting Act (the Bank Secrecy Act)
was originally designed as a means to
create and maintain records of various
financial transactions that otherwise
would not be identifiable in an effort to
trace the proceeds of illegal activities. 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 authorities with data useful in the detection and prevention of
unlawful activity. The Federal Reserve,
through its examination process and
other off-sight measures, monitors compliance with the requirements of the
Bank Secrecy Act by the institutions it
supervises.
In 1996 the Federal Reserve issued
new procedures for the banking com-

Banking Supervision and Regulation 247
munity to use in reporting suspicious
activities related to money laundering
and other financial crimes. The procedures are designed to lessen the reporting burden on financial institutions and
to make the reports more useful in the
investigation of money laundering and
other banking crimes. The Federal
Reserve acted as the lead regulatory
agency in the development of the new
procedures.
The Federal Reserve also used
new interagency anti-money-laundering
examination procedures as required by
section 404 of the Riegle Community
Development and Regulatory Improvement Act of 1994. The Federal Reserve
acted as the lead regulatory agency in
the development and subsequent revision of the interagency examination
procedures.
The Federal Reserve, through its
appointed senior staff 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 participated extensively in the Financial
Action Task Force, which in 1996 provided anti-money-laundering training
to numerous foreign governments and
central banking authorities. In addition,
a representative of the Federal Reserve
participated in the Financial Action Task
Force review of the progress made in
adopting and implementing anti-moneylaundering measures by certain foreign
governments.



Securities Regulation
Under the Securities Exchange Act of
1934, the Board is responsible for regulating credit in certain transactions
involving the purchase or carrying of
securities. The Board limits the amount
of credit that may be provided by securities brokers and dealers (Regulation T),
by banks (Regulation U), and by other
lenders (Regulation G). Regulation X
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 SEC, the
National Association of Securities
Dealers, and the national securities
exchanges examine brokers and dealers
for compliance with Regulation T. The
federal banking agencies examine banks
under their respective jurisdictions for
compliance with Regulation U. The
compliance of other lenders with Regulation G is examined by the Board,
the Farm Credit Administration, the
National Credit Union Administration,
or the OTS, according to the jurisdiction
involved. At the end of 1996, 774 lenders were registered under Regulation G,
and 503 came under the Board's supervision. Of these 503, the Federal Reserve regularly inspects 249 either biennially or triennially, according to the
type of credit they extend. An additional
254 lenders are exempted from periodic
on-site inspections by the Federal
Reserve but are monitored through the
filing of periodic regulatory reports.
During 1996, Federal Reserve examiners inspected 148 lenders for compliance with Regulation G.
In general, Regulations G and U
impose credit limits on loans secured
by publicly held equity securities when

248 83rd Annual Report, 1996
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) and foreign stocks that the Board
designates as having characteristics
similar to those of stocks listed on the
national exchanges, bonds that meet certain requirements, or mutual funds regulated by the SEC.
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
1996, the OTC list was revised in February, May, August, and November.
The November OTC list contained
4,718 stocks.
Pursuant to a 1990 amendment to
Regulation T, the Board publishes a list
of foreign stocks that are eligible for
margin treatment at broker-dealers on
the same basis as domestic margin securities. In 1996, the foreign list was
revised in February, May, August, and
November. The November foreign list
contained 1,965 foreign stocks.

In April the Board adopted a revised
version of Regulation T. The amendments are part of the Board's periodic
review of its regulations and reflect consideration of the comments submitted in
response to proposed amendments published in 1995. The final rule eliminates
restrictions on the ability of brokerdealers to arrange for credit; increases
the type and number of domestic and
foreign securities that may be bought on
margin and increases the loan value of
some securities that are already marginable; deletes Board rules regarding
options transactions in favor of the rules
of the options exchanges; and reduces
restrictions on transactions involving
foreign persons, foreign securities, and
foreign currency.
At the same time, the Board proposed
further amendments to Regulation T, G,
and U. The proposed amendments would
allow broker-dealers to extend good
faith credit on any non-equity security
rather than only those currently permitted in the Board's rules; allow transactions involving non-equity securities
to be effected in an account not subject
to the restrictions of the Regulation T's
margin account; remove restrictions on
the ability of broker-dealers to calculate
required margin for non-equity securities; and modify the method for determining which equity securities are subject to the Board's margin requirements
under Regulations G, T and U.

Loans by State Member Banks to their Executive Officers, 1995-96
Number

Amount (dollars)

Range of interest
rates charged
(percent)

1995
October 1-December 31

726

31,421,000

4.0-19.5

1996
January 1-March 31
April 1-June 30
July 1-September 30

717
762
756

34,334,000
31,960,000
37,498,000

3.0-18.0
5.0-21.0
4.5-18.0

Period

SOURCE. Call Report.




Banking Supervision and Regulation 249
Under section 8(a) of the Securities
Exchange Act, a nonmember domestic
or foreign bank may lend to brokers or
dealers posting registered securities as
collateral only if the bank has filed an
agreement with the Board that it will
comply with all the statutes, rules, and
regulations applicable to member banks
regarding credit on securities. The
Board processed no new agreements
from January to October 1996. In October 1996 the Congress enacted the
National Securities Markets Improvement Act of 1996, which repealed section 8(a) of the Securities Exchange Act
and limited the Board's authority under
section 7 of the Securities Exchange Act
to impose margin requirements on borrowings by certain broker-dealers.
In November the Board published an
interpretation of Regulations G, T, and
U in light of the enactment of the
National Securities Markets Improvement Act of 1996. The interpretation
reflects the statutory repeal of section 8(a) of the Securities Exchange Act
and makes clear that the Board has not
made a finding that it is necessary or
appropriate either in the public interest
or for the protection of investors to
impose rules on borrowings by brokerdealers otherwise exempt under the new
legislation. At the same time, the Board
published proposed amendments to
Regulations G, T, and U to implement
the new legislation and further the policies behind its adoption.
In 1996, the Securities Regulation
Section of the Board's Division of
Banking Supervision and Regulation
issued thirty interpretations of the margin regulations. Those that presented
sufficiently important or novel issues
were published in the Securities Credit
Transactions Handbook, which is part of
the Federal Reserve Regulatory Service.
These interpretations serve as a guide to
the margin regulations.



Loans To Executive Officers
Under Section 22(g) of the Federal
Reserve Act, state member banks must
include in each quarterly Call Report
all extensions of credit made by the
bank to its executive officers since the
date of the bank's previous report. The
accompanying table summarizes this
information.

Federal Reserve Membership
At the end of 1996, 3,701 banks were
members of the Federal Reserve System. Member banks operated 40,963
branches on December 31, 1996, and
accounted for 39 percent of all commercial banks in the United States and for
69 percent of all commercial banking
offices.
•

251

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.
In 1996 the Board's regulatory review
activity increased from a handful of
actions per year to more than a dozen
significant reviews of Board regulations
and policies. As part of the 1996 comprehensive regulatory review process,
two regulations were rescinded (Regulations R and V); three were simplified
and updated (E, M, and S); and four
were in the process of comprehensive
review at year-end (H, K, Y, and CC).
Additional actions included deleting
transitional rules for reserve requirements (Regulation D); increasing the
tolerance for closed-end credit transactions (Regulation Z); revising the
lending-rule prohibitions for insiders at
member banks and their affiliates (Regulation O); and streamlining the application process for well-capitalized and



well-managed banks (Regulation Y).
Also, certain rules under Regulation Y
for section 20 subsidiaries were revised
to increase the revenue limits, clarify
rules for administering the revenue test
with respect to interest income on securities held for a bank's own account, and
ease or amend the firewall restrictions.

Comprehensive Reviews
Section 3O3(a)(l) of the Riegle Community Development and Regulatory
Improvement Act of 1994 requires the
federal banking agencies to cooperate in
conducting a systematic review of their
regulations and written policies to
improve efficiency, reduce unnecessary
costs, eliminate inconsistencies, eliminate outmoded and duplicative requirements, promote uniformity among the
regulations and policies of the agencies,
and reduce regulatory burden "consistent with the principles of safety and
soundness, statutory law and policy, and
the public interest." As required by the
act, a progress report on these efforts,
Joint Report: Streamlining of Regulatory Requirements, was submitted to the
Congress in September.
As part of promoting uniformity
among the banking agencies, the Board
adopted an interagency system for rating a bank's financial condition and
adopted interagency guidelines for determining the safety and soundness standards for asset quality and earnings.
In addition to the streamlining efforts
required by the Riegle act, the Board in
1996 engaged in internal activities such
as reviewing all supervisory and regulatory (SR) letters issued by the Division
of Banking Supervision and Regulation.

252 83rd Annual Report, 1996
The SR letters, which communicate
supervisory policy and guidance to the
Reserve Banks, were reviewed to determine whether the policy was still applicable, whether it had been incorporated
into the appropriate examination manuals or the Federal Reserve Regulatory
Service, and whether it had been superseded by a subsequent letter. An updated
list of "active" letters was sent to the
Reserve Banks after the review.
The significant regulatory improvements made by the Board in 1996, as
noted in the joint interagency report to
the Congress, are discussed below.

Regulation D
Reserve Requirements of
Depository Institutions
The Board revised Regulation D in
December to simplify and update it and
thereby also to reduce the burden it imposes on institutions. In general, the
changes delete certain transitional rules
relating to reserve requirements, NOW
accounts, de novo institutions, "dissimilar" mergers, and other matters that no
longer have significant effect.

Regulation E
Electronic Fund Transfers
In April, following a comprehensive
review, the Board approved a final rule
which simplified the language and format of each section of Regulation E and
stated the requirements more clearly.
The Board shortened the final rule by
15 percent, largely by deleting obsolete
provisions and transferring explanatory
material to the commentary. Changes to
the rule included revisions of the existing exemption for transfers of securities
and commodities as well as an increase
in the asset size cutoff for the exemption of small institutions, from $25 million to $100 million. The Board also



exempted preauthorized transfers to or
from accounts at small institutions to
reduce the burden of compliance for
institutions that do not offer any other
electronic fund transfer service.
The final rule also exempts from
Regulation E the transfer of funds for
certain purchases and sales of unregulated securities if the broker-dealer that
handles the transaction is regulated by
another federal agency, such as the
Securities and Exchange Commission or
the Commodity Futures Trading Commission. The final rule also extends the
exemption to all securities or commodities held in book-entry form by the Federal Reserve Banks on behalf of the
Department of the Treasury and other
federal agencies. (In April the Board
also proposed amendments to Regulation E; see the chapter on Consumer and
Community Affairs.)

Regulation H
Membership of State Banking
Institutions in the Federal Reserve
System
The Board began a review of Regulation
H with an eye toward simplifying,
updating, and reorganizing the regulation. In particular, the Board is revising
the regulation to eliminate out-dated
requirements and conditions that are
not absolutely necessary for membership, to make regulatory language easier
to understand, and to reorganize the contents to make the provisions more easily
referenced. The Board anticipates final
action on the revised regulation during
the first quarter of 1997.

Regulation K
International Banking Operations
The Board took several actions in 1996
to remove obsolete or superseded portions of Regulation K and to reduce

Regulatory Simplification 253
unnecessary regulatory burden. As part
of these actions, the Board amended the
rules allowing foreign banks to establish
U.S. representative offices, required
foreign banks to select a home state,
removed the restrictions on certain
mergers by U.S. bank subsidiaries of
foreign banks outside of the home state,
and prohibited foreign banks from using
their U.S. branches or agencies to manage activities through offshore offices
that could not be managed by a U.S.
bank at its foreign branches or subsidiaries. In addition, the Board also established criteria for evaluating the continued operation of a foreign bank in the
United States.
The Board began a comprehensive
review of Regulation K that will focus
on streamlining processes and making
U.S. banking organizations more competitive internationally. At the same
time, the review will consider all aspects
of foreign bank regulation with an eye
toward adopting further streamlining
and burden reduction measures as well
as further liberalizations, especially as
provided in the Riegle-Neal Interstate
Banking and Branching Efficiency Act
of 1994.
Regulation M
Consumer Leasing
In September the Board revised Regulation M to simplify and clarify the
required disclosures for car leasing and
other types of consumer lease transactions. The changes focused on automobile leasing because of the increased
use of such leases. The Board's action
revised the disclosure format, adopted a
total-payments disclosure that will
facilitate comparisons, and required a
mathematical progression that shows
how the monthly lease payment is calculated. The revisions also implemented
the advertising provisions of a 1995



amendment to the Consumer Leasing
Act.

Regulation O
Loans to Executive Officers,
Directors, and Principal
Shareholders of Member Banks
The Board revised Regulation O in
November to allow insiders of a bank
and of the bank's affiliates to obtain
loans under a company-wide employee
benefit plan. The final rule also simplifies the procedures for a bank's board of
directors to exclude executive officers
and directors of affiliates from policymaking functions of the bank and
thereby from the restrictions of Regulation O.

Regulation S
Reimbursement for Providing
Financial Records; Recordkeeping
Requirements for Certain Financial
Records
The Board took separate actions on two
provisions of Regulation S during 1996.
In July the Board updated and streamlined subpart A, which implements the
Right to Financial Privacy Act (RFPA).
As part of the revision, the Board
increased the fees that financial institutions may charge a government authority for providing financial records pursuant to a request under the RFPA.
Earlier in the year the Board added
subpart B to the regulation. The new
subpart cross-references the substantive
provisions of a joint rule adopted by the
Board and the Department of the Treasury relating to the recordkeeping
requirements for transmittals of funds
under the Bank Secrecy Act. The joint
rule is intended to assist in the investigation and prosecution of moneylaundering activities.

254 83 rd Annual Report, 1996

Regulation T
Credit by Brokers and Dealers
In April the Board amended Regulation
T to provide significant regulatory relief
to broker-dealers. The changes eliminated restrictions on the ability of
broker-dealers to arrange for credit,
increased the type and number of
domestic and foreign securities that may
be bought on margin, increased the loan
value of some securities that are already
marginable, deleted Board rules regarding options transactions in favor of
the rules of the options exchanges, and
reduced restrictions on transactions
involving foreign persons, foreign securities, and foreign currency. The Board
also made technical changes to the rules
to provide clarification and update
references.
In November the Board issued an
interpretation of the margin regulations
in response to the enactment of the
National Securities Markets Improvement Act of 1996. Under this legislation, the Board no longer has the authority to regulate certain loans to registered
broker-dealers unless it finds that such
rules are necessary or appropriate in the
public interest or for the protection of
investors.
The interpretation makes it clear that
the Board has not made such a finding
and that provisions in its margin regulations for which the Board no longer has
general authority are without effect. The
Board also requested public comment
on the regulatory amendments to reflect
the new legislation.

Regulation Y
Bank Holding Companies and
Change in Bank Control
During 1996 the Board conducted an
extensive review of Regulation Y and
issued a proposal designed to improve



the competitiveness of bank holding
companies by eliminating unnecessary
regulatory burden and operating restrictions and by streamlining the application and notice provision. The proposal,
which was published for comment in
August, reorganizes and expands the
regulatory list of nonbanking activities
and removes outmoded, superseded, or
unnecessary restrictions on those activities that would not apply to insured
banks that conduct the same types of
activities.
The proposal also includes significant
amendments to the tying restrictions.
One proposed amendment eliminates the
Board's regulatory extension of the antitying statute to bank holding companies
and their nonbank subsidiaries, thus subjecting these entities to the same general
antitrust laws that govern their competitors. Other proposed amendments
broaden the product exception and the
types of arrangements to which the traditional bank product exception applies.
The Board expects to take action on
the comprehensive review proposal and
tying provisions in 1997.
In addition to the proposal, the Board
also issued several amendments or interpretations to Regulation Y. A final
amendment to the Board's interpretive
rule regarding investment adviser activities permits a bank holding company
(and its bank and nonbank subsidiaries)
to purchase, in a fiduciary capacity,
securities of an investment company
advised by the bank holding company.
To take advantage of this provision, the
purchase must be specifically authorized
by the terms of the instrument creating
the fiduciary relationship, by court order,
or by the law of the jurisdiction under
which the trust is administered.
In October the Board announced an
interim rule to implement provisions of
the Economic Growth and Regulatory
Paperwork Act. The new rule estab-

Regulatory Simplification 255
lishes expedited procedures for well
capitalized bank holding companies
that also meet other criteria to obtain
Board approval for certain acquisitions
and certain nonbanking activities. The
affected acquisitions are those of smaller
companies that engage in any permissible nonbanking activities listed in
Regulation Y, and the affected nonbanking activities are those that the Board
has approved only by order.
During the year the Board also
approved changes to three areas affecting section 20 subsidiaries of bank holding companies—firewalls, revenue limits, and treatment of income earned on
securities. In general, the amendments
modify the interlock restriction, eliminate the cross-marketing restriction, and
ease the financial assets restriction.
In December the Board raised the
limit on the amount of revenue that a
section 20 subsidiary may derive from
underwriting and dealing in securities.
Under the new rules, the permissible
revenue limit will change from 10 percent to 25 percent of the subsidiary's
total revenue. The revenue limit is
designed to ensure that a section 20
subsidiary will not be engaged principally in underwriting and dealing in
securities in violation of section 20 of
the Glass-Steagall Act.
In a separate announcement the Board
clarified that interest income earned on
the types of debt securities that a member bank could hold for its own account
shall not be treated as revenue from
underwriting or dealing in securities for
purposes of section 20. Interest earned
on these securities will continue to be
included in total revenue.
Regulation Z
Truth in Lending
The Board revised Regulation Z in September to incorporate the Truth in Lend


ing Act Amendments of 1995. The
amendments establish new creditorliability rules for closed-end loans
secured by real property or dwellings
and consummated on or after September 30, 1995, and establish several tolerances for accuracy in disclosing the
amount of the finance charge. Creditors
have no civil or administrative liability
if the finance charge and affected disclosures are within the applicable tolerances. The amendments also clarify how
lenders must disclose fees connected
with mortgage loans.
In addition to the changes required by
the statute, the revised regulation also
includes a new rule regarding the treatment of fees charged in connection with
debt cancellation agreements. This rule
is similar to the existing rule for credit
insurance premiums and provides for
more uniform treatment of these fees.

Regulation CC
Availability of Funds and
Collection of Checks
The Board continued its comprehensive
review of Regulation CC. The proposed
amendments arising from the review are
primarily technical in nature and do not
represent any major policy changes. In
some cases, the amendments also reduce
the compliance burden for depository
institutions.
Proposed changes to subpart B, which
governs availability schedules and disclosures, address a variety of issues,
including the treatment of deposits
received at "contractual" branches,
such as affiliates. In general, proposed
amendments provide more flexibility for
banks giving hold notices under emergency conditions, clarify the various
media through which written notices
may be given, delete certain requirements for notice content, and revise

256 83rd Annual Report, 1996
the model forms in appendix C of the
regulation.
Other proposed changes to subpart B
clarify the interaction between Regulation CC and the Uniform Commercial
Code, set forth rules for checks drawn
on certain U.S. territories, and address
other check collection matters. In conjunction with the proposal, the Board is
requesting comment on several items:
the time required for a bank to qualify a
returned check for automated processing, the provisions regarding the extension of the midnight deadline, and the
extent of a presenting bank's preferred
claim against a closed paying bank.

Rescission of Regulations R
andV
As a result of the Board's periodic
regulatory review process, the Board
determined that two of its regulations,
Regulations R and V, were obsolete and
no longer necessary. Both regulations
were subsequently rescinded.
Regulation R (Relations with Dealers
in Securities Under Section 32 of the
Banking Act of 1933), restated the statutory language of Section 32 of the
Glass-Steagall Act and set forth the only
exemption to the act adopted by the
Board. The Board determined that the
existing exemption in the regulation was
no longer necessary in view of interpretations of the act developed since 1969.
The Board also noted that having a substantive regulation solely to restate a
statutory provision is unnecessary.
Regulation V (Loan Guarantees for
Defense Production), implemented the
Defense Production Act of 1950 and
was intended to permit defense agencies
to enter into defense-related contracts
without regard to whether appropriations had been made for the underlying
projects. A subsequent amendment to
the act made it unlikely that a loan guar


antee application would be filed; however, the Federal Reserve System would
be able to process such an application
under existing fiscal agency procedures.

257

Federal Reserve Banks
The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994
paved the way for interstate branch
banking upon its 1997 implementation;
it thus has significant implications for
the account relationships between the
Federal Reserve Banks and depository
institutions. In 1996, Federal Reserve
staff members conducted a series of interviews with selected depository institutions to anticipate the new account
relationships that would best meet the
organizational and business needs of
the banking industry and the Federal
Reserve as interstate branching develops. Through the interview process,
the Federal Reserve devised an account
model that would facilitate a single
debtor-creditor relationship between
the Federal Reserve and any depository
institution while offering the flexible
information benefits of a distributed
account structure.
For a given institution, the new model
provides a single (master) account, held
at one Reserve Bank, where all credits
and debits arising from financial transactions with the Federal Reserve would
be settled and through which reserve
and risk management activities would
be conducted. Optional subaccounts
could be used to define subsets of financial transaction information. The subaccounts could be used by depository
institutions to segregate financial information by geographic region, operational function, or other criteria. Thus,
an institution could centralize all financial information or could segregate
information on financial transactions
based on its own organizational
structure.
The single-account model was
Digitized approved in April and will be available
for FRASER


in January 1998. Special transitional
arrangements will allow for the temporary operation of multiple accounts.
During 1996 the Federal Reserve held
10,077 accounts for financial institutions, a 0.8 percent increase over 1995.
Also in 1996, the Federal Reserve
Banks completed significant milestones
in their plan to transfer mainframe computer operations to the System's three
consolidated data centers, managed by
the Federal Reserve Automation Services (FRAS):
• Fully converted to the new centralized automated clearinghouse application (Fed ACH)
• Moved the Automated Standard
Application for Payments system, which
supports federal grant payments, to
the central application processing
environment
• Transfered applications in eleven
Districts to shared processing environments (the remaining Reserve Bank,
Kansas City, is scheduled to move to a
shared environment in the first quarter
of 1997)
• Converted four Reserve Banks to
the new centralized book-entry securities application, the National BookEntry System (the eight other Banks will
convert to it by the first quarter of 1998)
• Scheduled the new Statistical
Analysis and Reporting application for
Systemwide implementation beginning
in 1997.
In other activity, The Federal Reserve
Banks essentially completed the deployment of all elements of Fednet, the new
telecommunications network. Fednet
provides a consistent level of service to
all points in the Federal Reserve System

258 83rd Annual Report, 1996
and improves on the reliability, security,
and disaster recovery capabilities of the
previous system. The Federal Reserve
Bank of New York, the last of the
Reserve Banks to convert to the new
network, plans to complete the conversion of depository institutions to Fednet
in 1998.
The Reserve Banks began the development of a new version of Fedline
software, which for the first time would
operate under the Microsoft Windows
operating system. Fedline provides the
interface to Federal Reserve applications for many depository institutions.
Fedline for Windows is scheduled to be
available for implementation by depository institutions in 1998.
The remainder of this chapter details
the 1996 results in Federal Reserve
Bank priced services, currency and coin
operations, and fiscal agency services,
and reports on examinations, income
and expenses, holding of securities and
loans, and major construction activity.

Developments in Federal Reserve
Priced Services
The Monetary Control Act of 1980
requires the Federal Reserve to establish

fees that, over the long run, recover all
the direct and indirect costs of providing
services to depository institutions, as
well as the 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 100.7 percent of its priced
services costs, including the PSAF.
Overall, 1996 fees charged for
priced services increased approximately
2.1 percent over the 1995 levels. This
rise is the net result of several changes
in fees: increases for forward collection
check products, reductions for ACH

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.

Activity in Federal Reserve Priced Services, 1996, 1995, and 1994
Thousands of items except as noted
Percentage change
Service

1996

1995

1994
1995-96

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

15,486,833
84,871
4,125
2372,108
1,069
36

15,465,209
77,742
3,689
2,046,086
838
61

NOTE. Amounts in bold are restatements due to a
change in definition or to correct previously reported
errors.
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




16,479,161
73,611
3,693
1,736,863
643
94

.1
9.2
11.8
15.9
27.6
-41.0

1994-95
-6.2
5.6
-.1
17.8
30.3
-35.1

securities transfers, the number of transactions originated
on line and off line; in ACH, the total number of commercial items processed; in noncash collection, the number of
items on which fees are assessed; in cash transportation,
the number of registered mail shipments and FRBarranged armored carrier stops.

Federal Reserve Banks 259
transactions, increases for ACH account
servicing and non-automated products,
and no change for funds transfers,
book-entry securities, and electronic
connections.
The revenue from priced services in
1996 was $787.2 million, other income
was $28.7 million, and costs were
$789.3 million, resulting in net revenue
of $26.6 million and a recovery rate of
103.4 percent of costs, including the
PSAF.2 In 1995 the System's revenue
was $0.4 million more than total costs,
resulting in a recovery rate of 100.1 percent, including the PSAF but before
the cumulative effect of a change in
accounting principle. The change in
accounting resulted in a net loss of
$18.9 million and a recovery rate of
97.6 percent.
Check Collection
Federal Reserve Bank operating
expenses and imputed costs for commercial check services in 1996 totaled
$570.7 million. Revenue from check
operations totaled $588.1 million, and
other income amounted to $22.5 million, resulting in income before income
taxes of $39.9 million.
The Reserve Banks handled 15.5 billion checks, about the same number as
in 1995. The volume of checks deposited in fine-sort deposit products, requiring the depositing bank to presort items
by paying bank, declined 11.9 percent,
compared with a 16.5 percent decrease
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.



in 1995. The volume of checks deposited that required processing by Federal
Reserve Banks increased 2.8 percent.
In preparation for the 1997 implementation of interstate banking, the Federal
Reserve Banks introduced the Nationwide City Sort product, their first
national check product with uniform
pricing. It permits collecting banks to
make a single deposit of checks drawn
on city institutions across the country. In
addition, one District began to offer a
companion product for checks drawn on
institutions located in regional check
processing availability zones.
To enhance the efficiency of the check
collection system, the Reserve Banks
continued to expand the use of electronics in check processing. During 1996,
9.3 percent (approximately 1.4 billion)
of all checks presented to paying banks
were presented electronically, an increase of nearly 40 percent over the
1995 level. Depository institutions also
continued to expand their use of electronic information products to provide
timely cash-management information
to their corporate customers. Also, by
year-end 1996, all Federal Reserve
offices offered depository institutions the
ability to make all adjustment requests
electronically. Reserve Banks began to
accept electronic adjustment requests
from institutions within their territories
in 1995.
The Reserve Banks also continued to
expand their offerings of check image
capture and storage products to support
paying banks' use of electronic check
products. At least one office in each
of the Philadelphia, Atlanta, Chicago,
St. Louis, Kansas City, and San Francisco Districts introduced image products during the year. The Cleveland,
Minneapolis, and Dallas Banks introduced similar products in 1995.
In October 1996 the New York Bank
closed the Jericho Regional Check

260 83rd Annual Report, 1996
Processing Center (RCPC) and consolidated check processing operations at its
East Rutherford (N.J.) Operations Center. In addition, the Bank consolidated
the processing of all adjustment requests
at the Utica RCPC.
Funds Transfer and Net Settlement
Federal Reserve Bank operating expenses and imputed costs for Fedwire
funds transfer and net settlement services totaled $71.1 million. Revenue
from Fedwire and net settlement operations totaled $94.7 million, and other
income amounted to $2.9 million, resulting in income before income taxes of
$26.4 million.
Funds Transfer
The number of Fedwire funds transfers
originated increased 9.2 percent, to
84.9 million—82.6 million value (monetary) transfers and 2.3 million nonvalue
messages. The higher volume is due
largely to sharply increased mutual fund
activity, aggressive marketing of cash
management services by depository
institutions, and, to a lesser extent,
increased mortgage activity and
securities-related settlement payments.
Fees charged for Fedwire transfers
remained unchanged from 1995 fees.
In October 1996 the Board approved
a December 8, 1997, effective date to
open the Fedwire funds transfer service
at 12:30 a.m. eastern time. Previously,
the Board determined that expanding the
Fedwire funds transfer service to eighteen hours per day, from the current ten
hours per day, could be useful to the
private sector in reducing settlement risk
in the foreign exchange markets and
eliminating an operational barrier to
potentially important innovations in privately provided payment and settlement
services.



Also during 1996, 475 of the approximately 8,400 on-line depository institutions began receiving funds transfers
in the new expanded message format.
All on-line institutions must be able
to receive transfers in the new format
by June 1997 and to send transfers in
the new format by December 1997. The
expanded format will have several
benefits:
• Reduce manual interventions in the
transfer process
• Eliminate the need to truncate
payment-related information when forwarding through Fedwire payment
orders that were received via other
large-value transfer systems
• Allow additional information about
the originator and beneficiary of a transfer to be included in the transfer message, as required by the Bank Secrecy
Act rules adopted by the Department of
the Treasury.
Net Settlement
The Federal Reserve provides net
settlement services to approximately
170 local private-sector clearing and
settlement arrangements and to four
nationwide arrangements. 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 (CHIPS) and the Participants
Trust Company (PTC), process and net
large-dollar transactions, CHIPS for
interbank funds transfers and PTC
for the settlement of mortgage-backed
securities transactions. The two other
national arrangements, Visa ACH and

Federal Reserve Banks 261
the National Clearing House Association, process and net small-dollar
transactions—Visa for automated clearinghouse transactions and National
Clearing House for check payments.
The majority of local clearing arrangements are check clearinghouses.

Book-Entry Securities
Federal Reserve Bank operating expenses and imputed costs for book-entry
securities transfer services totaled
$16.2 million. Revenue from book-entry
securities operations totaled $16.6 million, and other income amounted to
$0.5 million, resulting in income before
income taxes of $0.9 million. The Federal Reserve Banks processed 4.1 million transfers of government agency
securities on the Fedwire book-entry
securities transfer system during the
year, an 11.8 percent increase over the
1995 level.3 Fees charged for book-entry
securities transfers remained unchanged
from 1995.
On January 2, 1996, a firm closing
time of 3:15 p.m. eastern time for the
origination of securities transfers and
3:30 p.m. eastern time for reversals
became effective. These closing times
were implemented to reduce market
uncertainty about the final closing time
due to ad hoc closing hour extensions.
These extensions are needed at times
to accommodate significant operational
problems at depository institutions or at
3. 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.



the Federal Reserve Banks. In 1996, participants requested 62 percent fewer
extensions, and the duration of extensions fell 53 percent.
Also in 1996, four Federal Reserve
Banks converted their Fedwire securities transfer applications to the new
centralized application known as the
National Book-Entry System. The
remaining Federal Reserve Banks are
scheduled to convert to the new application by early 1998.
Automated Clearinghouse
Federal Reserve Bank operating expenses and imputed costs for automated
clearinghouse (ACH) services totaled
$63.7 million. Revenue from ACH
operations totaled $77.4 million, and
other income amounted to $2.4 million,
resulting in income before income taxes
of $16.2 million. The Reserve Banks
processed 2.4 billion commercial ACH
transactions during the year, an increase
of 15.9 percent over 1995 volume levels. In October the Reserve Banks combined the interregional and intraregional
transaction fees (representing a 16.7 percent reduction for interregional transactions) and reduced the presort deposit
fee by 10 percent.
During 1996 the Reserve Banks completed their conversion to the new consolidated Fed ACH software, which is
installed at FRAS. The software processes ACH transactions on a flow basis
and gives customers more deposit and
delivery options. Customers can 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. Many
of these new features will be available
in 1997.
The consolidated processing environment has cut processing costs, enabling

262 83rd Annual Report, 1996
the Reserve Banks to reduce transaction
fees. It also has enabled the Reserve
Banks to eliminate the interregional,
presort, and local deposit deadlines.
Additional changes to the ACH fee
schedule that will be implemented
during 1997 will fully reflect the processing efficiencies of the Fed ACH
environment.
Noncash Collection
Federal Reserve Bank operating expenses and imputed costs for noncash
collection services totaled $4.9 million.
Revenue from noncash operations
totaled $5.2 million, and other income
amounted to $0.2 million, resulting in
income before income taxes of $0.5 million. The number of noncash collection
items (maturing coupons and bonds)
processed by the Reserve Banks
increased 27.5 percent, to more than
1 million items. In 1996 the Reserve
Banks implemented a national fee
schedule for the noncash collection
service.
Two Federal Reserve sites process
noncash items—the Cleveland Bank and
the Jacksonville Branch of the Atlanta
Bank. In 1996 the New York Reserve
Bank stopped presenting noncash items
to members of the New York Clearing
House; the Chicago Reserve Bank continued to present noncash items through
the Chicago Clearing House.
Cash Services
Federal Reserve Bank operating expenses and imputed costs for cash services totaled $5.2 million. Revenue from
cash operations totaled $5.2 million, and
other income amounted to $0.2 million,
resulting in income before income taxes
of $0.2 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 increased in 1996
to a daily average of $413.4 million; it
was $338.8 million in 1995. The Federal
Reserve recovers the cost of float associated with priced services through fees
for those services.

Developments in Currency
and Coin
The Federal Reserve continued to work
closely with Treasury and other agencies to deter the counterfeiting and laundering of U.S. currency. In March the
Federal Reserve began distributing the
new Series 1996 $100 note, the first
note since the 1920s to be totally redesigned. The Series 1996 note has several
new features—an enlarged portrait,
color-shifting ink, a watermark, concentric fine lines, and a universal Federal
Reserve seal. The distribution of the
Series 1996 $50 note is scheduled for
1997.
The Federal Reserve's cost to print
new currency in 1996 was $403 million.
Treasury's Bureau of Engraving and
Printing produced 9.8 billion Federal
Reserve notes in 1996 and charged
the Federal Reserve $40 per thousand
notes. During 1996, 13 percent of the
notes produced were the new Series
1996 $100 note, 45 percent were the
$1 denomination, and the remaining
42 percent were the $2 through $50
denominations.
Reserve Bank operating expenses for
processing and storing currency and
coin, including priced cash services,
totaled $279 million. The Federal
Reserve supplies currency and coin to

Federal Reserve Banks 263
the public through approximately 9,500
depository institutions throughout the
United States. The value of currency
and coin in circulation increased 9 percent in 1996 and exceeded $440 billion
by year-end. During 1996, the Reserve
Banks received more than 23.7 billion
Federal Reserve notes in deposits from
depository institutions and paid more
than 24.3 billion Federal Reserve notes
to depository institutions.
The Federal Reserve Banks continued
converting their currency processing
operations to the Banknote Processing
Systems (BPS) 3000. Before a recent
upgrade, the equipment was referred to
as ISS 3000 machines. At the end of
1996, 126 of the BPS 3000 machines
were in use at the Reserve Banks. The
Federal Reserve plans to install a total
of 128 processors at the Reserve Banks
and to complete the conversion in 1997.

In April the Board approved a new
cash access policy, to be effective in
May 1998, that provides greater consistency in Reserve Bank cash service
levels. It establishes a base level of currency access to all depository institutions at no charge but restricts the number of offices served and the frequency
of access. Depository institutions that
meet minimum volume thresholds will
be able to obtain more frequent free
access. Additional access, beyond the
free service level, will be priced.

Developments in Fiscal Agency
and Government Depository
Services
The Federal Reserve Act provides that,
when required by the Secretary of the
Treasury, Federal Reserve Banks will

Expenses of the Federal Reserve Banks for Fiscal Agency and Depository Services,
1996, 1995, and 1994
Thousands of dollars

1996

1995

1994

Bureau of the Public Debt
Savings bonds
Treasury Direct
Commercial book entry
Marketable Treasury issues
Definitive securities and Treasury coupons ...
Total

78,765.8
26,788.8
27,009.0
22,349.9
3,498.5
158,502.0

80,934.6
30,117.4
27,705.9
22,830.3
3,860.6
165,448.8

86,216.0
23,865.3
22,950.5
19,813.4
3,924.2
156,769.4

Financial Management Service
Treasury tax and loan and Treasury general account
Government check processing
Automated clearinghouse
Government agency deposits
Fedwire funds transfers
Other services
Total

38,828.2
22,604.1
20,557.0
3,366.1
455.3
17,346.3
103,157.1

35,749.3
24,347.4
22,238.0
3,823.5
357.9
16,376.7
102,892.8

34,487.1
22,998.9
24,502.0
4,602.2
416.9
13,842.9
100,850.0

Other
Total
Total, Treasury

3,554.6
265,213.6

4,017.5
272,359.1

3,545.7
261,165.1

18,788.8
25,287.6
5,722.9
49,799.3

18,547.2
24,251.4
5,467.8
48,266.4

15,282.7
22,653.9
5,486.3
43,422.9

315,012.9

320,625.5

304,588.0

Agency and service
DEPARTMENT OF THE TREASURY

OTHER FEDERAL AGENCIES

Securities services
Food coupons
Postal money orders
Total, other agencies
Total




264 83rd Annual Report, 1996
act as "fiscal agents" and "depositories" of the United States. As fiscal
agents for 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 October 1996 a new fiscal agency
policy was adopted to clarify the
Reserve Banks' unique statutory relationship with the Treasury and other
government entities. The policy identifies guidelines for managing a request
or directive for new services (without
competitive bidding) from a government
agency; outlines the criteria for determining whether to respond to a competitive procurement request from a
government agency for financial services; establishes uniform and consistent practices for cost accounting,
reporting, and billing for fiscal and
depository services on a full-cost or
other appropriate basis; and defines the
terms and conditions for providing services to government agencies.
In 1996 the total cost of providing
fiscal agency and depository services to
Treasury amounted to $265.2 million. In
addition, the Reserve Banks provide services to other government agencies; the
cost of providing services to other government agencies was $49.8 million in
1996.

Fiscal Agency Securities Services
The Federal Reserve Banks handle marketable Treasury securities and savings
bonds and monitor collateral pledged to



the federal government by depository
institutions.
Marketable Treasury Securities
Reserve Bank operating expenses for
activities related to marketable Treasury
securities amounted to $52.6 million.
The Reserve Banks processed more than
445,000 commercial tenders for government securities in Treasury auctions. In
1996 the volume of commercial tenders
decreased 26.2 percent from 1995 volume levels. Commercial tender processing was consolidated at the New York,
Chicago, and San Francisco Banks in
1996.
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. Almost
all book-entry Treasury securities—
97.6 percent of the par value outstanding at year-end 1996—were maintained
on Fedwire, and 2.4 percent of the total
was maintained on Treasury Direct.
The Reserve Banks processed
9.0 million Fedwire transfers of Treasury securities, a decrease of 1.6 percent
from the 1995 level. In addition, the
Banks processed 21.6 million interest
and principal payments for both Treasury and agency securities. The fees
charged to depository institutions for
sending and receiving Fedwire transfers
of Treasury book-entry securities are the
same as those charged to them for transfers of government agency securities.
The Federal Reserve keeps a portion of
the fee for transfers of Treasury securities to cover its settlement expenses; the
remainder of the fee is remitted to
Treasury.
The Philadelphia Bank operates Treasury Direct, a system of book-entry
securities accounts for nondepository
institutions and individuals planning to

Federal Reserve Banks 265
hold their Treasury securities to maturity. The Treasury Direct system contains more than 1.8 million accounts.
During 1996 the Reserve Banks processed 450 thousand tenders for Treasury Direct customers seeking to purchase Treasury securities at Treasury
auctions, and they handled 2.0 million
reinvestment requests. The volume of
tenders decreased 44.3 percent, and
the volume of reinvestment requests
increased 14.5 percent, compared with
1995 levels. In addition, the Philadelphia Bank issued 7.3 million payments
for discounts, interest, and redemption
proceeds; 2.7 million payments for savings bonds; and more than 61 thousand
interest payments for definitive Treasury issues.
The Federal Reserve also worked
with Treasury's Bureau of the Public
Debt to implement, on a pilot basis, an
option that permits selected Treasury
Direct investors to pay for securities
with an ACH debit to their bank
account.
Savings Bonds
Reserve Bank operating expenses for
savings bond activities amounted to
$78.8 million. The Reserve Banks
printed and mailed 55.1 million savings
bonds on behalf of Treasury's Bureau of
the Public Debt, a decrease of 9.6 percent from 1995. The Banks processed
8.2 million original-issue transactions.
Redemption, reissue, and exchange
transactions totaled 664,000, an increase
of 4.3 percent over 1995. The Reserve
Banks also responded to 1.7 million service calls from owners of savings bonds,
an increase of 12.7 percent from 1995.
Savings bond operations are performed at five Reserve Bank offices:
Buffalo, Pittsburgh, Richmond, Minneapolis, and Kansas City. All of these
offices process savings bond transac


tions; only the Pittsburgh and Kansas
City offices print savings bonds.
Other Initiatives
The Reserve Banks maintain custody
of definitive (physical) and book-entry
securities pledged as collateral by
depository institutions holding deposits
from Treasury and other government
agencies. In 1996 the Reserve Banks
monitored the value of the definitive
securities by pricing them according to
their market value (marking them to
market). The Reserve Banks will mark
book-entry securities to market after
completion of the conversion to the
National Book-Entry System.
The Federal Reserve also worked
with Treasury's Financial Management
Service to expand the Treasury Offset
Program on a pilot basis. The Offset
Program electronically compares information about delinquent debts owed to
the U.S. government with information
about payments being issued by the government. If a match occurs, the program
applies the payment to the delinquent
debt.

Depository Services
The Reserve Banks maintain Treasury's
funds account, accept deposits of federal
taxes and fees, pay checks drawn on
Treasury's account, and make electronic
payments on behalf of Treasury.
Federal Tax Payments
Reserve Bank operating expenses for
federal tax payment activities were
$38.8 million. The Reserve Banks processed 6.3 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,

266 83rd Annual Report, 1996
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 assisted with the
implementation of the Treasury's Electronic Federal Tax Payment System
(EFTPS), which automates the flow of
federal tax deposits from businesses.
The system became operational in October. Tax payments made via EFTPS
flow to Treasury one day sooner than
they do under the paper-based process,
improving Treasury's 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 who must send their payments
on the same day their tax liability is
established.
Payments Processed for Treasury
Operating expenses for government payment operations amounted to $47 million. During the year, Treasury continued to increase the proportion of its
payments made electronically. The number of ACH transactions processed for
Treasury amounted to 625 million, an
increase of 4.4 percent over the 1995
volume. The majority of government
payments made via the ACH are for
social security, pension, and salary payments. Treasury also uses the ACH to
make some payments to vendors.
The Reserve Banks processed
436 million government checks, a
decrease of 5.2 percent from 1995. The
Reserve Banks also issued 1.3 million
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 cou


pons 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.
Following successful tests of digital
imaging technology, Treasury's Financial Management Service issued their
specific requirements for the use of
check images archived at Reserve
Banks, which will improve the Treasury's check reconciliation and claims
processing. In response, the Reserve
Banks, as fiscal agents, designed and
began to build a check imaging system
composed of two fundamental elements:
(1) a capture subsystem, consisting of
image-enabled check reader-sorters and
temporary image storage facilities, and
(2) an archive and retrieval subsystem,
containing an indexed database configured for long-term storage and retrieval
of images of paid Treasury checks. The
image-based system will replace the
existing microfilm-based check truncation service, eliminate the manual
research associated with microfilm, and
reduce the time required to make paid
Treasury check information available
for research and inquiry.
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, (2) provide
custody for the stock of unissued, definitive securities, (3) maintain and update

Federal Reserve Banks 267
balances of outstanding book-entry 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 $25.3 million in 1996. The Reserve Banks
redeemed 3.6 billion food coupons, a
decrease of 7.1 percent from 1995.
The Account Management Agent
(AMA) system was completed in
March. The AMA system is used by the
Department of Agriculture's Food and
Consumer Service to establish and
monitor adherence to limits on federal
funding to states for food coupons. The
Federal Reserve, the Department of
Agriculture, and the Department of the
Treasury are continuing to work on
enhancements in the area of fraud
detection.
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. Since 1995 the
division has engaged a public accounting firm to audit the combined financial
statements of the Reserve Banks. In
addition, for 1996 the firm audited the
year-end financial statements of the
Dallas, Richmond, and New York
Reserve Banks; the division audited the
year-end financial statements of the
other nine Banks and conducted reviews
of their administrative controls and their
compliance with federal statutes and
regulations and with policies of the
System.



Each year, the division assesses compliance with the policies established by
the Federal Open Market Committee
(FOMC) by examining 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.
In addition, a public accounting firm
certifies the schedule of participated
asset and liability accounts and the
related schedule of participated income
accounts at year-end. 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 distributions of
net earnings of the Federal Reserve
Banks for 1996 and 1995.
Income was $25,164 million in 1996
and $25,395 million in 1995. Total
expenses were $2,111 million ($1,639
million in operating expenses, $309 million in earnings credits granted to
depository institutions, and $163 million
in assessments for expenditures by the
Board of Governors). The cost of new
currency was $403 million. Revenue
from financial services was $787 million. Unreimbursed expenses for services provided to Treasury amounted to
$38 million.
The profit and loss account showed a
net loss of $1,639 million. The loss was
primarily a result of realized and unrealized losses on assets denominated in
foreign currencies revalued to reflect
current market exchange rates. Statutory
dividends to member banks totaled
$256 million, $25 million more than in
1995. This rise reflects an increase in
the capital and surplus of member banks

268 83rd Annual Report, 1996
and a consequent increase in the paid-in
capital stock of the Reserve Banks.
Payments to Treasury totaled $20,083
million, compared with $23,389 million
in 1995. 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
Reserve Banks to the level of capital
paid-in. Also in 1996, the System made
a lump-sum payment of $106 million
to the U.S. Treasury from the surplus
account of the Federal Reserve Banks,
as required by statute.
In the Statistical Tables chapter of
this REPORT, table 6 details income and
expenses of each Federal Reserve Bank
for 1996, and table 7 shows a condensed
statement for each Bank for the years
1914 to 1996. A detailed account of the
assessments and expenditures of the
Board of Governors appears in the next
chapter—Board of Governors Financial
Statements.

Holdings of Securities and Loans
Average daily holdings of securities and
loans by Federal Reserve Banks during

1996 were $390,268 million, an increase
of $14,199 million from 1995 (see
accompanying table). From 1995 to
1996, their holdings of U.S. government
securities increased $14,196 million,
and loans increased $4 million.
Also during the period from 1995 to
1996, the average rate of interest
decreased from 6.34 percent to 6.12 percent on holdings of government securities and decreased from 5.62 percent to
5.27 percent on loans.

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 1993
through 1996.

Federal Reserve Bank Premises
Construction continued in 1996 on the
new headquarters building for the Minneapolis Bank and the expansion and
renovation of the headquarters building
of the Cleveland Bank.

Income, Expenses, and Distribution of Net Earnings
of Federal Reserve Banks, 1996 and 1995
Millions of dollars

1996

1995

Current income
Current expenses
Operating expenses'
Earnings credits granted

25,164
1,948
1,639
309

25,395
1,818
1,568
251

Current net income
Net additions to (deductions from, - ) current net income
Cost of unreimbursed services to Treasury
Assessments by the Board of Governors
For expenditures of Board
For cost of currency

23,216
-1,639
38
565
163
403

23,577
896
38
531
161
370

Net income before payments to Treasury
Dividends paid
Transferred to surplus2

20,975
256
635

23,903
231
283

20,083

23,398

Item

Payments to Treasury2
NOTE. Components may not sum to totals because of
rounding.
1. Includes a net periodic credit for pension costs of
Digitized$140.5 million in 1996 and $119.2 million in 1995.
for FRASER



2. In addition to the amounts shown, $106 million in
Federal Reserve Bank surplus was transferred to the
Treasury as statutorily required.

Federal Reserve Banks 269
The Atlanta Bank purchased property
for its new Birmingham Branch building and began the project's design
phase. The Atlanta Bank also retained
design consultants for its new headquarters building project in Atlanta.
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.
The New York Bank closed its
Jericho, New York, check processing
facility, and the Kansas City Bank sold
its old Omaha, Nebraska, Branch building. The Chicago Bank contracted to
lease space for processing checks in a
new building that is under construction
in Des Moines, Iowa.

Securities and Loans of Federal Reserve Banks, 1994-96
Millions of dollars except as noted
Item and year
Average daily holdings11
1994
1995
1996
Earnings
1994
1995
1996

Total

U.S.
government
securities'

354,001
376,069
390,268

353,740
375,867
390,063

261
202
206

19,259
23,837
23,895

19,247
23,826
23,884

11
11
11

5.44
6.34
6.12

5.44
6.34
6.12

4.39
5.62
5.27

Average interest rate (percent)
1994
1995
1996
NOTE. Components may not sum to totals because of
rounding.
1. Includes federal agency obligations.




Loans2

2. Does not include indebtedness assumed by the Federal Deposit Insurance Corporation.
3. Based on holdings at opening of business.

270 83rd Annual Report, 1996

Pro Forma Financial Statements for Federal Reserve Priced Services
Pro Forma Balance Sheet for Priced Services, December 31, 1996 and 1995
Millions of dollars
1995

1996

Item
Short-term assets (Note 1)
Imputed reserve requirements
on clearing balances
Investment in marketable securities ...
Receivables
Materials and supplies
Prepaid expenses
Items in process of collection
Total short-term assets

658.3
5,924.7
69.0
3.2
26.5
7,548.4

Long-term assets (Note 2)
Premises
Furniture and equipment
Leases and leasehold improvements ..
Prepaid pension costs
Total long-term assets

393.5
171.1
31.0
287.4

Long-term liabilities
Obligations under capital leases
Long-term debt
Postretirement/postemployment
benefits obligation
Total long-term liabilities

356.6
170.3
24.2
242.1
883.0

793.1

15,113.1

8,326.2

5,154.8
2,284.5
93.7

12,366.3
1,765.1
98.7

7,533.1

14,230.1
3.8
164.3

2.3
196.9

176.1

178.6

Total liabilities
Equity
Total liabilities and equity (Note 3)
NOTE. Components may not sum to totals because of
rounding.




7,533.1

14,230.1

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

504.2
4,537.8
63.7
10.6
19.4
2,397.4

377.8

344.3

14,607.9

7,877.4

505.2

448.8

15,113.1

8,326.2

The priced services financial statements consist of these
tables and the accompanying notes.

Federal Reserve Banks 271
Pro Forma Income Statement for Federal Reserve Priced Services, 1996 and 1995
Millions of dollars
Item

1996

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
Earnings credits
Income before income taxes
Imputed income taxes
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

738.8
655.2
83.6

787.2
666.0
121.2
21.9
17.3
11.6
0.0

19.0
16.2
22.1
6.3

50.8

63.7

70.4
315.8
-287.1

28.7
99.1
29.6

19.9
259.6
-233.2

26.4
46.3
14.4

69.5

69.5
42.9

NOTE. Components may not sum to totals because of
rounding.

31.9

19.4
12.6
31.5

The priced services financial statements consist of these
tables and the accompanying notes.

Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 1996
Millions of dollars

Total

Commercial
check
collection

Funds
transfer
and net
settlement

Bookentry
securities

Commercial
ACH

Noncash
collection

Cash
services

Revenue from operations

787.2

588.1

94.7

16.6

77.4

5.2

5.2

Operating expenses
(Note 5)

666.0

527.0

68.2

15.6

60.8

4.4

5.0

Income from operations

121.2

61.1

26.4

1.0

16.6

.8

.2

Imputed costs (Note 6)

50.8

43.7

2.9

.6

2.9

A

.2

Income from operations
after imputed costs

70.4

17.4

23.5

.4

13.7

A

.0

Other income and expenses,
net (Note 7)

28.7

22.5

2.9

.5

2.4

2

.2

Income before income taxes .

99.1

39.9

26.4

.9

16.2

.5

.2

Item

NOTE. Components may not sum to totals because of
rounding.




The priced services financial statements consist of these
tables and the accompanying notes.

272 83rd Annual Report, 1996
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 $45.3 million in 1996 and $35.4 million in
1995 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 $2.8 million in 1996 and
$2.7 million in 1995. 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 1996 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

795.4
12.4
783.0
78.4
382.0
116.4
206.2

Federal Reserve Banks 273
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 1996.
(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

(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):
1996
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

70.2

12.6

-10.5

-10.4

-6.3

-.1

^_^
53.4

19.4
21.5

(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 $6.3 million
of automation consolidation costs for 1996 and $0.1 million for 1995. 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.

275

Board of Governors Financial Statements
The financial statements of the Board were audited by Price Waterhouse, independent public accountants, for 1996 and 1995.

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, 1996 and 1995, 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, 1996 and
1995, and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also issued a report
dated March 25, 1997 on our consideration of the Board's internal controls and a
report dated March 25, 1997 on its compliance with laws and regulations.

UJP
March 25, 1997
Arlington, Virginia




276 83rd Annual Report, 1996
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEET
As of December 31,
1996
1995
ASSETS
CURRENT ASSETS

Cash
Accounts receivable
Transfers receivable—surplus Federal Reserve Bank earnings (Note 1)
Prepaid expenses and other assets

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

$16,142,195
1,900,155
—
1,225,022

680,384,226

19,267,372

61,110,184

59,781,623

$741,494,410

Total current assets

$ 15,712,258
2,561,975
659,862,602
2,247,391

$79,048,995

$ 10,435,545
6,804,678
659,862,602
6,966,327
—
2,263,338

$ 7,580,371
4,868,497
—
6,601,004
75,840
2,184,882

686,332,490

21,310,594

LIABILITIES AND FUND BALANCE
CURRENT LIABILITIES

Accounts payable and accrued liabilities
Accrued payroll and related taxes
Transfers payable—surplus Federal Reserve Bank earnings (Note 1)
Accrued annual leave
Capital lease payable (current portion)
Unearned revenues and other liabilities
Total current liabilities
CAPITAL LEASE PAYABLE (non-current portion)

—

232,638

ACCUMULATED RETIREMENT BENEFIT OBLIGATION (Note 2)

466,056

—

ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (Note 3)

18,171,722

17,074,588

ACCUMULATED POSTEMPLOYMENT BENEFIT OBLIGATION (Note 3)

1,409,343

1,093,400

35,114,799

39,337,775

$741,494,410

$79,048,995

FUND BALANCE
Total liabilities and fund balance

The accompanying notes are an integral part of these statements.




Board Financial Statements 277
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF REVENUES AND EXPENSES
AND FUND BALANCE
For the years ended December 31,
1996
1995
BOARD OPERATING REVENUES

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

$ 162,642,400
9,789,141

$161,347,900
10,240,830

172,431,541

171,588,730

106,353,644
18,417,943
11,159,490
8,626,785
4,942,020
4,356,715
4,263,382
4,189,203
3,907,874
3,417,539
2,665,188
4,354,734

100,412,576
16,394,955
11,240,373
7,525,971
4,920,996
3,853,657
4,523,272
4,155,038
3,362,342
3,689,603
3,144,178
3,915,489

176,654,517

167,138,450

Total operating revenues
BOARD OPERATING EXPENSES

Salaries
Retirement and insurance contributions
Contractual services and professional fees
Depreciation and net losses on disposals
Travel
Equipment and facilities rental
Postage and supplies
Utilities
Software
Repairs and maintenance
Printing and binding
Other expenses (Note 5)
Total operating expenses
BOARD OPERATING REVENUES (UNDER) OVER EXPENSES

(4,222,976)

4,450,280

ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES

Assessments levied on Federal Reserve Banks
for currency costs
Expenses for currency printing, issuance,
retirement, and shipping

403,232,215
403,232,215

370,206,037

—

CURRENCY ASSESSMENTS OVER (UNDER) EXPENSES

370,206,037

—

TOTAL REVENUES (UNDER) OVER EXPENSES

(4,222,976)

FUND BALANCE, Beginning of year

39,337,775

4,450,280

34,887,495

TRANSFERS TO THE U.S. TREASURY

Transfers and accrued transfers from surplus Federal Reserve Bank
earnings (Note 1)
Transfers and accrued transfers to the U.S. Treasury (Note 1)
FUND BALANCE, End of year

5,623,716,034
(5,623,716,034)
$

35,114,799

The accompanying notes are an integral part of these statements.




—
—
$ 39,337,775

278

83rd Annual Report, 1996
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
For the years ended December 31,
1996
1995

CASH FLOWS FROM OPERATING ACTIVITIES

Board operating revenues (under) over expenses

$ (4,222,976)

$ 4,450,280

Adjustments to reconcile operating revenues (under) over expenses
to net cash provided by operating activities:
Depreciation and net losses on disposals
8,626,785
(Increase) in transfers receivable—surplus Federal Reserve Bank earnings . (659,862,602)
Increase in accumulated postretirement benefits
1,097,134
Increase in accumulated retirement benefits
466,056
Increase (decrease) in accumulated postemployment benefits
315,943
(Increase) decrease in accounts receivable, prepaid expenses,
and other assets
(1,684,189)
Increase in accrued annual leave
365,323
Increase in accounts payable and accrued liabilities
2,855,174
Increase in transfers payable—surplus Federal Reserve Bank earnings
659,862,602
Increase in payroll payable and related taxes
1,936,181
Increase in unearned revenues and other liabilities
78,456
Net cash provided by operating activities

7,525,971
—
800,142
—
(226,618)
438,229
377,085
2,129,494
—
948,432
332,268

9,833,887

16,775,283

Proceeds from disposals of furniture and equipment
Capital expenditures

70,500
(10,334,324)

12,112
(15,594,485)

Net cash used in investing activities

(10,263,824)

(15,582,373)

NET (DECREASE) INCREASE IN CASH

(429,937)

CASH FLOWS FROM INVESTING ACTIVITIES

CASH BALANCE, Beginning of year
CASH BALANCE, End of year

16,142,195

14,949,285

$ 15,712,258

$16,142,195

The accompanying notes are an integral part of these statements.




1,192,910

Board Financial Statements

279

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES

Board Operating Revenues and Expenses—
Assessments made on the Federal Reserve Banks for
Board operating expenses and capital expenditures are
calculated based on expected cash needs. These assessments, other operating revenues, and operating expenses
are recorded on the accrual basis of accounting.
Issuance and Redemption of Federal Reserve Notes—
The Board incurs expenses and assesses the Federal
Reserve Banks for the costs of printing, issuing, shipping,
and retiring Federal Reserve Notes. These assessments
and expenses are separately reported in the statements of
revenues and expenses because they are not Board operating transactions.
Property, Buildings and Equipment—The Board's
property, buildings and equipment are stated at cost less
accumulated depreciation. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the
assets, which range from 4 to 10 years for furniture and
equipment and from 10 to 50 years for building equipment and structures. Upon the sale or other disposition of
a depreciable asset, the cost and related accumulated
depreciation are removed from the accounts and any gain
or loss is recognized.
Federal Reserve Bank Surplus Earnings—The Omnibus Budget Reconciliation Act of 1993 requires that
surplus Federal Reserve Bank earnings be transferred
from the Banks to the Board and then to the U.S. Treasury
for the period October 1, 1996 to September 30, 1998.
Prior to this time the Federal Reserve Banks made their
transfers directly to the Treasury. The Board accounts for
these transfers when earned and due, which may result in
transfers receivable and payable as of the balance sheet
date.
Estimates—The preparation of financial statements in
accordance with generally accepted accounting principles
requires management to make estimates that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue
and expenses during the reporting period.
Reclassifications—Certain 1995 disclosures have been
reclassified to conform with the 1996 presentation, the
effect of which is immaterial.
(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 System's Plan. Employees of the
Board who entered on duty after 1983 are covered by a
non-contributory defined benefits program under the System's Plan. Contributions to the System's Plan are actuarially determined and funded by participating employers
at amounts prescribed by the System Plan's administrator.
Based on actuarial calculations, it was determined that
employer funding contributions were not required for the




years 1996 and 1995, 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 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 $201,500 and $802,200 in 1996 and
1995 respectively. The Board has no liability for future
payments to retirees under these programs, and it is not
accountable for the assets of the plans.
Effective January 1, 1996, Board employees covered
under the System's Plan are also covered under a Benefits
Equalization Plan (BEP). Benefits paid under the BEP
are limited to those benefits that cannot be paid from the
System's Plan because of limitations imposed by Sections
401(a)(17), 415(b), and 415(e) of the Internal Revenue
Code of 1986. Pension costs attributed to the BEP reduce
the pension costs of the System's Plan. The net periodic
pension cost of the BEP for 1996 included the following
components:
Service cost (benefits attributed to employee
services during the year)
Interest cost on projected benefit obligation ..
Amortization of unrecognized net liabilitiy ..

$260,868
102,594
102,594

Net periodic pension cost

$466,056

Although these pension costs are recorded using the
accrual basis of accounting in accordance with Statement
of Financial Accounting Standards No. 87, "Employers'
Accounting for Pensions" (FAS 87), the Board's current
policy is to fund the cost of these benefits on a pay-asyou-go basis.
The net periodic pension cost was determined using a
7 percent discount rate and average compensation growth
of 5 percent.
The FAS 87 accumulated benefit obligation at December 31, 1996, comprises:
Accumulated benefit obligation
Vested
Nonvested
Total
Plan assets at fair value
Less: Actuarial present value of projected
benefit obligation
Projected benefit obligation in excess
of plan assets
Less: Unrecognized net transition
obligation
Unrecognized prior service cost
Unrecognized net (gain)/loss
Unfunded pension cost

$
$

218,000
21,000
239,000

$

0

(1,589,924)
(1,589,924)
1,363,041
(190,000)
(49,173)
$ (466,056)

The liability as of December 31, 1996, was determined
using a 7.25 percent discount rate. The average rate of
compensation increase used was 5 percent per year. The

280

83rd Annual Report, 1996

Board has elected to amortize the unrecognized prior
service cost over 14.3 years.
(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
$4,644,100 in 1996 and $4,320,400 in 1995.
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 1996 and 1995
included the following components:
1996
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

1995

$ 195,016 $ 418,649

1,461,103
372,253

$2,028,372

1,441,350
(80)

$1,859,919

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, 1996 and 1995 comprises:
1996
Retirees
Fully eligible active plan
participants
Other active plan
participants
Unrecognized net loss
Liability for accumulated
postretirement benefit
obligation

1995
(reclassified)

$14,393,309 $14,061,087
3,512,825

3,528,612

3,422,992

3,773,612

21,329,126 21,363,311
(3,157,404) (4,288,723)

the assumed health care cost trend rate would increase
the accumulated postretirement benefit obligation by
$2,543,145 at December 31, 1996, and the net periodic
benefit cost by $184,055 for the year. The assumed salary
trend rate for measuring the increase in postretirement
benefits related to life insurance was an average of
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 $3,553,400 and
$3,477,300 in 1996 and 1995 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.
(4) PROPERTY, BUILDINGS, AND EQUIPMENT

The following is a summary of the components of the
Board's fixed assets, at cost, net of accumulated
depreciation.
As of December 31,
1996
1995
Land and
improvements
Buildings
Furniture and
equipment

•

Less accumulated
depreciation
Total property,
buildings and
equipment




$ 1,301,314
65,298,136

54,592,393
121,237,307

52,215,976
118,815,426

60,127,123
_ _ ^

59,033,803

$ 61,110,184

$ 59,781,623

(5) O T H E R R E V E N U E S A N D O T H E R E X P E N S E S

The following are summaries of the components of
Other Revenues and Other Expenses.
For the years
ended December 31,
1996
1995

$18,171,722 $17,074,588

The liability for the accumulated postretirement benefit
obligation and the net periodic benefit cost was determined using a 7.25 percent discount rate. Unrecognized
losses of $3,157,404 result from changes in the discount
rate used to measure liabilities. 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 1996 to 1997 was 9.5 percent. These rates were
assumed to gradually decline to an ultimate rate of
5.5 percent in the year 2005 for the purpose of calculating
the December 31, 1996, accumulated postretirement
benefit obligation. The effect of a 1-percent increase in

1,301,314
65,343,600

$

Other Revenues
Data processing
revenue
National
Information
Center
Subscription
revenue
Reimbursable
services to
other agencies .
Miscellaneous
Total other
revenues

$4,612,476

$ 4,100,517

1,974,295

2,070,267

1,583,193

1,648,931

424,940
1,194,237

383,752
2,037,363

$9,789,141

$10,240,830

Board Financial Statements 281
Other Expenses
Tuition, registration,
and membership
fees
Cafeteria operations,
net
Subsidies and
contributions ...
Miscellaneous
Total other
expenses

$1,290,090

$ 1,413,233

870,429

788,506

646,194
1,548,021

755,857
957,893

$4,354,734

$ 3,915,489

(6) COMMITMENTS

The Board has entered into several operating leases to
secure office, training, and warehouse space for periods
ranging from one to nine years. Minimum future commitments under those leases having an initial or remaining
noncancelable lease term in excess of one year at December 31, 1996, are as follows:

1997
1998
1999
2000
after 2000

$ 3,724,037
3,645,048
3,681,559
3,938,055
17,121,831
$32,110,530

Rental expenses under the operating leases were
$3,930,689 and $3,301,186 in 1996 and 1995
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 1996 and 1995, the Board paid
$224,600 and $269,040 respectively, in assessments for
operating expenses of the Council. These amounts are
included in subsidies and contributions for 1996 and
1995. During 1996 and 1995, the Board paid $127,100
and $126,900 respectively, for office space subleased
from the Council.
•




Statistical Tables




284 83rd Annual Report, 1996
1. Detailed Statement of Condition of All Federal Reserve Banks Combined,
December 31, 1996 and 1995
Thousands of dollars
Item

1996

1995

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
Total bought outright
Held under repurchase agreement..
Total U.S. Treasury securities.
Total loans and securities
Items in process of collection
Transit items
Other items in process of collection.

11,048,036
9,718,000
591,170
85,337

135,440

2,224,700
1,612,000

2,633,995
1,100,000

190,646,505
150,921,721
49,338,894

183,115,712
151,013,150
44,068,604

390,907,120
19,971,000

378,197,466
12,762,000

410,878,120

390,959,466

Total bank premises
Less depreciation allowance . . .

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




4,179,015
1,101,279

11,740,684
1,387,061

5,280,294

13,127,745
191,902
934,260
241,454
194,470

166,903
882,954
230,523
128,934

1,562,087
329,185

1,409,314
283,562
1,125,753

1,232,901

Bank premises, net
Other assets
Furniture and equipment .
Less depreciation

394,828,901

414,800,157

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

11,050,060
10,168,000
424,452

1,230,372
706,846

1,192,205
671,613

523,526
19,263,604
3,891,457
6,004,465
5,666
991,247
3,029
10,103
299,326

520,592
21,099,289
4,101,149
5,410,827
22,920
865,525
13,398
11,507
312,533
30,992,423

32,357,740

481,510,432

455,235,200

Tables 285
1.—Continued

Item

1996

1995

LIABILITIES

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

481,044,070
-80,108,642

526,825,836
-100,304,015

Total Federal Reserve notes, net

426,521,822
24,523,700
7,741,937
167,401

Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
Other deposits
Officers' and certified checks
International organizations
Other2

Total other liabilities
Total liabilities

29,611,156
5,979,193
386,182
25,622
114,289
794,904

26,206
107,766
758,690

Total other deposits
Deferred credit items
Other liabilities
Discount on securities
Sundry items payable
Suspense account
All other

400,935,428

934,815
5,049,121

892,662
7,830,936
3,844,113
102,613
4,500
783,259

3,613,735
95,718
15,153
681,8954
4,734,485

4,406,5014

472,412,942

447,302,396 4

4,601,745
4,495,745
0

3,966,402
3,966,402
0

481,510,432

455,235,200 4

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 $8,291.8 million in 1996 and
$7,316.6 million in 1995 were invested in securities
issued by foreign governments, and the balance was
invested with foreign central banks and the Bank for
International Settlements.




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.
4. Corrections of data reported in 82nd Annual Report,
1995.

286

83rd Annual Report, 1996

2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1996 and 1995
Millions of dollars
Total

Boston

Item
1996

1995

1996

11,048

9,718
591

11,050
10,168
424

85
0

135
0

Federal agency obligations
Bought outright
Held under repurchase agreements

2,225
1,612

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

1995

ASSETS

661
636
13

575
511
17

2,634
1,100

131
0

130
0

390,907
19,971
414,800

378,197
12,762
394,829

23,000
0
23,131

18,600
0
18,736

Items in process of collection
Bank premises

13,128
1,233

5,280
1,126

706
95

299
94

Other assets
Denominated in foreign currencies2
Allother

19,264
11,729

21,099
11,258

830
534

799
459

0

0

1,024

7,063

481,510

455,235

27,629

28,552

426,522

400,935

25,417

26,175

24,524
7,742
167
893
33,326

29,611
5,979
386
935
36,911

1,048
0
6
38
1,092

1,414
0
5
33
1,452

7,831
4,734

5,049
4,407

511
268

359
225

472,413

447,302

27,289

28,211

4,602
4,496
0

3,966
3,966
0

172
168
0

11
7
11
7
0

481,510

455,235

27,629

28,552

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

526,826
100,304

481,044
80,109

30,331
4,914

31,502
5,327

Federal Reserve notes, net

426,522

400,935

25,417

26,175

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

11,048
9,718
0
405,756

11,050
10,168
0
379,717

426,522

400,935

Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Other
Acceptances held under repurchase agreements

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 dividends3
Total liabilities
CAPITAL ACCOUNTS

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

Digitized Total collateral
for FRASER
http://fraser.stlouisfed.org/
For notes see end of table.
Federal Reserve Bank of St. Louis

Tables 287
2.—Continued

1996

Cleveland

Philadelphia

N e w York

1996

1995

1995

1996

Richmond
1995

1996

1995

4,273
3,903
20

423
396
43

433
413
26

624
543
25

621
584
24

919
835
113

862
790
71

0

0

1
0

0

0

9
0

0

0

0

0

0
0

0
0

827
1,612

1,047
1,100

86
0

114
0

131
0

152
0

184
0

202
0

145,377
19,971
167,787

150,316
12,762
165,225

15,129
0
15,224

16,408
0
16,523

22,976
0
23,106

21,802
0
21,954

32,416
0
32,600

29,047
0
29,249

1,796
150

764
146

476
50

254
49

688
108

265
66

1,064
128

552
127

5,128
5,783

5,654
5,378

924
356

923
413

1,257
530

1,476
524

1,416
910

1,698
907

-27,599

-26,517

-1,762

-237

5,007

220

3,821

3,822

160,499

158,846

16,131

18,797

31,889

25,734

41,805

38,077

139,364

139,004

13,822

16,223

29,861

23,524

38,736

34,912

8,167
7,742

8,658
5,979

1,297

1,702

1,275

1,555

62
410

283
433

0
6
29

0
10
40

0
11
88

0
11
86

16,381

15,353

1,313

1,737

856
0
9
43
909

1,161

0
7
9

1,211

1,374

1,652

4,049
3,385
21

883

734

1,796

1,642

261
194

251
206

280
261

232
250

698
369

592
338

158,425

156,733

15,590

18,416

31,311

25,217

41,177

37,494

1,051
1,023
0

1,057
1,057
0

273
268
0

190
190
0

292
286
0

259
259
0

318
310
0

292
292
0

160,499

158,846

16,131

18,797

31,889

25,734

41,805

38,077

183,368
44,004

167,545
28,541

16,172
2,351

19,585
3,362

32,850
2,989

26,869
3,344

45,352
6,616

41,346
6,435

139,364

139,004

13,822

16,223

29,861

23,524

39,736

34,912




288 83rd Annual Report, 1996
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1996 and 1995—Continued
Millions of dollars
Atlanta

Chicago

Item
1996

1995

1996

1995

1,140
979
70

1,220
1,079
35

ASSETS

Gold certificate account
Special drawing rights certificate account
Coin

769
745
81

556
523
66

Loans
To depository institutions
Other

18
0

Acceptances held under repurchase agreements
Federal agency obligations
Bought outright
Held under repurchase agreements

148
0

122
0

241
0

304
0

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

26,087
0
26,236

17,558
0
17,689

42,364
0
42,623

43,602
0
43,906

Items in process of collection
Bank premises

1,556
80

688
77

1,537
110

519
110

Other assets
Denominated in foreign currencies2
Allother

1,890
631

1,954
460

2,296
1,006

2,401
1,119

Interdistrict Settlement Account

-511

13,362

157

-3,016

31,477

35,375

49,919

47^74

27,511

31,186

44,858

41,758

1,708
0
14
54
1,775

2,481
0
13
21
2,515

2,574
0
17
120
2,712

3,539
0
16
160
3,716

1,033
318

660
236

808
479

463
492

9,637

34,597

48,857

46,428

425
415
0

389
389
0

537
524
0

473
473
0

31,477

35^75

49,919

47,374

34,458
6,947

36,869
5,683

51,546
6,688

48,453
6,695

27,511

31,186

44,858

41,758

Total assets
LIABILITIES

Federal Reserve notes
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
Other
Total deposits
Deferred credit items
Other liabilities and accrued dividends3
Total liabilities
CAPITAL ACCOUNTS

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

Federal Reserve notes outstanding (issued to Bank)
Less: Held by Bank
Federal Reserve notes, net
NOTE. Components may not sum to totals because of
rounding.
1. Includes securities loaned—fully guaranteed by U.S.
Treasury securities pledged with Federal Reserve
Banks—and excludes securities sold and scheduled to be
Digitizedbought back under matched sale-purchase transactions.
for FRASER



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

St. Louis
1996

Minneapolis

1995

1996

Kansas City

1995

1996

Dallas

1995

1996

San Francisco
1995

1996

1995

474
419
29

484
490
20

168
144
19

203
180
20

321
280
56

382
342
41

433
399
49

405
376
49

1,067
957
74

1,036
977
37

29
0

9
0

7
0

4
0

7
0

3
0

1
0

0
0

15
0

103
0

104
0

121
0

34
0

48
0

70
0

101
0

80
0

85
0

188
0

209
0

18,312
0
18,445

17,308
0
17,437

5,896
0
5,936

6,828
0
6,879

12,244
0
12,321

14,451
0
14,555

13,998
0
14,078

12,262
0
12,348

33,108
0
33,312

30,016
0
30,328

666
31

220
30

639
111

450
54

843
56

361
55

1,284
155

333
158

1,873
160

574
159

476
411

486
408

481
151

563
180

737
293

797
352

1,197
344

1,414
319

2,631
780

2,935
739

-2,694

357

-453

-1,082

-650

-2,610

218

3,287

23,441

5,351

18,257

19,932

7,195

7,448

14,258

14,276

18,156

18,689

64,295

42,137

16,769

18,427

5,503

5,990

12,435

12,267

15,340

15,570

56,905

35,901

718
0
4
32
754

876
0
3
30
909

721
0
4
8
732

741
0
4
2
746

817
0
5
21
844

1,119
0
5
26
1,150

1,730
0
9
18
1,757

2,178
0
9
21
2,208

3,612
0
20
51
3,683

4,188
0
20
55
4,262

292
216

195
205

653
96

412
102

463
171

361
194

374
178

258
11
6

1,575
388

533
357

18,031

19,736

6,985

7,250

13,912

13,972

17,649

18,196

62,551

41,053

114
112
0

98
98
0

107
104
0

99
99
0

175
171
0

152
152
0

257
250
0

246
246
0

880
865
0

542
542
0

18,257

19,932

7,195

7,448

14,258

14,276

18,156

18,689

64,295

42,137

19,480
2,711

20,751
2,324

7,027
1,524

7,143
1,153

14,148
1,713

13,880
1,613

21,005
5,666

19,726
4,156

71,088
14,182

47,377
11,476

16,769

18,427

5,503

5,990

12,435

12,267

15,340

15,570

56,905

35,901




290

83rd Annual Report, 1996

3. Federal Reserve Open Market Transactions, 1996
Millions of dollars
Jan.

Feb.

Mar.

Apr.

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

0
0
31,476
0

0
0
39,332
0

0
0
30,556
0

88
0
32,218
0

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

0
0
2,048
-3,287
1,228

0
0
2,476
-7,575
0

0
0
0
0
0

35
0
3,511
-4,824
787

1 to 5 years
Gross purchases ,
Gross sales
Maturity shift
Exchanges

0
0
-2,048
3,287

0
0
-1,908
5,175

5 to 10 years
Gross purchases . . .
Gross sales
Maturity shift
Exchanges

oooo

0
0
-818
1,500

More than 10 years
Gross purchases .
Gross sales
Maturity shift
Exchanges

oooo

Type of security and transaction

0
0
-20
900

All maturities
Gross purchases .
Gross sales
Redemptions

oooo
oooo
oooo
ooo

Net change in U.S. Treasury securities

1,065
0
0
0

ooo

Repurchase agreements
Gross purchases
Gross sales

479
0
0
0

3,566
0
787

260,425
259,186

274,290
275,979

251,623
251,086

253,482
251,510

16,040
28,802

6,230
6,230

31,602
27,706

46,449
50,345

-11,523

-1,689

4,433

854

0
0
1,228

ooo

Matched transactions
Gross purchases
Gross sales

1,899
0
-3,511
4,824

ooo

U.S. TREASURY SECURITIES

0
0
108

0
0
82

9,793
10,893

765
765

5,640
4,640

2,372
3,372

-2,328

0

892

-1,082

13,851

-1,689

5,325

-228

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 figures increase such holdings. Components may not sum
holdings of the System Open Market Account; all other
to totals because of rounding.




Tables 291
3.—Continued
May

Aug.

July

Oct.

0
0
40,467
0

3,311
0
31,726
0

0
0
32,368
0

0
0
34,271
0

0
0
32,791
0

0
0
38,661
0

6,502
0
29,037
0

0
0
27,247
0

9,901
0
400,152
0

0
0
5,107
-5,448
0

0
0
0
0
0

0
0
2,807
-4,415
300

1,240
0
2,780
-3,580
0

0
0
2,371
2,890
485

0
0
1,623
-1,770
0

0
0
3,818
-5,655
0

0
0
2,259
-1,950
0

1,275
0
29,070
-41,394
1,776

0
0
-4,049
3,748

0
0
0
0

0
0
-2,807
3,694

1,279
0
-1,409
1,780

0
0
-2,371
2,890

0
0
-1,623
1,395

0
0
-2,102
2,715

0
0
-2,259
1,950

3,177
0
-24,087
31,458

0
0
-1,058
1,700

0
0
0
0

0
0
0
721

297
0
-1,371
900

0
0
0
0

0
0
0
375

0
0
1,716
1,470

0
0
0
0

776
0
-1,531
6,666

o o o o

0
0
0
0

0
0
0
0

900
0
0
900

0
0
0
0

0
0
0
0

0
0
0
1,470

0
0
0
0

1,965
0
-20
3,270

3,311
0
0

0
0

3,716
0

0

0

0
0
0

0
0
0

6,502
0
0

0
0
0

17,094
0
787

259,135
259,595

248,534
249,277

267,438
268,975

265,397
264,536

234,992
238,036

268,304
267,128

227,577
226,505

272,117
273,872

3,085,685
3,083,315

30,688
24,984

43,048
41,666

46,151
37,779

45,202
56,286

36,014
33,374

33,836
33,020

36,383
36,665

78,067
68,901

449,711
445,759

5,244

3,950

6,836

-6,508

-404

1,993

7,293

7,412

17,890

0
0
16

0
0
40

0
0
52

0
0
27

0
0
63

o

Total

to o

Dec.

ooo

Nov.

ooo

Sept.

ooo

June

0
0
1,637

5,722
4,372

5,138
6,488

3,145
2,863

8,500
7,544

4,536
4,436

12,683
11,051

9,264
9,471

8,041
8,787

75,599
74,682

1,334

-1,390

231

956

73

1,569

-217

-758

-720

6,578

2,560

7,066

-5,552

-331

3,562

7,076

6,654

17,169




292

83rd Annual Report, 1996

4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,
December 31, 1994-96
Millions of dollars
December 31

Change

Description
1996

1995

1994

1995-96

1994-95

405,613

390,534

372,561

15,079

17,973

106,063
99,289

101,564
93,888

98,129
87,291

4,499
5,401

3,435
6,597

29,045
95,608
33,782
41,826

41,419
90,031
31,469
36,921

34,212
10,205
28,053
34,845

12,374
10,335
2,313
4,905

7,207
-4,758
3,416
2,076

205,353
150,922
49,339

195,451
151,013
44,069

185,420
144,143
42,998

9,902
-91
5,270

10,031
6,870
1,071

19,971
14,706
0

12,762
12,336
0

9,565
8,041
0

7,209
2,370
0

3,197
4,295
0

Held outright1

2,225

2,634

3,637

-409

-1,003

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

1,223
520
457
25

1,241
841
527
25

1,737
1,387
488
25

-18
-321
-70
0

-496
-546
39
0

By issuer
Federal Farm Credit Banks
Federal Home Loan Banks
Federal Land Banks
Federal National Mortgage Association

912
115
17
1,181

912
230
66
1,425

1,050
796
66
1,725

0
115
-49
-244

-138
-566
0
280

Repurchase agreements

1,612

1,025

1,025

512

75

U.S. TREASURY SECURITIES

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

NOTE. Components may not sum to totals because of
rounding.




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, 1996
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

Employees

Other officers

Total

Number
Salary
(dollars)

Number

187,300
239,900
212,900
191,000
188,300
201,825
212,200
218,500
200,300
186,800
188,100
265,900

60
216
58
• 48
77
76
96
54
48
54
57
87

104,666,350

955

24




Salaries
(dollars)

6,385,550
27,541,815
5,988,500
4,930,500
7,218,400
7,292,355
9,690,300
4,926,200
4,904,250
5,201,700
5,537,400
9,922,200
2,633,200

Fulltime
1,060
3,715
1,142
1,307
1,880
2,142
2,067
1,072
1,122
1,527
1,402
2,266

490

102,172,370 21,192

Salaries
(dollars)

Number

Salaries
(dollars)

163
86
69
72
166
45
59
64
115
90
43
100

46,899,060
168,490,246
41,877,821
44,684,645
64,373,601
70,652,995
82,345,034
36,161,093
41,435,496
52,267,893
50,584,238
97,824,927

1,284
4,018
1,270
1,428
2,124
2,264
2,223
1,191
1,286
1,672
1,503
2,454

53,471,910
196,271,961
48,079,221
49,806,145
71,780,301
78,147,175
92,247,534
41,305,793
46,540,046
57,656,393
56,309,738
108,013,027

6

25,659,004

520

28,292,204

1,078 823,256,053

23,237

927,921,448

Parttime

294 83rd Annual Report, 1996
6. Income and Expenses of Federal Reserve Banks, 1996
Dollars
Item

Total

Boston

New York

Philadelphia

Cleveland

CURRENT INCOME

Loans
U.S. Treasury and federal
agency securities
Foreign currencies
Priced services
Other

10,855,101

169,855

935,475

224,228

143,085

23,883,718,256
442,816,416
787,152,182
39,761,493

1,328,674,303
18,896,077
68,101,941
576,197

9,207,282,770
118,021,601
105,327,217
29,467,510

944,101,600
21,090,551
41,360,600
1,401,162

1,381,391,105
29,047,617
50,295,275
480,092

Total

25,164,303,448

1,416,418,373

9,461,034,573

1,008,178,141

1,461,357,174

1,006,237,552
275,931,941
-139,543,043
31,753,785
46,582,951
57,120,579

56,459,570
16,636,188
37,961
1,835,046
2,199,279
1,194,182

222,438,121
60,622,434
-140,036,216
4,857,577
6,740,068
12,293,707

50,391,766
13,698,530
43,984
490,508
2,176,419
1,620,432

53,550,324
14,888,487
20,260
1,999,164
2,720,440
1,715,340

77,894,743
10,422,139
59,935,472

37,277,676
496,413
3,300,843

6,243,477
2,210,764
11,236,321

1,452,609
438,003
3,536,052

2,112,996
737,434
3,511,575

26,377,402
56,045,236
31,142,631
34,685,964
28,899,672

3,938,107
4,324,247
2,501,732
649,961
710,151

2,372,936
11,108,195
7,034,835
15,451,188
7,415,742

1,661,625
2,370,332
2,519,547
235,803
1,331,057

1,761,763
2,552,760
1,796,113
950,184
543,605

7,923,447
33,626,775
135,798,828
79,279,701
308,815,188
50,811,422
0
-53,191,381
-2,851,630

344,187
75,687
4,028,526
4,181,153
22,298,335
3,107,799
-1,393,774
-9,384,887
-279,886

1,370,179
2,898,504
18,772,134
12,569,765
57,722,661
11,265,662
11,229,265
-7,849,084
-11,574

371,480
268,867
4,976,336
3,085,572
26,490,515
1,453,270
11,985,034
-2,870,308
-248,610

236,008
204,359
4,671,434
3,993,813
13,693,294
3,298,036
14,202,201
-1,053,259
-307,071

2,163,699^76
-215,838,443
1,947,860,932

154,538,495
-9,277,655
145,260,840

337,956,661
-45,178,441
292,778,220

127,478,823
-17,575,267
109,903,556

127,799,260
-23,081,004
104,718,256

CURRENT EXPENSES

Salaries and other personnel
expenses
Retirement and other benefits
Net periodic pension costs' .
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, net2
Recoveries
Expenses capitalized3
Total

Reimbursements
Net expenses
For notes see end of table.




Tables 295
6.—Continued
Richmond

Atlanta

Chicago

3,106,781

Dallas

San Francisco

234,579

1,193,457

1,920,176,715 1,447,549,323 2,604,222,099 1,099,849,063 375,188,745 783,759,786
32,780,978
43,238,826
52,591,299
10,880,489 11,105,863
16,927,827
50,787,341
94,986,455
99,321,687
36,284,780 44,328,737
61,682,563
474,745
411,312
834,082
1,149,075
131,661
1,009,511

824,448,395
27,679,158
52,781,544
366,610

1,967,074,352
60,556,131
81,894,041
3,459,538

2,015,573,324 1,587,281,379 2,758,738,116 1,149,154,489 434,141,438

852,738,637

905,510,286

2,114,177,519

497,264

1,665,412

Minneapolis Kansas City

1,132,022

98,986

1,453,956

St. Louis

110,117,153
30,822,962
33,731
12,366,967
5,480,584
26,667,126

83,881,847
24,678,827
71,874
1,852,166
4,169,096
2,384,244

99,978,837
26,322,214
81,108
2,437,091
5,327,316
2,601,072

44,011,658
13,838,725
12,683
958,584
2,441,321
1,546,866

48,727,463
12,642,030
22,995
1,846,427
2,916,360
1,823,462

62,433,596
15,852,699
21,910
567,911
3,035,657
1,178,404

59,301,723
17,828,950
42,212
1,059,163
3,191,057
1,251,513

114,945,493
28,099,895
104,455
1,483,182
6,185,354
2,844,231

3,383,975
1,148,842
6,538,378

4,804,834
952,818
6,308,862

4,467,170
829,346
6,169,448

2,475,824
529,532
3,667,918

3,726,625
547,661
2,167,666

4,379,151
946,005
4,108,932

2,306,464
811,422
3,611,090

5,263,942
773,899
5,778,387

2,243,390
5,508,151
2,948,280
10,437,429
2,968,646

2,026,479
4,615,785
2,356,215
3,507,679
3,183,981

3,945,631
5,934,590
2,404,383
1,251,464
5,096,523

399,311
2,512,757
1,650,416
433,358
1,009,406

2,657,695
902,838
990,220
875,624
790,187

766,510
3,731,839
1,433,872
454,280
950,657

2,012,054
5,158,229
2,316,422
315,119
2,284,549

2,591,901
7,325,512
3,190,596
123,876
2,615,168

1,155,327
27,788,934
62,533,625
18,670,041
28,452,428
4,769,686
-146,742,179
-13,996,837
-264,804

649,833
619,349
8,459,956
9,224,871
30,097,127
4,861,696
16,918,488
-3,050,351
-467,926

733,135
822,942
9,130,673
7,577,002
38,264,577
6,079,156
24,550,070
-3,774,065
-131,863

287,123
116,848
2,678,690
2,861,990
12,101,176
2,430,871
12,551,571
-1,251,069
-126,062

602,695
288,514
3,042,241
2,593,476
5,575,322
1,757,905
10,344,011
-835,725
-361,352

572,038
87,133
3,617,359
2,682,032
14,193,748
3,319,431
19,061,475
-641,514
-476,346

450,120
120,425
5,034,986
3,680,762
29,408,823
3,384,377
15,320,978
-5,275,667
-95,162

1,151,324
335,213
8,852,867
8,159,224
30,517,182
5,083,533
11,972,859
-3,208,615
-80,973

203,031,835
-23,770,024
179,261,811

212,107,750
-12,103,535
200,004,215

250,097,821
-15,867,204
234,230,617

107,139,497 103,644,337 142,276,779
-9,132,559 -16,164,191 -19,087,772
98,006,938 87,480,146 123,189,007

153,519,610
-6,605,375
146,914,235

224,108,507
-17,995,417
226,113,090




296

83rd Annual Report, 1996

6. Income and Expenses of Federal Reserve Banks, 1996—Continued
Dollars
Item

Total

Boston

New York

Philadelphia

Cleveland

23,216,442,516

1,271,157,533

9,168,256,354

898,274,585

1,356,638,917

32,085,211
120,935
32,206,146

1,713,733
13,452
1,727,185

12,393,112
29,675
12,422,787

1,326,192
13,075
1,339,267

1,865,492
20,969
1,886,462

-1,668,198,783
-3,099,220
-1,671,298,002

-71,851,579
-3,701
-71,855,280

-444,393,928
-70,454
-444,464,381

-79,991,068
-2,872
-79,993,940

-108,832,757
-5,047
-108,837,805

-1,639,091,856

-70,128,095

-432,041,594

-78,654,673

-106,951,343

37,624,539

1,737,950

3,832,199

2,567,250

1,656,301

162,642,400
402,517,040

6,850,400
26,277,921

43,327,900
139,553,061

7,726,800
16,286,645

10,590,300
23,617,286

20,974,566,681

1,166,163,167

8,549,501,600

793,039,217

1,213,823,687

255,884,343

10,270,121

65,359,812

12,379,866

16,242,448

14,565,623,555
5,517,716,032
-106,000,000

826,506,487
328,055,909
-4,565,563

6,119,190,289
2,370,171,099
-28,237,496

552,651,198
145,005,453
-5,082,760

853,616,778
310,237,212
-6,915,406

PROFIT AND LOSS

Current net income
Additions to and deductions
from (-) current net income4
Profits on sales of U.S.
Treasury and federal
agency securities
Other additions
Total additions
Losses on foreign exchange
transactions
Other deductions
Total deductions
Net addition to or
deductions from (—)
current net income
Cost of unreimbursed Treasury
services
Assessments by Board
Board expenditures5 ..
Cost of currency
Net income before payment to
U.S. Treasury
Dividends paid
Payments to U.S. Treasury
(interest on Federal
Reserve notes)
Statutory transfer
Surplus transfer
Transferred to surplus
Surplus, January 1
Surplus, December 31

635,342,750

1,330,650

-5,219,600

83,002,700

33,727,250

3,966,401,950
4,495,744,700

170,838,300
167,603,387

1,056,615,650
1,023,158,554

190,191,200
268,111,140

258,766,800
285,578,644

NOTE. Components may not sum to totals because of
rounding.
1. The effect of Financial Accounting Standards
Board's Statement of Financial Accounting Standards
No. 87, Employers' Accounting for Pensions (SFAS 87).
The System Retirement Plan for employees is recorded
on behalf of the System on the books of the Federal
Reserve Bank of New York. This resulted in a reduction
in expenses of $140,566,144 in 1996. The Retirement
Benefits Equalization Plan is recorded by each Federal
Reserve Bank.
2. Includes distribution of costs for projects performed
by one Bank for the benefit of one or more other Banks.




3. Includes expenses for labor and materials temporarily capitalized and charged to activities when the products are consumed.
4. 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.
5. For additional details, see the preceding chapter:
Board of Governors Financial Statements.

Tables 297
6.—Continued
Richmond

Atlanta

Chicago

St. Louis

Minneapolis Kansas City

1,836,311,513 1,387,277,163 2,524,507,498 1,051,147,550 346,661,291

2,550,311
8,540
2,558,850

1,775,062
23,086
1,798,148

3,601,822
4,535
3,606,356

1,483,547
165
1,483,712

537,476
38
537,513

Dallas

San Francisco

729,549,631

758,596,050

1,888,064,429

1,129,151
140
1,129,291

1,087,883
6,653
1,094,536

2,621,430
609
2,622,039

-122,606,494 -163,590,523 -198,815,916
-16,879
-1,675,175
-10,443
-122,623,373 -165,265,698 -198,826,359

-41,204,351 -41,617,846 -63,832,062 -103,651,708 -227,810,550
-2,800
-3,692
-614,123
-9,262
-684,771
-41,207,151 -41,621,538 -64,446,185 -103,660,970 -228,495,321

-120,064,523 -163,467,551 -195,220,003

-39,723,439 -41,084,025 -63,316,894 -102,566,434 -225,873,283

4,260,915

3,790,153

3,790,785

2,129,229

3,518,067

2,624,738

2,200,845

5,516,107

11,850,200
35,049,171

16,120,200
31,308,982

19,530,400
41,922,553

4,060,700
18,498,878

4,038,400
6,013,202

6,370,200
12,315,411

10,054,000
15,631,347

22,122,900
36,042,583

1,665,086,705 1,172,590,278 2,264,043,757
17,981,905
1,168,388,993
452,209,508
-7,790,611

24,885,584

30,568,828

786,280,315 1,587,279,932
325,321,528 581,873,097
-10,394,802 -12,633,079

26,506,300

36,102,850

64,321,900

291,516,000
310,231,689

388,961,900
414,669,948

472,715,750
524,404,571




986,735,304 292,007,597 644,922,388
6,430,939

10,052,800

15,007,452

40,582,344

693,121,299 215,945,494 457,250,081
270,789,367 62,303,308 154,613,858
-2,618,190 -2,644,464 -4,055,991

453,449,062
149,169,760
-6,586,194

851,943,628
367,965,934
-14,475,444

23,005,650

10,517,150

338,017,650

97,969,750 98,952,900 151,770,650
111,745,260 103,944,986 170,720,309

246,448,050
250,379,006

541,655,000
865,197,206

16,393,700

6,122,245

628,143,424 1,598,509,556

7,636,550

298

83rd Annual Report, 1996

7. Income and Expenses of Federal Reserve Banks, 1914-96
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

5,217,998
16,128,339
67,584,417
102,380,583

2,018,282
2,081,722
4,921,932
10,576,892
18,744,815

5,875
-193,001
-1,386,545
-3,908,574
-4,673,446

302,304
192,277
237,795
382,641
594,818

1920
1921
1922
1923
1924
1925
1926
1927
1928
1929

181,296,711
122,865,866
50,498,699
50,708,566
38,340,449
41,800,706
47,599,595
43,024,484
64,052,860
70,955,496

27,548,505
33,722,409
28,836,504
29,061,539
27,767,886
26,818,664
24,914,037
24,894,487
25,401,233
25,810,067

-3,743,907
-6,314,796
^,441,914
-8,233,107
-6,191,143
-4,823,477
-3,637,668
-2,456,792
-5,026,029
-4,861,642

709,525
741,436
722,545
702,634
663,240
709,499
721,724
779,116
697,677
781,644

1,714,421
1,844,840
805,900
3,099,402

1930
1931
1932
1933
1934
1935
1936
1937
1938
1939

36,424,044
29,701,279
50,018,817
49,487,318
48,902,813
42,751,959
37,900,639
41,233,135
36,261,428
38,500,665

25,357,611
24,842,964
24,456,755
25,917,847
26,843,653
28,694,965
26,016,338
25,294,835
25,556,949
25,668,907

-93,136
311,451
-1,413,192
-12,307,074
-4,430,008
-1,736,758
485,817
-1,631,274
2,232,134
2,389,555

809,585
718,554
728,810
800,160
1,372,022
1,405,898
,679,566
,748,380
,724,924
,621,464

2,175,530
1,479,146
1,105,816
2,504,830
1,025,721
1,476,580
2,178,119
1,757,399
1,629,735
1,356,484

1940
1941
1942
1943
1944
1945
1946
1947
1948
1949

43,537,805
41,380,095
52,662,704
69,305,715
104,391,829
142,209,546
150,385,033
158,655,566
304,160,818
316,536,930

25,950,946
28,535,547
32,051,226
35,793,816
39,659,496
41,666,453
50,493,246
58,191,428
64,280,271
67,930,860

11,487,697
720,636
-1,568,208
23,768,282
3,221,880
-830,007
-625,991
1,973,001
-34,317,947
-12,122,274

,704,011
,839,541
1,746,326
2,415,630
2,296,357
2,340,509
2,259,784
2,639,667
3,243,670
3,242,500

1,510,520
2,588,062
4,826,492
5,336,118
7,220,068
4,710,309
4,482,077
4,561,880
5,186,247
6,304,316

1950
1951
1952
1953
1954
1955
1956
1957
1958
1959

275,838,994
394,656,072
456,060,260
513,037,237
438,486,040
412,487,931
595,649,092
763,347,530
742,068,150
886,226,116

69,822,227
83,792,676
92,051,063
98,493,153
99,068,436
101,158,921
110,239,520
117,931,908
125,831,215
131,848,023

36,294,117
-2,127,889
1,583,988
-1,058,993
-133,641
-265,456
-23,436
-7,140,914
124,175
98,247,253

3,433,700
4,095,497
4,121,602
4,099,800
4,174,600
4,194,100
5,339,800
7,507,900
5,917,200
6,470,600

7,315,844
7,580,913
8,521,426
10,922,067
6,489,895
4,707,002
5,603,176
6,374,195
5,973,240
6,384,083

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

1,103,385,257
941,648,170
1,048,508,335
1,151,120,060
1,343,747,303
1,559,484,027
1,908,499,896
2,190,403,752
2,764,445,943
3,373,360,559

139,893,564
148,253,719
161,451,206
169,637,656
171,511,018
172,110,934
178,212,045
190,561,166
207,677,768
237,827,579

13,874,702
3,481,628
-55,779
614,835
725,948
1,021,614
996,230
2,093,876
8,519,996
-557,553

6,533,700
6,265,100
6,654,900
7,572,800
8,655,200
8,576,396
9,021,600
10,769,596
14,198,198
15,020,084

7,455,011
6,755,756
8,030,028
10,062,901
17,229,671
23,602,856
20,167,481
18,790,084
20,474,404
22,125,657

For notes see end of table.



2,173,252

Tables 299
7.—Continued
Payments to U.S. Treasury
Dividends
paid

TV ti n c ft* TTP> H

Statutory
transfers4

Interest on
Federal Reserve
notes

11 dilolCllCLl

to surplus
(section 13b)

T r a n <ifPTTPH
1 lu.IlSlCIiCCl

to surplus
(section 7)

217,463
1,742,775
6,804,186
5,540,684
5,011,832

2,703,894

1,134,234
48,334,341
70,651,778

5.654,018
6,119,673
6,307,035
6,552,717
6,682,496
6,915,958
7,329,169
7,754,539
8,458,463
9,583,911

60,724,742
59,974,466
10,850,605
3,613,056
113,646
59,300
818,150
249,591
2,584,659
4,283,231

82,916,014
15,993,086
-659,904
2,545,513
-3,077,962
2,473,808
8,464,426
5,044,119
21,078,899
22,535,597

10,268,598
10,029,760
9,282,244
8,874,262
8,781,661
8,504,974
7,829,581
7,940,966
8,019,137
8,110,462

17,308

-2,297,724
-7,057,694
11,020,582
-916,855
6,510,071
607,422
352,524
2,616,352
1,862,433
4,533,977

1,134,234

2,011,418

8,214,971
8,429,936
8,669,076
8,911,342
9,500,126
10,182,851
10,962,160
11,523,047
11,919,809
12,329,373

297,667
227,448
176,625
119,524
24,579

-60,323
27,695
102,880
67,304
-419,140
-425,653

82,152
141,465
197,672
244,726
326,717
247,659
67,054
35,605

-54,456
-4,333
49,602
135,003
201,150
262,133
27,708
86,772

75,283,818
166,690,356
193,145,837

17,617,358
570,513
3,554,101
40,327,237
48,409,795
81,969,625
81,467,013
8,366,350
18,522,518
21,461,770

13,082,992
13,864,750
14,681,788
15,558,377
16,442,236
17,711,937
18,904,897
20,080,527
21,197,452
22,721,687

196,628,858
254,873,588
291,934,634
342,567,985
276,289,457
251,740,721
401,555,581
542,708,405
524,058,650
910,649,768

21,849,490
28,320,759
46,333,735
40,336,862
35,887,775
32,709,794
53,982,682
61,603,682
59,214,569
-93,600,791

23,948,225
25,569,541
27,412,241
28,912,019
30,781,548
32,351,602
33,696,336
35,027,312
36,959,336
39,236,599

896,816,359
687,393,382
799,365,981
879,685,219
1,582,118,614
1,296,810,053
1,649,455,164
1,907,498,270
2,463,628,983
3,019,160,638

42,613,100
70,892,300
45,538,200
55,864,300
-465,822,800
27,053,800
18,943,500
29,851,200
30,027,250
39,432,450




300 83rd Annual Report, 1996
7. Income and Expenses of Federal Reserve Banks, 1914-96—Continued
Dollars

Current
income

Federal Reserve Bank
and period

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

1980..
1981..
1982..
1983..
1984..
1985..
1986..
1987..
1988..
1989..
1990..
1991..
1992..
1993..
1994..
1995..
1996 .

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
25,164,303,448

Total, 1914-96.

417,408,838,469

Aggregate for each Bank,
1914-96
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago.
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

22,414,593,032
134,171,636,114
16,115,422,370
27,027,211,371
33,033,422,980
18,683,112,041
55,939,695,781
14,325,900,930
7,770,380,589
16,790,020,529
21,389,825,744
49,747,616,989

Total

417,408,838,469

Net
expenses

Assessments by
Board of Governors
Board
expenditures

Costs
of currency

11,441,829
94,266,075
-49,615,790
-80,653,488
-78,487,237
-202,369,615
7,310,500
-177,033,463
-633,123,486
-151,148,220

21,227,800
32,634,002
35,234,499
44,411,700
41,116,600
33,577,201
41,827,700
47,366,100
53,321,700
50,529,700

23,573,710
24,942,528
31,454,740
33,826,299
30,190,288
37,130,081
48,819,453
55,008,163
60,059,365
68,391,270

-115,385,855
718,032,836
814,190,392 -372,879,185
926,033,957
-68,833,150
1,023,678,474 -400,365,922
1,102,444,454 -412,943,156
1,127,744,490 1,301,624,294
1,156,867,714 1,975,893,356
1,146,910,699 1,796,593,917
1,205,960,134 -516,910,320
1,332,160,712 1,254,613,365
1,349,725,812 2,099,328,472
1,429,322,157
405,729,320
1,474,530,523
-987,787,687
1,657,799,914 -230,267,919
1,795,328,343 2,363,862,097
1,818,416,193
857,787,845
1,947,860,932 -1,676,716,395

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
162,642,400

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
402,517,040

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

30,546,980,808

2,030,182,865
5,365,393,4843
1,687,961,908
1,918,000,632
2,610,753,951
2,814,165,967
3,946,149,380
1,544,659,281
1,427,947,359
1,957,825,838
1,909,602,182
3,334,337,961
30,546,980,808

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. The $4,730,416,899 transferred to surplus was
reduced by direct charges of $500,000 for charge-off
on Bank premises (1927), $139,299,557 for contributions
to capital of the Federal Deposit Insurance Corporation
(1934), $3,657 net upon elimination of section 13b surplus (1958), and $106,000,000 transferred to the Treasury




Net additions
or
deductions (-)'

6,085,772,300 2,314,254,908 4,389,133,107

85,524,286
618,126,986
106,218,018
162,215,990
137,625,176
193,757,060
304,762,572
65,227,172
66,103,815
94,021,509
156,962,073
323,710,251

259,235,953
1,367,423,806
178,533,574
272,544,152
385,287,134
242,024,665
557,191,544
167,905,719
79,181,368
180,437,076
217,674,139
481,693,977

6,085,772,300 2,314,254,908

4,389,133,107

187,976,722
1,811,445,415
205,658,739
300,307,613
351,633,057
538,236,305
739,777,471
117,815,766
155,356,159
208,702,935
509,794,465
959,067,653

as statutorily required (1996); and was increased by transfer of $11,131,013 from reserves for contingencies
(1955), leaving a balance of $4,495,744,698 on December 31, 1996.
3. Reduced $776,102,763 million related to the System Retirement Plan. See note 1, table 6.
4. Represents transfers made as a franchise tax from
1917 to 1932; transfers made under section 13b of the
Federal Reserve Act from 1935 to 1947; and transfers
made under section 7 of the Federal Reserve Act for
1996.

Tables

301

7.—Continued
Payments to U.S. Treasury
Dividends
paid

Statutory
transfers 4

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
255,884,343

5,517,716,032

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
14,565,623,555

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
635,342,750

3,648,914,095

5,669,043,225

372,195,871,378

-3,657

145,739,134
994,043,947
180,644,268
267,503,570
210,908,799
290,271,992
475,290,267
104,921,102
100,731,338
146,394,749
235,741,109
496,723,819

335,448,147
2,438,546,477
151,286,760
315,162,589
458,582,190
334,351,353
607,337,668
273,552,460
67,561,823
161,617,171
149,831,892
375,764,696

19,564,040,184
124,111,327,621
13,728,621,798
24,086,374,111
29,258,068,063
14,916,440,658
50,236,363,729
12,167,994,403
6,073,679,505
14,279,519,545
18,968,510,799
44,804,930,959

135,411
-433,412
290,661
-9,906
-71,517
5,491
11,682
-26,515
64,874
-8,674
55,337
-17,089

182,263,775
1,088,652,621
287,524,122
305,727,843
323,902,108
430,331,290
552,366,404
119,483,078
110,466,663
178,916,250
261,242,678
889,540,067

3,648,914,095

5,669,043,225

372,195,871,378

-3,657

4,730,416,899




4,730,416,8992

302 83rd Annual Report, 1996
Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks
and Branches, December 31, 1996
Dollars
Acquisition costs
Federal Reserve
Bank or
Branch

Land

Buildings
(including
vaults)'

Building machinery and
equipment

Total

2

Net
book
value

Other
real
estate 3

BOSTON..

22,073,501

95,224,464

7,393,282

124,691,246

94,550,556

NEW YORK.
Buffalo

20,330,426
887,844

122,029,100
3,807,652

48,319,639
2,886,511

190,679,165
7,582,008

145,563,196
4,809,426

PHILADELPHIA

2,251,556

59,430,181

6,635,069

68,316,805

49,746,796

CLEVELAND .
Cincinnati
Pittsburgh

2,298,644
2,246,599
1,658,376

81,855,115
15,185,611
10,570,100

7,000,010
8,385,938
5,945,626

91,153,769
25,818,147
18,174,102

82,114,215
12,116,195
13,712,888

RICHMOND.
Baltimore
Charlotte

6,111,681
6,476,335
3,129,645

61,613,424
27,100,992
27,402,251

18,820,236
4,568,965
4,737,485

86,545,340
38,146,293
35,269,381

70,815,818
27,697,064
29,517,951

5,708,457

ATLANTA....
Birmingham...
Jacksonville...
Miami
Nashville
New Orleans..

25,407,225
2,116,535
1,732,270
3,810,291
603,199
3,497,233

11,500,082
1,885,999
17,104,571
12,929,718
2,153,118
5,535,272

4,094,354
1,749,485
2,851,236
2,728,485
2,385,502
2,826,816

41,001,661
5,752,019
21,688,077
19,468,493
5,141,819
11,859,322

34,036,441
3,441,437
17,679,620
13,921,990
2,624,172
8,167,263

4,346,050

CHICAGO...
Detroit

5,033,326
797,734

116,667,902
5,443,037

13,887,161
3,593,208

135,588,390
9,833,979

101,468,479
8,527,778

ST. LOUIS.
Little Rock.
Louisville..
Memphis...

700,378
1,148,492
700,075
1,135,623

18,554,937
3,085,929
3,308,312
4,334,482

5,298,206
1,110,099
1,131,238
2,538,967

24,553,521
5,344,519
5,139,624
8,009,072

17,843,826
4,234,004
3,630,568
5,111,680

MINNEAPOLIS.
Helena

8,876,249
1,954,514

103,395,475
9,278,687

7,753,083
526,787

120,024,808
11,759,987

100,267,078
10,496,799

KANSAS CITY.
Denver
Oklahoma City..
Omaha

2,048,446
3,187,962
646,386
6,534,583

17,690,589
5,777,563
10,627,823
10,987,009

8,227,232
3,311,080
2,880,901
1,401,083

27,966,267
12,276,605
14,155,109
18,922,675

19,636,087
8,247,316
12,202,209
15,719,619

DALLAS
El Paso
Houston
San Antonio .

28,512,492
262,477
2,205,500
482,284

103,908,815
2,737,583
5,025,337
5,019,470

18,570,460
902,921
1,318,755
2,649,439

150,991,767
3,902,982
8,549,592
8,151,194

137,763,658
3,360,141
7,109,258
6,353,620

SAN FRANCISCO

15,599,928
3,891,887
2,733,212
494,556
324,772

70,371,626
51,907,298
9,085,898
7,002,496
9,192,083

18,273,912
9,168,091
2,453,483
2,357,975
2,771,774

104,245,466
64,967,276
14,272,593
9,855,028
12,288,629

77,998,128
51,962,990
12,419,951
8,143,018
9,890,153

Los Angeles
Portland
Salt Lake City
Seattle
Total

191,902,236 1,128,729,998 241,454,495

NOTE. Components may not sum to totals because of
rounding.
1. Includes expenditures for construction at some
offices, pending allocation to appropriate accounts.




1,562,086,729 1,232,901,388

'48,365

10,102,871

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, 1993-96

Operation

1996

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
Commercial2
Government
Food stamps redeemed
Millions of dollars
Loans
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. government checks
Postal money orders
All other
Government securities transfers'
Transfer of funds
Automated clearinghouse transactions
Commercial2
Government
Food stamps redeemed

1994

1993

6
23,436
8,686
8,654

6
22,594
8,911
7,578

8
20,166
7,244
6,950

6
20,768
7,376
7,690

436
206
15,487
13
83

460
203
15,465
13
76

470
200
16,479
13
72

480
192
19,009
12
70

2,372
625
3,637

2,046
599
3,954

1,737
574
4,229

1,486
555
4,198

25,350
375,399
148,394
1,175

22,854
345,318
113,828
1,112

22,853
277,685
76,620
1,045

20,760
290,989
79,599
1,143

462,647
25,831
11,584,276
160,637,460
249,140,021

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

8,287,711
1,250,472
18,669

7,817,323
1,117,452
20,862

7,094,246
948,984
21,867

6,454,742
885,011
21,661

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
change was made to enable consistent time series report-




1995

ing for the fiscal area, where complex definitional changes
have occurred over the reported years.
2. The volume and value of commercial automated
clearinghouse transactions were adjusted for earlier years
to correct a reporting error.

304

83rd Annual Report, 1996

10. Federal Reserve Bank Interest Rates on Loans to Depository Institutions,
December 31, 1996
Extended credit3
Reserve Bank

All Federal Reserve Banks

Adjustment
credit'

Seasonal
credit2

5.00

5.35

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

5.00

5.85

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. The flexible rate is
reestablished on the first business day of each two-week
reserve maintenance period. At the discretion of the Federal Reserve Bank, the flexible rate may be charged on
extended-credit loans that are outstanding less than thirty
days.

Tables 305
11. Reserve Requirements of Depository Institutions, December 31, 1996
Requirements
Type of deposit
Percentage of deposits
Net transaction accounts'
$0 million-$49.3 million2
More than $49.3 million3

Effective date

3
10

1-2-97
1-2-97

Nonpersonal time deposits4

0

12-27-90

Eurocurrency liabilities5

0

12-27-90

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, or telephone or preauthorized transfers for the purpose of making payments to third persons
or others. However, 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 by check, draft, debit card, or similar order
payable directly to third parties) 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 with the reserve maintenance period beginning January 2, 1997, for depository
institutions that report weekly, and with the period beginning January 16, 1997, for institutions that report quarterly, the amount was decreased from $52.0 million to
$49.3 million.
Under the Garn-St Germain Depository Institutions
Act of 1982, the Board adjusts the amount of reservable




liabilities subject to a zero percent reserve requirement
each year for the succeeding calendar year by 80 percent
of the percentage increase in the total reservable liabilities
of all depository institutions, measured on an annual basis
as of June 30. No corresponding adjustment is made in
the event of a decrease. The exemption applies only to
accounts that would be subject to a 3 percent reserve
requirement. Effective with the reserve maintenance
period beginning January 2, 1997, for depository institutions that report weekly, and with the period beginning
January 16, 1997, for institutions that report quarterly, the
exemption was raised from $4.3 million to $4.4 million.
3. The reserve requirement was reduced from 12 percent to 10 percent on April 2, 1992, for institutions that
report weekly, and on April 16, 1992, for institutions that
report quarterly.
4. For institutions that report weekly, the reserve requirement on nonpersonal time deposits with an original
maturity of less than 1 xh 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. For institutions
that report quarterly, the reserve requirement on nonpersonal time deposits with an original maturity of less man
l'/2 years was reduced from 3 percent to zero on January 17, 1991.
The reserve requirement on nonpersonal time deposits
with an original maturity of 1 xh years or more has been
zero since October 6, 1983.
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 1 Vi years (see note 4).

306

83rd Annual Report, 1996

12. Initial Margin Requirements under Regulations T, U, G, and X
Percent of market value
Short sales,
T only'

Effective date
1934, Oct. 1 .
1936, Feb. 1 .
Apr. 1 .
1937, Nov. 1.
1945, Feb. 5 .
July 5 .
1946, Jan. 21
1947, Feb. 21
1949, Mar. 3 .
1951, Jan. 17
1953, Feb. 20
1955, Jan. 4 .
Apr. 23
1958, Jan. 16
Aug. 5.
Oct. 16
1960, July 28
1962, July 10
1963, Nov. 6.
1968, Mar. 11
June 8.
1970, May 6.
1971, Dec. 6.
1972, Nov. 24
1974, Jan. 3 .

25-45
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 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




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

required for writing options on securities, setting it at
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.
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, 1996 and 1995
Millions of dollars, except as noted
Member banks
Item

Total
Total

National

State

Nonmember
banks

1996
ASSETS

1,435,469
399,384

547,478
374,287
373,810
173,191

827,103
589,561
587,778
237,542

193,631
378,944
166,724

136,587
262,797
131,481

57,044
116,147
35,243

116,791
120,750
42,294

2,601,607
41,671
724,824
2,038,896
365,328

1,905,957
35,069
543,799
1,456,829
275,227

1,486,568
26,976
423,598
1,136,788
207,627

419,389
8,093
120,201
320,044
67,601

695,650
6,602
181,024
582,066
90,101

9,653

Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total

3,776

2,755

1,021

5,877

3,211,239
2,401,121
2,397,057
810,117

2,384,136
1,811,560
1,809,279
572,576

1,836,658

310,423
499,695
209,017

1,437,274

LIABILITIES

Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital
Number of banks

1995
ASSETS

Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total

3,057,022
2,249,343
2,224,639
807,679

2,227,141
1,663,974
1,661,360
563,167

1,667,536
1,276,481
1,274,454
391,055

559,605
387,493
386,905
172,112

829,881
585,369
583,279
244,513

328,556
479,124
198,843

207,122
356,044
157,221

151,811
239,244
117,556

55,311
116,801
39,664

121,433
123,079
41,622

2,465,251
38,710
773,794
1,930,233
335,432

1,758,543
31,468
574,908
1,344,046
246,282

1,328,485
21,999
428,781
1,024,899
180,887

430,058
9,470
146,127
319,147
65,394

706,708
7,242
198,886
586,187
89,150

10,143

3,929

2,937

992

6,214

LIABILITIES

Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital
Number of banks

NOTE. Components may not sum to totals because of rounding.




308 83rd Annual Report, 1996
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-96, and Month-End 1996
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
638
235
98
7

21
20
14
15
5

372
378
41
137
21

0
0
0
0
0

1,373
1,853
2,145
2,688
2,463

4,306
4,173
4,226
4,036
8,238

2,027
2,035
2,204
2,303
2,511

1935
1936
1937
1938
1939

2,431
2,430
2,564
2,564
2,484

2,430
2,430
2,564
2,564
2,484

1
0
0
0
0

5
3
10
4
7

12
39
19
17
91

38
28
19
16
11

0
0
0
0
0

2,486
2,500
2,612
2,601
2,593

10,125
11,258
12,760
14,512
17,644

2,476
2,532
2,637
2,798
2,963

1940
1941
1942
1943
1944

2,184
2,254
6,189
11,543
18,846

2,184
2,254
6,189
11,543
18,846

0
0
0
0
0

3
3
6
5
80

80
94
All
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


http://fraser.stlouisfed.org/ table.
For notes see end of
Federal Reserve Bank of St. Louis

Tables 309
14.—Continued

Factors absorbing reserve funds

Currency
in
circulation

Deposits, other
than reserves, with
Federal Reserve Banks
Treasury
cash
holdings 6

Treasury

Foreign

Other

Other
Federal
Reserve
accounts 3

Required
clearing
bal-

Other
Federal
Reserve
liaWith
bilities
Federal
and
Reserve
3
capital
Banks

Member bank
reserves7

Currency
and

Required9

Excess 9

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
1
1
38
5
1

5
1
2
3
4
1
9

1
8
1
5
26
1
9
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
1
4
59

4,817
4,808
4,716
4,686
4,578

203
201
208
202
216

1
6
1
7
1
8
23
29

8
46
5
6
6

2
1
1
9
2
1
21
24

272
293
31
0
348
393

0
0
0
0
0

0
0
0
0
0

2,212
2,194
2,487
2,389
2,355

0
0
0
0
0

2,256
2.250
2,424
2,430
2,428

-44
-56
63
-41
-73

4,603
5,360
5,388
5,519
5,536

21
1
222
272
284
3,029

1
9
54
8
3
11
2

6
79
1
9
4
20

22
3
1
24
18
2
19
6

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
19
9
397

226
160
235
242
256

253
261
263
260
21
5

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
21
9
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
81
2

862
508
392
642
767

446
314
569
547
750

495
607
563
590
16
0

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
71
6
796

668
247
389
346
563

895
526
550
423
490

565
363
455
493
441

714
746
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
31
9

394
441
481
358
504

402
322
356
272
345

554
426
246
31
9
694

925
901
998
1,122
81
4

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

12
0
-30
-57
-70
-135

32,869
33,918
35,338
37,692
39,619

377
422
380
31
6
612

485
465
597
880
820

217
279
247
11
7
229

533
320
393
291
31
2

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




in

310 83rd Annual Report, 1996
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-96 and Month-End 1996—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding

Period

U.S. Treasury and
federal agency securities

Total

Other
Federal
All
2
other Reserve
assets3

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

Special
drawing
rights
certificate
account

13,733
13,159
11,982
10,367
10,367

Loans

Float1

Total

Treasury
currency
outstanding 5

5,575
6,317
6,784
6,795
6,852

1965
1966
1967
1968
1969

40,768
44,316
49,150
52,937
57,154

40,478
43,655
48,980
52,937
7,1543

1970
1971
1972
1973
1974

62,142
70,804
71,230
80,495
85,714

62,142
69,481
71,119
80,395
84,760

0
1,323
111
100
954

335
39
1,981
1,258
299

4,261
4,343
3,974
3,099
2,001

57
261
106
68
999

1,123
1,068
1,260
1,152
3,195

67,918
76,515
78,551
86,072
92,208

10,732
10,132
10,410
11,567
11,652

400
400
400
400
400

7,147
7,710
8,313
8,716
9,253

1975
1976
1977
1978
1979

94,124
104,093
111,274
118,591
126,167

92,789
100,062
108,922
117,374
124,507

1,335
4,031
2,352
1,217
1,660

211
25
265
1,174
1,454

3,688
2,601
3,810
6,432
6,767

1,126
991
954
587
704

3,312
3,182
2,442
4,543
5,613

102,461
110,892
118,745
131,327
140,705

11,599
11,598
11,718
11,671
11,172

500
1,200
1,250
1,300
1,800

10,218
10,810
11,331
11,831
13,083

1980
1981
1982
1983
1984

130,592
140,348
148,837
160,795
169,627

128,038
136,863
144,544
159,203
167,612

2,554
3,485
4,293
1,592
2,015

1,809
1,601
717
918
3,577

4,467
1,762
2,735
1,605
833

776
195
1,480
418
0

8,739
9,230
9,890
8,728
12,347

146,383
153,136
63,659
172,464
186,384

11,160
11,151
11,148
11,121
11,096

2,518
3,318
4,618
4,618
4,618

13,427
13,687
13,786
15,732
16,418

1985
1986
1987
1988
1989

191,248
221,459
231,420
247,489
235,417

186,025
205,454
226,459
240,628
233,300

5,223
16,005
4,961
6,861
2,117

3,060
1,565
3,815
2,170
481

988
1,261
811
1,286
1,093

0
0
0
0
0

15,302
17,475
15,837
18,803
39,631

210,598
241,760
251,883
269,748
276,622

11,090
11,084
11,078
11,060
11,059

4,718
5,018
5,018
5,018
8,518

17,075
17,567
18,177
18,799
19,628

1990
1991
1992
1993
1994
1995
1996

259,786
288,429
308,518
349,865
378,746
394,693
414,715

241,432
272,531
300,424
336,653
368,156
380,831
393,132

18,354
15,898
8,094
13,212
10,590
13,862
21,583

190
218
675
94
223
136
85

2,566
1,026
3,350
963
740
231
5,297

0
0
0
0
0
0
0

39,880
34,524
30,278
33,394
33,441
33,483
32,222

302,421
324,197
342,820
384,316
413,150
428,543
452,319

11,058
11,059
11,056
11,053
11,051
11,050
11,048

10,018
10,018
8,018
8,018
8,018
10,168
9,718

20,404
21,017
21,452
22,101
22,912
23,951
24,798




Tables

311

14.—Continued

Factors absorbing reserve funds
Deposits, other
than reserves, with
Federa 1 Reserve Banks

Currency
in
circulation

Treasury
cash
hold- •
ings 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

Member bank
reserves 7

Other
Federal
Reserve
liaWith
bilities
Federal
and
Reserve
capital 3
Banks

Currency
and
coin 8

Required 9

Excess9-12

-238
-232
-182
-700
-901

Foreign

Other

Other
Federal
Reserve
accounts 3

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

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

431
460
345
317
185

1,156
2,020
1,855
2,542
2,113

148
294
325
251
418

,233
999
840
1,419 13
1,275 13

0
0
0
0
0

0
0
0
0
0

1,986
2,131
2,143
2,669
2,935

24,150
27,788
25,647
27,060
25,843

5,423
5,743
6,216
6,781
7,370

30,033
-460
32,496
1,035
98 12
32,044
35,268 -1,360
37,011 -3,798

86,547
93,717
103,811
114,645
125,600

483
460
392
240
494

7,285
10,393
7,114
4,196
4,075

353
352
379
368
429

1,090
1,357
1,187
1,256
1,412

0
0
0
0
0

0
0
0
0
0

2,968
3,063
3,292
4,275
4,957

26,052
25,158
26,870
31,152
29,792

8,036
8,628
9,421
10,538
11,429

35,197
35,461
37,615
42,694
44,217

136,829
144,774
154,908
171,935
183,796

441
443
429
479
513

3,062
4,301
5,033
3,661
5,316

411
505
328
191
253

617
781
,033
851
867

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
41,391
1,328
39,179
-945

197,488
211,995
230,205
247,649
260,456

550
447
454
395
450

9.351
7,588
5,313
8,656
6,217

480
287
244
347
589

,041
917
1,027
548
1,298

0
0
0
0
0

1,490
1,812
,687
,605
,618

5,940
6,088
7,129
7,683
8,486

27,141
46,295
40,097
37,742
36,713

286,965
307,759
334,706
365,299
403,762
424,192
450,660

561
636
508
377
335
270
249

8,960
17,697
7,492
14,809
7,161
5,979
7,742

369
968
206
386
250
386
167

242
,706
372
397
876
932
892

0
0
0
0
0
0
0

1,963
3,945
5,897
6,332
4,239
5,171
6,601

8,147
8,113
7,984
9,292
11,959
12,342
13,829

36,695
25,467
26,181
28,614
26,550
24,441
17,922

Treasury




n.a.

n.a.

-1,103 14
-1,535
-1,265
-893
-2,835

n.a.

312 83 rd Annual Report, 1996
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-96, and Month-End 1996—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding

Period

Total

1996
Jan. . . .
Feb. . . .
Mar. ...
Apr. ...
May ...
June ...
July . . . .
Aug. ...
Sept. ...
Oct. . . .
Nov. ...
Dec. . . .

Gold
stock4

Special
drawing
rights
certificate
account

Treasury
currency
outstanding 5

11,052
11,053
11,053
11,052
11,051
11,050
11,050
11,050
11,050
11,049
11,049
11,048

10,168
10,168
10,168
10,168
10,168
10,168
10,168
9,718
9,718
9,718
9,718
9,718

24,105
24,194
24,279
24,372
24,455
24,531
24,620
24,710
24,801
24,866
24,922
24,978

U.S. Treasury and
federal agency securities

Bought
outright10

Held
under
repurchase
agreement11

380,842
379,153
384,478
384,250
390,828
393,388
400,454
394,903
394,571
398,134
405,210
414,715

380,842
379,153
379,582
384,250
383,774
386,302
384,714
389,291
386,219
387,334
394,899
393,132

0
0
4,896
0
7,054
7,086
15,740
5,612
8,352
10,800
10,311
21,583

Loans

Float'

15
18
43
93
155
636
1,718
339
1,654
162
188
85

1,136
372
128
1,011
-203
22
446
298
625
1,270
907
5,297

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.
1. Beginning in 1960, figures reflect a minor change in
concept; see Federal Reserve Bulletin, vol. 47 (February
1961), p. 164.
2. Principally acceptances and, until August 21, 1959,
industrial loans, authority for which expired on that date.
3. For the period before April 16, 1969, includes the
total of Federal Reserve capital paid in, surplus, other
capital accounts, and other liabilities and accrued dividends, less the sum of bank premises and other assets,
and is reported as "Other Federal Reserve accounts";
thereafter, "Other Federal Reserve assets" and "Other
Federal Reserve liabilities and capital" are shown
separately.
4. Before January 30, 1934, includes gold held in
Federal Reserve Banks and in circulation.




Other
Federal
All
2
other Reserve
assets3

0
0
0
0
0
0
0
0
0
0
0
0

31,379
30,317
31,468
31,623
30,270
31,462
33,722
31,230
31,370
32,168
30,894
32,222

Total

413,372
410,860
455,057
452,063
421,050
394,046
436,340
426,770
428,220
431,734
440,210
452,319

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
holdings 6

412,690
414,008
416,289
417,746
422,411
424,801
428,767
432,118
430,429
433,268
440,943
450,660

273
279
314
288
265
280
261
277
286
281
273
249

Treasury

Foreign

Other

Other
Federal
Reserve
accounts 3

8,210
5,632
7,021
11,042
3,757
7,701
6,836
5,149
7,700
5,897
4,857
7,742

165
209
191
166
160
183
166
171
265
176
170
167

406
318
348
360
300
326
278
293
368
363
292
892

0
0
0
0
0
0
0
0
0
0
0
0

10. Beginning in 1969, includes securities loaned—
fully guaranteed by U.S. government securities pledged
with Federal Reserve Banks—and excludes securities
sold and scheduled to be bought back under matched
sale-purchase transactions.
11. Beginning December 1, 1966, includes federal
agency obligations held under repurchase agreements and
beginning September 29, 1971, includes federal agency
issues bought outright.
12. Beginning with week ending November 15, 1972,
includes $450 million of reserve deficiencies on which
Federal Reserve Banks are allowed to waive penalties for
a transition period in connection with bank adaptation to
Regulation J as amended, effective November 9, 1972.
Allowable deficiencies are as follows (beginning with
first statement week of quarter, in millions): 1973—Ql,
$279; Q2, $172; Q3, $112; Q4, $84; 1974—Ql, $67; Q2,
$58. The transition period ended with the second quarter
of 1974.




Required
clearing
bal-

Other
Federal
Reserve
liaWith
bilities
Federal
and
Reserve
capital3
Banks

5,193
5,437
5,561
5,770
5,879
5,895
5,972
6,059
6,269
6,516
6,556
6,601

11,832
13,062
12,714
12,559
13,148
13,371
14,817
14,007
13,744
14,066
14,219
13,829

Member bank
reserves8

Currency
and
coin8

Required 9

Ex-

19,929
16,331
19,180
14,637
20,806
18,699
25,080
14,175
14,728
16,801
15,575
17,922

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 83rd Annual Report, 1996
15. Number of Banking Offices in the United States, December 31, 1995 and 1996
(Commercial banks'
Type of office,
number, and change

Member

Total
Total

Nonmember
Total

National

State

Statechartered
savings
banks

BANKS

Number, Dec. 31, 1995 ..

10,422

9,910

3,863

2,822

1,041

6,047

512

166

148

59

52

7

89

18

-529

-518

-263

-191

-72

-255

-11

-62
0

-50
0

-19
61

-14
18

-5
43

-31
-61

-12
0

Changes during 1996
New banks
Banks converted
into branches
Ceased banking
operation2
Other3
Net change

-425

-420

-162

-135

-27

-258

-5

Number, Dec. 31,1996 ..

9,997

9,490

3,701

2,687

1,014

5,789

507

61,518

58,072

39,718

29,790

9,928

18,354

3,446

2,688

2,487

1,673

1,215

458

814

201

529
-1,949

516
-1,870
43

290
-1,537
819

213
-1,035
1 147

77
-502
-328

226
-333
-776

13
-79
-43

BRANCHES AND
ADDITIONAL OFFICES

Number, Dec. 31, 1995 ..
Changes during 1996
New branches
Branches converted
from banks .
...
Discontinued2
Other3

o
1,268

1,176

1,245

1,540

-295

-69

92

62,786

59,248

40,963

31,330

9,633

18,285

3,538

Net change
Number, Dec. 31,1996 ..

1. For purposes of this table, banks are entities that
are defined as banks in the Bank Holding Company Act
as amended and implemented in Federal Reserve Regulation Y. Banks generally consist of any institution that
accepts demand deposits and is engaged in the business
of making commercial loans or any institution that is




defined as an insured bank in section 3(h) of the FDIC
Act. Covers entities in the United States or its territories
or possessions (affiliated insular areas).
2. Institutions that no longer meet the Regulation Y
definition of bank.
3. 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, 1996
Chemical Bank, New York, New York to merge
with Chase Manhattan Bank, N.A., New York,
New York1

Centura Bank, Rocky Mount, North Carolina
to merge with First Commercial Bank, Asheville,
North Carolina

SUMMARY REPORT BY THE ATTORNEY GENERAL

SUMMARY REPORT BY THE ATTORNEY GENERAL

(12/22/95)
The proposed transaction would not be significantly adverse to competition.

(12/22/95)
The proposed transaction would not be significantly adverse to competition.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(1/5/96)
The applicant has assets of $142 billion; the target
has assets of $98 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.

(1/19/96)
The applicant has assets of $5.3 billion; the target
has assets of $177 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 Clarke County, Berryville, Virginia to
acquire assets and liabilities o/the Stephens City,
Virginia, branch of First Union National Bank
of Virginia, Roanoke, Virginia

PremierBank & Trust, Elyria, Ohio to acquire
assets and liabilities of 11 branches of Bank One
Cleveland, N.A., Cleveland, Ohio

SUMMARY REPORT BY THE ATTORNEY GENERAL

(1/25/96)
The proposed transaction would not be significantly adverse to competition.

(12/12/95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

SUMMARY REPORT BY THE ATTORNEY GENERAL

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(1/11/96)
The applicant has assets of $114 million; the target
has assets of $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.

(1/25/96)
The applicant has assets of $540 million; the targets have assets of $119 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.

Home Bank, Signal Hill, California to acquire
assets and liabilities of the Signal Hill branch of
Southern California Bank, Downey, California

United Jersey Bank, Hackensack, New Jersey
to merge with Summit Bank, Chatham,
New Jersey

SUMMARY REPORT BY THE ATTORNEY GENERAL

SUMMARY REPORT BY THE ATTORNEY GENERAL

(1/8/96)
The proposed transaction would not be significantly adverse to competition.

(12/22/95)
The proposed transaction would not be significantly adverse to competition.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(1/17/96)
The applicant has assets of $425 million; the target
has assets of $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.

(2/5/96)
The applicant has assets of $13.1 billion; the target
has assets of $5.6 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.

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.



United Jersey Bank, Hackensack, New Jersey
to merge with Flemington National Bank and
Trust Company of New Jersey, Flemington,
New Jersey
SUMMARY REPORT BY THE ATTORNEY GENERAL

(12/22/95)

316 83rd Annual Report, 1996
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1996—Continued
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(2/5/96)
The applicant has assets of $13.1 billion; the target
has assets of $289 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
Fifth Third Bank, Cincinnati, Ohio to acquire
assets and liabilities of 8 branches of NBD Bank,
Dayton, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL

(12/22/95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(2/7/96)
The applicant has assets of $9.1 billion; the targets
have assets of $177 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
Fifth Third Bank of Columbus, Columbus,
Ohio to acquire assets and liabilities of 17
branches of NBD Bank, Columbus, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL

(12/22/95)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(2/7/96)
The applicant has assets of $1.0 billion; the targets
have assets of $319 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
The Bank of Waverly, Waverly, Virginia to
acquire assets and liabilities of the Courtland
and Franklin branches of First Union National
Bank of Virginia, Roanoke, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL

(1/25/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(2/15/96)
The applicant has assets of $57 million; the targets
have assets of $36 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.
Valliwide Bank, Fresno, California to merge
with Commerce Bank of San Luis Obispo, NA,
San Luis Obispo, California
SUMMARY REPORT BY THE ATTORNEY GENERAL

(2/6/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(2/20/96)
The applicant has assets of $1.6 billion; the target
has assets of $103 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 Ohio Bank, Findlay, Ohio to acquire assets
and liabilities of the Carey, Ottawa, Glandorf,
Leipsic, and Columbus Grove branches of Society National Bank, Cleveland, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL

(1/25/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(2/22/96)
The applicant has assets of $516 million; the targets have assets of $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.
Chippewa Valley Bank, Rittman, Ohio to
acquire assets and liabilities of the Doylestown
and Clinton branches of First National Bank of
Ohio, Akron, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL

(2/6/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(2/23/96)
The applicant has assets of $132 million; the targets have assets of $30 million. The parties operate in the same market. The banking factors and
considerations relating to the convenience and

Tables

317

16.—Continued

needs of the community are consistent with
approval.
Security Dollar Bank, Niles, Ohio to acquire
assets and liabilities of one branch of National
City Bank, Northeast, Akron, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL

(2/6/96)
The proposed transaction would not be significantly adverse to competition.

SUMMARY REPORT BY THE ATTORNEY GENERAL

(2/6/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(3/13/96)
The applicant has assets of $646 million; the target
has assets of $406 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

(2/29/96)
The applicant has assets of $134 million; the target
has assets of $1 million. The parties operate in the
same market. The banking factors and considerations relating to the convenience and needs of the
community are consistent with approval.
The State Bank of Jerseyville, Jerseyville,
Illinois to acquire assets and liabilities of the
Brighton, Illinois, branch of Mercantile Bank
of Illinois, Alton, Illinois
SUMMARY REPORT BY THE ATTORNEY GENERAL

(2/28/96)
The proposed transaction would not be significantly adverse to competition.

F&M Bank, Kaukauna, Wisconsin to acquire
assets and liabilities of the Little Chute Branch
of TCF Bank Wisconsin, Milwaukee, Wisconsin
SUMMARY REPORT BY THE ATTORNEY GENERAL

(2/28/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(3/21/96)
The applicant has assets of $104 million; the target
has assets of $500 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.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(3/5/96)
The applicant has assets of $96 million; the target
has assets of $10 million. The parties do not
operate in the same market. The banking factors
and considerations relating to the convenience and
needs of the community are consistent with
approval.

F&M Bank-Lakeland, Woodruff, Wisconsin
to merge with Bradley Bank, Tomahawk,
Wisconsin
SUMMARY REPORT BY THE ATTORNEY GENERAL

(3/14/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

Texas State Bank, McAUen, Texas to merge with
The Border Bank, Hidalgo, Texas
SUMMARY REPORT BY THE ATTORNEY GENERAL

(2/6/96)
The proposed transaction would not be significantly adverse to competition.
j

(3/21/96)
The applicant has assets of $102 million; the target
has assets of $36 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(3/13/96)
The applicant has assets of $646 million; the target
has assets of $120 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.

Capital City Bank, Tallahassee, Tallahassee,
Florida to merge with First Federal Bank, Tallahassee, Florida

Texas State Bank, McAllen, Texas to merge with
First State Bank & Trust, Mission, Texas



BASIS FOR APPROVAL BY THE FEDERAL RESERVE

SUMMARY REPORT BY THE ATTORNEY GENERAL

(3/28/96)
The proposed transaction would not be significantly adverse to competition.
(4/1/96)

318 83rd Annual Report, 1996
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1996—Continued
The applicant has assets of $670 million; the target
has assets of $232 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.

erations relating to the convenience and needs of
the community are consistent with approval.
Elkridge Bank, Elkridge, Maryland to merge
with Odenton Federal Savings and Loan Association, Odenton, Maryland
SUMMARY REPORT BY THE ATTORNEY GENERAL

Johnstown Bank
& Trust Company,
Johnstown, Pennsylvania to merge with The
Moxham National Bank of Johnstown, Johnstown, Pennsylvania

(2/28/96)
The proposed transaction would not be significantly adverse to competition.

SUMMARY REPORT BY THE ATTORNEY GENERAL

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(4/4/96)
The proposed transaction would not be significantly adverse to competition.

(4/10/96)
The applicant has assets of $195 million; the target
has assets of $34 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

(4/2/96)
The applicant has assets of $592 million; the target
has assets of $196 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.

Marine Midland Bank, Buffalo, New York to
acquire assets and liabilities of River Bank
America, New Rochelle, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL

Johnstown Bank
& Trust
Company,
Johnstown, Pennsylvania to merge with The
First National Bank of Garrett, Garrett,
Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL

(4/4/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(4/2/96)
The applicant has assets of $592 million; the target
has assets of $44 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.
Johnstown Bank
& Trust Company,
Johnstown, Pennsylvania to merge with The
Armstrong
County
Trust
Company,
Kittanning, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL

(2/28/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(4/10/96)
The applicant has assets of $592 million; the target
has assets of $51 million. The parties operate in
the same market. The banking factors and consid


(3/28/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(4/12/96)
The applicant has assets of $20.3 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.
Vectra Bank, Denver, Colorado to merge with
Southwest State Bank, Denver, Colorado
SUMMARY REPORT BY THE ATTORNEY GENERAL

(3/14/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(4/17/96)
The applicant has assets of $416 million; the target
has assets of $114 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
Crestar Bank (MD), Bethesda, Maryland to
acquire assets and liabilities of Mellon Bank
(MD), Rockville, Maryland
SUMMARY REPORT BY THE ATTORNEY GENERAL

(3/28/96)

Tables

319

16.—Continued

The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(4/19/96)
The applicant has assets of $1.6 billion; the target
has assets of $220 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 applicant has assets of $131 million; the target
has assets of $130 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.
Pioneer Bank, Mapleton, Minnesota to merge
with The First National Bank of Elmore,
Elmore, Minnesota
SUMMARY REPORT BY THE ATTORNEY GENERAL

Midland American Bank, Midland, Texas to
merge with Stanton National Bank, Stanton,
Texas

(3/28/96)
The proposed transaction would not be significantly adverse to competition.

SUMMARY REPORT BY THE ATTORNEY GENERAL

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(3/14/96)
The proposed transaction would not be significantly adverse to competition.

(5/20/96)
The applicant has assets of $27 million; the target
has assets of $25 million. The parties do not
operate in the same market. The banking factors
and considerations relating to the convenience and
needs of the community are consistent with
approval.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(4/24/96)
The applicant has assets of $140 million; the target
has assets of $20 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.

Wesbanco Bank Wheeling, Wheeling, West
Virginia to merge with Bank of Weirton,
Weirton, West Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL

Triangle Bank, Raleigh, North Carolina to
acquire assets and liabilities o/the Scotland Neck
branch of Southern Bank and Trust Company,
Mount Olive, North Carolina

(5/14/96)
The proposed transaction would not be significantly adverse to competition.

SUMMARY REPORT BY THE ATTORNEY GENERAL

(5/21/96)
The applicant has assets of $618 million; the target
has assets of $177 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.

(3/28/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(4/24/96)
The applicant has assets of $820 million; the target
has assets of $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.
Republic Bank, Philadelphia, Pennsylvania to
merge with First Executive Bank, Philadelphia,
Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL

(3/28/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(5/2/96)



BASIS FOR APPROVAL BY THE FEDERAL RESERVE

Harris Trust and Savings Bank, Chicago,
Illinois to acquire assets and liabilities of 63
branches of Household Bank, F.S.B., Prospect
Heights, Illinois
SUMMARY REPORT BY THE ATTORNEY GENERAL

(6/10/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(5/29/96)
The applicant has assets of $13.1 billion; the targets have deposits of $3.0 billion. The parties
operate in the same markets. The banking factors
and considerations relating to the convenience and

320 83rd Annual Report, 1996
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1996—Continued
needs of the community are consistent with
approval.
Centura Bank, Rocky Mount, North Carolina
to acquire assets and liabilities of the Greensboro, Raleigh, and Wilmington branches of
Essex Savings Bank, F.S.B., Virginia Beach,
Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL

(5/14/96)
The proposed transaction would not be significantly adverse to competition.

SUMMARY REPORT BY THE ATTORNEY GENERAL

(6/26/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/11/96)
The applicant has assets of $127 million; the target
has assets of $13 million. The parties do not
operate in the same market. The banking factors
and considerations relating to the convenience and
needs of the community are consistent with
approval.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(5/30/96)
The applicant has assets of $5.5 billion; the targets
have assets of $76 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.
Croghan Colonial Bank, Fremont, Ohio to
merge with Union Bank and Savings Company,
Bellevue, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL

(4/24/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(6/10/96)
The applicant has assets of $246 million; the target
has assets of $97 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.
Baylake Bank, Sturgeon Bay, Wisconsin to
merge with The Bank, Manawa, Wisconsin
SUMMARY REPORT BY THE ATTORNEY GENERAL

(4/24/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(6/12/96)
The applicant has assets of $316 million; the target
has assets of $58 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.
Silsbee State Bank, Silsbee, Texas to acquire
assets and liabilities of the Buna branch of First
Bank of Texas, Tomball, Texas



Tri-City Bank and Trust Company, Blountville,
Tennessee to acquire assets and liabilities of
the Kingsport and Johnson City branches of
National Bank of Commerce, Memphis,
Tennessee
SUMMARY REPORT BY THE ATTORNEY GENERAL

(6/26/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/18/96)
The applicant has assets of $237 million; the targets have assets of $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.
Centura Bank, Rocky Mount, North Carolina
to merge with First Community Bank, Gastonia,
North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL

(6/10/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/19/96)
The applicant has assets of $5.6 billion; the target
has assets of $124 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.
Compass Bank, Jacksonville, Florida to merge
with Community First Bank, Jacksonville,
Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL

(5/14/96)

Tables

321

16.—Continued

The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/22/96)
The applicant has assets of $607 million; the target
has assets of $313 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 applicant has assets of $1.3 billion; the target
has assets of $76 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 FirstSouth Bank, Burlington,
North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL

DeMotte State Bank, DeMotte, Indiana to
acquire assets and liabilities of the Hebron
branch of NBD Bank, N.A., Indianapolis,
Indiana

(7/23/96)
The proposed transaction would not be significantly adverse to competition.

SUMMARY REPORT BY THE ATTORNEY GENERAL

(8/30/96)
The applicant has assets of $5.8 billion; the target
has assets of $156 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.

(7/11/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/23/96)
The applicant has assets of $140 million; the target
has assets of $10 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
Triangle Bank, Raleigh, North Carolina to
merge with Granville United Bank, Oxford,
North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL

(7/23/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(8/2/96)
The applicant has assets of $836 million; the target
has assets of $60 million. The parties do not
operate in the same market. The banking factors
and considerations relating to the convenience and
needs of the community are consistent with
approval.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

First Banking System-Burlington, Burlington,
Wisconsin to acquire assets and liabilities o/the
Genoa City and Pell Lake, Wisconsin, branches
of American National Bank and Trust Company of Chicago, Chicago, Illinois
SUMMARY REPORT BY THE ATTORNEY GENERAL

(7/31/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(9/5/96)
The applicant has assets of $229 million; the targets have deposits of $18 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 The Bank of Commerce, N.A., Auburn,
California

First Community Bank, Buckhannon, West
Virginia to acquire assets and liabilities of the
Grafton and Rowlesburg, West Virginia,
branches of Huntington National Bank of
West Virginia, Charleston, West Virginia

SUMMARY REPORT BY THE ATTORNEY GENERAL

SUMMARY REPORT BY THE ATTORNEY GENERAL

(7/23/96)
The proposed transaction would not be significantly adverse to competition.

(8/8/96)
The proposed transaction would not be significantly adverse to competition.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(8/21/96)



(9/11/96)

322 83rd Annual Report, 1996
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1996—Continued
The applicant has assets of $340 million; the targets have deposits of $24 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 First Trust & Savings Bank, Aurelia, Iowa
to merge with Cleghorn State Bank, Cleghorn,
Iowa
SUMMARY REPORT BY THE ATTORNEY GENERAL

(7/31/96)
The proposed transaction would not be significantly adverse to competition.

Summit Bank, Hackensack, New Jersey to
merge with Central Jersey Savings Bank, SLA,
East Brunswick, New Jersey
SUMMARY REPORT BY THE ATTORNEY GENERAL

(10/1/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(10/18/96)
The applicant has assets of $19.6 billion; the target
has assets of $462 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(9/13/96)
The applicant has assets of $18 million; the target
has assets of $12 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.
1st United Bank, Boca Raton, Florida to merge
with First National Bank of Lake Park,
Lake Park, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL

(8/26/96)
The proposed transaction would not be significantly adverse to competition.

Compass Bank, Jacksonville, Florida to merge
with Enterprise National Bank of Jacksonville,
Jacksonville, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL

(10/1/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(10/22/96)
The applicant has assets of $651 million; the target
has assets of $159 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

(10/17/96)
The applicant has assets of $446 million; the target
has assets of $67 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.
Marine Midland Bank, Buffalo, New York to
acquire assets and liabilities of Morgan Guaranty Trust Company of New York, New York,
New York
SUMMARY REPORT BY THE ATTORNEY GENERAL

(10/1/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(10/18/96)
The applicant has assets of $22.6 billion; the target
has assets of $3.0 billion. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.



Manufacturers and Traders Trust Company,
Buffalo, New York to acquire assets and liabilities of the Ossining and White Plains branches
of GreenPoint Bank, New York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL

(10/29/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(10/30/96)
The applicant has assets of $10.8 billion; the targets have assets of $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.
Texas Bank, Weatherford, Texas to acquire
assets and liabilities of the Benbrook, Burleson,
Cleburne, Crowley, Glen Rose, Granbury,
Hillsboro, and Weatherford branches of Bank
of America Texas, NA, Irving, Texas

Tables

323

16.—Continued

SUMMARY REPORT BY THE ATTORNEY GENERAL

(10/29/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(11/20/96)
The applicant has assets of $332 million; the targets have assets of $148 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.
Summit Bank, Hackensack, New Jersey to
merge with Bank of Mid-Jersey, Bordentown,
New Jersey
SUMMARY REPORT BY THE ATTORNEY GENERAL

(11/21/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(12/6/96)
The applicant has assets of $19.5 billion; the target
has assets of $650 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.
Tehama County Bank, Red Bluff, California to
acquire assets and liabilities of the Willows and
Orland branches of Wells Fargo Bank, N.A.,
San Francisco, California
SUMMARY REPORT BY THE ATTORNEY GENERAL

(12/2/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(12/11/96)
The applicant has assets of $138 million; the targets have assets of $22 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.
Citizens Banking Co., Sandusky, Ohio to
acquire assets and liabilities of three branches of
EST National Bank, Elyria, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL

(11/21/96)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(12/24/96)
The applicant has assets of $245 million; the targets have assets of $18 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.

324 83rd Annual Report, 1996
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1996—Continued
Institution'

Firstar Bank Minocqua, Minocqua, Wisconsin
Merger
Firstar Bank Madison, N.A., Madison, Wisconsin
Firstar Bank
Merger
Firstar Bank
Firstar Bank
Firstar Bank
Firstar Bank
Firstar Bank
Firstar Bank
Firstar Bank
Firstar Bank
Firstar Bank
Firstar Bank

Wisconsin, Madison, Wisconsin
Wausau, N.A., Wausau, Wisconsin
Grantsburg, N.A., Grantsburg, Wisconsin
Eau Claire, N.A., Eau Claire, Wisconsin
Rice Lake, N.A., Rice Lake, Wisconsin
Manitowoc, Manitowoc, Wisconsin
Oshkosh, N.A., Oshkosh, Wisconsin
Green Bay, Green Bay, Wisconsin
Fond du Lac, N.A., Fond du Lac, Wisconsin
Sheboygan, N.A., Sheboygan, Wisconsin
Appleton, Appleton, Wisconsin

Assets
(millions
of dollars)

96

1 200

Chemical Bank Bay Area, Bay City, Michigan
Merger
Chemical Bank Huron Standish Michigan

253

1-17-96

117
1-22-96

58
62

1-24-96

27
608

1-25-96

1,158

First Community Bank Glasgow Montana
Merger
Culbertson State Bank Culbertson Montana

85

Vectra Bank Denver Colorado
Merger
Vectra Bank of Boulder, Boulder, Colorado

313

First Virginia Bank-Commonwealth, Grafton, Virginia
Merger
First Virginia Bank of Tidewater (4 branches), Norfolk, Virginia ....

160

Farmers Bank of Maryland, Annapolis, Maryland
Merger
First Virginia Bank-Maryland (Edgewater branch),
Upper Marlboro, Maryland

590




1-10-96

173
128
292
163
269
322
267
417
575
188
138

Mercantile Bank Overland Park Kansas
Merger
Mercantile Bank of Kansas City, Kansas City, Missouri

1-10-96

1,100

Community Bank of Mississippi, Forest, Mississippi
Merger
Community Bank (3 branches), Indianola, Mississippi

Farmers State Bank of Conrad, Conrad, Montana
Merger
Farmers State Bank of Cut Bank, Cut Bank, Montana

Date of
approval

2-1-96

16
2-1-96

80
2-29-96

63

7

2-29-96

Tables 325
16.—Continued

Institution'

Westamerica Bank, San Rafael, California
Merger
Napa Valley Bank, Napa, California
Rocky Mountain Bank, Billings, Mountain
Merger
Security State Bank, Plenty wood, Montana
Citizens Commercial & Savings Bank, Flint, Michigan
Merger
Second National Bank of Saginaw, Saginaw, Michigan
National Bank of Royal Oak, Royal Oak, Michigan
State Bank of Standish, Standish, Michigan
Second National Bank of Bay City, Bay City, Michigan
Grayling State Bank, Grayling, Michigan
Morgan Guaranty Trust Co. of NY, New York, New York ...
Merger
J.R Morgan Delaware, Wilmington, Delaware
Signet Bank, Richmond, Virginia
Merger
Signet Bank, N.A., Falls Church, Virginia
First Virginia Bank-Shenandoah Valley, Woodstock, Virginia
Merger
First Virginia Bank-Central, Charlottesville, Virginia
West One Bank, Idaho, Boise, Idaho
Merger
U.S. Bank of Idaho, N.A., Coeur d'Alene, Idaho
F & M Bank-Hallmark, Springfield, Virginia
Merger
F & M Bank-Potomac, Herndon, Virginia
Fairfax Bank & Trust Company, Fairfax, Virginia

Assets
(millions
of dollars)

Date of
approval

2,120

3-8-96

275
149

3-12-96

63
2,053

4-11-96

710
175
110
166
83
143,400

4-29-96

3,000
10,700

4-29-96

640
392

5-23-96

114
4,700

6-17-96

127
126

7-10-96

63
255

California United Bank, Encino, California
Merger
California United Bank, NA, Encino, California

7-24-96
434
381

BancFirst, Oklahoma City, Oklahoma
Merger
The Bank of Commerce, McLoud, Oklahoma

7-26-96
1,200
18

Boulder Valley Bank & Trust, Boulder, Colorado
Merger
Mountain Parks Bank-East, Evergreen, Colorado
Mountain Parks Bank-West, Breckenridge, Colorado
The Bank of Louisville, Louisville, Colorado



7-26-96
72
191
157
39

326 83rd Annual Report, 1996
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1996—Continued
Institution'

Yellowstone
Merger
Yellowstone
Yellowstone
Yellowstone
Mercantile
Merger
Mercantile
Mercantile
Mercantile
Mercantile
Mercantile
Mercantile
Mercantile
Mercantile
Mercantile
Mercantile
Mercantile
Mercantile
Mercantile

Assets
(millions
of dollars)

Bank, Laurel, Montana

68

Bank, Absarokee, Montana
Bank, Billings, Montana
Bank, Columbus, Montana

Date of
approval

15
34
41

Bank of Polk County, Des Moines, Iowa ...

327

Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank

8-20-96

83
103
65
40
49
70
143
45
68
49
42
36
99

of
of
of
of
of
of
of
of
of
of
of
of
of

the Bluffs, Council Bluffs, Iowa ...
Boone, Boone, Iowa
Centerville, Centerville, Iowa
Chariton, Chariton, Iowa
Clay County, Spencer, Iowa
Humboldt County, Humboldt, Iowa
Jasper County, Newton, Iowa
Lyon County, Rock Rapids, Iowa ..
Marshalltown, Marshalltown, Iowa
Mount Ayr, Mount Ary, Iowa
Onawa, Onawa, Iowa
Osceola County, Sibley, Iowa
Pella, Pella, Iowa

Crestar Bank MD, Bethesda, Maryland
Merger

1,700

Crestar Bank, FSB, Baltimore, Maryland

2,500

Crestar Bank DC, Vienna, Virginia

1,400

8-28-96

Merger
Crestar Bank, Richmond, Virginia
Crestar Bank MD, Bethesda, Maryland

9-26-96

14,200
4,200

The Bank of New York, New York, New York
Merger
The Bank of New York, NJ, West Paterson, New Jersey
The Putnam Trust Company, Greenwich, Connecticut ..

41,559

First Virginia Bank-Colonial, Richmond, Virginia
Merger
First Virginia Bank-South Hill, South Hill, Virginia ...

736

10-7-96

4,061
766
10-10-96

86

Bank of Gainesville, Gainesville, Missouri
Merger
Douglas County Bank, Ava, Missouri

82

First Knoxville Bank, Knoxville, Tennessee
Merger
Bank of Madisonville, Madisonville, Tennessee
United Southern Bank, Morristown, Tennessee

87




9-25-96

10-16-96

33

86
37

10-25-96

Tables

327

16.—Continued
Assets
(millions
of dollars)

Institution'

Chase Manhattan Bank, New York, New York
Merger
Chase Manhattan Bank, NA, Morristown, New Jersey

Date of
approval

261,859

10-28-96

5,427

Fifth Third Bank of Kentucky, Inc., Louisville, Kentucky
Merger
Fifth Third Savings Bank of Western Kentucky, F.S.B.,
Mayfield, Kentucky

1,800

Fifth Third Bank of Northeastern Ohio, Cleveland, Ohio
Merger
Fifth Third Savings Bank of Northern Ohio, F.S.B., Kent, Ohio

2,557

Fifth Third Bank of Northern Kentucky, Inc., Florence, Kentucky ...
Merger
Fifth Third Savings Bank of Northern Kentucky, F.S.B.,
Hebron, Kentucky

1,046

Kent City State Bank, Kent City, Michigan
Merger
The Grant State Bank, Grant, Michigan

254

87

11-8-96

26

Mercantile Bank of Lawrence, Lawrence, Kansas
Merger
Mercantile Bank, Overland Park, Kansas

258




11-1-96

201

214

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

11-1-96

219

Aliant Bank, Alexander City, Alabama
Merger
First Montgomery Bank, Montgomery, Alabama .
Elmore County Bank, Wetumpka, Alabama

FCNB Bank, Frederick, Maryland .
Merger
Elkridge Bank, Elkridge, Maryland

11-1-96

11-15-96

178
64
12-2-96

1,700
521

12-11-96

219
include the acquisition of certain assets and liabilities of
the affiliated bank,

328 83rd Annual Report, 1996
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1996—Continued
Mergers Approved Involving a Nonoperating
Institution with an Existing Bank
The following transactions have no significant
effect on competition; they merely facilitate the
acquisition of the voting shares of a bank (or
banks) by a holding company. In such cases, the
summary report by the Attorney General indicates
that the transaction will merely combine an existing bank with a nonoperating institution; in consequence, and without regard to the acquisition of

the surviving bank by the holding company, the
merger would have no effect on competition. The
Board of Governors, the Federal Reserve Bank, or
the Secretary of the Board, whichever approved
the application, determined that the proposal
would, in itself, have no adverse competitive
effects and that the financial factors and considerations relating to the convenience and needs of the
community were consistent with approval.

Assets
(millions
of dollars)2

Institution'

Date of
approval

Adams Bank & Trust Company, Ogallala, Nebraska
Merger
Adams Savings & Loan Association of Grant, Chappell, Nebraska ...

160

1-17-96

Adams Bank & Trust Company, Ogallala, Nebraska .
Merger
Adams Savings & Loan Association of North Platte,
Chappell, Nebraska

160

1-18-96

Mercantile Bank of Jackson County, Kansas City, Missouri
Merger
Mercantile Bank of Kansas City, Kansas City, Missouri ....

1-25-96
1,158

Bank of Isle of Wight, Smithfield, Virginia
Merger
BIW Acquisition Bank, Suffolk, Virginia ..

34

2-8-96

Bank of Tazewell County, Tazewell, Virginia
Merger
NBI Interim Bank, Blacksburg, Virginia

177

4-24-96

Citizens Acquisition Subsidiary, Inc., Tazewell, Virginia
Merger
Citizens Bank of Tazewell, Tazewell, Virginia
Adams Bank & Trust Company, Ogallala, Nebraska
Merger
Adams Savings & Loan Association of Chappell, Chappell, Nebraska.
BH Acquisition Subsidiary, Inc., Mechanicsville, Virginia
Merger
Hanover Bank, Mechanicsville, Virginia
1. Each proposed transaction was to be effected under
the charter of the first-named bank. The entries are in
chronological order of approval.




5-22-96
49
160

5-29-96

9-13-96
99

2. Where no assets are listed, the bank is newly organized and not in operation,

Federal Reserve
Directories and Meetings




330 83rd Annual Report, 1996

Board of Governors of the Federal Reserve System
December 31,1996
Members
ALAN GREENSPAN, of New York, Chairmanx
ALICE M. RlVLlN, of Pennsylvania, Vice Chair1

of Iowa
B. LINDSEY, of Virginia
EDWARD W. KELLEY, JR., of Texas
JANET L. YELLEN, of California
LAURENCE H. MEYER, of Missouri
SUSAN

M.

Term expires January 31,
2006
.. 2010

1998
2000
2004
2008
2002

PHILLIPS,

LAWRENCE

Officers
OFFICE OF BOARD MEMBERS

OFFICE OF THE SECRETARY

Joseph R. Coyne, Assistant to the Board
Donald J. Winn, Assistant to the Board
Theodore E. Allison, Assistant to the Board
for Federal Reserve System Affairs
Lynn Fox, Deputy Congressional Liaison
Bob Stahly Moore, Special Assistant
to the Board
Winthrop P. Hambley, Special Assistant
to the Board
^.
^ TT7
. , , .
f
o
Diane E. Werneke, Special Assistant
to the Board

William W. Wiles, Secretary
Jennifer J. Johnson, Deputy Secretary
Barbara R. Lowrey, Associate Secretary
and Ombudsman

Portia W. Thompson, Equal Employment
Opportunity Programs Adviser

LEGAL DIVISION
J. Virgil Mattingly, Jr., General Counsel
Scott G. Alvarez, Associate General
Counsel
n - u ,1 A * A L +
A
•.
Richard M. Ashton, Associate
General Counsel
Oliver Ireland, Associate General
Counsel

Kathleen M. O'Day, Associate General
Counsel

„ . . TT ,, r u .
„
,
A .
Kathenne H. Wheatley, Assistant General

1. The designations as Chairman and Vice Chair
expire on June 20, 2000, and June 24, 2000, respectively,
unless the service of these members of the Board shall
Digitizedhave FRASER sooner.
for terminated



DIVISION OF INTERNATIONAL FINANCE
T m m a n ) staff Director
. , c .
T
T ~
Larry J. Promisel, Steiwor
Associate Director
^, , T o .
.
o
Charles J. Siegman, 5emOr
Associate Director
,
,
.
~.
n , „, „
D a l e W Henderson
"
> Associate Director
David H. Howard, Senior Adviser
Donald B. Adams, Assistant Director
Thomas A. Connors, Assistant Director
£dwin M

Peter Hooper m
Kafen H

Joh

Assistant
Assistant

_ f . T mjr '
Catherine L. Mann, Assistant
., T '
.
n , t XTr o
Ral h W S m i t h Jr
P
' " Assistant

Director
Director

^.
Director
^.
Director

DIVISION OF MONETARY AFFAIRS

Donald L. Kohn, Director
David E. Lindsey, Deputy Director
Brian R Madi an
g ' Associate Director
Richard D. Porter, Deputy Associate
Director
Vincent R. Reinhart, Assistant Director
Normand R.V. Bernard, Special Assistant
to the Board

Directories and Meetings 331

Board of Governors—Continued
DIVISION OF RESEARCH
AND STATISTICS

DIVISION OF CONSUMER
AND COMMUNITY AFFAIRS

Michael J. Prell, Director
Edward C. Ettin, Deputy Director
David J. Stockton, Deputy Director
Martha Bethea, Associate Director
William R. Jones, Associate Director
Myron L. Kwast, Associate Director
Patrick M. Parkinson, Associate Director
Thomas D. Simpson, Associate Director
Lawrence Slifman, Associate Director
Martha S. Scanlon, Deputy
Associate Director
Peter A. Tinsley, Deputy
Associate Director
David S. Jones, Assistant Director
Stephen A. Rhoades, Assistant Director
Charles S. Struckmeyer, Assistant Director
Alice Patricia White, Assistant Director
Joyce K. Zickler, Assistant Director
John J. Mingo, Senior Adviser
Glenn B. Canner, Adviser

Griffith L. Garwood, Director

DIVISION OF BANKING SUPERVISION
AND REGULATION

Richard Spillenkothen, Director
Stephen C. Schemering, Deputy Director
William A. Ryback, Associate Director
Herbert A. Biern, Deputy Associate
Director
Roger T. Cole, Deputy Associate Director
James I. Garner, Deputy Associate Director
Howard A. Amer, Assistant Director
Gerald A. Edwards, Jr., Assistant Director
Stephen M. Hoffman, Jr., Assistant
Director
James V. Houpt, Jr., Assistant Director
Jack P. Jennings, Assistant Director
Michael G. Martinson, Assistant Director
Rhoger H Pugh, Assistant Director
Sidney M. Sussan, Assistant Director
Molly S. Wassom, Assistant Director
William C. Schneider, Jr., Project Director,
National Information Center




Glenn E. Loney, Associate Director
Dolores S. Smith, Associate Director
Maureen P. English, Assistant Director
Irene Shawn McNulty, Assistant Director
DIVISION OF FEDERAL RESERVE BANK
OPERATIONS AND PAYMENT SYSTEMS

Clyde H. Farnsworth, Jr., Director
David L. Robinson, Deputy Director
(Finance and Control)
Louise L. Roseman, Associate Director
Charles W. Bennett, Assistant Director
Jack Dennis, Jr., Assistant Director
Earl G. Hamilton, Assistant Director
Jeffrey C. Marquardt, Assistant Director
John H. Parrish, Assistant Director
Florence M. Young, Assistant Director
OFFICE OF STAFF DIRECTOR
FOR MANAGEMENT

S. David Frost, Staff Director
Sheila Clark, Equal Employment
Opportunity Programs Director
OFFICE OF THE CONTROLLER

George E. Livingston, Controller
Stephen J. Clark, Assistant Controller
(Programs and Budgets)
Darrell R. Pauley, Assistant Controller
(Finance)
DIVISION OF HUMAN
RESOURCES MANAGEMENT

David L. Shannon, Director
John R. Weis, Associate Director
Joseph H. Hayes, Jr., Assistant Director
Fred Horowitz, Assistant Director

332 83rd Annual Report, 1996

Board of Governors—Continued
DIVISION O F INFORMATION
RESOURCES MANAGEMENT

Stephen R. Malphrus, Director
Marianne M. Emerson, Assistant Director
Po Kyung Kim, Assistant Director
Raymond H. Massey, Assistant Director
Edward T. Mulrenin, Assistant Director
Day W. Radebaugh, Jr., Assistant Director
Elizabeth B. Riggs, Assistant Director
Richard C. Stevens, Assistant Director

DIVISION OF SUPPORT SERVICES

Robert E. Frazier, Director
George M. Lopez, Assistant Director
David L. Williams, Assistant Director
OFFICE OF THE INSPECTOR GENERAL

Brent L. Bowen, Inspector General
Donald L. Robinson, Assistant Inspector
General
Barry R. Snyder, Assistant Inspector
General

Federal Open Market Committee
December 31,1996

Members
A L A N GREENSPAN, Chairman, Board of Governors
WILLIAM J. McDoNOUGH, Vice Chairman, President, Federal Reserve Bank of New York
EDWARD G. BOEHNE, President, Federal Reserve Bank of Philadelphia
JERRY L. JORDAN, President, Federal Reserve Bank of Cleveland
EDWARD W. KELLEY, JR., Board of Governors

LAWRENCE B. LlNDSEY, Board of Governors
ROBERT D. McTEER, JR., President, Federal Reserve Bank of Dallas
LAURENCE H. MEYER, Board of Governors
SUSAN M. PHILLIPS, Board of Governors

ALICE M. RIVLIN, Board of Governors
GARY H. STERN, President, Federal Reserve Bank of Minneapolis
JANET L. YELLEN, Board of Governors

Alternate Members
J. ALFRED BROADDUS, JR., President, Federal Reserve Bank of Richmond
JACK GUYNN, President, Federal Reserve Bank of Atlanta
MICHAEL H. MOSKOW, President, Federal Reserve Bank of Chicago
ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco
ERNEST T. PATRIKIS, First Vice President, Federal Reserve Bank of New York

Officers
DONALD L. KOHN,

Secretary and Economist
NORMAND R.V BERNARD,

Deputy Secretary
JOSEPH R. COYNE,

Assistant Secretary
GARY P. GILLUM,

Assistant Secretary



J. VIRGIL MATTINGLY, JR.,

General Counsel
THOMAS C. BAXTER, JR.,

Deputy General Counsel
MICHAEL J. PRELL,

Economist
EDWIN M. TRUMAN,

Economist

Directories and Meetings 333

Federal Open Market Committee—Continued
RICHARD W. LANG,

Associate Economist
DAVID E. LINDSEY,

Associate Economist
FREDERIC S. MISHKIN,

Associate Economist
LARRY J. PROMISEL,

Associate Economist
ARTHUR J. ROLNICK,

HARVEY ROSENBLUM,

Associate Economist
CHARLES J. SIEGMAN,

Associate Economist
THOMAS D. SIMPSON,

Associate Economist
MARK S. SNIDERMAN,

Associate Economist
DAVID J. STOCKTON,

Associate Economist
Associate Economist
PETER R. FISHER, Manager, System Open Market Account
During 1996 the Federal Open Market Committee held eight regularly scheduled meet-

ings (see Minutes of Federal Open Market
Committee Meetings in this REPORT.)

Federal Advisory Council
December 31,1996

Members
District 1—WILLIAM M. CROZIER, JR., Chairman of the Board,
Bank of Boston Corporation, Boston, Massachusetts
District 2—WALTER V. SHIPLEY, Chairman and Chief Executive Officer,
The Chase Manhattan Corporation, New York, New York
District 3—WALTER E. DALLER, JR., Chairman, President, and Chief Executive Officer,
Harleysville National Bank and Trust Company, Harleysville, Pennsylvania
District 4—FRANK V. CAHOUET, Chairman, President, and Chief Executive Officer,
Mellon Bank, N.A., Pittsburgh, Pennsylvania
District 5—RICHARD G. TILGHMAN, Chairman and Chief Executive Officer,
Crestar Financial Corporation, Richmond, Virginia
District 6—CHARLES E. RICE, Chairman and Chief Executive Officer,
Barnett Banks, Inc., Jacksonville, Florida
District 7—ROGER L. FITZSIMONDS, Chairman and Chief Executive Officer,
Firstar Corporation, Milwaukee, Wisconsin
District 8—THOMAS H. JACOBSEN, Chairman, President, and Chief Executive Officer,
Mercantile Bancorporation Inc., St. Louis, Missouri
District 9—RICHARD M. KOVACEVICH, Chairman, President, and Chief Executive Officer,
Norwest Corporation, Minneapolis, Minnesota
District 10—CHARLES E. NELSON, Chairman, Chief Executive Officer, and President,
Liberty Bank and Trust Company of Oklahoma City, N.A., Oklahoma City, Oklahoma
District 11—CHARLES T. DOYLE, Chairman and Chief Executive Officer,
Texas First Bank - Texas City, Texas City, Texas
District 12—WILLIAM F. ZUENDT, President, Wells Fargo & Company,
San Francisco, California

Officers
RICHARD G. TILGHMAN, President
FRANK V. CAHOUET, Vice President
HERBERT V. PROCHNOW, Secretary Emeritus

JAMES E. ANNABLE, Co-Secretary
http://fraser.stlouisfed.org/
WILLIAM J. KORSVIK, Co-Secretary

Federal Reserve Bank of St. Louis

334 83rd Annual Report, 1996

Federal Advisory Council—Continued
Directors
ROGER L. FITZSIMONDS

RICHARD M. KOVACEVICH

The Federal Advisory Council met on February 1-2, May 2-3, September 5-6, and
November 7-8, 1996. The Board of Governors met with the council on February 2, May 3, September 6, and November 8, 1996. The council, which is composed
of one representative of the banking industry

CHARLES E. NELSON

from each of the twelve Federal Reserve
Districts, is required by law to meet in Washington at least four times each year and is
authorized by the Federal Reserve Act to
consult with, and advise, the Board on all
matters within the jurisdiction of the Board,

Consumer Advisory Council
December 31,1996

Members
RICHARD S. AMADOR, President and Chief Executive Officer, CHARO Community
Development Corporation, Los Angeles, California
THOMAS R. BUTLER, President and Chief Operating Officer, NOVUS Services, Inc.,
Riverwoods, Illinois
ROBERT A. COOK, Partner, Hudson Cook, LLP, Crofton, Maryland
ALVIN J. COWANS, President and Chief Executive Officer, McCoy Federal Credit Union,
Orlando, Florida
ELIZABETH G. FLORES, Consultant, Laredo, Texas
HERIBERTO FLORES, President and Chief Executive Officer, Brightwood Development
Corporation, Springfield, Massachusetts
EMANUEL FREEMAN, President, Greater Germantown Housing Development Corporation,
Philadelphia, Pennsylvania
DAVID C. FYNN, Senior Vice President, National City Bank, Regulatory Risk Manager,
National City Corporation, Cleveland, Ohio
ROBERT G. GREER, Chairman of the Board, Bank of Tanglewood, Houston, Texas
KENNETH R. HARNEY, Journalist, Washington Post Writers Group, Chevy Chase,
Maryland
GAIL K. HILLEBRAND, Litigation Counsel, West Coast Regional Office, Consumers Union
of U.S., Inc., San Francisco, California
TERRY JORDE, President and Chief Executive Officer, Towner County State Bank,
Cando, North Dakota
FRANCINE C. JUSTA, Executive Director, Neighborhood Housing Services of New York,
New York, New York
EUGENE I. LEHRMANN, Immediate Past President, American Association of Retired
Persons, Madison, Wisconsin
ERROL T. LOUIS, Treasurer and Manager, Central Brooklyn Federal Credit Union,
Brooklyn, New York
WILLIAM N. LUND, Director, Office of Consumer Credit Regulation, State of Maine,
Augusta, Maine
RONALD A. PRILL, Vice President, Credit, Dayton Hudson Corporation, Minneapolis,
Minnesota

http://fraser.stlouisfed.org/
LISA RICE, Executive Director, Fair Housing Center, Toledo, Ohio
Federal Reserve Bank of St. Louis General Motors Acceptance Corporation, Detroit, Michigan
JOHN R. RINES, President,

Directories and Meetings 335

Consumer Advisory Council—Continued
MARGOT SAUNDERS, Managing Attorney, National Consumer Law Center,
Washington, D.C
ANNE B. SHLAY, Associate Director, Institute for Public Policy Studies, Temple
University, Philadelphia, Pennsylvania
REGINALD J. SMITH, Vice Chairman and Chief Executive Officer, United Missouri Bank
Mortgage Company, Kansas City, Missouri
GREGORY D. SQUIRES, Professor of Sociology, University of Wisconsin-Milwaukee,
Milwaukee, Wisconsin
GEORGE P. SURGEON, Chief Financial Officer and Executive Vice President, Shorebank
Corporation, Chicago, Illinois
JOHN E. TAYLOR, President and Chief Executive Officer, The National Community
Reinvestment Coalition, Washington, D.C.
LORRAINE VANETTEN, Vice President and Community Lending Officer, Standard Federal
Bank of Troy, Troy, Michigan
THEODORE J. WYSOCKI, JR., Executive Director, CANDO, Chicago, Illinois
LILY K. YAO, Chair and Chief Executive Officer, Pioneer Federal Savings Bank,
Honolulu, Hawaii

Officers
KATHARINE W. MCKEE, Chair

JULIA W. SEWARD, Vice Chair

Associate Director,
Center for Community Self-Help,
Durham, North Carolina

Vice President and Corporate
Community Reinvestment Officer,
Signet Banking Corporation,
Richmond, Virginia

The Consumer Advisory Council met with
members of the Board of Governors on
March 28, June 27, and October 24, 1996.
The council is composed of academics, state
and local government officials, representatives of the financial industry, and repre-

sentatives of consumer and community interests. It was established pursuant to the 1976
amendments to the Equal Credit Opportunity
Act to advise the Board on consumer financial services.

Thrift Institutions Advisory Council
December 31,1996

Members
E. LEE BEARD, President and Chief Executive Officer, First Federal Savings and Loan
Association of Hazleton, Hazleton, Pennsylvania
BARRY C. BURKHOLDER, President and Chief Executive Officer, Bank United of Texas
FSB, Houston, Texas
MICHAEL T. CROWLEY, JR., President and Chief Executive Officer, Mutual Savings Bank,
Milwaukee, Wisconsin
GEORGE L. ENGELKE, JR., President and Chief Executive Officer, Astoria Federal Savings
and Loan Association, Lake Success, New York
DOUGLAS A. FERRARO, President and Chief Executive Officer, Bellco First Federal Credit
Union, Englewood, Colorado
BEVERLY D. HARRIS, President, Empire Federal Savings and Loan Association,
Livingston, Montana




336

83rd Annual Report, 1996

Thrift Institutions Advisory Council—Continued
DAVID F. HOLLAND, Chairman, President, and Chief Executive Officer, Boston Federal

Savings Bank, Burlington, Massachusetts
CHARLES R. RINEHART, Chairman and Chief Executive Officer, Home Savings of

America, FSB, Irwindale, California
JOSEPH C. SCULLY, Chairman and Chief Executive Officer, St. Paul Federal Bank for

Savings, Chicago, Illinois
LARRY T. WILSON, President and Chief Executive Officer, Coastal Federal Credit Union,

Raleigh, North Carolina
WILLIAM W. ZUPPE, President and Chief Operating Officer, Sterling Savings Association,

Spokane, Washington

Officers
E. LEE BEARD, President

The members of the Thrift Institutions
Advisory Council met with the Board of
Governors on March 1, June 28, September 27, and December 6, 1996. The council,
which is composed of representatives from

DAVID F. HOLLAND, Vice President

credit unions, savings and loan associations,
and savings banks, consults with, and
advises, the Board on issues pertaining to the
thrift industry and on various other matters
within the Board's jurisdiction.

Officers of Federal Reserve Banks and Branches
December 31,1996

Chairman1
Deputy Chairman

President
First Vice President

BOSTON2

Jerome H. Grossman
William C. Brainard

Cathy E. Minehan
Paul M. Connolly

NEW YORK2

John C. Whitehead
Thomas W. Jones
Joseph J. Castiglia

William J. McDonough
Ernest T. Patrikis

PHILADELPHIA

Donald J. Kennedy
Joan Carter

Edward G. Boehne
William H. Stone, Jr.

CLEVELAND2

A. William Reynolds
G. Watts
Humphrey, Jr.
John N. Taylor, Jr.
John T. Ryan III

Jerry L. Jordan
Sandra Pianalto

Claudine B. Malone
Robert L. Strickland
Michael R. Watson
James O. Roberson

J. Alfred Broaddus, Jr.
Walter A. Varvel

BANK or Branch

Buffalo

Cincinnati
Pittsburgh
RICHMOND2
Baltimore
Charlotte




Vice President
in charge of Branch

Carl W. Turnipseed3

Charles A. Cerino3
Harold J. Swart3

William J. Tignanelli3
Dan M. Bechter3

Directories and Meetings 337

Officers of Federal Reserve Banks and BranchesContinued
BANK or Branch
ATLANTA
Birmingham
Jacksonville
Miami
Nashville
New Orleans
CHICAGO2
Detroit
ST. LOUIS
Little Rock
Louisville

Chairmanl
Deputy Chairman

President
First Vice President

Jack Guynn
Hugh M. Brown
Daniel E. Sweat, Jr.
Patrick K. Barron
Donald E. Boomershine
Joan Dial Ruffier
R. Kirk Landon
Paula Lovell
Lucimarian Roberts
Robert M. Healey
Lester H.
McKeever, Jr.
Florine Mark

James M. McKee
FredR. Herr3
James D. Hawkins3
James T. Curry III
Melvyn K. Purcell
Robert J. Musso

Michael H. Moskow
William C. Conrad

John F. McDonnell
Susan S. Elliott
.... Janet M. Jones
John A. Williams
John V. Myers

Vice President
in charge of Branch

Thomas C. Melzer
W. Legrande Rives

David R. Allardice3

Robert A. Hopkins
Thomas A. Boone
John P. Baumgartner

Memphis
MINNEAPOLIS

Jean D. Kinsey
David A. Koch
Lane W. Basso

Gary H. Stern
Colleen K. Strand

A. Drue Jennings
Jo Marie Dancik
Peter I. Wold
Barry L. Eller
LeRoy W. Thorn

Thomas M. Hoenig
Richard K. Rasdall

John D. Johnson

Helena
KANSAS CITY
Denver
Oklahoma City
Omaha
DALLAS
El Paso
Houston
San Antonio
SAN FRANCISCO
Los Angeles
Portland
Salt Lake City
Seattle

Robert D. McTeer, Jr.
Cece Smith
Roger R.
Helen E. Holcomb
Hemminghaus
Patricia Z. Holland-Branch
Isaac H. Kempner III
Carol L. Thompson
Judith M. Runstad
James A. Vohs
Anita E. Landecker
Ross R. Runkel
Gerald R. Sherratt
George F. Russell, Jr.

NOTE. A current list of these officers appears each
month in the Federal Reserve Bulletin.
1. The Chairman of a Federal Reserve Bank serves, by
statute, as Federal Reserve Agent.
2. Additional offices of these Banks are located at
Lewiston, Maine; Windsor Locks, Connecticut; Utica at




Robert T. Parry
John F. Moore

CarlM. Gambs3
Kelly J. Dubbert
Bradley C. Cloverdyke

Sammie C. Clay
Robert Smith III 3
James L.Stull 3

Mark L. Mullinix3
Raymond H. Laurence3
Andrea P. Wolcott
Gordon R. G.
Werkema4

Oriskany, New York; East Rutherford New Jersey;
Columbus, Ohio; Charleston, West Virginia; Columbia,
South Carolina; Indianapolis, Indiana; Milwaukee,
Wisconsin; Des Moines, Iowa; and Peoria, Illinois.
3. Senior Vice President.
4. Executive Vice President

338 83rd Annual Report, 1996

Conference of Chairmen
The chairmen of the Federal Reserve Banks
are organized into the Conference of Chairmen, which meets to consider matters of
common interest and to consult with, and
advise, the Board of Governors. Such meetings, attended also by the deputy chairmen,
were held in Washington on May 29 and 30,
and on December 4 and 5, 1996.
The members of the Executive Committee of the Conference of Chairmen during
1996 were Cece Smith, chair; A. William
Reynolds, vice chairman; and John F.
McDonnell, member.
On December 5, 1996, the conference
elected its Executive Committee for 1997;
it named Judith M. Runstad as chair, John F.
McDonnell as vice chairman, and Donald J.
Kennedy as the third member.

Conference of Presidents
The presidents of the Federal Reserve Banks
are organized into the Conference of Presidents, which meets periodically to consider
matters of common interest and to consult
with, and advise, the Board of Governors.
Robert D. McTeer, President of the Federal Reserve Bank of Dallas, served as chairman of the conference in 1996, and Thomas
M. Hoenig, President of the Federal Reserve
Bank of Kansas City, served as its vice chairman. Helen E. Holcomb, of the Federal
Reserve Bank of Dallas, served as its secretary. Esther L. George, of the Federal
Reserve Bank of Kansas City, served as its
assistant secretary.
On December 5, 1996, the conference
elected Thomas M. Hoenig as its chairman
for 1997 and Jerry L. Jordan, President of
the Federal Reserve Bank of Cleveland, as
its vice chairman.

Conference of First
Vice Presidents
The Conference of First Vice Presidents of
the Federal Reserve Banks was organized in
1969 to meet periodically for the consideration of operations and other matters.
Sandra Pianalto, First Vice President of
the Federal Reserve Bank of Cleveland,
served as chair of the conference in 1996,
Federal Reserve Bank of Cleveland, served
Digitized and FRASER K. Strand, First Vice President
for Colleen
http://fraser.stlouisfed.org/
of the Federal Reserve Bank of Minneapolis,
Federal Reserve Bank of St. Louis

served as its vice chair. Martha Maher, of the
as its secretary and Niel D. Willardson, of
the Federal Reserve Bank of Minneapolis,
served as its assistant secretary.

Directors
The following list of directors of Federal
Reserve Banks and Branches shows for each
director the class of directorship, the director's principal organizational affiliation, and
the date the director's term expires. Each
Federal Reserve Bank has a nine-member
board: three Class A and three Class B directors, who are elected by the member commercial banks, and three Class C directors,
who are appointed by the Board of Governors of the Federal Reserve System.
Class A directors represent the member
banks in each Federal Reserve District.
Class B and Class C directors represent the
public and are chosen with due, but not
exclusive, consideration to the interests of
agriculture, commerce, industry, services,
labor, and consumers; they may not be officers, directors, or employees of any bank or
bank holding company. In addition, Class C
directors may not be stockholders of any
bank or bank holding company.
For the election of Class A and Class B
directors, the Board of Governors classifies
the member banks of each Federal Reserve
District into three groups. Each group, which
comprises banks with similar capitalization,
elects one Class A director and one Class B
director. Annually, the Board of Governors
designates one of the Class C directors as
chairman of the board and Federal Reserve
Agent of each District Bank, and it designates another Class C director as deputy
chairman.
Federal Reserve Branches have either five
or seven directors, a majority of whom are
appointed by the parent Federal Reserve
Bank; the others are appointed by the Board
of Governors. One of the directors appointed
by the Board is designated annually as chairman of the board of that Branch in a manner
prescribed by the parent Federal Reserve
Bank.
For the name of the chairman and deputy
chairman of the board of directors of each
Reserve Bank and of the chairman of each
Branch, see the preceding table, "Officers
of Federal Reserve Banks and Branches."

Directories and Meetings 339
Term expires
Dec. 31

DISTRICT l—BOSTON
Class A
G. Kenneth Perine
Jane C. Walsh
Marshall N. Carter

Class B
Stephen L. Brown

Edward Dugger III
Robert R. Glauber

President and Chief Executive Officer, National
Bank of Middlebury, Middlebury, Vermont
President, Northmark Bank,
North Andover, Massachusetts
Chairman and Chief Executive Officer,
State Street Bank and Trust Company,
Boston, Massachusetts

Chairman and Chief Executive Officer, John
Hancock Mutual Life Insurance Company,
Boston, Massachusetts
President and Chief Executive Officer,
UNC Ventures, Inc., Boston, Massachusetts
Adjunct Lecturer, John F. Kennedy School of
Government, Harvard University,
Cambridge, Massachusetts

Class C
John E. Flynn

Executive Director, The Quality Connection,
East Dennis, Massachusetts
Jerome H. Grossman, M.D.. .Chairman and Chief Executive Officer,
Health Quality, LLC, Boston, Massachusetts
William C. Brainard
Chairman, Department of Economics,
Yale University, New Haven, Connecticut

1996
1997
1998

1996

1997
1998

1996
1997
1998

DISTRICT 2 — N E W YORK

Class A
J. William Johnson

J. Carter Bacot
Robert G. Wilmers

Class B
Ann M. Fudge
Eugene R. McGrath

William C. Steere, Jr



Chairman and Chief Executive Officer,
The First National Bank of Long Island,
Glen Head, New York
Chairman and Chief Executive Officer,
The Bank of New York, New York, New York
Chairman, President, and Chief Executive
Officer, Manufacturers and Traders Trust
Company, Buffalo, New York

President, Maxwell House Coffee Company,
White Plains, New York
Chief Executive Officer, Consolidated Edison
Company of New York, Inc.,
New York, New York
Chairman and Chief Executive Officer,
Pfizer Inc., New York, New York

1996

1997
1998

1996
1997

1998

340 83rd Annual Report, 1996
Term expires
Dec. 31

DISTRICT 2, NEW YORK—Continued
Class C
John C. Whitehead
Thomas W. Jones

Peter G. Peterson

Chairman, AEA Investors Inc., New York, New York
Vice Chairman, President, and Chief Operating
Officer, Teachers Insurance and Annuity
Association-College Retirement Equities Fund,
New York, New York
Chairman, The Blackstone Group,
New York, New York

1996
1997

1998

BUFFALO BRANCH

Appointed by the Federal Reserve Bank
Louise Woerner
Chairman and Chief Executive Officer, HCR,
Rochester, New York
William E. Swan
President and Chief Executive Officer,
Lockport Savings Bank, Lockport, New York
Mark W. Adams
Owner and Operator, Adams Poultry Farm,
Naples, New York
Kathleen R. Whelehan
Regional President, Rochester Southern Region,
Marine Midland Bank, Rochester, New York
Appointed by the Board of Governors
Joseph J. Castiglia
Former Vice Chairman, President, and Chief
Executive Officer, Pratt & Lambert United, Inc.,
Buffalo, New York
Louis J. Thomas
Director, District 4, United Steelworkers of
America, Buffalo, New York
Bal Dixit
President and Chief Executive Officer,
Newtex Industries, Inc., Victor, New York

1996
1997
1997
1998

1996
1997
1998

DISTRICT 3 — P H I L A D E L P H I A

Class A
Terry K. Dunkle
Dennis W. DiLazzero
Albert B. Murry

Class B
J. Richard Jones

Robert D. Bums



Chairman, United States National Bank,
Johnstown, Pennsylvania
President and Chief Executive Officer, Minotola
National Bank, Vineland, New Jersey
.President and Chief Executive Officer,
Lebanon Valley National Bank,
Lebanon, Pennsylvania

1996

President and Chief Executive Officer,
Jackson-Cross Company,
Philadelphia,