Full text of Annual Report of the Federal Reserve Bank of New York : Eightieth Annual Report for the Year Ended December 31, 1994

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

FEDERAL RESERVE BANK OF NEW YORK




Eightieth Annual Report

FOR THE YEAR EN D ED
DECEMBER 31, 1994

S E C O N D FED ER A L RESERVE D IS T R IC T

FEDERAL RESERVE BANK OF NEW YORK

May 1995

To the Depository Institutions in the
Second Federal Reserve District

I am pleased to send you the Eightieth Annual Report of the Federal Reserve Bank of New
York. This year’s Annual Report includes the text of the Roy Bridge Memorial Lecture for
1995, delivered on April 12 at the Guildhall in London, England, on the subject of international
financial cooperation. Against the background of an increasingly global financial marketplace,
I emphasize the need for stronger, ongoing international cooperation by both government
officials and the private sector. In addition, I highlight the critical role of central banks in
containing systemic consequences of financial problems.
For the first time, the Annual Report also includes reports on open market operations and
Treasury and Federal Reserve foreign exchange operations for 1994.




I hope that you will find this year’s Annual Report of interest.

William J. M cDonough
President




CONTENTS
IN T E R N A T IO N A L E C O N O M IC C O O P E R A T I O N ......................................... 1

M O N E T A R Y P O L IC Y A N D O P E N M ARKET
O P E R A T IO N S D U R IN G 1994.................................................................................... 15

TREA SU RY A N D FED ER A L RESERVE
F O R E IG N E X C H A N G E O P E R A T IO N S
Overview o f Operations for 1994................................................................................. 47
November 1993-January 1994...................................................................................... 49
February-April 1994...................................................................................................... 57
May-June 1994................................................................................................................ 67
July-September 1994...................................................................................................... 77
October-December 1994................................................................................................ 87

F IN A N C IA L S T A T E M E N T S ................................................................................... 97
C H A N G E S IN D IR E C T O R S A N D S E N IO R O F F IC E R S .............................. 101
LIST O F D IR E C T O R S A N D O F F IC E R S ............................................................. 109

INTERNATIONAL ECONOMIC
COOPERATION
William J. McDonough

I am greatly honored to be here this evening to present the annual Roy Bridge Memorial Lec­
ture. I am well aware of being the first American public official to deliver this lecture and feel it
is particularly apt that you have given that honor to an official of the Federal Reserve Bank of
New York. Roy Bridge’s American counterpart was Charles Coombs of the New York Fed,
the man who taught me a great deal about the workings of the international economy and
especially the foreign exchange markets when he served as an adviser to the commercial bank at
which I worked.
Both Roy Bridge and Charlie Coombs were legendary experts on foreign exchange matters and
were closely involved in international financial policy in the 1960s and ’70s. They believed that
it was international financial cooperation that underpinned the functioning of the Bretton Woods
System, which they fought so valiantly to preserve. The friendship between Messrs. Bridge and
Coombs reminded many of the extraordinary friendship and cooperation between Montagu
N orm an and Benjamin Strong, the first head of the New York Fed, and N orm an’s co-creator of
central banking cooperation. That is a legacy that my good friend Eddie George and I try to
keep alive today.
This evening I would like to share some thoughts on international financial cooperation—a
subject that obviously would have met with Roy Bridge’s approval. Like Roy Bridge, I fully
subscribe to the view that proper functioning of the international financial system requires
close and ongoing cooperation among central bankers and market participants. I hope that my

The R oy Bridge M emorial Lecture , presented by W illiam J. McDonough , President o f the Federal Reserve Bank o f N ew York ,
a t the G uildhall in Londony England , on A p ril 12, 1995.




1

remarks will honor, however inadequately, Roy Bridge’s remarkable career at the Bank of
England and his contributions to the cause of international cooperation.
Discussions of international economic cooperation are usually concerned with efforts of major
countries to coordinate their foreign exchange market intervention, or their m onetary or fiscal
policies. But economic cooperation is much broader in scope than just the coordination of
macroeconomic policy actions by central banks and national governments. I believe the focus
on macroeconomic issues alone leads to a considerable underappreciation of international coop­
erative efforts.
International economic cooperation, in the broader context, involves both the public and pri­
vate sectors and spans a wide range of activities beyond the macroeconomic and financial arena.

I fully subscribe to the view that proper functioning of the international financial
system requires close and ongoing cooperation among central bankers and market
participants.

These include agreements on trade policy, shipping and navigation, public health standards, and
product safety. In fact, international agreements in the nonfinancial area deserve much of the
credit for the sm ooth flow of commerce that we now take for granted.
Though I have that broad context in mind, it is not my intention to offer a comprehensive
picture of international cooperation. Instead, I will highlight some financial issues that have
been at the forefront of central bank cooperation in recent years. Specifically, I would like to
focus on three broad areas: banking supervision and related issues concerning financial mar­
kets; paym ent and settlement issues; and financial policies aimed at dealing w ith international
financial crises or major financial sector problems.
First, let me be clear that, in my view, international cooperation is not a coded phrase for central
bankers and finance ministers telling market participants what to do. The evolution and expan­
sion of financial markets over the last thirty years have moved too far for anyone to believe that
central bankers alone have the wisdom or power to absolutely control markets or behavior. N or
do I think that the private sector is always right or that the greed of the most aggressive trader
produces the best results for society. Rather, international cooperation is public servants and
market participants working together to make markets function as best they can.
Indeed, financial markets are a highly cooperative form of competition, and depend upon shared
assumptions and expectations of all participants about the rules of the game, and those rules

2




being followed. Thus, international cooperation must begin with the market participants them ­
selves and perhaps best at the level of each marketplace.
W hen I got into banking in 1967, foreign exchange markets were relatively simple and not
highly profitable because of the rules of the Bretton Woods System. Perhaps because of that
relative simplicity and absence of the boxcar-size profits known today, informal cooperation
among dealers, chief dealers, and their bosses was quite common. If one of us saw something
that looked strange at another institution, we would make a quiet phone call and suggest some­
body look into it. We assumed, correctly, that the favor would be returned if the need arose.
To the degree that is not happening in the much fiercer competitive environm ent in which you
must live, I recommend it to you. It has merit if for no other reason than that a quiet phone call
from a friendly com petitor is likely to have a less unpleasant aftermath than one of those quiet
phone calls from the Bank of England or the considerably less subtle boot in the backside from
the New York Fed.
The same kind of courtesy can extend internationally. N ote that I do not recommend this
informal “com m unity foreign exchange market protection association” as a substitute for the
internal controls so necessary in each bank or for the appropriate supervision by regulators, but
as an additional protection for all market participants from the rogue trader or the rogue group
within a market participant. It is rare, indeed, that a num ber of people do not say after one of

International cooperation on financial issues of mutual concern to central banks
has improved significantly in recent years. B u t. . . increasingly greater internationalization of the financial marketplace requires even stronger ongoing coopera­
tive efforts to reduce potential systemic risk and to deal with other major
challenges to the stability of the international financial system.

these unfortunate incidents that they saw something strange going on or were aware that such
and such a dealer was swinging much too big and too wide.
More formal cooperation in the private sector is demonstrated by such efforts as the Group of
T hirty study on derivatives and the many fine works produced by the Foreign Exchange Com ­
mittee in N ew York, a private sector group encouraged and supported by the N ew York Fed.
N ow let me turn to the central banks and our role.
It is clear that international cooperation on financial issues of mutual concern to central banks
has improved significantly in recent years. But I believe that increasingly greater international­




3

ization of the financial marketplace requires even stronger ongoing cooperative efforts to re­
duce potential systemic risk and to deal with other major challenges to the stability of the
international financial system. Indeed, international cooperation on many financial matters is
no longer just a good thing, but an absolute necessity, not only to deal with ad hoc financial
problems or crises but also to ensure the day-to-day functioning of the international financial
and payment systems. The ongoing financial innovations and internationalization of financial
activities have greatly increased the degree of interdependence among national financial policies
and have exposed serious gaps in the supervisory apparatus. They also have put new pressures
on payment and settlement systems. Any systemic risk stemming from a major disruption in
one market is now essentially international in character and requires cooperative remedies.
Given the extensive public discussions of banking supervision and capital standards in recent
years, you probably will not be surprised to hear me say that international cooperation in bank
oversight, at least among the G-10 countries, has advanced significantly over the last decade.
Much of this progress has occurred in the context of the Basle Committee on Banking Supervi­
sion, which has acted as the key point of contact to safeguard the stability of the financial
system and to ensure fair com petition among banks across countries.
One of the most im portant, and perhaps the best known, achievements in international coop­
eration on banking supervision is the Capital Accord of 1988. The Accord established mini­
mum capital standards and helped level the playing field for internationally active banks. While

One of the most important. . . achievements in international cooperation on banking supervision is the Capital Accord of 1988. The Accord established minimum
capital standards and helped level the playing field for internationally active banks.

there were many forces at work, the Accord stressed the importance of capital as the bedrock of
financial strength and had the effect of generally raising bank capital positions and making the
banking system safer.
A nother major recent achievement in coordinating banking supervision was the 1992 revision
of the Basle Concordat to incorporate ‘‘m inimum standards” for the supervision of interna­
tional banking groups and their cross-border establishments. You will recall that the original
1975 Concordat had delineated the roles of host and home country supervisors in the aftermath
of the failure of Herstatt Bank, and its subsequent 1983 revision established the principle of
consolidated supervision for all internationally active banks.

4



Over the last few years, the Basle Committee on Banking Supervision has been working to
develop capital requirements for market risks in banks’ trading activities to complement the
original Capital Accord, which dealt exclusively with credit risk. The Com m ittee’s April 1993
draft proposals generated extensive comments from market participants, with many of them
suggesting alternatives to the proposed approach based on banks’ own internal models for mea­
suring risk in their trading activities. In response, the Committee has been exploring the feasi­
bility of an approach under which banks could be given the choice of using the standard ap­
proach as the basis for calculating the capital charge or using their own model, which I strongly
prefer. These proposals are being made public today and I look forward to the comments of
banks and other interested parties on the changes the Basle Committee is putting forward.
The discussions on these issues reflect a basic tension that has emerged in the efforts to prom ul­
gate capital standards: the desire to have easily understood rules that are not mathematically
complex competing with the desire for more precise, if complex, standards. It is likely that
the credit and market risk parts of the extended Capital Accord will end up with different
approaches.
Two other cooperative initiatives in the financial supervision area are w orth mentioning. First,
since January 1993, an informal tripartite working party of G-10 banking, securities, and insur­
ance supervisors has been working toward achieving consistency in supervisory approaches to
similar-type risks in banking and the so-called financial conglomerates—-companies engaged in
banking, insurance, and securities, with exclusive or predominant activities in at least two of
those financial sectors. The tripartite group is developing a deeper understanding of supervi­
sory approaches in different sectors and has made progress in identifying the main issues about
which all supervisors are concerned. But further w ork is needed to achieve agreements on
capital standards and other matters.
Second, supervisors of both banks and securities firms have made good progress in developing a
cooperative approach to dealing with risks in derivatives. Last July, the Basle Committee on
Banking Supervision and the Technical Committee of the International Organization of Securi­
ties Commissions (IOSCO) acted jointly, for the first time, in issuing risk management guide­
lines for derivatives. The two sets of guidelines are consistent and are based on three basic
principles: appropriate oversight by boards of directors and senior management, adequate risk
management, and comprehensive internal controls and audit procedures. I hope that such co­
operation will strengthen and expand over time to a broader range of issues. For example, the
Basle Committee and IOSCO have been w orking constructively on a framework for regulatory




5

reporting, and I also expect the Basle Com m ittee’s market risk proposal to further stimulate the
Basle/IOSCO dialogue.
O n other, more general aspects of derivatives activities:
G-10 central banks, the Group of Thirty, and the Institute for International Finance, among
others, have issued reports aimed at achieving greater public disclosure of risks in derivatives
and enhanced market transparency. I regard these areas as critical for both risk management
and banking supervision. A striking aspect of the markets in the last year has been the recurrent
dramatic problem situations at individual institutions, accompanied by tremendous uncertainty
as to the exact nature of market forces at w ork and the size of overhang positions. This uncer­
tainty has created considerable potential for volatile and disorderly markets.
In this environment, I see a strong and urgent need for bold and ambitious disclosure standards.
While all of us recognize that greater disclosure and market transparency will not eliminate
abuse or fraud, they will reduce the potential for such problems. Weak and inadequate informa­
tion systems clearly add to the difficulties of senior management and supervisors in detecting
fraud related to complex trading activities.
The observations and recommendations presented in the Fisher report, a discussion paper
released last September by the G-10 central banks, provide a good foundation for enhancing

I see a strong and urgent need for bold and ambitious disclosure standards. While
all of us recognize that greater disclosure and market transparency will not elimi­
nate abuse or fraud, they will reduce the potential for such problems.

public disclosure of risks in trading of derivatives and other financial instruments. W ith similar
efforts under way in the private sector, I think it is reasonable to expect significant progress in
this area over the near term. The 1994 annual reports of major U.S. banks—many just out—
show that substantial strides are being made.
Personally, I am convinced that our collective efforts over the past years have prevented some
incipient financial problems from developing and have ameliorated others. But I am also con­
cerned that as we have intensified our efforts on the official side, perhaps particularly in banking
regulation and supervision, market participants run the risk of making the mistake of accepting
official minim um standards in place of their own best judgments. As financial markets have
grown more complex, regulators and supervisors are drawn into greater levels of detail, and
necessarily so. But the increasingly detailed minimum standards we suggest, w hether for capi­

6




tal, trading practices, audit controls, or disclosure, should not—and really cannot—be a substi­
tute for the optim um levels of capital, the optim um trading practices, and the optim um
financial disclosures that market participants should expect of themselves.
In recent years, the rapid growth of cross-border financial activity and the worldwide inter­
relationship of payment and settlement systems have heightened the importance of payment

Our collective efforts over the past years have prevented some incipient financial
problems from developing and have ameliorated others. But . . . as we have
intensified our efforts on the official side, . . . market participants run the risk
of making the mistake of accepting official minimum standards in place of their
own best judgments.

issues for the safety and soundness of the international financial system. In interconnected
markets, payment problems in any market spread quickly around the world.
The G-10 central banks, largely working through the Basle Committee on Payment and Settle­
m ent Systems, which I chair, have focused on cooperative efforts to define and set out the
benefits and limits of netting and to prom ote safer payments arrangements. In my view, the
Lamfalussy report, released in November 1990, was a particularly im portant step in central
bank cooperation on coping with the payment system risks. The report developed minimum
standards for the operation of netting schemes, together with a cooperative oversight arrange­
m ent for central banks as they deal with netting arrangements.
Central banks and the private sector have devoted much recent effort to defining and under­
standing H erstatt risk—the risk of settlement failure in foreign exchange caused by temporal

The Lamfalussy report, released in November 1990, was a particularly important
step in central bank cooperation on coping with the payment system risks. The
report developed minimum standards for the operation of netting schemes, together
with a cooperative oversight arrangement for central banks as they deal with net­
ting arrangements.

gaps—and finding ways of mitigating its severity, if not eliminating it. H erstatt risk, named
after the German bank that failed in 1974, is especially troublesome because it necessarily goes
beyond national borders and affects the financial system globally.




7

While many im portant changes put in place since H erstatt have helped reduce the settlement
risk in foreign exchange transactions, we are still far from eliminating H erstatt risk. I am en­
couraged, however, that efforts to deal w ith H erstatt risk have moved ahead at a faster pace over
the last two years or so. In particular, the Noel report, released in September 1993 by the
Committee on Payment and Settlement Systems, the w ork of the N ew Y ork Foreign Exchange
Committee, summarized in a study issued last October, and a recent report by the N ew York
Clearing House Association have made very significant contributions to understanding the is­
sues involved in reducing or eliminating H erstatt risk.
A steering committee of central bank payments experts, working under the auspices of the
Committee on Payment and Settlement Systems, is taking a coordinated look at the dimensions
and sources of H erstatt risk, including a series of interviews with financial m arket participants

The most important objective of international cooperation in the context of finan­
cial problems or crises is to avoid or contain systemic risk. . . . In finding solutions
to financial problems, however, central banks are not, and should not be, inter­
ested in providing protection against “normal” risks in the financial system.

in many countries. That w ork is not yet complete, but it should help identify potential vulner­
abilities in current arrangements and suggest methods of dealing with them. It is my hope that
the recent substantial private and public sector efforts dedicated to this issue would lead to the
elimination, or at least the near-elimination, of H erstatt risk. After more than tw enty years,
that goal is long overdue.
The reason to recount the num ber of recent reports is to show the depth of the dialogue on the
goals and means of dealing with H erstatt risk. While we have not yet solved H erstatt risk, the
tacit agreement of the public and private sectors to debate the issues at a high level with all
interested parties and publicly airing potential solutions augurs well for the process. This en­
courages maximum participation and fullest disclosure of new ideas and the delineation of risks.
It might not be the most efficient way, but I believe it is the best way of turning the dialogue
into a lasting solution.
Most everyone would agree that the most im portant objective of international cooperation in
the context of financial problems or crises is to avoid or contain systemic risk. Since central
banks are the ultimate sources of liquidity, their involvement in the cooperative process is criti­
cal to solving financial problems and containing systemic threats. In finding solutions to finan­
cial problems, however, central banks are not, and should not be, interested in providing pro­




tection against “norm al” risks in the financial system. After all, risk taking is an inherent part of
banking and finance in market economies.
I also want to stress another general point: international financial crises or problems and their
solutions usually involve im portant macroeconomic policy dimensions. This certainly has been
true for most of the major international financial problems of the 1980s and the 1990s—the
LDC debt crisis of the early 1980s, the dollar misalignment that prom pted the September 1985
Plaza agreement, the O ctober 1987 stock market crash, the fall 1992 exchange rate crisis of the
European M onetary System, and the recent financial difficulties of Mexico.
The importance of macroeconomic forces in causing and resolving financial crises has increased
significantly in recent years. The main reason is that greatly enhanced international integration
and increased competition have tightened linkages between macroeconomic factors and finan­
cial markets. Actual or expected changes in monetary policy, for example, can cause sudden
shifts in market confidence and huge changes in financial flows across borders, leading to dislo­
cations in the countries involved and increasing potential risks to the entire financial system and
the world economy. Effective solutions to financial crises, therefore, require that we also ad­
dress their macroeconomic causes and consequences.
Central banks’ role in resolving international financial problems is crucial because they exercise
joint responsibilities for both macroeconomic stability and oversight of the financial system
while, at the same time, they are the ultimate sources of liquidity. Thus, central banks are in a

Central banks' role in resolving international financial problems is crucial
because they exercise joint responsibilities for both macroeconomic stability and
oversight of the financial system while, at the same timey they are the ultimate
sources of liquidity.

unique position to balance conflicting short-run interests stemming from the resolution of a
crisis and the broader long-run consequences of that resolution. The position of the Federal
Reserve in cooperative efforts is all the more im portant because of the role of the dollar in
international finance.
Central bank cooperation has played a critical role in containing systemic consequences of ma­
jor international financial crises over the years. For example, when the LDC debt crisis broke
publicly in 1982, with a potential default by Mexico on more than $50 billion debt to interna­
tional commercial banks, central banks acted quickly to organize the provision of immediate




9

liquidity support while a broader, permanent solution was worked out. The effort was led by
the Federal Reserve, but it would not have succeeded w ithout the active cooperation of the
Bank of England and other central banks. As Paul Volcker wrote some years later, central
bankers, under the leadership of Lord Richardson and Fritz Leutwiler, then president of the
Bank for International Settlements (BIS), “instinctively understood what was at stake.”
The intergovernmental and commercial bank cooperation to deal with broader aspects of the
LDC debt problem was much harder to achieve and less effective. As you know, it took more
than a decade and many debt rescheduling exercises and debt service reduction operations to
resolve the problems that followed the debt crisis of the early 1980s. Even here, however,
central bankers persevered with the necessary patience to encourage continued engagement
among negotiators and helped balance long-term considerations of financial prudence and
macroeconomic goals.
Cooperation among central banks also worked effectively to contain the consequences of the
O ctober 1987 abrupt drop in stock prices in the United States and other countries. Central
banks acted prom ptly to make liquidity available to financial markets, w ithout losing sight of
prudential concerns. During the crisis period, the Federal Reserve and other major central
banks were engaged in nearly continuous consultations with one another, drawing upon knowl­
edge obtained from contacts with commercial banks and securities houses.
But O ctober 1987 also spotlighted an element that has greatly complicated international coordi­
nation in market crises since then—and that is the large flow of highly mobile international
capital. The factors that motivate international investors are often different from those of
domestic financial market participants, which changes the relationship between financial and
macroeconomic variables. Large and persistent inflows of international capital may make do­
mestic financial conditions appear more benign than warranted and may even lull policymakers
into believing there is more time than they really have for macroeconomic adjustment. But as
we have seen more than once, the speed at which international investors redirect their capital
has greatly shortened the time frame in which global solutions have to be identified and agreed
upon.
The breakdown of the Exchange Rate Mechanism of the European M onetary System in 1992
represented a particularly striking example of a crisis that reflected a collision between
macroeconomic forces and the new highly integrated international financial environment. Given
the requirement of a high degree of macroeconomic convergence, financial markets could not
endure for long the inconsistency between the interlocked pegged exchange rates and the wide
disparities in performance across European economies. In reviewing this episode, I cannot help

10




but notice that the inflow of international capital contributed im portantly to the ability of
European C om m unity members to sustain divergent policies, thereby adding to the severity of
the adjustment when it came.
The incongruence between macroeconomic forces and the new international financial environ­
ment also is fundamental to understanding the broader context of the recent Mexican financial

Large and persistent inflows of international capital may make domestic financial
conditions appear more benign than warranted and may even lull policymakers
into believing there is more time than they really have for macroeconomic adjustment.

problems. In 1992 and 1993, reflecting declining inflation and ongoing fundamental improve­
ments in its economic and financial structure, Mexico attracted huge amounts of portfolio capi­
tal inflows and foreign direct investment. But at the same time, Mexico was losing external
competitiveness, and its current account deficit widened significantly. In 1994, foreign inves­
tors became increasingly less confident about the Mexican economy as uncertainties caused by
some noneconomic events—the Chiapas uprising, political assassinations, and the August elec­
tion—unfolded. And the Mexican authorities supported the peso exchange rate and financed
the large and increasing current account deficit by short-term borrowing and drawing down
their reserves.
One interpretation of the Mexican crisis comes from looking closely at the international reserve
position of the Banco de Mexico during 1994. After each of the political shocks, the market
stabilized and international reserves held their new lower levels and then began to increase
slowly. The authorities, understandably in my view, thought that they should interpret these
results as renewed external confidence in the country and its policies. A nother interpretation,
with the gift of hindsight, is that we were looking at the last gasp of a long bull market in
Mexican financial assets. As is almost always the case with a long-in-the-tooth bull market, it
turned with a vengeance. Money not only stopped flowing into Mexico, but moved out rapidly
and made it impossible to hold the exchange rate. The result was a disorderly retreat and the
severe readjustment we have been seeing over the last few months.
From my perspective, the large financial support package for Mexico arranged by the interna­
tional com m unity under the leadership of the United States reflected the seriousness of the
situation. While it is im portant to the United States that Mexico succeed in regaining financial
market confidence and reestablishing noninflationary growth and financial stability, the stakes
for the entire international com m unity also are high. The Mexican situation has had the poten­




11

tial for considerable systemic harm to the global financial system and the world economy.
The implications of the Mexican situation also need to be considered in the wider context of the
post-cold war period in which almost all nations have been trying to emulate the free-marketoriented approaches of the industrialized democracies. Mexico has been widely perceived as a
model of economic transition from a rigid state-directed economic system toward a free-market
system. A reversal of Mexico’s reforms and a spread of its financial problems to other emerging
economies could halt, or even reverse, the international trend toward free-market-oriented
approaches.
The international context of recent financial difficulties highlights the critical importance of
maintaining sound domestic economic and financial policies in today’s global financial environ­
ment. By inducing capital inflows from abroad and providing access to international markets,
sound domestic policies deliver significant additional benefits to an economy through interna­
tional channels. But domestic policy mistakes elicit quick and harsh punishm ent on an economy
from international sources and also may reverberate around the globe at a prodigious pace,
requiring international solutions.
The increasingly global financial environm ent also raises some broader fundamental issues about
the process of financial disruptions and crises in our free-market-based financial system: what
are the critical forces in the development of international financial problems? how can such
problems be prevented? and what types of mechanisms are needed to deal with them once they
do occur? We in central banks have been thinking about these issues for some time and recent

The international context of recent financial difficulties highlights the critical im­
portance of maintaining sound domestic economic and financial policies in today's
global financial environment___ Domestic policy mistakes elicit quick and harsh
punishment on an economy from international sources and also may reverberate
around the globe at a prodigious pace9 requiring international solutions.

events have provided an impetus to accelerate that process. In this respect, I might mention that
G-7 finance ministers and central bank governors have agreed to make progress on issues con­
cerning more effective prevention and coordination mechanisms dealing with international fi­
nancial problems by the time of the G-7 Halifax meeting in June.
One general issue raised by the Mexican problem and fears of other problems in the future is
whether we need a more formal international institutional structure. My own view is that we

12




definitely do not need to create another institution or a new bureaucracy. But a positive and
necessary step to take would be to better delineate responsibilities for more intensive m onitor­
ing and warning systems within existing structures. We need to understand the process of
financial crises in the new international environm ent with much greater clarity before we seri­
ously consider making any substantive changes in institutional arrangements.
A nother general issue that I would like to raise is whether, in today’s free-market-oriented
global financial system, we need to find a mechanism that incorporates for sovereign nations the

I want to emphasize that international cooperation ultimately depends on mutual
confidence and trust, and on good working relationships among people involved
in decision making. These intangibles are particularly important in times of stress,
when decisions must be made quickly.

principles and procedures of private sector debt workout, features such as prioritization of claims
and standstill provisions. Developing such a mechanism is im portant if we wish to facilitate
early resolution of these problems—always key in workout situations—and give the private
sector a larger role. I am optimistic and hopeful that our need for such mechanisms will be rare,
and that an episode such as the Mexican situation will lead to a self-correcting mechanism by
sensitizing other countries to avoid overdependence on large inflows of portfolio capital.
In closing, I want to emphasize that international cooperation ultimately depends on mutual
confidence and trust, and on good working relationships among people involved in decision
making. These intangibles are particularly im portant in times of stress, when decisions must be
made quickly w ith little time for the deliberative process. Central bankers have a long tradition
of close contacts and working well with each other. The BIS m onthly meetings in Basle, for
example, provide an opportunity for central bankers not only to exchange views on current
developments and policies, but also to get to know each other on a personal level. Over the
years, mutual understanding based on these contacts has proven vital in dealing with problem
situations.
And yet all the contacts among central bankers will accomplish little if you, the people who are
in the markets every day trying to do the best you can for your customers and maximizing
profits for your institutions, do not keep ever present your own collective interest in and re­
sponsibility for the safety and soundness of financial markets. As somebody who was a com­
mercial banker for twenty-two years, with responsibility for foreign exchange operations for




13

that entire period, and a central banker for just over three years, I could not be more convinced
that you and we are in this together. The world in which we live is not only a saner one, but
over time a much more consistently profitable one for you, if central bankers and market prac­
titioners w ork together to make these complicated, difficult, and yet intellectually fascinating
markets both safe and sound.
Thank you for giving me the honor to present this year’s Roy Bridge Memorial Lecture.

14



MONETARY POLICY AND OPEN MARKET
OPERATIONS DURING 1994

IN T R O D U C T IO N
In 1994, the operating techniques for implementing monetary policy remained similar to those
of recent years; however, the Trading Desk at the Federal Reserve Bank of New York gained
slightly more flexibility in its execution of open market operations after the Federal Open Mar­
ket Committee began announcing its policy actions in February. As a consequence of the
change in procedures, open market operations were no longer used to communicate policy
shifts. Nearly all the Desk’s operations added reserves because cumulative reserve shortages
were substantial for the fourth consecutive year. These deficiencies reflected the continued
rapid expansion of currency, which stemmed in part from heavy currency shipments abroad.
W orking in the other direction were declines in the demand for reserve balances arising from
monetary policy tightening. Higher interest rates reined in the growth of transactions deposits
and reduced the balances that banks were required to hold at the Federal Reserve. As these
balances fell, banks lost some flexibility in managing their reserve positions, and by year-end the
potential for operating difficulties associated with low balances had reemerged.
The next section of the report briefly reviews the course of monetary policy in 1994 and de­
scribes the responses of the fixed-income securities markets to economic and policy develop­
ments. Monetary policy moved away from the accommodative stance that had been in place for
some time as the robust pace of economic growth cut into remaining excess productive capacity.
W ith the economy expanding rapidly and the Federal Reserve acting to restrain inflationary

Adapted from a report to the Federal Open Market C om m ittee by Peter R. Fisher, Executive Vice President o f the Bank and
Manager o f the System Open Market Account. Ann-Marie Meulendyke, A dviser , Open Market Function , and Spence H iltony
Manager, Open Market Trading and Analysis Staff were prim arily responsible fo r the preparation o f this report. Other
members o f the Open Market Function assisting in the preparation were Robert Van Wicklen , Theodore Tulpany Eileen
Steigledery and Steve Zannetos. W illiam Mayy Economist, Financial Markets and Institutions D epartm ent , also assisted.




15

pressures, interest rates moved sharply higher and the yield curve flattened. The extent of the
rise in yields took many market participants by surprise, contributing to losses and a few bank­
ruptcies, particularly by highly leveraged accounts.
The final section of this report discusses the Open Market Trading Desk’s implementation of
the objectives established by the Federal Open Market Committee (FOMC). It reviews policy
techniques and factors affecting reserve supplies and demands over the year. In 1994, the Desk
added a net $32 billion to its securities portfolio, the second largest annual increase. Repurchase
agreements w ith relatively short maturities were used extensively by the Desk to manage
reserves within two-week reserve maintenance periods; such transactions are well adapted to
handle short-term variations in reserve levels and the frequent revisions to estimated reserve
needs. In addition, pricing of daylight overdrafts, which began in April, had the potential to
complicate policy implementation, but the actual effects on operations proved to be minimal.
M O N E T A R Y P O L IC Y A N D F IN A N C IA L M A R K ET RESPO N SE
THE COURSE OF MONETARY POLICY
Monetary policy in 1994 was formulated against a background of rapid economic growth and
rising resource utilization but generally modest aggregate price increases. The FOM C increased
reserve pressures at five of eight meetings and once between meetings, resulting in a cumulative
increase of 2Vi percentage points in the federal funds rate (Table 1). Asymmetric directives
indicating a greater likelihood that future changes in policy would be toward restraint were
adopted at the three meetings where no change was made to existing pressures. Meanwhile, the
Board of Governors approved three increases in the discount rate totaling VA percentage points.
When determining the stance of policy, the FOM C continued to m onitor a broad range of
economic and financial indicators. Annual targets were still set for the broader monetary aggre­
gates, but the FOM C placed limited weight on the aggregates because of the considerable uncer­
tainty that persisted about the behavior of their velocities.1

Economic background
The economic expansion remained on solid footing throughout 1994, with personal consump­
tion, business investment, and inventory accumulation the mainstays of growth (Table 2). Con­
sumer outlays for durable goods were particularly robust, and producers’ durable equipment
purchases remained strong for the third consecutive year. The rate of inventory investment
picked up over the first two quarters and remained at relatively high levels for the rest of the
year. The pace of expansion was moderated by developments in other sectors: residential
construction activity cooled off as the year progressed, government expenditures trended lower,
and the trade balance remained a modest drag. Despite these offsetting factors, by year-end the

16






Table 1

S PE C IF IC A T IO N S FR O M D IR EC TIV ES O F T H E FED ER A L O P E N
M A RK ET C O M M IT T E E A N D R ELA TED IN F O R M A T IO N

Date of
M eeting

Specified
Short-Term
G row th for
M2 and M3

D iscount
Rate
(Percent)

Borrow ing
A ssum ption
for D eriving
N onborrow ed
Reserve Path
(M illions
of Dollars)

Associated
Federal
Funds Ratea
(Percent)

Effect on
Degree of
Reserve
Pressure

12/21/93

Moderate grow th over
coming m onths

3

50

3

M aintain

2/3 to
2 /4 /9 4

M oderate grow th over
the first half of the year

3

50
75 on 2 /4 d

3'/4

Increase
slightly

3/22/94

M oderate grow th over
the first half of the year

3

3 Vi

Increase
slightly

75
100
125
150
175

on
on
on
on

3/23d
4 /1 8d
5 /5c
5/12°

Guidelines for M odifying
Reserve Pressure
between Meetings
Slightly greater reserve
restraint or slightly lesser
reserve restraint might
be acceptable.

ft

334 on 4/18

5/17/94

M odest grow th over
coming m onths

3 ‘/2

175e
200 on 5/19°
225 on 5/26°
325 on 6/23c

4 lA

Increase
som ew hat

7/5 to
7 /6 /9 4

Modest grow th over
coming m onths

V/2

325
375 on 7 /7 c
425 on 7/21°
450 on 7/28°

4%

M aintain

Slightly greater reserve
restraint would be
acceptable; slightly lesser
reserve restraint might be
acceptable.

8/16/94

Modest grow th over
coming m onths

4

450e
475 on 8/18°
500 on 8/25°
475 on 9/1°

43/i

Increase
som ew hat

Slightly greater reserve
restraint or slightly lesser
reserve restraint would be
acceptable.

9/2 7 /9 4

Modest grow th over the
balance of the year

4

475
450
425
375
325
275
225

43/4

M aintain

Somewhat greater reserve
restraint would be
acceptable; slightly lesser
reserve restraint might be
acceptable.

on
on
on
on
on
on

10/6°
10/13°
10/20c
10/27°
11/3°
11/10°

11/15/94

M odest grow th over
coming m onths

4:'A

225e
175 on 11/24°
125 on 12/8°

5]/2

Increase
significantly

Somewhat greater reserve
restraint or somewhat
lesser reserve restraint
would be acceptable.

12/20/94

M odest grow th over
coming m onths

4%

125

5

M aintain

Somewhat greater reserve
restraint would be
acceptable; slightly lesser
reserve restraint might be
acceptable.

a The trading area for the federal funds rate that is expected to be consistent with the borrowing assumption.
b Modifications to reserve pressures are evaluated “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.”
c Change in borrowing assumption reflects technical adjustment to account for actual or prospective behavior of seasonal borrowing.
d Change in borrowing assumption reflects adjustment to reserve pressures.
e The assumption was unchanged because the full effect of the discount rate increase was allowed to show through to the market.

17

Table 2

O U T P U T A N D PRICES
Seasonally Adjusted Annual Rates of Change, Except as Noted
1992-1V 1993-IV
to
to
1993-IV 1994-1V

1993
IV

I

II

III

IV

6.3

3.3

4.1

4.0

5.1

3.1

4.1

-2.2

14.6

33.8

-2.1

-7.7

4.2

38.6

6.4

2.2

1.5

4.3

5.7

3.0

3.4

4.0

4.7

1.3

3.1

5.1

3.0

3.5

15.5
2.4
2.0

8.8
3.8
4.0

0.4
2.2
1.1

5.8
3.3
2.2

20.4
3.1
2.3

9.0
1.3
2.5

8.6
3.1
2.4

1994

Output
Real GDP
Change in inventory accumulation3
Final sales
Consumption
Durables
Nondurables
Services
Producers’ durable equipment
Nonresidential structures

27.5

18.6

6.1

18.1

19.6

21.3

15.5

3.3

-11.8

20.6

1.6

11.0

1.6

4.6

28.2

10.0

7.0

-6.0

2.3

8.1

3.1

Change in net exports3

4.1

-21.8

-7.8

-5.2

9.9

-43.7

-24.9

Government purchases

-0.1

-4.9

-1.2

6.7

-4.1

-1.0

-1.0

4.0

3.6

4.1

4.1

4.6

-2.2b

Residential fixed investment

Addenda

Industrial production

0.6b

5.3

7.0

6.2

4.9

6.0

3 .6

6.0

82.3

83.2

83.8

84.3

84.9

1.2b

2.6b

Civilian unemployment rate (level)

6.5

6.6

6.2

6.0

5.6

o
bo
cr

Savings rate (percent of disposable income)

-1.0b

Change in nonfarm payroll
employment (thousands)

608

613

1,019

913

873

2,235

3,418

-9

31

47

59

105

-119

242

Capacity utilization rate (level)

Change in manufacturing
payrolls (thousands)
Prices
Consumer price index
Total
Excluding food and energy

3.3

2.1

2.6

3.6

2.2

2.7

2.6

2.8

2.9

3.0

3.0

2.3

3.1

2.8

-0.1

2.7

0.2

2.1

0.3

0.2

1.3

-0.6

2.9

1.9

1.9

0.0

0.2

1.7

0.8

2.2

1.6

5.0

6.5

1.1

3.8

Producer price index
Finished goods
Excluding food and energy
Intermediate goods
Implicit GDP deflator

1.3

2.9

2.9

1.9

1.3

1.8

2.3

Fixed-weight GDP index

2.6

2.9

3.2

2.8

2.8

2.8

2.9

Employment cost index

3.4

3.0

3.3

3.3

2.6

3.4

3.1

Note: Data are as of April 12, 1995.
a Billions of 1987 dollars.
b Change in rate.

18




rapid pace of output expansion had brought resource utilization rates up to levels associated
historically with rising inflationary pressures. The unemployment rate fell to 5.4 percent in
December, and the industry operating rate stood at 85.4 percent.
Although the slack in the economy steadily diminished, aggregate price increases for final goods
and services remained modest. Inflation, as measured by the fixed-weight GDP deflator and the
consumer price index, showed no deterioration; increases in producer prices for finished goods
remained low; and labor cost increases were restrained. Nonetheless, evidence accumulated that
price pressures could be intensifying. Producer price increases at the intermediate stage of pro­
duction accelerated, and manufacturers increasingly reported paying higher prices for their inputs.

Policy initiatives
The initial monetary policy move came at the February FOM C meeting; it represented the first
change in reserve conditions since September 1992 and the first move toward tightening since
early 1989. The Committee adopted a limited measure, associated with a ^-percentage-point
rise in the federal funds rate, because of the likelihood that this first step toward firming policy
in some years might be magnified in the financial markets. At the same time, it was felt that this
action would effectively signal the Committee’s anti-inflation intentions.
In a departure from past practice, the Chairman of the FOM C issued a brief public statement
announcing this policy decision in order to avoid misinterpretation of the Committee’s actions
by market participants. Similar brief statements were issued on a case-by-case basis to announce
the other FOM C policy changes during 1994.
The Committee raised reserve pressures slightly further at its March meeting, with the federal
funds rate expected to rise another X
A percentage point. The Committee again limited the size
of the move to avoid any overreaction in the financial markets. A third slight upward adjust­
ment in reserve pressures was made between meetings in mid-April. At the May meeting, with
the economy evidently expanding on a solid and self-sustaining basis, the FOM C voted to have
the full V^-percentage-point increase in the discount rate that had been approved that day by the
Board of Governors show through to reserve conditions. The Committee felt that financial
markets could absorb this more aggressive policy adjustment. The Federal Reserve press release
announcing these moves stated that “these actions, combined with the three adjustments initi­
ated earlier this year by the FOM C, substantially remove the degree of monetary accommoda­
tion that prevailed throughout 1993.”
At the conclusion of the July FOM C meeting, at which no policy change was initiated, a Federal
Reserve press spokesperson indicated that the meeting had adjourned and that no further




19

announcement would be made. The Committee authorized this step to avoid uncertainty about
its intentions. Similar statements were authorized following the other two Committee meet­
ings at which no rate actions were taken.
The FOM C next raised reserve pressures at its August meeting, when the full am ount of a
V2-percentage-point hike in the discount rate approved by the Board that same day was passed
through to reserve markets. A Federal Reserve press statement indicated that “these measures
were taken against the background of evidence of continuing strength in the economic expan­
sion and high levels of resource utilization,” and went on to add that “these actions are expected
to be sufficient, at least for a time, to meet the objective of sustained, noninflationary growth.”
The economy continued to display considerable forward m om entum over the autumn, and
there was some sense that past policy actions might be having less effect than expected, even in
sectors believed to be especially sensitive to interest rate increases. At its November meeting,
the Committee agreed that a substantial firming in policy was appropriate. In its final policy
move of the year, the Committee voted to pass through to reserve conditions the full effect of a
34-percentage-point hike in the discount rate approved that day by the Board of Governors.
FINANCIAL MARKET DEVELOPMENTS
Interest rates across the m aturity spectrum rose sharply in 1994. Yields on Treasury coupon
securities ended the year 150 to nearly 350 basis points higher than they were a year earlier,
while the coupon yield curve flattened substantially (Charts 1-2).

Chart 1

YIELD CURVES FOR SELECTED U.S. TREASURY SECURITIES
Percent

Notes: Treasury bill yields are on a bond-equivalent basis. Coupon yields are constant maturity values.

20




Yields rose dramatically in the first few m onths after the Federal Reserve began to tighten
policy in early February. By mid-May, the yield on two-year Treasury notes had risen about
180 basis points, and the thirty-year bond yield was up more than 110 basis points. Market
analysts sensed that the economy retained significant forward momentum and anticipated that
the Federal Reserve would respond forcefully to ward off inflationary pressures. Consequently,
rates on many short- and intermediate-term securities rose, and a wide spread emerged between
theseyields and the federal funds rate.
Longer term yields also rose as investors grew anxious over whether the gains made in reducing




Chart 2

SHORT- AND LONG-TERM INTEREST RATES
Percent

1993

1994

Notes: All rates are averages for weeks ending Wednesdays. Treasury bill rates are discount rates; note
and bond yields are constant maturity yields. Moody's Aaa-rated corporate bond and municipal bond
yields are based on issues with an average maturity of twenty years.

21

inflation in recent years might begin to erode. Market participants focused on the inflation
risks posed by the shrinking degree of economic slack, and they were disturbed by information
appearing in manufacturers’ surveys, as well as evidence from commodity price movements,
that suggested an intensification of price pressures. Rising interest rates in European countries
and weakness in the dollar spilled back and reinforced the upward m om entum in domestic
yields. Hedging activity in the mortgage-backed-debt market, a sector particularly hard hit by
the sharp rise in yields, lifted rates on intermediate-term Treasury securities.3
From mid-May through August, yields moved in a broad trading range. Large rate movements
were often followed by abrupt reversals, a pattern that resulted in generally small net changes.
Investors responded to economic data that presented a mixed picture. Episodes of dollar weak­
ness continued to weigh on sentiment, as they did interm ittently throughout the year. Mean­
while, the monetary policy adjustments in May and August were believed to have brought
policy to a more neutral position, and they encouraged brief rallies in debt markets.
Driven largely by a spate of strong economic statistics, interest rates across most maturities
resumed their climb from September to early Novem ber, rising by 65 to 85 basis points.
Measures of resource utilization notched higher, and a string of reports showing a resilient
housing sector raised questions about the impact of previous interest rate hikes. Survey results
of input price pressures faced by manufacturers continued to flash warning signals. By late
autumn, it was widely felt that the economy was bumping up against its long-run capacity
limits, and many traders began to fear that the Federal Reserve was falling behind in its efforts
to rein in inflationary pressures. In late October, the yield on the most recently auctioned
thirty-year Treasury bond exceeded 8 percent for the first time in more than two years.
From just before the November FOM C meeting until year-end, the Treasury coupon yield
curve flattened further. Short-term Treasury coupon yields rose by another 65 basis points, while
long-term yields edged down about 20 basis points. The Committee’s action in November, viewed
by market participants as aggressive, and continued strong economic statistics convinced most
analysts that further policy tightening moves were in store and put upward pressure on shorter
term rates. Selling in the front end of the yield curve was exacerbated by liquidations and
hedging of portfolios made unprofitable by higher interest rates. Adding to the pressure was
the disposal of the securities held by the Orange County, California, Investment Pool after its
steep financial losses became known.4 Meanwhile, the November policy action and continued
favorable aggregate price statistics instilled confidence that the Federal Reserve would succeed
in preventing a significant increase in inflation pressure. This expectation helped to bring down
longer term yields.

22




The sharp increases in interest rates in 1994 also had profound effects on investor returns, finan­
cial flows, and issuance in the fixed-income markets (Table 3). Investors holding portfolios con­
sisting of longer maturity securities sustained particularly heavy losses. The Lehman Brothers
Long Treasury Bond Index fell 7Vi percent, the first yearly decline in this measure since 1987
and the steepest decline in the twenty-two years spanned by the index. N et returns for most
categories of bond mutual funds were negative in 1994, in many cases after the funds posted
strong earnings the previous year. Throughout 1994, there were reports of institutions suffering
steep financial losses in domestic securities markets. In some cases, the losses were linked to
exposures to derivative instruments that magnified the effect of yield movements on interest
payments.
Efforts to reduce exposure to rising interest rates spurred huge reinvestment flows in financial
markets. Redemptions from bond mutual funds soared following a year of heavy inflows, and
withdrawals frequently outpaced inflows as investors reacted to reports of poor performance.
The growth in noncompetitive awards at Treasury auctions suggested that many participants
began to redirect their investments into securities markets. A heightened sense of uncertainty
in financial markets accompanied these elevated flows. Implied price volatility in longer term




Table 3

M EASURES O F P E R F O R M A N C E A N D A C T IV IT Y IN D O M ESTIC
SECU RITIES M ARKETS
1994

1993

-7.6

17.3

-3.3
0.0
-3.4
-3.9
-6.5

9.8
5.8
9.5
19.0
12.4

206
27
154

266
56
280

-44

114

Portfolio returns (percent)
Longer run Treasury issues
Mutual funds
Intermediate-term Treasury debt
Short-term Treasury debt
Intermediate-term corporate debt
High-yield corporate debt
General municipal debt
Gross debt issuance (billions of dollars)
Investment-grade corporate debt
Below-investment-grade corporate debt
Municipal securities
Financial flows (billions of dollars)
N et bond mutual fund inflows

Sources: Returns on longer run Treasury issues are based on the Lehman Brothers Long Treasury Bond
Index and reflect changes in principal value and coupon income. Returns for the various categories of
mutual funds are from Lipper Analytical Services, Inc. Debt issuance data are from Securities Data Com­
pany. Mutual fund flow data are from the Investment Company Institute.

23

Treasury issues was substantially higher in 1994 than in 1993 (Chart 3). Meanwhile, new issuance in
major sectors dropped significantly, in part reflecting higher borrowing costs.
IM P L E M E N T A T IO N O F P O L IC Y
OPERATING PROCEDURES
In 1994, the FOM C continued to express its policy directives in terms of a desired degree of
reserve pressure. Reserve pressure effectively refers to the costs and other conditions under
which the Federal Reserve makes reserves available to the banking system. The FOM C has
informally used the federal funds rate as a guide for evaluating conditions of reserve availability
since the late 1980s.
In addition, the FO M C has continued to express reserve pressures in term s of borrow ed
reserves, an approach that involves using nonborrowed reserves to satisfy most, but not all, of
the demand for reserves, while forcing banks to meet remaining needs at the discount window,
where access is rationed. When the FOM C has increased (or reduced) reserve pressures without
a change in the discount rate, expected borrowing has been adjusted upward (or downward)
accordingly. The adjustments have been based on the premise that the more the banks are
forced to borrow at the discount window to meet their demand for reserves, the more they will
bid up the federal funds rate relative to the discount rate.

Chart 3

IM PLIED VOLA TILITY OF TREASURY BOND FUTURES PRICES
Percent

1994
Source: Bloomberg L.P.
Notes: Chart presents the monthly averages of daily price volatility for at-the-money call options.
All prices are for near-month futures contracts.

24



In the late 1980s, however, the relationship weakened appreciably, in part because a series of
banking crises had encouraged observers to associate discount window borrowing with financial
difficulties. As a result, banks became extremely reluctant to borrow. Although the banking
crises have passed and the association of discount window borrowing with financial problems
presumably has faded somewhat, banks apparently still have a reluctance to utilize their borrow­
ing privileges. Consequently, if borrowing were forced to higher levels, the federal funds rate
probably would rise substantially more than it had in the past. Against this background, the
Desk has continued to develop objectives for nonborrowed reserves calculated as estimated
demands for total reserves less the allowance for adjustment and seasonal borrowing. Whenever
actual discount window borrowing has differed significantly from the allowance, however, the
Trading Desk has accepted the deviation and informally modified the nonborrowed reserve
objective accordingly, rather than force unwanted changes in the federal funds rate.5
Between February and April, the FO M C ’s reserve tightening actions lifted the anticipated spread
between the federal funds and discount rates from zero, where it had been since September 1992,
to 75 basis points. The spread remained at 75 basis points for the balance of the year because the
last three policy steps involved equal changes in both rates. (Actual levels of borrowing and the
effective federal funds and discount rates are presented in Chart 4.)
With this widening of the spread, borrowing could have been expected to increase significantly.
However, adjustment borrowing actually decreased slightly in 1994, averaging $65 million a day
compared with $75 million a day in 1993. Although the decrease is outwardly surprising, closer
examination of the data shows some indications of the expected association between borrowing
and the funds rate. Adjustment borrowing did pick up on reserve-period settlement days, and it
rose for most size classes of banks. Settlement-day adjustment borrowing averaged $336 million
in 1994, almost double the $180 million average in 1993. Adjustment borrowing on nonsettlement
days by small- and medium-sized banks also increased in 1994, although by less than would have
been expected on the basis of historical relationships from the early 1980s. Some of the shortfall
in borrowing likely reflected a continuing reluctance to utilize the discount window, but the
strong liquidity positions of many of these banks also may have played a role. Small- and
medium-sized banks usually account for a considerable portion of nonsettlement-day borrowing.
The decline in average borrowing resulted entirely from a reduction in nonsettlement-day bor­
rowing by large money center banks. These banks have traditionally concentrated their borrow­
ing on settlement days, and in 1994 all of their borrowing occurred on those days. By contrast,
members of this group borrowed seven times on nonsettlement days in 1993, either because of
operational difficulties or temporarily elevated funds rates.




25

In the case of seasonal borrowing, the rate incentive for stepped up borrowing in 1994 was small
because the rate charged on seasonal borrowing closely tracked federal funds and certificate of
deposit rates. Nonetheless, seasonal borrowing was persistently higher than in recent years; it
averaged $193 million in 1994, compared with $109 million the year before. It still followed the
typical seasonal pattern, which reflected demands for agricultural loans (Chart 5). As a result, the
Desk made ten upward technical adjustments to the formal borrowing allowance between May
and August 1994 and nine downward adjustments over the remainder of the year. The increased
use of the program was related in part to a marked rise in demand for farm credit at small banks.
In addition, strong loan demand at midwestern correspondent banks might have constrained the
correspondents’ ability to provide seasonal funding to their respondent banks.6

Chart 4

B O R R O W IN G AND THE BEHAVIOR OF THE FEDERAL FUNDS RATE
AND THE D ISC O U N T RATE
M aintenance Period A verages

M illions o f dollars
800
j A djustm ent borrow ing
| Seasonal borrow ing

600

400

200

llll

Iillli

Percent

N ote: D isco u n t rate reflects Federal R eserve Bank o f N e w York rate.

26




uiiii

Chart 5

SEASONAL BORROWING
Millions of dollars

Maintenance periods
Notes: Data are maintenance period averages and are not seasonally adjusted. For each set of annual
observations, period 1 covers the end of the preceding year.

THE DESK’S APPROACH TO RESERVE MANAGEMENT7

Reserve patterns over the year
The behavior of narrowly defined money, M l, had an im portant influence on reserve supplies
and demands over the year.

Currency registered another year of strong growth, and the result­

ing record $37 billion increase in currency in circulation was the primary factor behind the subO

stantial need to provide reserves in 1994.

A decline in the deposit component, however, limited

the overall growth of M l and contributed to a fall in the demand for reserves. Consequently,
required reserves, the prim ary source of demand, slipped by about $2 billion, reducing the need
to add reserves over the year.
Several other factors also modestly reduced the Desk’s need to provide reserves. Applied vault
cash, a source of supply, increased by about $3 billion, in part mirroring the currency expansion.
Rising interest rates led banks to cut their required clearing balances by about $2 billion as the
rate at which they accumulated earned income credits rose.10 Because the declines were not offset
by higher excess reserves, the lower clearing balances lessened the overall need to provide reserves.
These balances had been increased sharply in 1991 and 1992, when banks were adapting to lower
required reserve levels, and had been lifted modestly in 1993.11 On balance, cumulative changes in
other supply and demand factors had smaller effects on total reserve needs over the year.




12

27

Outright transactions and changes in the System portfolio
The Trading Desk met the ongoing need to add reserves by increasing the Federal Reserve System’s
portfolio of U.S. government securities. Altogether, the Desk purchased about $25 billion through
six operations conducted in the market, four of them involving Treasury coupon issues.13 As in
the past, the market entries were arranged when available forecasts suggested that large reserve
shortages would persist for at least several maintenance periods. The market purchases were
supplemented by nearly $11 billion of acquisitions from foreign accounts, almost entirely Trea­
sury bills. These purchases, typically modest in size, were arranged when orders were compatible
with estimated reserve needs.
For a second consecutive year, the Desk did not sell securities, although it did redeem some.
Because the Treasury no longer sells seven-year notes, the System’s holdings of these notes must
be redeemed early in each quarter as they mature; over $2 billion came due in 1994. The Desk
also redeemed agency securities when no suitable replacement securities were offered and when
issues were called. Holdings of these issues fell for the fourteenth year in a row, declining by
almost $1 billion, to $3.6 billion.
As a result of the D esk’s outright activity, total holdings in 1994 grew by $32 billion, to
$376 billion. Although somewhat less than the record rise of 1993, this increase was still the
second highest ever. Slightly more than half of the increase occurred in Treasury bills, while
growth in coupon holdings was strongest in the one-to-five-year sector. Consequently, the
weighted average m aturity of the System’s holdings was virtually unchanged in 1994.14

Temporary operations
The Desk used self-reversing operations to meet the reserve shortages that developed between
its outright operations and to address reserve imbalances created by short-lived movements in
other factors affecting reserves. Almost all of the tem porary operations in 1994 added reserves
because of the underlying growth in reserve shortages and the Desk’s preference for letting
deficiencies build to a sizable level before arranging outright purchases. In fact, the Desk
entered only one maintenance period facing an estimated need to drain more than a very small
amount of reserves, and even that surplus was subsequently erased by revisions to forecasts of
operating factors. Consequently, only five matched sale-purchase agreements were arranged all
year, and none exceeded one business day.
All told, the Desk arranged $362 billion of repurchase agreements (RPs) for the System and
$113 billion that were customer-related. The num ber and average size of multiday System RPs
both fell in 1994. Several factors contributed to these declines. A greater share of the year’s

28



reserve needs was met with outright operations: the Desk typically made outright purchases that
left a remaining estimated need to be met with RPs, but on several occasions actual needs fell
below the estimated needs. In addition, the Desk further increased its use of fixed-term opera­
tions in 1994 (discussed below), reducing the need for replacement RPs to offset early withdrawals.

Managing reserves within a maintenance period
When developing strategies for each maintenance period, the Desk took into account the esti­
mated day-to-day distribution of reserve shortages or excesses, the potential for revisions to
15
reserve estimates, and bank reserve management strategies.
The Desk generally met each
period’s reserve needs gradually in order to accommodate sometimes uneven reserve distribu­
tions and possible revisions. It often arranged a series of multiday RPs, many of which matured
in three or four days. The Desk also continued to be guided by the federal funds market. When
faced with conflicting information between the funds rate and forecasts of reserve supply and
demand, the Desk had to evaluate which indicator was likely to provide the more reliable
information about reserve availability.
Banks’ reserve management strategies can affect the funds rate because they influence reserve
demands within a maintenance period. As several previous reports have explained, the cuts in
reserve requirement ratios made between 1990 and 1992 reduced the level of required operating
balances at the Federal Reserve.16 These lower levels increased the likelihood that depository
institutions would be unable to eliminate unwanted excess positions without running an over­
night overdraft. Consequently, in the early 1990s, depositories tended to concentrate their
reserve holdings late in a period, showing particular caution about holding excess reserves over the
weekend, when reserves count for three days. This reluctance to hold reserves over a weekend
was the main contributor to soft funds rates on Fridays.
In 1994, banks used these reserve management practices less aggressively. By the end of 1993,
rapid growth in required reserves and clearing balances had restored required operating balances
to the levels prevailing right before the initial round of cuts in reserve requirement ratios in late
1990 (Chart 6). Perhaps as a result, the distribution of demands for excess reserves within a
maintenance period appeared less skewed in 1994 than it had been in the preceding three years.17
Moreover, the degree of softness on Fridays was typically slight. Nonetheless, banks were still
reluctant to accumulate large excess reserve holdings early in a maintenance period. By the end
of 1994, the level of required operating balances had once again fallen back to the lower levels
seen in late 1991 and in 1992, thus reducing banks’ reserve management flexibility. This decline
reflected the drops in required reserves and clearing balances and the expansion in applied vault
cash noted earlier.




29

The Desk further increased its use of fixed-term RPs on Thursdays to run through the weekend,
a strategy that avoided the risk of large early withdrawals on Fridays if the federal funds rate
traded to the soft side while a large reserve need remained. The Desk believed that if withdraw­
able RPs had been arranged on a Thursday, dealers probably would have opted to refinance at
lower rates the next day, forcing the Desk to find another opportunity to add back the reserves.
The Desk also expanded the use of fixed-term RPs on the first Monday through Wednesday of
each period, again to avoid unwanted withdrawals and to reduce the num ber of operations.

18

Withdrawable RPs were still useful at times, particularly when the Desk felt that operating
factors or required reserves might turn out to be sufficiently different from estimates to sharply
reduce or eliminate the estimated reserve need. Thus, withdrawable RPs continued to be used
over the final few days of many maintenance periods.
Market speculation during the year that monetary policy might be tightened sometimes put
upward pressure on the federal funds rate that did not seem justified by estimates of reserve
imbalances. The Desk remained sensitive to these situations when formulating its operations
strategy to avoid any misunderstanding by market participants, who continued to view open
market operations as a possible indicator of policy shifts.19 Consequently, on several occasions
when the funds rate was very high, the Desk arranged overnight System RPs, in part to prevent
any perception that it was either paving the way for a firming in policy or hinting at a Commit-

Chart 6

REQUIRED O PER A TIN G BALANCES
Billions of dollars

Maintenance periods
Notes: Data are maintenance period averages. For each set of annual observations, period 0 is equal
to the last complete maintenance period of the preceding year. Period 1 is the maintenance period
that spans the year-end.

30



tee inclination to change policy.

20

As the year progressed and market analysts began to assume

that the FOM C would indicate its policy actions through a public announcement, market partici­
pants came to feel that the Desk’s open market activities were less likely to be used to commu­
nicate policy shifts. This perception gave the Desk more flexibility in selecting its operations to
meet its reserve objectives.

Trading Room Automated Processing System
In 1994, the Desk began arranging its open market operations using the Trading Room Auto­
mated Processing System (TRAPS). Under TRAPS, the Desk announces reserve operations and
dealers respond with their propositions through Fedline terminals. The system is also used to
process operations and to notify dealers of the results. The Desk started using TRAPS for its
temporary operations in July, followed in August by the first outright market purchase using
the system.
DAYLIGHT OVERDRAFT PRICING
O n April 14, the Federal Reserve began charging banks a fee of 10 basis points on overdrafts
incurred in their reserve accounts during the day.

21

Previously, daylight overdrafts had been

subject to size limitations related to a bank’s capital, but they were not subject to charges. For
a few banks, such daylight overdrafts were substantial. The Trading Desk anticipated that the
charges might affect its own operations by encouraging changes in the functioning of the federal
funds and RP markets and in some banks’ reserve management techniques. In preparation for
pricing daylight overdrafts, Federal Reserve personnel had conversations with market partici­
pants and undertook some contingency planning. As it turned out, however, Desk operations
were minimally affected in 1994.
Before charges were assessed for daylight overdrafts, reserve management was focused on endof-day reserve balances rather than on intraday balances. End-of-day balances are important
because they meet reserve requirements. Furthermore, banks need reserve balances at the end
of the day to avoid overnight overdrafts and their associated stiff charges. In fact, total reserve
balances vary considerably during the day, rising whenever the Federal Reserve or any entity
maintaining an account at the Federal Reserve—the federal government, federally sponsored agen27

cies, or foreign official institutions—makes payments and falling whenever it receives payments. “
The most dramatic movements in intraday balances, however, have been in the distribution of
reserves, with large intraday balances occurring at some banks and huge overdrafts at others
during part of the day.

23

The previous absence of fees had encouraged practices that resulted in large daylight overdrafts.
For example, many financial market transactions, such as interbank federal funds and RP con­




31

tracts, did not specify transaction settlement times. Yet receipt and return times do influence the
intraday distribution of reserves. In federal funds transactions, the sending bank controls the
timing of the reserve transfer. Under daylight overdraft pricing, it was thought that banks facing
intraday reserve charges might delay sending federal funds in order to increase their intraday
balances. If Fedwire traffic became concentrated near the end of the day, the funds market could
lose liquidity, thus making the rate a less reliable indicator of reserve availability.
In practice, however, after daylight overdraft pricing began, the average time for sending funds
transfers over Fedwire moved only slightly later in the day. Apparently, many banks did not
change their practices because they did not face large enough daylight overdrafts from their funds
transactions to justify the cost of making changes. Federal funds brokers did report that some
requests for transactions specified sending or returning funds during specific time periods and
noted that some potential trades were rejected because the counterparty was reputed to be a “late
sender.” But these restrictions affected only a small portion of trades, and therefore did not
impede market liquidity.
For securities transactions, the sender of the securities controls the transaction time. Conse­
quently, banks lose reserve balances when they receive securities, but they cannot control the
time at which that happens.24 Dealers, who rely heavily on RPs to finance inventories, tradition­
ally had their clearing banks send the securities to their counterparties’ custody banks between
late morning and early afternoon. Then, on the m aturity date, the counterparties’ banks typi­
cally returned the securities at the opening of business. The prevalence of this timing pattern
caused both the dealers’ and their banks’ accounts to be overdrawn during the morning because
the dealers began the day with small working balances. In anticipation of daylight overdraft
pricing, the clearing banks informed their customers that they would pass on the overdraft charges.
Dealers indicated in conversations with the Federal Reserve that they planned to speed up their
negotiation and processing of RPs in the morning so that any securities being returned and then
refinanced would leave their accounts more quickly. Some participants predicted that this speedup
in RP operations would cause the market to be liquid only briefly early in the morning. Such a
development was of particular concern to the Federal Reserve because the Desk’s temporary
open market operations are routinely executed around 11:30 a.m. The Federal Reserve had
chosen that time because information about reserve levels is received and analyzed gradually
over the morning. O nly part of the data flow could be accelerated. If the Desk were forced to
arrange its open market operations a couple of hours earlier, it would have to base its decisions
on less reliable data.

32



To address these concerns, the Desk did make one change in its procedures: it delayed the return
time for the collateral on its own maturing RPs from the opening of business until 11 a.m., thereby
leaving reserves in the banking system for a larger part of the day. It was hoped that the later
return time would encourage the dealers to participate in the late morning operations.
Once pricing began, the RP market did experience a shift toward somewhat more morning activ­
ity, but a number of customers continued to seek RP investments during the late morning and
early afternoon, so market liquidity was retained. More rapid processing of trades has accounted
for most of the reduction in peak and average overdrafts.

25

In addition, the volume of afternoon

trades for next day delivery has increased.
The Desk saw essentially no change in participation rates in its RP operations after April. Deal­
ers reported somewhat smaller inventories of securities left to be financed at midmorning, but
on most days, they were nonetheless able to submit propositions of sufficient size for the Desk
to accomplish its planned operations. Furthermore, dealers’ customers increased their partici­
pation in Trading Desk operations.




33

A P P E N D IX A: T H E M O N E T A R Y A G G REG A TES
Growth of the broader monetary aggregates remained subdued in 1994. The FOM C voted in
February to retain the growth ranges for M2 and M3 adopted on a preliminary basis the previous
summer. These ranges were consistent with the expected slowing of nominal income and the
anticipated continuation of the substantial velocity increases experienced in recent years. The
FOM C reaffirmed these ranges in July. For the entire year, M2 advanced a mere 1.0 percent, at
the lower end of its annual growth cone (Chart Al), while M3 rose only 1.2 percent, within the

Chart AI
M2 : LEVELS A N D T A R G F T S

Chart A2
M3 : LEVELS A N D T A R G E T S

('.ones and Parallel Bands

Cones and Parallel Bands

Billions o f dollars
3800

Billions of dollars
4450
5 .0%

3700 —

^

V
✓x

—

s

* ' /
'
/

'

/

C I 7S ' V

v

_

/

/

Actual

Actual
4250
' '

3500 -

4 .0 %

V

5 .0 %

f
1.0%

1.0 %

s'
•"

0 .0 %

,

s '
11
1992

11 111111i I 1
1993

1 11I 1 11 11I 1
1994

i i i i i i i i i t i

Chart A3
M l : I t . VI :LS A N D G R O W T H R AT E S

Chart A4
D O M E S T I C N O N E I N A N C I A L DEBT:
LEVELS A N D M O N I T O R I N G R A N G E S

Billions of dollars
1200 r -

Billions of dollars
13400

Cones and Parallel Bands
8 .0%
Actual

13000
G row th from
fourth quarter 1992
to fourth
quarter

\

8 .0%
G row th from
fourth quarter 1993.
to fourth
quarter 1994 = 2.4%

v

12600

/

12200

✓/
/ /
/
/

/

'/
11800

/ A
/

/ /

i
y"
/

// /

>

/ /
'
' 4 .0%
/

/
X

/
/

/
1000

34




11400

✓
M i II I I I i I i
i -i
1992
1993

1 1 I i \ J II 1 1 1
1994

lower half of its annual growth cone (Chart A2).

26

Growth in the broader aggregates was held

down in 1994 by weakness in the liquid components, including savings and interest-bearing check­
able deposits.27 These deposits were relatively unattractive because depositories raised rates at
a much slower pace than market rates rose.

28

The preference for m arket investments and

the resultant increase in velocity were factors in the Committee’s decisions to accept the weak
aggregates.
Some components of the broader aggregates, however, did show strength. Depositories sharply
increased their issuance of both overnight Eurodollars and RPs, thus lifting M2. In addition,
during the second half of the year, issuance of consumer time deposits picked up, as did growth
in retail money market mutual funds. M3 received some support from large time deposits and
term RPs and Eurodollars, while institutional money funds were very weak early in the year
but showed more robust growth later. The strength in some of these components reflected
expanded bank funding needs. Total bank credit rose 6.8 percent in 1994, after having grown
5.0 percent the previous year. The increase was concentrated in bank lending; aggregate holdings of securities fell modestly on balance over the year.

29

After three consecutive years of rapid growth, M l rose only 2.4 percent in 1994 (Chart A3). The
slowdown in part reflected substantial increases in opportunity costs, which depressed deposits.
Reduced mortgage refinancing activity also weakened demand deposits, and sweep programs
initiated by several banks lowered other checkable deposits.30 But currency, buoyed by heavy
shipments overseas, registered another year of strong growth, expanding about 10 percent over
the four quarters.
Finally, domestic nonfinancial debt grew by 5.3 percent in 1994 (Chart A4). The improved
balance sheet condition of many borrowers supported growth of nonfederal debt. Total debt
ended the year toward the lower end of its m onitoring range.




35

A P P E N D IX B: RESERVE FO R E C A ST A C C U R A C Y
This appendix reviews the accuracy of staff forecasts of the factors affecting reserve supply and
demand. For the year, the accuracy of the forecasts for required reserves was similar to that
for 1993 at each stage of the maintenance period (see table). The Desk maintained a formal
allowance of $1 billion for excess reserves during each of the twenty-six maintenance periods in
1994, but it often made informal allowances when demand for excess reserves was expected to
be above or below the path allowance.

31

O n average, the estimates available at the beginning of the period of the factors affecting the
supply of nonborrowed reserves improved. The smaller forecast errors largely resulted from
better estimates of the Treasury balance and less distortion from the treatment of premiums on
RPs, while currency projections showed some deterioration.
There was a marked improvement in the first-day estimates of the Treasury’s balance at the
Federal Reserve in 1994, particularly around the im portant September and December tax pay­
ment dates. A surge in tax receipts can cause the Treasury’s total cash holdings to exceed the
capacities of the Treasury Tax & Loan (TT&L) note accounts at depository institutions, with any
excess flowing into the Treasury’s balance at the Federal Reserve. Forecasting the balance in the
Federal Reserve account, therefore, can be particularly difficult around these times. In 1994,
Treasury cash levels were above the capacity of the TT&L accounts on fourteen days, much less
frequently than in 1993, when capacity was exceeded on thirty-two days. Two developments

A PPR O X IM A T E M EA N ABSO LU TE ER R O RS F O R V A R IO U S FO R EC A STS
O F RESERVES A N D O P E R A T IN G FA C T O R S
Millions of Dollars
1994
First
Day
Required reserves

1993

Midperiod

Final
Day

First
Day

Midperiod

Final
Day

285-340

160-170

40-65

290-335

160-180

55-65

65-75

785-885

420-465

55-70

45-50

750-760

365-485

40-45

710-750

425-465

Treasury

610

285-305

Currency

500-515

180-205

15-25

330-400

160-210

10-20

Float

220-250

140-160

25-45

245

150

35-65

Pool

240

90

10

270

110

15

Other items

190

90

35

250

135

20

Factors

Notes: A range indicates varying degrees of accuracy for the staff forecasts of the Federal Reserve Bank of
New York and the Board of Governors. Values are rounded to the nearest $5 million.

36



acco u n ted fo r m uch of the difference:

In S eptem ber 1994, the capacity was about

$8 billion to $10 billion higher than it was a year earlier, making room for more tax receipts. In
December, approximately $35 billion of Treasury cash management bills matured without re­
placement, compared with $14 billion in December 1993. The enlarged maturities limited the size
of the Treasury’s total cash holdings.
Another factor reducing measured forecast errors was a decline in average premiums on RPs and
on coupon securities purchased, elements in the “other items” category. The measured impact of
any reserve transaction is based on the par value of the securities, although the actual impact
depends on the market value of the securities. In practice, the Desk allows for possible net
premiums (premiums less discounts) when they are expected to be large, so that the premiums do
not constitute actual forecast misses. Average net premiums in 1993 had grown to 8 percent on
all RPs and to 15 percent on market purchases of coupons as a result of falling interest rates.
Because of rising interest rates in 1994, however, the average net premiums on securities held
under RP fell back to about 2 percent of the par value, with discounts outweighing premiums on
some operations. Average net premiums fell to 8 percent on coupons purchased in the market.
Currency projections at the beginning of maintenance periods deteriorated in 1994. Currency
often behaved in a manner at odds with past seasonal patterns, which are used for forecasting
purposes. In the first and last maintenance periods of 1994, typically times of large seasonal
swings, currency drained fewer reserves than initially anticipated.




37

A PPE N D IX C: TABLES SU M M A R IZIN G 1994 DESK A C TIV ITY
The tables in this appendix support the text discussion of the Trading Desk’s approach to reserve
management in 1994. The operating factors affecting bank reserves appear in Table C l. The
Desk’s outright operations are summarized in Table C2, and the operations’ effects on the Sys­
tem portfolio are presented in Tables C3 through C5. Temporary operations are reported in
Table C6.

Table C l

RESERVE MEASURES A N D FA C TO R S A F F E C T IN G RESERVES
Maintenance Period
Ended January 4, 1995

Change during
1994a
1993

Bank reserves (m illions of dollars, not seasonally adjusted)

Nonborrowed reserves

61,372

-2,133

6,100

246
151
95

404
25
79

-127
-131
4

60,451

-1,954

6,116

1,167

-74

-144

System portfolio and repurchase agreements outstanding1E

385.3

31.5

36.2

Operating factors
Foreign currency
U.S. currency
Treasury balance
Float
Special drawing rights
Gold deposits
Foreign deposits
Applied vault cash
Other items
Foreign repurchase agreement pool8

17.3
403.0
7.1
0.7
8.0
11.1
0.2
36.4
20.8
8.1

-2.1
-37.2
1.4
-0.5
0.0
0.0
-0.1
3.1
2.1
-0.4

0.7
-31.5
-1.1
-1.2
0.0
0.0
0.1
2.2
1.3
-0.2

Borrowed reserves
Adjustment plus seasonal
Adjustment
Seasonal
Required reservesc
Excess reserves
System portfolio and operating factors (billions of dollars)1*

Note: Figures may not add to totals because of rounding.
a Change from maintenance period ended January 5, 1994, to that ended January 4, 1995.
Change from maintenance period ended January 6, 1993, to that ended January 5, 1994.
0 Not adjusted for changes in required reserve ratios.
Indicates impact of changes in operating factors on bank reserves. All items are biweekly averages.
Matched sale-purchase agreements with foreign accounts are added back in.
Acquisition value plus interest. Revaluations of foreign currency holdings are included in “other items.”
8 Includes customer-related repurchase agreements.




Table C2

SYSTEM O U T R IG H T O P E R A T IO N S BY TYPE O F T R A N S A C T IO N
AND COUNTERPARTY
Billions of Dollars
1994
38.5

1993
38.6

Purchases
Bills
Coupons

35.3
17.5
17.8

36.9
17.7
19.2

Sales
Bills
Coupons

0.0
0.0
0.0

0.0
0.0
0.0

Redemptions
Bills
Coupons
Agency issues

3.2
0.0
2.3
0.9

1.7
0.0
0.8
0.9

24.7

25.4

24.7
7.7
17.0

25.4
8.6
16.8

0.0
0.0
0.0
0.0

0.0
0.0
0.0
0.0

10.6

11.5

Purchases
Bills
Coupons

10.6
9.8
0.8

11.5
9.1
2.4

Sales
Bills
Coupons

0.0
0.0
0.0

0.0
0.0
0.0

Total outright
By type of transaction

By counterparty
Total outright in market
Purchases
Bills
Coupons
Sales
Bills
Coupons
Agency issues
Total outright with foreign accounts

Note: Values are on a commitment basis.




39

Table C3

SYSTEM P O R T F O L IO : SUM M ARY O F H O L D IN G S
Billions of Dollars
Change during
1994
1993

Year-End 1994
Total holdings

376.2

32.1

35.3

185.4
187.1
3.6

17.5
15.5
-0.9

17.7
18.4
-0.9

Bills
Coupons
Agency issues

Notes: Values are on a commitment basis. Changes in holdings are from year-end to year-end. Figures may
not add to totals because of rounding.

Table C4

SYSTEM P O R T FO L IO OF TREASURY A N D FEDERAL A G EN C Y SECURITIES
Treasury Coupon Issues
Total
Portfolio

Treasury Bills

Under One Year
$ Millions

One-to-Five Years
$ Millions

%a

Five-to-Ten Years
$ Millions

End of

$ Millions

$ Millions

1960

26,984

2,900

1965

40,478

9,101

1970

62,142

25,965

1975

93,290

37,708

40.4

1980

131,344

46,994

35.8

1985

190,072

89,471

47.1

1986 210,249

108,571

51.6

18.863

9.0

1987 231,243

112,475

48.6

22,966

9.9

1988 245,756

117,910

48.0

26,123

10.6

55,279

1989 235,566

106,847

45.4

28,883

12.3

54,076

1990 247,586

118,675

47.9

25,963

10.5

58,749

23.7

13,121

1991

278,628

138,732

49.8

30,542

11.0

64,299

23.1

14,469

10.7

39.6

1,178

%a

11,955

44.3

10,680

4.4

22.5

15,478

38.2

14,066

34.7

1,448

3.6

41.8

10,373

16.7

19,089

30.7

6,046

9.7

8,730

9.4

30,273

32.5

6,425

6.9

12,749

9.7

34,505

26.3

13,354

20,179

10.6

35,650

18.8

14.785

36,469

17.3

15,451

47,512

20.5

15,313

22.5
23.0

Over Ten Years
$ Millions

271

0

0.0

385

1.0

0

0.0

669

1.1

0

0.0

4,082

4.4

6,072

6.5

10.2

15,002

11.4

8,739

6.7

7.8

21,759

11.4

8,227

4.3

7.3

23,066

11.0

7,829

3.7

6.6

25,424

11.0

7,553

3.3

12,568

5.1

26,909

10.9

6,966

2.8

12,529

5.3

26,706

11.3

6,525

2.8

5.3

24,736

10.0

6,342

2.6

5.2

24,540

8.8

6,045

2.2

1992 308,848

150,219

48.6

37,758

12.2

68,750

22.3

18,903

6.1

27,805

9.0

5,413

1.8

1993 344,105

167,936

48.8

35,423

10.3

79,826

23.2

24,659

7.2

31,739

9.2

4,522

1.3

1994 376,197

185,419

49.3

35,841

9.5

88,401

23.5

28.053

7.5

34,845

9.3

3,637

1.0

a As percent of total System Account portfolio.




$ Millions

1.0

Notes: Figures may not add to totals because of rounding. Values are on a commitment basis.

40

Federal
Agency
Securities

Table C5

W EIG H TED AVERAGE M ATURITY O F MARKETABLE TREASURY DEBT
Months
Federal Reserve
Holdings3

Holdings outside
Federal Reserve

1960

19

61

55

1965

16

70

60

1970

24

45

40

1975

31

34

33

1980

55

46

48

1985

49

61

59

1986

46

64

62

1987

44

69

66

1988

42

71

67

1989

43

73

69

1990

41

71

68

1991

38

72

68

1992

36

71

67

1993

38

68

65

1994

38

66

63

End of

Total
Outstandin

a The effects of all outstanding temporary transactions, including repurchase agreements and matched sale
purchase agreements with foreign accounts, are excluded from the calculation of the average maturity of
the portfolio.




Table C6

SYSTEM T EM PO R A R Y T R A N S A C T IO N S
1994
Number3

1993
Volume
($ Billions)

Number3

Volume
($ Billions)

Repurchase agreements
System

92

362.0

0

510.5

Maturing next business day

26

104.9

0

149.5

Term

66

257.1

0

361.0

Fixed-term

44

175.3

31

127.2

Withdrawable

22

81.8

49

233.8

Customer-related

54

112.7

0

117.1

5

13.1

0

10.9

Maturing next business day

5

13.1

0

7.2

Term

0

0.0

0

3.8

Matched sale-purchase agreements
In market

With foreign accounts*5

251

1,688.2

0

1,464.1

Total temporary transactions

402

2,176.1

0

2,102.7

151

487.8

0

638.6

In market

Note: Figures may not add to totals because of rounding.
a Number of rounds. If the Desk arranged repurchase agreements with two different maturities on the same
day, the agreements are treated as one round. The Desk arranged such multiple repurchase agreements on
two days in 1993; none were arranged in 1994.
k Volumes exclude amounts arranged as customer-related repurchase agreements.

42




ENDNOTES
1. The behavior of the monetary aggregates and the Com mittee’s targets for them are discussed
in Appendix A.
2. Most announcements of policy changes were made early in the afternoon, shortly after the
FOM C had completed its meeting. However, at the two-day meeting in February 1994, the
announcement was made in the morning on the second day, soon after the Committee made its
decision. In that instance, the Committee preferred to make the information available before
the weekend and ahead of the Desk’s regular 11:30 a.m. operating time. The one policy action
taken between meetings was also announced in the morning.
In February 1995, the Committee formally adopted new procedures for conveying information
to the public. The procedures include the announcement of all changes in the stance of monetary
policy on the day the changes are made.
3. Higher interest rates extended the expected durations of mortgage-backed securities, thereby
compounding the downward pressure on prices for this debt. Holders of mortgage-backed
securities often hedge their exposures by selling intermediate-term Treasury debt.
4. Roughly $20 billion of securities held by the highly leveraged Orange County fund were sold.
Most of these securities were government agency notes, many of them derivative instruments
that paid interest according to formulas based on movements in market yields.
5. The borrowing relationship has been discussed more extensively in previous annual reports
of the Open Market Function.
6. O nly small banks are eligible for the seasonal credit program.
7. Many of the statistics cited in this section appear in tables in Appendix C.
8. Changes in the components of M l and the reasons for the components’ behavior are described
in Appendix A.
9. Currency in circulation, which is the factor that affects reserve balances, includes cash held by
depository institutions; for money supply calculations, however, this vault cash is subtracted.
10. Earned income credits accumulate at a rate linked to the federal funds rate. The credits may
be used only to pay for certain priced services provided by the Federal Reserve, and many large
banks hold clearing balances sufficient to generate credits to pay for all the services they use. As




43

the rate at which the credits are earned increases, the maximum useful level of a bank’s clearing
balance decreases.
11. Technically, clearing balances are treated as a factor reducing the supply of reserves, although
they are actually a source of demand for reserves.
12. The various foreign-exchange-related activities on the System’s balance sheet drained less
than $0.5 billion. The historical value of the foreign currency sold was $3.0 billion, about
$0.7 billion below the market value. The value of the System’s foreign exchange holdings was
increased by $2.4 billion as a result of upward revaluations, while interest earnings totaled
$0.9 billion. In the reserve factor categories, interest earnings and the historical value of foreign
currency transactions appear under “foreign currency,” while revaluations and the profit or loss
on foreign currency transactions appear in the “other items” category.
13. The Desk bought, in par values, $3.3 billion of Treasury coupon securities on March 15,
$5.0 billion of coupons on April 12 (a record volume), $3.8 billion of bills on June 1, $4.5 billion
of coupons on August 30, $3.9 billion of bills on November 9, and $4.2 billion of coupons on
November 29.
14. The average m aturity of the portfolio is also affected by the reinvestment choices made for
maturing securities at auctions.
15. The accuracy of the staff forecasts for reserve supply and demand is reviewed in Appendix B.
16. Required operating balances are defined as required reserves plus required clearing balances
less applied vault cash; they represent the working balances held by depository institutions at
the Federal Reserve for supporting payment transactions.
17. The average levels of excess reserves in the first and second weeks of a maintenance period in
1994 were $725 million and $1,375 million, respectively. During 1993, the corresponding figures
were $170 million and $1,980 million, and a similar distribution characterized 1992 after the round
of reserve requirement cuts made in April of that year. Before December 1990, the distribution
of excess reserves within the maintenance period was, on average, fairly even. O f course, Desk
reserve provision strategies, which may not match ex ante demands, also contribute to the actual
pattern of excess reserves.
18. A total of forty-four fixed-term RPs were arranged in 1994 (thirty of which were in place on
Fridays), compared with thirty-one in the previous year (twenty-three covering Fridays). By
contrast, just nine fixed-term operations had been arranged in 1992.

44



19. Misinterpretations did in fact arise. O n February 3, with fed funds trading just Vi6 of a
percentage point above the level associated with the desired degree of reserve pressures, the
Desk took no market action to affect reserves because a shortage was not seen. With an FOM C
meeting scheduled to start later that day, and with expectations of a policy shift running high,
some participants interpreted the Desk’s inaction as indicating such a shift. In fact, this was not
the case, although the FOM C did decide to firm pressures the following day. This episode
occurred before the FOM C began to announce policy changes.
20. W ith expectations of an easing in policy almost entirely absent in 1994, the Desk felt freer to
add reserves when called for by its reserve projections, even when the funds rate was slightly
soft. It did so on numerous occasions.
21. The fee reflects an annual rate of 24 basis points using a standard ten-hour day for Fedwire
operations. The charge is made on all end-of-minute overdrafts in excess of a deductible based on
10 percent of the bank’s capital. The “Overview of the Federal Reserve’s Payments System Risk
Policy,” published by the Federal Reserve System in October 1993, describes the calculations in
detail.
22. Differences in posting times for check credits and debits also influence aggregate intraday
reserve levels.
23. In the six months before daylight overdraft charges took effect, peak overdraft levels averaged
$124 billion. From mid-April through year-end, they averaged $70 billion. To put the overdraft
figures in perspective, total end-of-day reserve balances averaged $34.5 billion and $31 billion,
respectively, over those two periods.
24. Under the delivery-versus-payment system used for the transfer of government securities,
reserve balances are automatically moved from the account of the bank receiving the securities to
that of the bank sending them when the transfer is processed.
25. Average daylight overdrafts fell from $70 billion in the six m onths before pricing to
$43 billion over the balance of 1994.
26. The data on all the m onetary aggregates are as of January 26, 1995, and do not reflect the
annual seasonal factor and benchmark revisions of February 2. The earlier data are used because
they more closely approximate the information the Committee had when it made its policy
decisions. The revisions generally had a minimal effect on total growth over the year. O n
balance, the revisions redistributed a little more of the net increases in M l and M2 into the first
half of the year and shifted more of the growth in M3 into the second half of the year. The annual




45

changes of the m onetary aggregates are measured from the fourth quarter of 1993 to the fourth
quarter of 1994. Data on nonfinancial debt reported in this section are as of March 3, 1995.
27. The behavior of the monetary aggregates is described in more detail in the “Monetary Policy
Report to the Congress Pursuant to the Full Employment and Balanced G row th Act of 1978”
(Board of Governors of the Federal Reserve System), July 20, 1994, and February 21, 1995.
28. Investors moving out of mutual funds favored instruments not included in the aggregates,
such as the direct purchase of Treasury debt. For this reason, and because of capital losses
suffered by many funds, M2 plus bond and stock mutual funds rose less than 1 percent in 1994,
an increase similar to that for M2 and well below the nearly 7 percent gain of the previous year.
29. Credit expansion was partially funded by bank borrowings from abroad, which nearly
doubled over the year.
30. In January, one large regional bank initiated a sweep program that transferred funds from
other checkable deposits into money market deposit accounts. Another large regional bank
phased in a similar program during September and October. Altogether, these programs lowered
M l growth by about 1 percentage point in 1994. The sweep programs shifted funds between
accounts included in M2 and therefore had no impact on the broader aggregates.
31. Excess reserves are estimated from a combination of models and observed behavior during
maintenance periods. Any analysis of the accuracy of these estimates would be misleading
because it would not take account of the informal revisions.

46



TREASURY AND FEDERAL RESERVE
FOREIGN EXCHANGE OPERATIONS
FOR 1994: AN OVERVIEW

During 1994, the dollar declined 10.9 percent against the German mark, 10.8 percent against the
Japanese yen, and 8.4 percent on a trade-weighted basis. Over the same period, the dollar rose
5.8 percent against the Canadian dollar and 56.1 percent against the Mexican peso. The U.S.
m onetary authorities intervened on five occasions during 1994—April 29, May 4, June 24,
November 2, and November 3—each time buying dollars against the mark and the yen (see table).
All of these purchases were divided equally between the Treasury D epartm ent’s Exchange
Stabilization Fund and the Federal Reserve System. In other operations, the U.S. monetary
authorities liquidated all non-mark and non-yen reserves during the February-April period.
A more detailed discussion of these operations can be found in the quarterly foreign exchange
reports that follow.
Please note that until July 1 the reports were issued on a quarterly basis that started on February 1.
The change to a calendar quarter was accomplished with a two-month report covering the May-June
period.




47

U.S. FO R E IG N EX C H A N G E IN T E R V E N T IO N ACTIVITY D U R IN G 1994
Millions of Dollars
Dollar purchases (+) or sales (-)

Against the Mark

Against the Yen

April 29

+ 500

+ 200

+ 700

May 4

+ 750

+ 500

+ 1,250

June 24

+ 950

+ 610

+ 1,560

November 2

+ 800

+ 800

+ 1,600

November 3

+ 500

+ 500

+ 1,000

+ 3,500

+ 2,610

+ 6,110

Total

PERCENTAGE CHANGE IN THE DOLLAR D U R IN G 1 9 9 4
Spot Exchange Rate
Percent

Source: Federal Reserve Bank o f N ew York.

48



Total

TREASURY AND FEDERAL RESERVE
FOREIGN EXCHANGE OPERATIONS
November 1993-January 1994

The dollar appreciated modestly against most major currencies during the November-January
period. It rose 2.9 percent against the German mark, 0.1 percent against the Japanese yen, and
0.5 percent on a trade-weighted basis.1 The U.S. monetary authorities did not undertake any
intervention operations during the period.
T H E D O LL A R ENDS T H E PE R IO D V IR TU A LLY U N C H A N G E D
A G A IN ST T H E Y EN
After opening at ¥108.64 on November 1, the dollar rose against the yen in thin year-end mar­
kets, reaching a high of ¥113.55 before coming down to end the period unchanged. Initially, the
dollar rose as market participants turned their attention to Japan’s lingering recession and to the
prospect of interest rate differentials moving in favor of the dollar. This shift in focus was
prompted by continued weakness in Japanese money supply growth, employment, industrial
production, and retail sales. Moreover, Japanese equity prices dropped sharply in November—
with the Nikkei stock index falling nearly 17 percent over the course of the m onth—and re­
mained volatile throughout December. Growing pessimism over the economic outlook for
Japan, as well as the uncertain prospects for the Hosokawa government’s long-awaited fiscal
stimulus package, helped fuel expectations of an additional cut in the Bank of Japan’s Official
Discount Rate (ODR).
Over the course of December, trading activity in the dollar-yen exchange market started to ebb
as first corporate and then interbank participants pulled back from the market ahead of the
This report, presented by Peter R. Fisher, Senior Vice President, Federal Reserve Bank o f New York, and Manager fo r Foreign
Operations, System Open Market Account, describes the foreign exchange operations o f the U.S. D epartm ent o f the Treasury
and the Federal Reserve System fo r the period from Novem ber 1993 through January 1994. Nicholas Pifer was prim arily
responsible fo r preparation o f the report.




49

year-end holidays. Japanese exporters, who regularly sell dollars to the market to hedge their
foreign currency receivables, were notably absent toward the end of the m onth. In this environ­
m ent, market conditions were increasingly characterized by the dominance of technically ori­
ented traders who bought up the U.S. currency in anticipation of further dollar gains, and the
dollar rose gradually through December from a low of ¥107.37 to a high of ¥112.05.
In late December, Treasury Secretary Bentsen was asked whether he saw a need to intervene in
the foreign exchange market to stem the yen’s decline. He responded that he did not think
intervention would be necessary, but rather thought that the foreign exchange market would
focus on Japan’s substantial trade surplus when determining the relative value of the dollar and
the yen. Secretary Bentsen expressed concern that Japan was not meeting its comm itm ent to
achieve domestic demand-led growth and a significant reduction in its external surplus. He ex­
panded on this view in early January when he said that the proper way for Japan to address its
economic imbalances was through a combination of effective fiscal stimulus and market-open­
ing measures, not through a depreciation of the yen.
The dollar reached its period high of ¥113.55 on January 5, but soon drifted lower when ex­
pected movements in interest rates failed to materialize. Market participants turned their atten­
tion to the shifting fortunes of Japanese political reform and to bilateral trade talks with the

Chart 1

THE DOLLAR AGAINST THE JAPANESE YEN
Spot Exchange Rate
Japanese yen per U.S. dollar

1993
Source: Federal Reserve Bank o f N ew York.
Note: Inset panel show s the six-month exchange rate movement.

50



1994

United States, but they were unable to develop a lasting view on how the success or failure of
these two initiatives would affect exchange rates. Reflecting the market’s uncertainty about the
near-term direction of the dollar against the yen, the implied one-month option volatility for
the dollar-yen exchange rate spiked higher in the second half of January. At the same time,
foreign investors purchased the equivalent of $10.5 billion in Japanese equities during January;
these flows contributed to a sharp rebound in Japanese stock prices and helped support the yen.
The upper house of the Japanese Diet passed Prime Minister Hosokawa’s political reform bill
on January 29, permitting the government to turn its attention to other policy issues. As the
period came to a close, U.S.-Japan trade talks were continuing and the Japanese government was
reportedly at w ork on a record stimulus package for the economy. Reflecting the positive impli­
cations of such a package for Japanese domestic demand growth, the Nikkei surged nearly
8 percent on the last day of the period and expectations of additional interest rate cuts in Japan
receded even further. These factors helped strengthen the yen, and the dollar closed at ¥108.65
on January 31.
T H E D O L L A R A PPR EC IA TES M O D ESTLY A G A IN ST T H E M ARK
During November and most of December, the dollar was relatively stable against the German
mark, trading in a narrow range around the DM 1.70 level. Market sentiment toward the dollar
was generally positive, however, with dealers taking note of the increasingly divergent paths of




Chart 2

DIFFERENTIAL BETW EEN DOLLAR AND YEN INTEREST RATES
Implied by the Three-Month Eurodeposit Futures (March 1994 Contracts)
Interest rate

Interest rate differential

1993

1994

1993

1994

Source: Bloomberg L.P.

51

the U.S. and German economies. In this environment, market participants began to anticipate a
fairly rapid convergence of short-term German and U.S. interest rates. The Bundesbank, which
had surprised the foreign exchange market in late October when it cut its discount and Lombard
rates by 50 basis points, trimmed its key money-market repurchase rate from 6.40 percent at the
start of the period to 6.25 percent on December 1. At its December 2 council meeting, the
Bundesbank announced a prefixed rate of 6.0 percent for the next five weekly auctions of
fourteen-day repurchase agreements. Market participants generally interpreted this move as an
effort to nudge short-term interest rates lower while also dampening speculation of further
m onetary easing.
The dollar broke out of its trading range in late December, jumping four pfennigs higher in the
last three days of the month. Dealers expressed initial skepticism over the rise, which occurred
in thin year-end markets. Nonetheless, the dollar subsequently extended its gains to reach a
twenty-eight-month high of DM 1.7562 on January 14. As the dollar moved higher, it gained
broad support from a series of U.S. and German statistical releases—notably retail sales, factory
orders, and the purchasing managers index for the United States, and industrial production,
unemployment, and real GDP for Germany—that further contrasted economic conditions in
the two countries.

C h a rt 3

DOLLAR-YEN EXCHANGE RATE VOLATILITY IM PLIED BY
O P T IO N PRICES
Percent per year

1993

Source: Reuters.

52



1994

During the latter part of January, the dollar settled into a new trading range against the mark.
Expectations of near-term volatility in the dollar-mark exchange rate dropped off sharply, with
the implied one-month option volatility falling from nearly 12 percent in early January to less
than 9 percent at month-end. While market rumors of central bank sales helped cap the dollar’s
rise, movements in actual and expected interest rate differentials also weighed on the U.S. cur­
rency. At its two January meetings, the Bundesbank Council kept its repurchase rate fixed at
6.0 percent, disappointing the market and further deflating expectations about the pace of Ger­
man interest rate cuts. Similarly, a perceived lack of inflationary pressures in the United States
led dealers to rethink their expectations of a near-term hike in short-term U.S. interest rates.
During most of January, therefore, differentials in three-month Eurodeposit rates, as well as
those in the expected three-month deposit rates implied by futures prices, moved in the m ark’s
favor. The dollar closed the period on January 31 at DM 1.7338.




Table 1

FED ER A L RESERVE R E C IPR O C A L C U R R E N C Y A R R A N G E M E N T S
Millions of Dollars

Institution

Amount of Facility as of
January 31, 1994

Drawings during Period

250

0

National Bank of Belgium

1,000

0

Bank of Canada

2,000

0

Austrian National Bank

250

0

Bank of England

3,000

0

Bank of France

2,000

0

Deutsche Bundesbank

6,000

0

Bank of Italy

3,000

0

Bank of Japan

National Bank of Denmark

5,000-

0

Bank of Mexico

700

0

Netherlands Bank

500

0

Bank of Norway

250

0

Bank of Sweden

300

0

4,000

0

600

0

1,250

0

30,100

0

Swiss National Bank
Bank for International Settlements
Dollars against Swiss francs
Dollars against other authorized
European currencies
Total

53

O T H E R O P E R A T IO N S
As of the end of January, cumulative valuation gains on outstanding foreign currency bal­
ances were $2,868.4 million for the Federal Reserve and $2,513.0 million for the Treasury’s
Exchange Stabilization Fund (ESF). There were no realized profits or losses for the quarter.

Table 2

N E T PR O FIT S (+) O R LOSSES (-) O N U.S. TR EA SU R Y A N D
FED ER A L RESERVE F O R E IG N E X C H A N G E O P E R A T IO N S , BASED
O N H IS T O R IC A L C O S T -O F -A C Q U IS IT IO N E X C H A N G E RATES
Millions of Dollars
Federal Reserve

U.S. Treasury Exchange Stabilization Fund

+3,368.5

+2,839.0

0.0

0.0

+2,868.4

+2,513.0

Valuation profits and losses
on outstanding assets and
liabilities as of October 31, 1993
Realized profits and losses
November 1, 1993 - January 31, 1994
Valuation profits and losses
on outstanding assets and
liabilities as of January 31, 1994
Note: Data are on a value-date basis.

Chart 4

THE DOLLAR AGAINST THE GERMAN MARK
Spot Exchange Rate
German marks per U.S. dollar

1993
Source: Federal Reserve Bank o f N ew York.
Note: Inset panel show s the six-month exchange rate m ovement.

54



1994

The Federal Reserve and the ESF regularly invest their foreign currency balances in a variety of
instruments that yield market-related rates of return and have a high degree of liquidity and
credit quality. A portion of the balances is invested in securities issued by foreign governments.
As of the end of January, the Federal Reserve and the ESF held, either directly or under repur­
chase agreements, $10,740.5 million and $10,436.2 million, respectively, in foreign government
securities valued at end-of-period exchange rates.

ENDNOTE
1. The dollar’s movements on a trade-weighted basis are measured using an index developed by
staff at the Board of Governors of the Federal Reserve System.




C h a rt 5

DIFFERENTIAL BETW EEN GERMAN MARK AND DOLLAR
INTEREST RATES
Implied by the Three-Month Eurodeposit Futures (March 1994 Contracts)
Interest rate

Interest rate differential

1993

1994

1993

1994

Source: Bloomberg L.P.

55

Chart 6

DOLLAR-MARK EXCHANGE RATE VOLA TILITY IM PLIED BY
O P T IO N PRICES
Percent per year

1993

1994

Source: Reuters.

C h a rt 7

SHORT-TERM INTEREST RATES FOR SELECTED CO U N TRIES
Percent

1993
Source: Bank for International Settlements.

56



1994

TREASURY AND FEDERAL RESERVE
FOREIGN EXCHANGE OPERATIONS
February-April 1994

During the February-April period, the dollar declined 4.6 percent against the German mark,
6.5 percent against the Japanese yen, and 3.6 percent on a trade-weigh ted basis.1 O n the last
business day of the period, April 29, the Federal Reserve Bank of New Y ork’s Foreign Ex­
change Desk entered the m arket to purchase $500 million against the Germ an m ark and
$200 million against the yen for the U.S. monetary authorities. Contemporaneously, Treasury
Secretary Bentsen issued a statement confirming the intervention. In other operations, the Desk
liquidated the non-yen and non-mark reserves of the Federal Reserve System and the U.S. Trea­
sury Departm ent’s Exchange Stabilization Fund (ESF). Following the assassination of the lead­
ing Mexican presidential candidate, U.S. monetary authorities provided a $6 billion temporary
swap facility to Mexico. This was superseded on April 26, when the monetary authorities of the
United States, Canada, and Mexico announced the creation of the N orth American Financial
Group and the establishment of a trilateral foreign exchange swap facility.
T H E D O LL A R RISES BRIEFLY IN EARLY FEBR U A RY
As the period opened, many market participants had positioned themselves for an extended
dollar rally. This anticipated appreciation of the dollar rested in part on the expectation that
interest rate differentials would start to move more rapidly in the dollar’s favor. Dealers be­
lieved that with the U.S. economy strengthening, the Federal Reserve would eventually tighten
monetary conditions in the United States, perhaps by the end of the first quarter. Dealers also
expected the Bundesbank to lower short-term German interest rates quickly, allowing rates in

This report, presented by Peter R. Fisher, Senior Vice President, Federal Reserve Bank o f N ew York, and Manager fo r Foreign
Exchange Operations, System Open Market Account, describes the foreign exchange operations o f the U.S. Departm ent o f the
Treasury and the Federal Reserve System fo r the period from February 1994 through A pril 1994. Ladan Archin was prim arily
responsible fo r preparation o f the report.




57

other parts of Europe to fall as well. Against this backdrop, market participants entered the
period holding substantial long-dollar positions against the mark and the yen, and also holding
large positions in European government bonds. O n February 4, Chairman Greenspan announced
the decision of the Federal Open Market Committee (FOMC) to increase pressure on bank
reserves, a move that resulted in an increase in the federal funds rate from 3.0 to 3.25 percent.
The dollar spiked higher in the days immediately following the tightening, reaching period
highs of DM 1.7675 and ¥109.65 before starting to drift lower (Charts 1 and 2).
T H E D O L L A R D EC LIN ES FIRST A G A IN ST T H E Y E N A N D
T H E N T H E M ARK
As the February 11 summit meeting between President Clinton and Japanese Prime Minister
Hosokawa approached, market participants increasingly expected the two leaders to announce
a compromise resolution of the trade issues under discussion between the two countries in
bilateral “framework” talks. Correspondingly, expectations grew that the dollar would start to
appreciate once the meeting was over, and market participants began to build up significant
long-dollar positions. The dollar closed at ¥108.13 on Thursday, February 10. Reflecting this
positive sentiment toward the dollar, the premium on dollar put options over equally out-ofthe-money dollar call options diminished a few days before the meeting. Thus, when President
Clinton and Prime Minister Hosokawa announced late in the afternoon on Friday, February 11,

Chart 1

THE DOLLAR AGAINST THE GERMAN MARK
Spot Exchange Rate
German marks per U.S. dollar

1994
Source: Federal Reserve Bank o f N ew York.
Note: Inset panel show s the six-month exchange rate movement.

58



that they had failed to reach an agreement and were suspending the framework talks, surprised
market participants began to unwind their long-dollar positions. The dollar began to decline in
late New York trading and continued to move lower through Asian, European, and early New
York dealings on Monday, February 14. The dollar’s price adjustment against the yen culmi­
nated at about midday, when the dollar dropped sharply to an intraday low of ¥101.10. The
dollar recovered by the end of the day, however, and traded above ¥103 for the balance of the
month.
As the Bundesbank’s February 17 council meeting approached, market participants anticipated
that the German central bank would act to lower interest rates for the first time since early
December 1993. While the Bundesbank did reduce its discount rate by 50 basis points to 5.25
percent, it disappointed these expectations by leaving its key money market rate, the securities
repurchase rate, unchanged. The dollar-mark exchange rate began to trade lower in subsequent
days, but sharp sell-offs in U.S. and European bond markets generally dominated market atten­
tion during late February.
In early March, the dollar traded above the ¥105 level, gaining support from signs that Japan was
considering private and public initiatives to address its trade surplus. Market participants also
appeared to take comfort in the fact that the Clinton Administration’s decision to revive “Super




Chart 2

THE DOLLAR AGAINST THE JAPANESE YEN
Spot Exchange Rate
Japanese yen per U.S. dollar

1994
Source: Federal Reserve Bank o f N ew York.
Note: Inset panel show s the six-month exchange rate movement.

59

301” trade sanction powers would not result—at least in the short term —in new trade sanctions.
However, in mid-March attention increasingly focused on reports that substantial foreign flows
of funds into Japanese equity and bond markets were leading to further strength in the yen.
Against the mark, a slower than expected narrowing of short-term interest rate differentials
weighed on the dollar during much of March. A surge in German M3 money supply growth,
coupled with growing frustration over the Bundesbank’s cautious step-by-step reduction of its
securities repurchase rate, spurred market participants to reassess their expectation of sharply
lower German interest rates (Chart 3). These developments also encouraged the view that fur­
ther rate reductions by the Bundesbank would be calibrated to the Fed’s rate increases to mini­
mize the impact on the dollar-mark exchange rate. In this environment, the second 25 basis
point rate increase in the federal funds rate resulting from the FO M C ’s decision, announced
after its March 22 meeting, had little impact on the dollar.
T H E D O L L A R M OVES U P A N D T H E N D O W N IN APRIL
In early April, the dollar moved higher against the mark and the yen on a much higher than
expected increase in March U.S. nonfarm payrolls and on a brief recovery in U.S. securities
prices. The dollar soon came under pressure against the yen, however, when the resignation of
Prime Minister Hosokawa led to a widespread perception in the foreign exchange market that

Chart 3

DIFFERENTIAL BETW EEN GERMAN MARK AND DOLLAR
SHORT-TERM INTEREST RATES
Implied by the Three-Month Eurodeposit Futures (June 1994 Contracts)
Interest rate

Interest rate differential

1994
Source: Bloomberg L.P.

60




1994

the bilateral trade talks would encounter further delays. Political uncertainty in Japan lingered,
and dealers came to doubt whether Japan would be able to meet its commitment to have a new
package of market-opening measures in place before the Group of Seven (G-7) summit in July.
The political uncertainty in Japan also created a concern among dealers that the Japanese gov­
ernment would be unable to pass measures to stimulate domestic demand and that the yen
would consequently appreciate over the longer term as well.
During April, a change in market perception strengthened the mark against both the dollar and
the yen. W ith the Bundesbank easing cautiously since mid-February, the expected trend in short-




Table 1

F O R E IG N E X C H A N G E H O L D IN G S O F U.S. M O N E T A R Y
A U T H O R IT IE S A T P E R IO D E N D
Millions of Dollars
Federal Reserve

U.S. Treasury Exchange Stabilization Fund

German marks

13,615.8

8,413.7

Japanese yen

9,375.3

12,600.3

22,991.1

21,014.0

Total

Chart 4

DIFFERENTIAL BETW EEN DOLLAR AND JAPANESE YEN
SHORT-TERM INTEREST RATES
Implied by the Three-Month Eurodeposit Futures (June 1994 Contracts)
Interest rate

Interest rate differential

1994

1994

Source: Bloomberg L.P.

61

term German interest rates, as implied by several series of Eurom ark futures contracts, backed
up sharply over the latter part of the period (Chart 5). The surprise announcement by the
Bundesbank on April 14 that it was cutting its discount and Lombard rates by 25 basis points, to
5.0 and 6.5 percent, respectively, appeared to signal to market participants that further signifi­
cant near-term easing was unlikely. This change in sentiment can be seen in the flattening of
near-term Eurom ark contracts around the 5 percent level (Chart 5). This was followed by the
announcement of a third 25 basis point increase in the federal funds rate on April 18. W ith
market participants perceiving little prospect for a further narrowing in the interest differential
in the short run, the mark strengthened against both the dollar and the yen as the short end of
the German yield curve looked increasingly attractive.
The mark continued to rise against the dollar through the end of April, even though expected
interest rate differentials, as implied by futures contracts on Eurodollar and Eurom ark deposits,
were now moving more clearly in the dollar’s favor (Charts 3 and 4). Sentiment toward the
dollar became increasingly negative as dealers expressed growing anxiety that the dollar-yen
exchange rate might drop swiftly below its historical lows. This risk was reflected in options
markets, where dollar put options traded at a substantial premium over equally out-of-the-money

Table 2

N E T P R O FIT S (+ ) O R LOSSES (-) O N U.S. TR EA SU R Y A N D
FED ER A L RESERVE F O R E IG N E X C H A N G E O P E R A T IO N S , BASED
O N H IS T O R IC A L C O S T -O F -A C Q U IS IT IO N E X C H A N G E RATES
Millions of Dollars
Federal Reserve
Valuation profits and losses
on outstanding assets and
liabilities as of January 31, 1994
Realized profits and losses
January 31 - April 29, 1994
Valuation profits and losses
on outstanding assets and
liabilities as of April 29, 1994

2,868.4
81.7a

4,163.4

U.S. Treasury Exchange Stabilization Fund

2,513.0
5.6

3,804.9

Note: Data are on a value-date basis.
a This figure represents net realized profit on market sales of Swiss francs, British pounds, Canadian dollars,
French francs, Belgian francs, and Dutch guilders. The figure excludes intervention sales transacted on
April 29, which settled during the first week of May and are thus not reflected here.
k This figure represents net realized profit on market sales of Swiss francs and British pounds. The figure
excludes intervention sales transacted on April 29, which settled during the first week of May and are thus
not reflected here.

62



dollar call options. With market participants focused on the risk that the dollar might decline
against the yen, and the mark receiving solid support against the yen at the ¥60 per mark level,
the prospect for the dollar appreciating against the mark appeared remote.
Following the G-7 meetings on the weekend of April 23-24, market participants were somewhat
disappointed over the lack of official guidance on exchange rates, and the dollar began to move
down against both the mark and the yen. A t this time, a perception was growing that dollar
weakness had begun to affect the U.S. bond market adversely, and market participants expressed
concern that a lower dollar would spark inflationary pressures and thereby diminish the value
of dollar-denominated assets. Dealers increasingly focused on the parallel movements in U.S.
bond prices and the value of the dollar. O n Thursday, April 28, the U.S. bond market recorded
sharp losses, and the dollar approached its postwar low of ¥100.40 in thin and nervous trading.
U.S. M O N E T A R Y A U T H O R IT IE S E N T E R T H E M A RK ET T O BUY D OLLARS
A G A IN ST T H E M ARK A N D T H E Y EN
O n Friday, April 29, in early New York trading, the dollar started to drop abruptly against the
mark, falling nearly two pfennigs in less than an hour before bottoming out at a six-month low
of DM 1.6440. At the time, the dollar was trading just below ¥102. Trading became increasingly
volatile, with market participants reporting that dealers were not answering phones and that
customers were having trouble finding out whether their orders had been filled. Shortly before
10:30 a.m., the Federal Reserve Bank of New York’s Foreign Exchange Department entered the




C h a rt 5

INTEREST RATES IMPLIED BY EUROMARK FUTURES CONTRACTS
Implied interest rates

Contract
Source: Bloomberg L.P.

63

market, purchasing dollars against the mark for the U.S. m onetary authorities. Soon thereafter,
Treasury Secretary Lloyd Bentsen issued the following statement confirming the intervention:
U.S. m onetary authorities intervened today in foreign exchange markets to
counter disorderly conditions. This is in line with our previously articulated
policy which recognizes that excessive volatility is counterproductive to growth.
We stand ready to continue to cooperate in foreign exchange markets.
Shortly before 11:30 a.m., the Desk again entered the market, purchasing dollars against both
the mark and the yen. In total, U.S. monetary authorities purchased $500 million against the
m ark and $200 million against the yen; these amounts were equally divided between the Federal
Reserve and the ESF.

Table 3

FED ER A L RESERVE R E C IP R O C A L C U R R E N C Y A R R A N G E M E N T S
Millions of Dollars

Institution
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark

Amount of Facility as of
April 29, 1994

4,000

0
0
0
0
0
0
0
0
0
0
0
0
0
0

600

0

1,250

0

32,400

0

250

1,000
2,000
250

Bank of England

3,000

Bank of France
Deutsche Bundesbank

2,000
6,000

Bank of Italy

3,000

Bank of Japan

5,000

Bank of Mexico

3,000

Netherlands Bank

500

Bank of Norway

250

Bank of Sweden
Swiss National Bank

Drawings during Period

300

Bank for International Settlements
Dollars against Swiss francs
Dollars against other authorized
European currencies
Total

64



Following the intervention, the dollar began to gain ground in orderly trading, reaching an
intraday high of 1.6635 against the mark and 102.50 against the yen. The dollar drifted lower in
the afternoon, however, and closed the period at DM 1.6535 and ¥101.55.
N O R T H A M E R IC A N SWAP LINES
Following the March 23 assassination of Luis Donaldo Colosio, the presidential candidate of
Mexico’s Institutional R evolutionary Party (PRI), U.S. m onetary authorities established a
$6.0 billion temporary bilateral swap facility for the Bank of Mexico at the request of the Mexi­
can authorities. The facility included reciprocal swap arrangements already in place. The assas­
sination of Colosio had prom pted the closing of Mexican markets on March 24 and gave rise to
concerns that the reopening of the markets on March 25 would be accompanied by market
disorders that could spill over into the U.S. financial markets. N o drawings were made on this
facility.
O n April 26, the monetary authorities of the United States, Canada, and Mexico announced the
creation of the N orth American Financial Group to provide a forum for more regular consulta­
tion on economic and financial developments and policies in these countries. These arrange­
ments were unrelated to developments in Mexico; they had been planned several months earlier
in recognition of the three nations’ increasingly interdependent economic relationships. In con­
nection with the creation of the N orth American Financial Group, the monetary authorities of
the three countries announced the establishment of the trilateral foreign exchange swap facility
to expand the pool of potential resources available to the m onetary authorities of each country
to maintain orderly exchange markets. The United States and Mexico put in place swap agree­
ments for up to $6.0 billion, with the Treasury and the Federal Reserve each participating up to
$3.0 billion. In addition, the Bank of Canada and the Bank of Mexico expanded their existing
swap agreement to C$1.0 billion. Finally, the Federal Reserve and the Bank of Canada reaf­
firmed their existing swap agreement in the amount of $2.0 billion. Each party has reciprocal
privileges to draw on the other’s currency in amounts equivalent to the amounts indicated.
The Mexican peso, which opened the period at 3.1060, traded to a low of 3.3694 per dollar
following the assassination but strengthened toward the end of the period to close at 3.2700
pesos per dollar.
O T H E R O P E R A T IO N S
During the period, the Federal Reserve Bank of New York sold in the market all non-mark and
non-yen foreign exchange reserve holdings of the Federal Reserve and the Exchange Stabiliza­
tion Fund (ESF) of the U.S. Treasury. The Federal Reserve liquidated the equivalent of
$703.8 million, while the ESF liquidated the equivalent of $64.4 million. Swiss francs repre­




65

sented $629.0 million of the amount liquidated by the Federal Reserve and $37.3 million of
the am ount liquidated by the Treasury. Swiss franc sales took place on the following days:
February 15, February 22, March 1, March 8, April 5, April 12, and April 26. The remaining
sales for the account of the Federal Reserve were as follows: $1.0 million of Belgian francs on
February 25, $38.0 million of Dutch guilders on March 29, $0.3 million of Canadian dollars on
March 29, $26.9 million of British pounds on April 12, and $8.7 million of French francs on
April 12. The remaining sale for the account of the Treasury was a liquidation of $27.1 million
of British pounds on April 26. It was decided to eliminate these currency holdings in light of the
U.S. monetary authorities’ practice in recent years of conducting intervention operations in
German marks and Japanese yen. The sales were conducted in accordance w ith a schedule
reflecting the m aturity of investments in the individual currencies.
A t the end of the period, the current values of the foreign exchange reserve holdings of the
Federal Reserve and the U.S. Treasury were $23.0 billion and $21.0 billion, respectively. These
holdings are invested in a variety of instruments that yield market-related rates of return and
have a high degree of liquidity and credit quality. The Federal Reserve and the U.S. Treasury
held, either directly or under repurchase agreement, $11.7 billion and $11.3 billion, respectively,
in foreign government securities.

ENDNOTE
1. The dollar’s movements on a trade-weighted basis are measured using an index developed by
staff at the Board of Governors of the Federal Reserve System.

66



TREASURY AND FEDERAL RESERVE
FOREIGN EXCHANGE OPERATIONS
May-June 1994

During the May-June period, the dollar declined 4.0 percent against the German mark, 3.0
percent against the Japanese yen, and 2.7 percent on a trade-weighted basis.1 The dollar opened
the period at DM 1.6548 and ¥101.75, and closed the period at DM 1.5869 and ¥98.50. The
Federal Reserve Bank of New Y ork’s Foreign Exchange Desk intervened twice during the pe­
riod on behalf of the U.S. monetary authorities, purchasing $1,250 million on May 4 and $1,560
million on June 24. O n both occasions, the Desk intervened as part of a concerted operation to
support the dollar.
T H E U N IT E D STATES IN IT IA T E S A C O N C E R T E D O P E R A T IO N
In the weeks leading up to the reporting period, the dollar declined against the mark and the yen
in increasingly volatile trading. O n the last business day of the previous period, the U.S. mon­
etary authorities intervened in the foreign exchange market.
O n May 4, in early European trading, the dollar reached a new six-month low of DM 1.6330
before recovering to approximately DM 1.6470 after Bundesbank President Tietmeyer stated
that too strong an appreciation of the mark against the dollar was not in the interest of the
German economy. At about 8:30 a.m., the Desk, joined by eighteen other central banks, en­
tered the market to purchase dollars against the yen and the mark. Shortly after this initial
round of intervention, Treasury Secretary Bentsen released the following statement confirming
the intervention:

This report, presented by Peter R. Fisher, Senior Vice President, Federal Reserve Bank o f New York , and Manager fo r Foreign
Operations, System Open Market Account, describes the foreign exchange operations o f the U.S. Department o f the Treasury
and the Federal Reserve System fo r the period from May 1994 through June 1994. Ladan Archin ■
was prim arily responsible fo r
preparation o f the report.




67

I am concerned by recent developments in the exchange markets. This Admin­
istration sees no advantage in an undervalued currency.
The monetary authorities of the major countries are joining this morning in
concerted intervention. These operations reflect our view that recent move­
ments in exchange markets have gone beyond what is justified by economic
fundamentals.
Following the Secretary’s statement, the dollar reached its intraday highs of DM 1.6645 and
¥102.40. The Desk continued to purchase dollars against the mark and the yen throughout the
morning, concluding the operation at midday. The dollar closed the day at DM 1.6530 and
¥101.83. In total, the Desk purchased $1,250 million, of which $750 million was against the
mark and $500 million was against the yen. These amounts were equally divided between the
Federal Reserve and the U.S. Treasury’s Exchange Stabilization Fund (ESF).
E X P E C T A T IO N S O F F U T U R E IN T E R E ST RATES B EG IN T O C H A N G E
In the week following the intervention, the dollar gradually firmed against both the mark and
the yen. This occurred as market participants came to expect that central banks would follow
up on their intervention operations with interest rate changes that would also have the effect of
supporting the dollar.

Chart 1

THE DOLLAR AGAINST THE GERMAN MARK
Spot Exchange Rate
German marks per U.S. dollar

Source: Federal Reserve Bank o f N ew York.
Note: Inset panel show s the five-month exchange rate movement.

68



In early May, the Bank of Japan was more accommodative in its money market operations, as
reflected in a decline in the overnight call money rate to an historical low of 2.03 percent. O n
May 11, the Bundesbank reduced its discount and Lombard rates by 50 basis points to 4.5 per­
cent and 6.0 percent, respectively. O n May 17, the Federal Reserve announced the Board of
Governors’ decision to raise the discount rate by 50 basis points. At the same time, the Federal
Reserve announced a decision by the Federal Open Market Committee (FOMC) to provide a
corresponding increase in pressure on bank reserves, resulting in a 50 basis point increase in the
federal funds rate. The Federal Reserve Board’s statement that the interest rate changes made up
to this date in 1994 had “substantially remove[d] the degree of monetary accommodation which
prevailed throughout 1993” reduced market participants’ expectations for further near-term
rate increases in the United States. Similarly, the size of the Bundesbank’s interest rate cuts
lowered expectations for further official reductions in interest rates in Germany. Thus, follow­
ing these official interest rate changes, expected interest rate differentials, which had widened
quite substantially in the dollar’s favor in early May, began to narrow rapidly (Chart 2).
The dollar subsequently moved lower against the mark and traded in a narrow range for the rest
of the m onth as market participants reassessed the likelihood that interest rate changes would
lead to dollar appreciation. This period of reassessment was encouraged by the comments of




Chart 2

DIFFERENTIAL BETW EEN DOLLAR AND GERMAN MARK
SHORT-TERM INTEREST RATES
Implied by the Three-Month Eurodeposit Futures (September 1994 Contracts)
Interest rate

Interest rate differential

1994

1994

Source: Bloomberg L.P.

69

various Bundesbank officials, who indicated that further changes in official interest rates might
not occur. A t the same time, several data releases in Germany, particularly the figures on indus­
trial production for April and first-quarter GDP, encouraged market participants to view the
outlook for the German economy more optimistically.

Table 1

F O R E IG N E X C H A N G E H O L D IN G S O F U.S. M O N E T A R Y
A U T H O R IT IE S A T P E R IO D E N D
Millions of Dollars
Federal Reserve
German marks
Japanese yen
Total

U.S. Treasury Exchange Stabilization Fund

13,350.0

7,753.3

8,996.6

12,466.9

22,346.5

20,220.2

Note: Figures do not add to totals because of rounding.

Chart 3

THE DOLLAR AGAINST THE JAPANESE YEN
Spot Exchange Rate
Japanese yen per U.S. dollar

Source: Federal Reserve Bank o f N ew York.
Note: Inset panel show s the five-month exchange rate movement.

70



T H E D O L L A R S T R E N G T H E N S A G A IN ST T H E Y EN , BUT T H E N
M OVES LO W ER
In late May and early June, the dollar posted modest gains against the yen when U.S.-Japanese
trade relations showed signs of progress. O n May 24, the United States and Japan reopened the
framework trade talks that were suspended on February 11. In subsequent days, press reports
and various official comments led market participants to regard settlement on a range of trade
issues between the United States and Japan as more likely. As this view became increasingly
widespread, the dollar strengthened against the yen, reaching its period high of ¥105.50 on
June 6.
However, the yen appreciated after comments on June 7 and 8 by senior Adm inistration
officials indicating that the United States had not changed its goals in the trade talks and was
prepared to impose trade sanctions if the fram ework talks failed. Several other factors also
appeared to strengthen the yen. First, although the accommodative money market operations
by the Bank of Japan in May had led some market participants to expect a reduction in the Bank
of Japan’s Official Discount Rate (ODR), these expectations started to unwind by the first week
of June as Japanese government bond yields rose and the Bank of Japan returned to a more
neutral stance (Chart 4). Moreover, the June 10 release of the Tankan business survey, as well as




Chart 4A

Chart 4B

DEVIATIO NS OF JAPANESE
BANK RESERVES FRO M
R E Q U IR E D LEVELS

JAPANESE TEN-YEAR
GOV ERNM ENT
BOND YIELD

Billions of yen

Interest rate

Source: Bank o f Japan.

Source: Bank for International Settlements.

71

subsequent comments by Japanese officials, suggested that the Japanese economy had bottomed
out and was poised for a recovery. Also in early June, expectations grew that the Hata govern­
ment would face a no-confidence vote as soon as the budget process for fiscal year 1994-95 was
completed and, consequently, that the Japanese political situation would further delay trade
negotiations and the implementation of fiscal measures in Japan.
T H E M ARK A N D T H E SWISS F R A N C B EG IN T O S T R E N G T H E N
W ith the dollar declining against the yen and the market reassessing the prospects of dollar
appreciation against the mark, a series of events in mid-June caused a sudden strengthening of
the mark and the Swiss franc (Chart 5). Over the weekend of June 11-12, tensions with N orth
Korea mounted, leading to market anxiety about Japan’s proximity to the peninsula and uncer­
tainty about the likely U.S. policy response. O n Sunday, June 12, German Chancellor Kohl’s
party, the Christian Democratic U nion (CDU), performed better than expected in elections for
the European parliament, a development that appeared to promise greater continuity in Ger­
man policies after the fall national elections. Then, on Monday, June 13, Swiss National Bank
President Lusser said that further interest rate cuts in Switzerland would not be forthcoming,
even though inflationary pressures in the Swiss economy remained muted. This combination of
events prom pted substantial flows into Swiss francs and German marks, leading to a broadbased appreciation of those currencies. After initially breaking lower against the Swiss franc, the

Chart 5

PERCENTAGE CHANGE IN SELECTED CURRENCIES
Period: April 29, 1994, to June 30, 1994
Percent

Source: Federal Reserve Bank o f N ew York.

72



U.S. currency soon came under selling pressure against the mark and eventually against the yen.
In this environment, market participants became increasingly anxious about the dollar’s nearterm prospects and began to question the U.S. Administration’s level of concern about the U.S.
currency.
O n Friday, June 17, in extremely thin market conditions, the dollar fell more than two pfennigs
following the breach of DM 1.6280, an im portant technical level, and on headlines reporting
views of a private sector research economist that, in the absence of a high real interest rate
policy in the United States, the dollar could fall by 10 percent against the mark over the next
eighteen months. During the day, the dollar dropped to DM 1.6065, its lowest level since O cto­
ber 1993. The dollar’s sharp price adjustment took place in a very short period, giving market
participants little opportunity to adjust their positions and putting added pressure on the dollar
as the next week began.
T H E D O L L A R FALLS SH A RPLY A G A IN ST T H E Y EN
Liquidations of long-dollar positions against the yen abruptly pushed the dollar down by more
than two yen to a new low of ¥99.85 during Tuesday, June 21. As the dollar reached new lows,
negative sentiment and technical conditions became self-reinforcing, with market participants
increasingly interpreting the dollar’s movements as reflecting a lack of confidence in U.S.
economic policies.




Table 2

N E T PR O FIT S (+) O R LOSSES (-) O N U.S. TR EA SU R Y A N D
FED ER A L RESERVE F O R E IG N E X C H A N G E O P E R A T IO N S , BASED
O N H IS T O R IC A L C O S T -O F -A C Q U IS IT IO N E X C H A N G E RATES
Millions of Dollars

Valuation profits and losses
on outstanding assets and
liabilities as of April 29, 1994
Realized profits and losses
April 29, 1994-June 30, 1994
Valuation profits and losses
on outstanding assets and
liabilities as of June 30, 1994

Federal Reserve

U.S. Treasury Exchange Stabilization Fund

+ 4,163.4

+ 3,804.9

+ 310.4a

+ 4,458.2

+229.8

+4,253.8

Note: Data are on a value-date basis.
a This figure represents net realized profit on intervention sales of German marks and Japanese yen.

73

The dollar was supported briefly by Secretary Bentsen’s statement on June 22:
I am concerned by recent movements in the exchange markets. We are care­
fully monitoring developments. We continue to be in close communication
with our G-7 partners, and we continue to be prepared to act as appropriate.
Ultimately, what is im portant is the fundamental strength of our economy,
and I am very confident in the outlook. We are now in the midst of the first
investment-led recovery from a low-inflation base in 30 years. And there is
increased evidence of recovery abroad. We share with the Fed and with our
G-7 partners the common goal of sustaining recovery with low inflation.
O n the same day, Federal Reserve Chairman Greenspan, testifying before the House Budget
Committee, said that the U.S. monetary authorities “cannot be indifferent to major movements
in our currency.”

Table 3

FED ER A L RESERVE R E C IP R O C A L C U R R E N C Y A R R A N G E M E N T S
Millions of Dollars

Institution
Austrian National Bank

Amount of Facility as of
June 30, 1994
250

Drawings during Period
0

National Bank of Belgium

1,000

0

Bank of Canada

2,000

0

National Bank of Denmark

250

0

Bank of England

3,000

0

Bank of France

2,000

0

Deutsche Bundesbank

6,000

0

Bank of Italy

3,000

0

Bank of Japan

5,000

0

Bank of Mexico

3,000

0

Netherlands Bank

500

0

Bank of Norway

250

0

Bank of Sweden
Swiss National Bank

300

0

4,000

0

600

0

1,250

0

32,400

0

Bank for International Settlements
Dollars against Swiss francs
Dollars against other authorized
European currencies
Total

74



O n Thursday, June 23, however, there was renewed selling pressure on the dollar. Market anxi­
ety about the risk of a rapid downward movement of the dollar, especially against the yen, was
reflected in options markets, where dollar puts began to trade at an extraordinarily high pre­
mium over equally out-of-the-money dollar calls. The dollar closed that day at DM 1.6024 and
¥101.22. O n Friday, June 24, during Asian and European trading, the dollar again began to
move lower against the mark and the yen, reaching lows of DM 1.5855 and ¥99.93, while U.S.
and European bond yields rose and European stock markets declined.
O n Friday morning, the Desk entered the market shortly before 9:30 a.m. to purchase dollars
against the mark and the yen. Sixteen other central banks joined the Desk in a concerted inter­
vention. Soon after the Desk entered the market, Treasury Secretary Bentsen confirmed the
intervention, stating:
O ur actions today in cooperation with our G-7 partners and other monetary
authorities reflect a shared concern about recent developments in financial
markets. We look forward to continued cooperation to maintain the condi­
tions necessary for sustained economic expansion with low inflation.
The Desk continued purchasing dollars through late morning. However, market participants
sold the dollar aggressively during the operation, especially against the mark, and at noon the
dollar traded at DM 1.5855 and ¥100.40. Shortly after 12:30 p.m., the Desk entered the market
for a final round of intervention, purchasing dollars against both marks and yen. In total, the
Desk purchased $1,560 million, of which $950 million was against the German mark and $610
million was against the Japanese yen. These amounts were equally divided between the Federal
Reserve and the ESF. The dollar closed the day at DM 1.5835 and ¥100.35. U.S. bond and stock
prices closed the day sharply lower as market participants perceived that the risk of interest rate
changes in the aftermath of the intervention had increased.
In the week following the intervention, the dollar steadied against most European currencies
and U.S. stock and bond markets initially regained some of the losses recorded on Friday. The
dollar traded in a range of ¥98 to ¥101. The resignation of Prime Minister Hata on June 25 and
the subsequent election of Tomiichi Murayama, the head of the Socialist party, as the new
prime minister on June 29 buoyed the yen as market participants anticipated that political un­
certainty in Japan would delay progress in bilateral trade negotiations with the United States
and the enactment of further economic stimulus measures in Japan. O n June 30, the final day of
the period, the dollar traded to a new post-W orld W ar II low of ¥98.35 before rebounding
slightly to close the period at ¥98.50. Against the m ark, the dollar closed the period at
DM 1.5869.




75

RESERVE P O S IT IO N
Intervention operations during the May-June period totaled $2.81 billion, divided equally be­
tween the Federal Reserve and the U.S. Treasury’s Exchange Stabilization Fund (ESF). H ow ­
ever, because operations conducted on the last business day of April settled in early May, inter­
vention operations settling in May and June totaled $3.51 billion. This full settlement amount
was also divided equally between the Federal Reserve and the ESF. During the period, the Fed­
eral Reserve and the ESF realized total profits of $310.4 million and $229.8 million, respectively,
on intervention sales based on historical cost-of-acquisition exchange rates.
At the end of the period, the current values of the foreign exchange reserve holdings of the
Federal Reserve and the ESF were $22.3 billion and $20.2 billion, respectively. The U.S. m on­
etary authorities regularly invest their foreign currency balances in a variety of instruments that
yield market-related rates of return and have a high degree of liquidity and credit quality. A
portion of the balance is invested in foreign government securities. As of June 30, the Federal
Reserve and the ESF each held, either directly or under repurchase agreement, $12.0 billion in
foreign government securities.

ENDNOTE
1. The dollar’s movements on a trade-weighted basis are measured using an index developed by
staff at the Board of Governors of the Federal Reserve System.

76



TREASURY AND FEDERAL RESERVE
FOREIGN EXCHANGE OPERATIONS
July-September 1994

During the July-September quarter, the dollar consolidated within increasingly narrow ranges.
It rose 0.6 percent against the Japanese yen and 0.1 percent against the Mexican peso, but
declined 2.3 percent against the German mark, 2.9 percent against the Canadian dollar, and
1.9 percent on a trade-weighted basis.1 Much of the period was characterized by thin summer
markets and the predominance of interbank dealers and short-term speculative traders—condi­
tions that occasionally resulted in abrupt but tem porary movements in exchange rates. U.S.
monetary authorities did not conduct any intervention operations during the quarter.
T H E D O L L A R TRADES T O ITS LOW S O F T H E P E R IO D BUT S O O N
R E T U R N S T O ITS O P E N IN G LEVELS
At the end of the prior period, with the dollar trading at DM 1.5869 and ¥98.50, many market
participants perceived a risk of a further decline in the dollar, given the prospect of stronger
growth in Europe and concern about the continued trade imbalances of the United States and
Japan. There was some market anticipation in advance of the Naples Summit that the Group of
Seven (G-7) might launch a coordinated “dollar support package.” When no formal dollar sup­
port package was announced, the dollar resumed its decline. O n Monday, July 11, the dollar
dropped sharply as some market participants liquidated remaining long-dollar positions and
others established sizable short-dollar positions. The dollar fell further the next day, briefly
reaching a twenty-month low of DM 1.5165 against the mark and a new postwar low of ¥96.60
against the yen. W ith the dollar perceived as oversold on a technical basis, however, traders

This report, presented by Peter R. Fisher, Executive Vice President, Federal Reserve Bank o f N ew York , and Manager fo r
Foreign Operations, System Open Market Account , describes the foreign exchange operations o f the U.S. D epartm ent o f the
Treasury and the Federal Reserve System fo r the period from July 1994 through September 1994. Nicholas Pifer was prim arily
responsible fo r preparation o f the report.




77

soon took profits on their short-dollar positions, and by the end of the week the dollar had
recovered almost all of its post-summit losses.
The dollar rose further in mid-July when senior U.S. officials articulated a clear preference for a
stronger dollar and highlighted its advantages for the U.S. economy. Secretary Bentsen stated
on July 14, “W e’re going to continue to be in accord with the Federal Reserve as far as their
objectives to see that we have substantial growth with low inflation and w ork toward a stronger
dollar.” O n July 20, Federal Reserve Chairman Alan Greenspan, in his semiannual HumphreyHawkins testimony before the Senate Banking Committee, said that he was troubled by the
dollar’s decline and noted that “any evidences of weakness in [the dollar] are neither good for
the international financial system nor good for the American econom y.” The next day,
Undersecretary of the Treasury Lawrence Summers, in his semiannual report to Congress on
international economic and exchange rate policy, stated:
The Administration believes that a strengthening of the dollar against the yen
and the mark would have im portant economic benefits for the United States.
It would restore the confidence in financial markets that is im portant to sus­
taining recovery. It would boost the attractiveness of U.S. assets and the incen­
tive for longer-term investment in the economy, and help to keep inflation
low. In addition we believe—and this view is shared by other G-7 countries—

Chart 1

PERCENTAGE CHANGE IN THE DOLLAR D U R IN G 1 9 9 4
Spot E xchange Rate
Percent

1994
Source: Federal Reserve Bank o f N ew York.

78



that a renewed decline of the dollar would be counterproductive to global
recovery.
Market participants reacted positively to these remarks. Earlier worries that U.S. officials were
unconcerned about the dollar began to dissipate, and by the end of July the dollar had moved
back to DM 1.5830 and ¥99.85.
T H E D O L L A R TRADES C A U T IO U S L Y H IG H E R A G A IN ST T H E Y EN
The dollar continued to rise gradually against the yen in late July and early August, reaching its
period high of ¥101.75 on August 8. At the time, the release of positive Japanese economic
statistics, notably June industrial production data and new machinery orders, fostered a market
perception that Japan’s economy was improving and that increased imports would help reduce
its trade surplus. Moreover, foreign investors turned into net sellers of Japanese bonds and
equities in July, selling the equivalent of $5.8 billion, and this development may have helped to
reduce the yen’s strength. Against this backdrop, news that the United States and Japan had
failed to reach an agreement on liberalizing Japan’s government procurement sector before the
July 31 deadline caused only a short-lived drop in the dollar. This muted reaction also reflected
a realization that any possible U.S. trade sanctions would not be imposed before the end of a
sixty-day “cooling off” period.




Chart 2

THE DOLLAR AGAINST THE GERMAN MARK
Spot Exchange Rate
German marks per U.S. dollar

1994
Source: Federal Reserve Bank o f N ew York.

79

E X P E C T A T IO N S O F H IG H E R S H O R T-TER M IN T E R E ST RATES
IN E U R O P E EM ERG E
In late July and early August, the dollar traded narrowly around the DM 1.58 level despite its
rise against the yen. In part, the dollar’s limited movement reflected a steadily growing percep­
tion among market participants that the Bundesbank’s process of easing short-term interest
rates might be approaching its end. Moreover, increased market concern over large fiscal deficits
in several European countries served to keep the mark firm against other European currencies
and, secondarily, against the dollar.
O n August 11, the central banks of Italy and Sweden surprised the markets with 50 basis point
increases in official lending rates and, in Sweden, a 28 basis point hike in its key money market
rate. For many market participants, these unexpected rate increases created a sudden anxiety
that European interest rates in general had reached their trough and would now be rising. In the
days after the news, bond yields in Germany and other European countries spiked higher and
the mark, buoyed by a flow of funds into mark-denominated money market instruments, rose
abruptly against most European currencies. The mark also increased sharply against the dollar
in the days following the rate hikes, moving from roughly DM 1.59 to DM 1.55. The dollar
declined further after increases of 50 basis points in the U.S. federal funds and discount rates on
August 16, as market participants apparently perceived a reduced likelihood of further U.S. rate
hikes in the near term. The dollar fell to DM 1.5265 on August 22, but then started to reverse.

Chart 3

THE DOLLAR AGAINST THE JAPANESE YEN
Spot E xchange Rate
Japanese yen per U.S. dollar

1994
Source: Federal Reserve Bank o f N ew York.

80



T H E D O L L A R SETTLES IN T O A N A R R O W R A N G E A G A IN ST T H E M ARK
In late August and early September, the dollar-mark exchange rate developed a trading pattern
in which it would move uneventfully for much of each week but then react abruptly on Friday
to a series of data releases on U.S. GDP, nonfarm payrolls, producer prices, and industrial pro­
duction and capacity utilization. The dollar’s sudden swings on those Fridays appeared to track
movements in U.S. bond prices, notably those of the thirty-year Treasury bond. This relation­
ship appeared to reflect the view among some foreign exchange traders that the long bond
offered a surrogate measure of foreign interest in U.S. securities, and the view among other
traders that the long bond provided a proxy for inflationary expectations in the U.S. economy.
The dollar spent most of September between the DM 1.5450 and DM 1.5550 levels. In part, the
dollar’s tight range reflected an absence of large positions in the market and a clear reluctance on
the part of market participants, many of whom had suffered trading losses during the first eight
months of the year, to put capital at risk. The dollar’s limited movement also appeared to reflect
a mix of views on likely interest rate movements in the United States and Germany during the
rest of the year. Some observers expected the Federal Reserve to raise U.S. rates aggressively to
counter a perceived rise in inflationary pressures; others, anticipating a deceleration in U.S.
growth, expected only a moderate rise in U.S. rates. Similarly, although most traders expected
the Bundesbank to keep German rates on hold, some speculated that the Bundesbank would




Chart 4

DIFFERENTIAL BETW EEN DOLLAR AND GERMAN MARK
SHORT-TERM INTEREST RATES
Implied by the Three-Month Eurodeposit Futures (Decem ber 1994 Contracts)
Interest rate

Interest rate differential

1994

1994

Source: Bloomberg L.P.

81

raise rates by year-end while others continued to look for one more cut after the O ctober 16
federal elections. During the latter part of September, as investors started to focus on uncer­
tainty surrounding the German election, a reduction of long-mark positions against other Euro­
pean currencies provided modest support for the dollar against the mark. The dollar closed the
period at DM 1.5510.
T H E D O L L A R ALSO SETTLES IN T O A N A R R O W R A N G E A G A IN S T T H E
Y E N AS A T T E N T IO N SHIFTS T O U.S. T R A D E TALKS W IT H JA P A N
During the latter half of August, the dollar-yen exchange rate briefly dipped back below the ¥98
level, moving lower in line with the dollar-mark exchange rate. Contributing to the decline was
the August 18 release of U.S. trade data for June showing a decrease in the overall trade deficit

Table 1

F O R E IG N E X C H A N G E H O L D IN G S O F U.S. M O N E T A R Y
A U T H O R IT IE S A T P E R IO D E N D
Millions of Dollars

German marks
Japanese yen
Total

Federal Reserve

U.S. Treasury Exchange Stabilization Fund

13,900.2

8,032.6

9,163.9

12,415.2

23,064.1

20,447.8

Chart 5

U.S. AND GERMAN TEN-YEAR GOV ERNM ENT B OND YIELDS

July

August
19 9 4

Source: Bloomberg L.P.

82



September

July

August
19 9 4

September

but an increase in the bilateral deficit with Japan, a development that refocused attention on
U.S. trade relations with Japan.
For the remainder of the quarter, the dollar traded between the ¥98 and ¥100 levels; in large
part, movements within that range were driven by changing perceptions about the likely results
of the fram ework trade talks between the U nited States and Japan and the chances of an




Table 2

N E T PR O FIT S (+) O R LOSSES (-) O N U.S. TR EA SU R Y A N D
FED ER A L RESERVE F O R E IG N E X C H A N G E O P E R A T IO N S , BASED
O N H IS T O R IC A L C O S T -O F -A C Q U IS IT IO N E X C H A N G E RATES
Millions of Dollars
Federal Reserve

U.S. Treasury Exchange Stabilization Fund

+4,458.2

+4,253.8

Realized profits and losses
June 30, 1994 - September 30, 1994

0.0

0.0

Valuation profits and losses
on outstanding assets and
liabilities as of September 30, 1994

+4,973.4

+4,356.7

Valuation profits and losses
on outstanding assets and
liabilities as of June 30, 1994

Note: Data are on a value-date basis.

Chart 6

THE U.S. DOLLAR AGAINST THE MEXICAN PESO AND
MEXICAN SHORT-TERM INTEREST RATES
Mexican pesos per U.S. dollar

Ninety-one-day Cetea (weekly auction rate)
20.0

17.5

-x \

-

15.0 —

\
12.5 —

10.0

ii iiiiiiiiiiuiiiii

July
1994

1111111111111111111111 mi mi mmmi i i
September
August
1994

Source: Bloomberg L.P.
a Mexican peso-denominated treasury bill.

83

agreement before the September 30 deadline. During the first half of September, the dollar
firmed to the upper end of this range as comments by U.S. and Japanese officials suggested that
the two sides were making progress toward an accord. Toward the end of the m onth, however,
the dollar moved lower on news of a larger than expected U.S. trade deficit for July and on
statements by U.S. officials suggesting that the United States would impose trade sanctions on
Japan if the two sides failed to strike an agreement. As the period drew to a close, the dollar
firmed again as a high-level team of Japanese officials traveled to the United States for a final
round of negotiations, leading some market participants to expect a last-minute breakthrough.
The dollar-yen exchange rate closed the quarter at ¥99.10.
T H E D O L L A R CLOSES U N C H A N G E D A G A IN ST T H E M E X IC A N PESO
Beginning in late July, market participants started to anticipate that Ernesto Zedillo, candidate
of Mexico’s Institutional Revolutionary Party (PRI), would win the August 21 presidential elec­
tion. This view, combined with expectations of faster growth and lower interest rates in the
year ahead, led to greater demand for Mexican stocks and peso-denominated government debt.
Supported by such investor inflows, the Mexican peso rose modestly against the dollar, short­
term Mexican interest rates fell, and the Mexican stock market increased about 20 percent in the
m onth before the election.
W ith a Zedillo victory well discounted in the market by the time of the election, the peso gave
up some of its gains on profit taking once the results became clear. Subsequently, the market
Chart 7

THE U.S. DOLLAR AGAINST THE CANADIAN DOLLAR AND THE
U .S.-C A N A D IA N SHORT-TERM INTEREST RATE DIFFERENTIAL
Canadian dollars per U.S. dollar

1994
Source: Bloomberg L.P.

84



U.S.-Canada three-month deposit rate differential

1994

began to focus on the renegotiation of Mexico’s annual wage and price agreement between
business, labor, and government—known as the “Pacto”—which also governs the workings of
Mexico’s crawling band exchange rate regime. Foreign and domestic investors reacted favorably
to the September 24 news of the Pacto’s renegotiation, in which the peso’s allowable rate of
depreciation was left unchanged at 0.0004 pesos per day and Mexico’s inflation target was low­
ered from 6 percent in 1994 to 4 percent in 1995. Near the end of the period, however, these
gains were offset by the assassination on September 28 of Jose Francisco Ruiz Massieu, general
secretary of the PRI. The dollar-peso exchange rate closed the quarter at N P 3.3930, little changed
from where it opened.
T H E C A N A D IA N D O L L A R A PPR EC IA TES AS P O L IT IC A L U N C E R T A IN T Y
R EC ED ES
During the quarter, the Canadian dollar strengthened against the U.S. dollar as market concerns




Table 3

FED ER A L RESERVE R E C IPR O C A L C U R R E N C Y A R R A N G E M E N T S
Millions of Dollars
Amount of Facility as of
Institution
Austrian National Bank

September 30, 1994

Drawings during Period

250

0

National Bank of Belgium

1,000

0

Bank of Canada

2,000

0

250

0

Bank of England

3,000

0

Bank of France

2,000

0

Deutsche Bundesbank

6,000

0

Bank of Italy

3,000

0

Bank of Japan

5,000-

0

Bank of Mexico

National Bank of Denmark

3,000

0

Netherlands Bank

500

0

Bank of Norway

250

0

Bank of Sweden

300

0

4,000

0

600

0

1,250

0

32,400

0

Swiss National Bank
Bank for International Settlements
Dollars against Swiss francs
Dollars against other authorized
European currencies
Total

85

over Quebec separatism receded, allowing investors to turn their attention to Canada’s favor­
able mix of strong growth and low inflation. The U.S. dollar opened the period at C$1.3791.
The Canadian dollar began to appreciate in early August as opinion polls suggested that even
though the Parti Quebecois (“P Q ”) was likely to win Q uebec’s September 12 provincial
election, support for its separatist platform was more limited. By the eve of the election, the
Canadian dollar had firmed to about C$1.3670 while spreads on Canadian interest rates over
equivalent U.S. rates had narrowed considerably. The Canadian dollar firmed suddenly on
September 13, the day after the election, as the P Q ’s narrower than expected victory over the
incumbent Liberal Party and its inability to garner 50 percent of the popular vote suggested that
a referendum on Quebec independence w ould probably not succeed. Buoyed by foreign
demand for Canadian financial assets, the Canadian dollar traded to a high of C$1.3400 in the
days after the election and then closed at C$1.3430. Canadian interest rates declined further, and
by late September Canadian short-term rates were below U.S. rates.
TR EA SU R Y A N D FED ER A L RESERVE F O R E IG N E X C H A N G E RESERVES
A t the end of the period, the current value of the foreign exchange reserve holdings of the
Federal Reserve and the Treasury D epartm ent’s Exchange Stabilization Fund (ESF) were
$23.1 billion and $20.4 billion, respectively. The U.S. monetary authorities regularly invest
their foreign currency balances in a variety of instruments that yield market-related rates of
return and have a high degree of liquidity and credit quality. A portion of the balances is in­
vested in securities issued by foreign governments. As of September 30, the Federal Reserve and
the ESF held, either directly or under repurchase agreement, $12.4 and $12.0 billion, respec­
tively, in foreign government securities.

ENDNOTE
1. The dollar’s movements on a trade-weighted basis are measured using an index developed by
staff at the Board of Governors of the Federal Reserve System.

86



TREASURY AND FEDERAL RESERVE
FOREIGN EXCHANGE OPERATIONS
October-December 1994

During the fourth quarter of 1994, the dollar fell 0.1 percent against the German mark, but rose
0.5 percent against the Japanese yen and 1.0 percent on a trade-weighted basis.1 O n November
2, the U.S. monetary authorities purchased $800 million against the German mark and an equal
amount against the Japanese yen, and Treasury Secretary Lloyd Bentsen issued a statement af­
firming the Administration’s support for a stronger dollar. O n November 3, the U.S. monetary
authorities intervened again, this time purchasing $500 million against the German mark and an
equal amount against the Japanese yen. In other operations, the U.S. and Mexican monetary
authorities activated their $6 billion swap facility after Mexico announced, before the market
opened on December 22, that the peso would be allowed to float.
T H E D O L L A R D EC LIN ES D U R IN G O C T O B E R
Having closed the prior period at DM 1.5510, the dollar traded fairly steadily against the Ger­
man mark. Against the Japanese yen, the dollar rose briefly from ¥99.10, its close at the end of
the prior quarter, after a partial trade agreement between the United States and Japan was an­
nounced on O ctober 1. Soon thereafter, however, the dollar started to decline against both
currencies.
Early in the period, continued signs of robust growth in the U.S. economy led market partici­
pants to question the Federal Reserve’s decision not to raise rates at its September 27 meeting,

This report, presented by Peter R. Fishery Executive Vice President, Federal Reserve Bank o f N ew York , and Manager fo r
Foreign Operations , System Open Market Account, describes the foreign exchange operations o f the U.S. D epartm ent o f the
Treasury and the Federal Reserve System fo r the period from October 1994 through December 1994. Carol Osier was prim a­
rily responsible fo r preparation o f the report.




87

and concern that the stance of monetary policy was inadequate to contain price pressures began
to grow. At the same time, market participants perceived short-term and long-term U.S. rates as
too low relative to comparable foreign rates and found in these differentials an explanation for
the dollar’s weakness during the year and a reason for further dollar weakness.
Against the mark, the dollar started to decline sharply on October 13. This occurred as expecta­
tions rose that the coalition government of Chancellor H elm ut Kohl would be returned to
office in Germ any’s October 16 federal elections and as German bond and stock markets rallied.
The dollar’s downward movement accelerated as it breached a number of im portant technical
points. From its closing level of DM 1.5405 on October 12, the dollar fell to DM 1.4937 on
October 17. After this abrupt decline, market discomfort with the level of U.S. interest rates
grew more pronounced and market participants began to express the view that the U.S. Admin­
istration was becoming less concerned about the dollar. At the same time, the dollar also began
to decline against the yen, particularly as a result of heavy dollar sales by Japanese exporters.
By O ctober 25, the dollar had declined to ¥96.40 and a period low of DM 1.4860. The release on
October 28 of GDP data containing encouraging news about the U.S. price deflator provided a
brief respite, but as November began, pressure on the dollar intensified once again.




Chart 1

THE DOLLAR AGAINST THE GERMAN MARK
Spot Exchange Rate
German marks per U.S. dollar

1994
Source: Federal Reserve Bank o f N ew York.

U.S. M O N E T A R Y A U T H O R IT IE S E N T E R T H E M A R K ET T O BUY DOLLA RS
A G A IN ST T H E M ARK A N D T H E Y EN
O n the morning of Wednesday, November 2, the dollar fell to a new postwar low of ¥96.11 and
was trading at DM 1.4910. Shortly after 11:00 a.m., the Federal Reserve Bank of New York’s
Foreign Exchange Desk entered the market, purchasing dollars for the U.S. monetary authori­
ties. During the course of the day, the Desk purchased $800 million against the mark and
$800 million against the yen.
As the intervention began, Treasury Secretary Bentsen issued the following statement:
I believe that recent movements in the dollar are inconsistent with the funda­
mentals of a strong investment-led recovery in the United States and the greatly
enhanced ability of U.S. firms to compete around the world. This Administra­
tion is committed to sound economic policies that expand the economy’s ca­
pacity and sustain recovery with low inflation. Continuation of recent foreign
exchange trends would be counterproductive for the United States and the
world economy. A stronger dollar will reduce inflation pressures, improve
American living standards, and prom ote investment. We will continue to
m onitor developments closely in cooperation with our G-7 [Group of Seven]
partners.
Later that day Bundesbank President Hans Tietmeyer expressed support for the U.S. operation,




Chart 2

THE DOLLAR AGAINST THE JAPANESE YEN
Spot Exchange Rate
Japanese yen per U.S. dollar

1994
Source: Federal Reserve Bank o f N ew York.

89

saying “I welcome the fact that the American monetary authorities have clearly expressed their
interest in a stronger dollar and want to back this with an appropriate policy. This statement
[by Secretary Bentsen] is likely to contribute to bringing the value of the dollar on markets
more into line with the fundamental data.” After reaching intraday highs of DM 1.5220 and
¥98.00, the dollar closed at DM 1.5149 and ¥97.60.
Shortly after 11:00 a.m. on Thursday, November 3, with the dollar trading at DM 1.5145 and
¥97.65, the Desk intervened a second time on behalf of the U.S. m onetary authorities. During
the course of the day, the Desk purchased $500 million against the m ark and $500 million
against the yen. The dollar reached intraday highs of DM 1.5260 and ¥98.30 before closing at
DM 1.5185 and ¥97.73.
O n both days of intervention, the yen operations of the U.S. monetary authorities were coordi­
nated with the operations of the m onetary authorities of another country. All the dollar pur­
chases of the U.S. monetary authorities were divided equally between the Federal Reserve and
the Exchange Stabilization Fund (ESF) of the Departm ent of the Treasury.
T H E D O L L A R C O N T IN U E S T O S T R E N G T H E N D U R IN G N O V EM B ER
Following the intervention, the dollar continued to rise against the mark as market participants
became increasingly confident that the Federal Reserve would raise official U.S. interest rates at

Chart 3

DOLLAR INTEREST RATES IMPLIED BY SERIES OF THREE-MONTH
EURODEPOSIT FUTURES CONTRACTS
Implied interest rates

Contract
Source: Federal Reserve Bank of New York.

90



the November 15 meeting of the Federal Open Market Committee (FOMC). O n November 9,
in Asian and early European trading hours, the dollar rose abruptly in response to the results of
the previous day’s U.S. elections, in which the Republican party took control of both the House
and the Senate. From its closing levels the day before, the dollar rose nearly two pfennigs to
DM 1.5265 and about half a yen to ¥97.70 by the time the N ew Y ork m arket opened on
November 9, then traded around these levels for the rest of the day.




Chart 4

D IFFERENTIAL BETW EEN DOLLAR AND GERMAN MARK
SHORT-TERM INTEREST RATES
Implied by the Three-Month Eurodeposit Futures (March 1995 Contracts)
Interest rate differential

Interest rate

1994

1994
Source: Bloomberg L.P.

Table 1

F O R E IG N E X C H A N G E H O L D IN G S O F U.S. M O N E T A R Y
A U T H O R IT IE S A T P E R IO D E N D
Millions of Dollars
Federal Reserve
German marks
Japanese yen
Total

U.S. Treasury Exchange Stabilization Fund

13.405.2

7,500.6

8,510.0

11,801.0

21.915.2

19,301.6

91

By the eve of the N ovem ber 15 FO M C meeting, the dollar had risen further, reaching
DM 1.5441 and ¥98.28. In the event, the Federal Reserve’s decision to raise the federal funds and
discount rates by 75 basis points surprised m any m arket participants, who had generally
expected the Federal Reserve to raise rates by only 50 basis points. The dollar spiked higher in
response. The perceived aggressiveness of the action also encouraged some market participants
to anticipate additional tightening in December.
The dollar’s rally continued through the end of November as the notable widening of short-term
interest rate differentials encouraged market participants to accumulate dollar positions. Market
behavior began to reflect the perception that the Federal Reserve would bring short-term interest
rates to levels that were high enough to restrain incipient inflationary pressures. Indeed, the dollar
rose on stronger than expected U.S. data on consumer confidence, third-quarter GDP, and N o­
vember nonfarm payrolls. Market participants also came to view U.S. rates as sufficiently high to
compensate investors for the continued risk of dollar decline. For example, three-month U.S.
rates, which had only moved above equivalent German rates in September, had come to surpass
German rates by about 100 basis points. For foreign exchange market participants, the stability
and subsequent decline of long-term U.S. bond yields during late November also helped to sup­
port the dollar, since these developments suggested good demand for long-term U.S. paper. The
dollar closed the m onth at DM 1.5692 and ¥98.90, up 4.4 percent and 2.1 percent, respectively, over
its values at the end of October.

Chart 5

U .S. AND GERMAN TEN-YEAR GOVERN M ENT BOND YIELDS
Interest rate

Interest rate differential

1994
Source: Bloomberg L.P.

92



1994

T H E D O LLA R TRADES Q U IETLY A G A IN ST T H E M ARK A N D Y EN D U R IN G
MOST OF DECEMBER
The dollar’s rise came to an end in early December and, with the volume of transactions reduced
by the holiday season, the currency traded for most of the m onth around the DM 1.57 and ¥100
levels. Expectations among some market participants that the Federal Reserve would raise inter­
est rates in late December—a view partly based on Chairman Greenspan’s December 7 testimony
before Congress, in which he characterized U.S. growth as stronger than expected—helped sup­
port the dollar. At the same time, however, strong German GDP data for the third quarter and
volatility in U.S. interest rate markets, caused by the liquidation of the financing positions of the
Orange C ounty investment pool and of other portfolios, appeared to limit the dollar’s upside. At
its December 20 meeting, the Federal Reserve left U.S. interest rates unchanged, a decision that
had no immediate impact on the dollar. By the end of the period, however, the dollar was nearly
three pfennigs and about half a yen lower, with most of the decline coming on December 28 in thin
market conditions. The dollar closed the quarter at DM 1.5490 and ¥99.55.
T H E C A N A D IA N D O LLA R DECLIN ES STEADILY
After opening at C$1.3450, the Canadian dollar weakened steadily against the U.S. currency and
finished the quarter at C$1.4025, down 4.2 percent. International investors were discouraged
from purchasing Canadian dollars by short-term interest rate differentials that, for much of the
period, favored the U.S. currency, especially after the mid-November rise in U.S. short-term
rates. These investors also expressed concern about large Canadian government budget deficits




Table 2

N E T PR O FIT S (+) O R LOSSES (-) O N U.S. TR EA SU R Y A N D
FED ER A L RESERVE F O R E IG N E X C H A N G E O P E R A T IO N S , BASED
O N H IS T O R IC A L C O S T -O F -A C Q U IS IT IO N E X C H A N G E RATES
Millions of Dollars
Federal Reserve

U.S. Treasury Exchange Stabilization Fund

Valuation profits and losses
on outstanding assets and
liabilities as of September 30, 1994

+ 4,973.4

+ 4,356.7

Realized profits and losses
September 30 - December 31, 1994

+ 313.7

+ 270.9

Valuation profits and losses
on outstanding assets and
liabilities as of December 31, 1994

+ 4,577.6

+ 4,054.1

Note: Data are on a value-date basis.

93

at the federal and provincial levels, and about political uncertainty stemming from Quebec’s
quest for sovereignty.
M E X IC A N A U T H O R IT IE S A LLO W T H E PESO T O F L O A T
Over the quarter, the peso declined by 30 percent against the dollar from its initial level of 3.3930
new pesos (NP) per dollar. The move began as a gradual depreciation within the permissible
range set by the government. The peso remained within its band through November and for a few
weeks past President Zedillo’s December 1 inauguration, despite considerable financial market
pressures and increasing concern among market participants about possible inconsistencies within
the Mexican economic strategy. The view increasingly took hold that, even at the lower limit of
the band, the peso was overvalued given Mexico’s past inflation and a current account deficit
estimated at nearly 8 percent of the country’s GDP. Nevertheless, investors remained hopeful that
Mexico would not ultimately be required to change its exchange rate policy.
From the start of the quarter through Monday, December 19, the peso declined 2 percent to reach
3.4632. O n the morning of December 20, the Mexican financial authorities, in agreement with
representatives of labor and business, changed the peso’s lowest permissible value against the
dollar by 0.53 pesos, to N P 4.0016 from N P 3.4712 the p rio r day. M arket participants
reacted negatively, and the peso was quickly pushed to its new limit. The peso’s value against the
dollar dropped 12.5 percent over the course of the day.

Chart 6

THE DOLLAR AGAINST THE MEXICAN PESO
Spot Exchange Rate
Mexican pesos per U.S. dollar

1994
Source: Federal Reserve Bank o f N ew York.

94



W ith pressure on the peso continuing unabated, the Mexican financial authorities announced
before the market opened on December 22 that “the supply and demand for currency would freely
determine the exchange rate until the exchange market stabilized.” It was also announced that
Mexican and U.S. monetary authorities had jointly activated a pre-existing swap facility of $6
billion. The peso closed the day at N P 4.70,15.7 percent below its close on December 20.
During the rest of December the peso remained volatile as foreign investors continued to reduce
their peso exposure. The peso closed the year at N P 4.85 per dollar.
TREASURY A N D FEDERAL RESERVE F O R E IG N E X C H A N G E RESERVES
The U.S. monetary authorities intervened twice during the period, purchasing a total of $2,600
million against German marks and Japanese yen. This amount was divided equally between the




Table 3

FED ER A L RESERVE R E C IP R O C A L C U R R E N C Y A R R A N G E M E N T S
Millions of Dollars
Amount of Facility as of
Institution

December 31, 1994

Drawings during Period

250

0

National Bank of Belgium

1,000

0

Bank of Canada

2,000

0

250

0

Austrian National Bank

National Bank of Denmark
Bank of England

3,000

0

Bank of France

2,000

0

Deutsche Bundesbank

6,000

0

Bank of Italy

3,000

0

Bank of Japan

5,000

0

Bank of Mexico

3,000

0

Netherlands Bank

500

0

Bank of Norway

250

0

Bank of Sweden

300

0

4,000

0

600

0

1,250

0

32,400

0

Swiss National Bank
Bank for International Settlements
Dollars against Swiss francs
Dollars against other authorized
European currencies
Total

95

Federal Reserve and the Treasury Departm ent’s ESF. The Federal Reserve and the ESF realized
profits of $313.7 million and $270.9 million, respectively, on this intervention activity. These
profits are based on historical cost-of-acquisition exchange rates.
At the end of the period, the current values of the foreign exchange reserve holdings of the Federal
Reserve and the ESF were $21.9 billion and $19.3 billion, respectively. The U.S. monetary authori­
ties regularly invest their foreign currency balances in a variety of instruments that yield marketre la ted rates of re tu rn and have a high degree of liq u id ity and c re d it q u ality .
A p ortio n of the balances is invested in securities issued by foreign governments. As of
December 31, the Federal Reserve and the ESF held, either directly or under repurchase agree­
ment, $9.2 billion and $12.5 billion, respectively, in foreign government securities.

ENDNOTE
1. The dollar’s movements on a trade-weighted basis are measured using an index developed by
staff at the Board of Governors of the Federal Reserve System.

96






Financial Statements

STA T E M E N T O F C O N D IT IO N
In Dollars

Assets

Dec. 30, 1994

Dec. 31, 1993

Gold certificate account

4,133,635,217

3,753,286,002

Special drawing rights certificate account

2,808,000,000

2,808,000,000

18,697,679

10,962,156

6,960,332,896

6,572,248,158

0

9,250,000

134,693,405,585

114,654,212,455

9,565,000,000

12,187,000,000

1,343,797,883

1,601,778,522

Coin
Total

Advances
United States government securities:
Bought outright3
Held under repurchase agreements
Federal agency obligations:
Bought outright

1,025,000,000

1,025,000,000

146,627,203,468

129,477,240,977

Cash items in process of collection

648,912,240

788,551,991

Bank premises

137,094,609

140,351,696

Held under repurchase agreements
Total loans and securities

Other assets:

All other13
Total other assets

Interdistrict settlement account
Total assets

a Includes securities loaned—fully secured

10,429,060,558

11,003,359,701

11,215,067,407

11,932,263,388

5,852,633,645

12,725,458,508

170,655,237,416

160,707,211,031

1,255,000,000

296,000,000

kIncludes assets denominated in foreign currencies revalued monthly at market rates.

97

Financial Statements

S T A T E M E N T O F C O N D IT IO N
In Dollars

Dec. 30, 1994

Dec. 31, 1993

151,607,516,466

134,963,730,980

Depository institutions

7,105,402,568

6,968,803,928

United States Treasury—-general account

7,161,094,854

14,809,010,583

149,274,664

287,626,759

Liabilities

Federal Reserve notes (net)

Reserve and other deposits:

Foreign-official accounts
Other
Total deposits

263,134,324

196,045,821

14,678,906,410

22,261,487,091

550,535,468

746,714,038

1,843,013,572

797,989,922

Other liabilities:
Deferred availability cash items
All other
Total other liabilities
Total liabilities

2,393,549,040

1,544,703,960

168,679,971,916

158,769,922,031

987.632.750

968.644.500

Capital Accounts
Capital paid in
Surplus
Total capital accounts
Total liabilities and capital accounts

98



987.632.750

968.644.500

1,975,265,500

1,937,289,000

170,655,237,416

160,707,211,031




Financial Statements

S T A TEM EN T O F E A R N IN G S A N D EXPENSES F O R
T H E C A L E N D A R YEARS 1994 A N D 1993
In Dollars

Total current earnings
N et expenses
Current net earnings

1994

1993

7,438,763,300

6,606,811,777

305,700,181

226,105,484

7,133,063,119

6,380,706,293

Additions to current net earnings:
Profit on sales of United States government
securities and federal agency obligations (net)
Profit on foreign exchange
All other
Total additions

689,950,602

14,033,132
76,941,700

42,821

1,488,759

689,993,423

92,463,591

Deductions from current net earnings:
Loss on sales of United States government
securities and federal agency obligations (net)
All other
Total deductions
N et additions (deductions)

9,095,296

-

3,305,653

101,114,496

12,400,949

101,114,496

677,592,474

(8,650,905)

Assessments by the Board of Governors:
Board expenditures
Federal Reserve currency costs

41,453,600

40,674,400

144,484,979

116,794,492

185,938,579

157,468,892

7,624,717,014

6,214,586,496

Dividends paid

58,789,295

55,967,417

Transferred to surplus

18,988,250

83,623,900

Total assessments
N et earnings available for distribution

Distribution of net earnings:

Payments to United States Treasury
(interest on Federal Reserve notes)
N et earnings distributed

7,546,939,469

6,074,995,179

7,624,717,014

6,214,586,496

99

100



CHANGES IN DIRECTORS AND SENIOR OFFICERS
C H A N G E S IN D IR E C T O R S
In May 1994, the Board of Governors of the Federal Reserve System reappointed Maurice R.
Greenberg a class C director of this Bank for a three-year term beginning January 1995 and
redesignated him C hairm an of the Board and Federal Reserve Agent for the year 1995.
Mr. Greenberg, who is Chairman and Chief Executive Officer of American International Group,
Inc., New York, N.Y., has been serving as a class C director since June 1988 and as Chairman and
Federal Reserve Agent since January 1994. He also served as Deputy Chairman for the years 1992
and 1993.
Also in May 1994, the Board of Governors reappointed David A. Hamburg Deputy Chairman
for the year 1995. Dr. Hamburg, who is President of the Carnegie Corporation, New York,
N.Y., has been serving as a class C director and as Deputy Chairman since January 1994.
In January 1995, member banks in Group 1 elected J. Carter Bacot a class A director, and Eugene
R. McGrath a class B director, both for three-year terms beginning January 1995. Mr. Bacot,
Chairman and Chief Executive Officer of The Bank of New York, New York, N.Y., succeeded
Thomas G. Labrecque, Chairman and Chief Executive Officer of The Chase Manhattan Bank
(National Association), New York, N.Y., who had served as a class A director from January 1992
through December 1994. Mr. McGrath, Chairman, President, and Chief Executive Officer of the
C o n so lid ated E dison C o m pany of N ew Y o rk , Inc., N ew Y ork, N .Y ., succeeded
Robert E. Allen, Chairman and Chief Executive Officer of AT&T, New York, N.Y., who had
served as a class B director from April 1992 through December 1994.

Buffalo Branch
In August 1994, the Board of Governors reappointed Donald R. Rust a director of this Bank’s
Buffalo Branch for a three-year term beginning January 1995. Mr. Rust, who is Plant Manager of
the Tonawanda Engine Plant, GM Powertrain Division, General Motors Corporation, Buffalo,
N.Y., has been serving as a Branch director since January 1992.
In December 1994, the Board of Directors of this Bank appointed William E. Swan a director of
the Buffalo Branch for a three-year term beginning January 1995. Mr. Swan is President and
Chief Executive Officer of Lockport Savings Bank, Lockport, N.Y. O n the Branch Board, he
succeeded Charles M. Mitschow, Chairman of the Board, Western Region, Marine Midland
Bank, Buffalo, N.Y., who had served as a director of the Branch since January 1992.




101

Also in December 1994, the Board of Directors of this Bank appointed Mark W. Adams a director
of the Buffalo Branch for a three-year term beginning January 1995. Mr. Adams is the owner of
Adams Poultry Farm, Naples, N.Y. O n the Branch Board, he succeeded Richard H . Popp,
Operating Partner, Southview Farm, Castile, N.Y., who had served as a Branch director since
January 1989.
A t the same time, the Board of this Bank redesignated Joseph J. Castiglia Chairman of the Board
of the Buffalo Branch for the year 1995. Mr. Castiglia, who is President and Chief Executive
Officer of Pratt & Lambert, Inc., Buffalo, N.Y., has been serving as a director of the Buffalo
Branch since January 1991 and as Chairman of the Branch Board since June 1993.

C H A N G E S IN SE N IO R O FFIC ER S
The following changes in the official staff at the level of vice president and above have occurred
since the publication of the previous Annual Report:
Effective March 17y 1994:
Peter Bakstansky, formerly Vice President, was appointed Senior Vice President and assigned to
the Public Information Function.
Paul B. Bennett, Senior Vice President, was designated Senior Vice President and Acting Director
of Research pending the appointment of a successor to Richard G. Davis, who elected early
retirement.
Terrence J. Checki, formerly Vice President, was appointed Senior Vice President and assigned
to the International Bank Examinations Function.
Christine M. Cumming, formerly Vice President, was appointed Senior Vice President and
assigned to the Bank Analysis and the Specialized Examinations Functions.
Christopher J. McCurdy, formerly Vice President, was appointed Senior Vice President and
assigned to the Banking and Payments Studies Function.
Kathleen A. O ’Neil, formerly Vice President, was appointed Senior Vice President and assigned
to the Personnel and the Planning and Control Functions and as the senior officer responsible
for planning, administration, and coordination in the Corporate Group.
R obert A. O ’Sullivan, form erly Vice President, was appointed Senior Vice President and
assigned to the Domestic Bank Examinations Function.

102



Carl W. Turnipseed, formerly Vice President, was appointed Senior Vice President and Branch
Manager, succeeding James O. Aston, who began a leave of absence to accept a position as
Senior Adviser with the Greater Buffalo Partnership.
Donald T. Vangel, Senior Vice President, was assigned as the officer in charge of the Domestic
Bank Examinations Function.
Nancy Bercovici, formerly Assistant Vice President, was appointed Vice President and assigned
to the International Bank Examinations Function.
Arturo Estrella, formerly Assistant Vice President, was appointed Vice President and assigned to
the Financial and Market Analysis Function.
James K. Hodgetts, form erly Assistant Vice President, was appointed Vice President and
assigned to the Com m unity Affairs Office and the Compliance Examinations Function.
Willene A. Johnson, form erly Assistant Vice President, was appointed Vice President and
assigned to the International Affairs Function and the Equal Employment O pportunity Office.
Barbara L. Walter, Vice President, was assigned to the Banking and Payments Studies Function
and as the senior officer responsible for planning, administration, and coordination in the
Research and Market Analysis Group.

Effective May 19, 1994:
Margaret L. Greene, Senior Vice President, was designated Senior Vice President and Economic
Adviser and assigned to the Research and Market Analysis Group.
M. Akbar Akhtar, formerly Vice President, was designated Economic Adviser and assigned to
the Research and Market Analysis Group.

Effective June 20, 1994:
Elizabeth Tibbals joined the Bank as Counsel and Vice President in the Legal Function.
Ms. Tibbals had been Deputy Superintendent and Counsel at the New York State Banking
Department.




103

Effective September 8, 1994:

Frederic S. Mishkin joined the Bank as Executive Vice President and Director of Research.
Dr. Mishkin had been Professor of Economics at Columbia U niversity’s Graduate School
of Business.
Paul B. Bennett was designated Senior Vice President and Deputy Director of Research.

Effective September 30, 1994:
Kathleen A. O ’Neil, Senior Vice President, and Nirm al V. Manerikar, Vice President, were
assigned to the new Office of Corporate Consultancy, in addition to their other responsibilities.

Effective October 6, 1994:
Peter Ryerson Fisher, formerly Senior Vice President, was appointed Executive Vice President
with responsibility for the Markets Group.
Mary R. Clarkin, Senior Vice President, elected early retirement and was assigned interim re­
sponsibility for the Loans and Credits Function.
Pauline E. Chen, formerly Assistant Vice President, was appointed Vice President and assigned
to the new Market Accounting and Operations Function.
Betsy Buttrill White, Vice President, was assigned responsibility for the M arket Surveillance
Function.

Effective November 7, 1994:
MarySue Fisher, Counsel and Vice President, was designated Vice President and assigned to the
Banking and Payments Studies Function.

104



Effective January 1, 1995:

The Federal Reserve Banks established a new financial services management structure and a series
of product offices. One of these new offices, the Wholesale Product Office—encompassing all
large-dollar transfer businesses, including the Fedwire funds transfer and book-entry securities
services—was assigned to James H. Oltman, First Vice President of this Bank, as Product Director.
Carol W. Barrett, Senior Vice President, was designated Wholesale Product Manager. Daniel
C. Bolwell, formerly Assistant Vice President, was appointed Vice President and assigned to that
Office. Dara Hunt, formerly of the Federal Reserve Bank of Chicago, joined the Bank as Vice
President and was also assigned to that Office.
John M. Eighmy, Senior Vice President, was assigned as the senior officer responsible for
planning, administration, and coordination in the Banking Services Group. All of his other
assignments continued.
Michele S. Godfrey, formerly Secretary and Vice President, was appointed Senior Vice President
in charge of the Central Bank Services Function.
Betsy Butrill White, formerly Vice President, was appointed Senior Vice President, continuing
as the officer in charge of the Market Surveillance Function and as the senior officer responsible
for planning, administration, and coordination in the Markets Group.
M. A kbar A khtar was designated Vice President and assigned to the Public Inform ation
Function.
Robert J. Ambrose, Assistant General Auditor, was prom oted to the level of vice president.
Steven J. Garofalo, Vice President, was assigned responsibility for the Electronic Payments and
the Fiscal Services Functions.
Patricia Y. Jung, Vice President, was assigned to the Systems Development Function with re­
sponsibility for the Open Systems Support Department, the Markets and Accounts Systems
Department, and the Special Projects Staff.
Dino Kos, formerly Assistant Vice President, was appointed Vice President and assigned to the
Foreign Exchange Function.
Sandra C. Krieger, form erly Assistant Vice President, was appointed Vice President and
assigned to the Open Market Function.




105

M onika K. N ovik, form erly Assistant Vice President, was appointed Vice President and
assigned to the Systems Development Function with responsibility for the Bank Supervision
and Administrative Systems Department, the Cash and Check Systems Department, the Data
Base Administration Department, and the Advanced Technology Staff.
Janet K. Rogers, formerly Assistant Vice President, was appointed Vice President and assigned
to the Loans and Credits Function.
George W. Ryan, Vice President, was assigned as officer in charge of the Fiscal Services
Function in anticipation of the retirement of W hitney R. Irwin, Vice President.
Robert C. Scrivani, formerly Assistant Vice President, was appointed Vice President in charge
of the Hum an Resources Function.

Effective January 13y 1995:
Edward J. Frydl, Senior Adviser, Financial and Market Analysis Group, resigned from the Bank.
Mr. Frydl joined the Bank in 1973 and was appointed an officer in 1981.

Effective February l y 1995:
Sandra C. Krieger, Vice President, was designated as the officer in charge of the Open Market
Function and as Manager for Domestic Operations of the System Open Market Account. In
these respects, she succeeded Joan E. Lovett, Senior Vice President, who had elected early retire­
ment and who was assigned the interim role of adviser to the Bank.
James O. Aston, formerly Vice President, retired from the Bank. Mr. Aston joined the Bank in
1957 and was appointed an officer in 1968.

Effective February 2, 1995:
Terrence J. Checki, Senior Vice President, was appointed Adviser to the President, reporting to
the President on matters related to financial developments in emerging nations.

106



On March 16, 1995, the Bank announced the appointment o f Ernest T. Patrikis as First Vice President
o f the Bank, effective June 1,1995. Mr. Patrikis, formerly Executive Vice President and General Counsel,
succeeds James H. Oltman, who announced his retirement, effective May 31, 1995, after more than
thirty-four years o f distinguished service. Mr. Oltman joined the Bank in February 1961 and was
appointed an officer in January 1964.
Effective March 16, 1995:
Thomas C. Baxter, Jr., form erly D eputy General Counsel and Senior Vice President, was
appointed Executive Vice President and General Counsel.
Kathleen A. O ’Neil, formerly Senior Vice President, was appointed Executive Vice President
and assigned responsibility for the Corporate Group.
Mary R. Clarkin, Senior Vice President, was designated Senior Adviser for market-related issues.
Janet K. Rogers, Vice President, was assigned as the officer in charge of the Loans and Credits
Function and as the senior officer responsible for planning, administration, and coordination in
the Corporate Group.
Christine M. Cumming, Senior Vice President, was assigned responsibility for the Advisory
and Technical Services Function, in the Bank Supervision Group. H er responsibilities for the
Bank Analysis Function continue.
Robert A. O ’Sullivan, Senior Vice President, was assigned to the Financial Examinations Function.
Donald T. Vangel, Senior Vice President, was assigned responsibility for the Financial Examina­
tions Function.
Nancy Bercovici, Vice President, was assigned to the Financial Examinations Function.
Frank C. Eiseman, form erly Senior O perations Officer at the Federal Reserve Employee
Benefits System, rejoined the Bank as Vice President and was assigned to the Statistics Function.
James K. Hodgetts, Vice President, was assigned responsibility for Career Development in the
Bank Supervision Group.
George R. Junker, Vice President, was assigned to the Advisory and Technical Services Function.




107

Elaine D. Mauriello, form erly Assistant Vice President, was appointed Vice President and
assigned responsibility for the Supervision Support Function.
Raleigh M. Tozer, Counsel and Vice President, was designated Deputy General Counsel and
Vice President.

Effective April 5, 1995:
Willene A. Johnson, Vice President, was assigned to the Equal Em ploym ent O pportunity
Office.

108



DIRECTORS OF THE
FEDERAL RESERVE BANK OF NEW YORK
Directors

Term expires Dec. 31

Class

ROBERT G. WILMERS
Chairman, President, and Chief Executive Officer
Manufacturers and Traders Trust Company, Buffalo, N.Y.

1995

A

J. WILLIAM JO H N SO N
Chairman and Chief Executive Officer
The First National Bank of Long Island, Glen Head, N.Y.

1996

A

J. CARTER BACOT
Chairman and Chief Executive Officer
The Bank of N ew York, N ew York, N.Y.

1997

A

WILLIAM C. STEERE, JR.
Chairman and Chief Executive Officer
Pfizer Inc., N ew York, N.Y.

1995

B

SANDRA FELDMAN
President, United Federation of Teachers, New York, N.Y.

1996

B

EUGENE R. McGRATH
Chairman, President, and Chief Executive Officer
Consolidated Edison Company of New York, Inc., New York, N.Y.

1997

B

HERBERT L. W ASHINGTON
Owner, HLW Fast Track, Inc., Rochester, N.Y.

1995

C

DAVID A. HAMBURG, Deputy Chairman
President, Carnegie Corporation, N ew York, N.Y.

1996

C

MAURICE R. GREENBERG, Chairman and Federal Reserve A gent
Chairman and Chief Executive Officer
American International Group, Inc., N ew York, N.Y.

1997

C

Directors—Buffalo Branch
GEORGE W. HAMLIN IV
President and Chief Executive Officer
The Canandaigua National Bank and Trust Company, Canandaigua, N.Y.

1995

F.C. RICHARDSON
President, Buffalo State College, Buffalo, N.Y.

1995

JOSEPH J. CASTIGLIA, Chairman
President and Chief Executive Officer
Pratt & Lambert, Inc., Buffalo, N.Y.

1996




109

Directors—Buffalo Branch (Continued)

Term expires Dec. 31

LOUISE C. WOERNER
Chairman and Chief Executive Officer
HCR, Rochester, N.Y.

1996

MARK W. ADAMS
Owner, Adams Poultry Farm, Naples, N.Y.

1997

DO N A LD L. RUST
Plant Manager, Tonawanda Engine Plant, GM Powertrain Division
General Motors Corporation, Buffalo, N.Y.

1997

WILLIAM E. SWAN
President and Chief Executive Officer
Lockport Savings Bank, Lockport, N.Y.

1997

ADVISORY GROUPS
Federal Advisory Council
Second District Member and Alternate Member
WALTER V. SHIPLEY, Member
Chairman
Chemical Banking Corporation, N ew York, N.Y.
EDWARD D. MILLER, A lternate Member
President
Chemical Banking Corporation, N ew York, N.Y.

Economic Advisory Panel
JAMES ANNABLE
First National Bank of Chicago

GLENN HUBBARD
Columbia University

BEN S. BERNANKE
Princeton University

PETER B. KENEN
Princeton University

PHILLIP D. CAG A N
Columbia University

MICKEY LEVY
Nations Bank

RUDIGER W. DORNBUSCH
Massachusetts Institute of Technology

WILLIAM POOLE
Brown University

MARTIN S. FELDSTEIN
Harvard University

ROBERT J. SHILLER
Yale University

BENJAMIN M. FRIEDMAN
Harvard University

WILLIAM L. SILBER
N ew York University

110



Advisory Council on Small Business and Agriculture
FREDERICK D. CLAUSER
President, Koh-I-Noor Inc., Bloomsbury, N.J.
CHRISTOPHER C. COLLINS
President, Nuttall Gear Corporation, Niagara Falls, N.Y.
JO H N W. LINCOLN
President, Linholm Farm, Bloomfield, N.Y.
FRANK A. NIGRELLI
President and Chief Executive Officer
Knight Manufacturing Co., Lindenhurst, N.Y.

MARTIN SILVER
President and Chief Executive Officer
Northeast Wood Crafts Inc., Amsterdam, N.Y.
JO AN SNYDER
The American Family Farm, Inc., Stuyvesant, N.Y.
J. BRIAN THEBAULT
President and Chief Executive Officer
L.P. Thebault Company, Parsippany, N.J.

JAMES I. N IX O N
President and Chief Executive Officer
Inline Brake Manufacturing Corp., Clifton, N.J.

International Capital Markets Advisory Committee
WILLIAM J. BRODSKY
President and Chief Executive Officer
Chicago Mercantile Exchange
Chicago, Illinois

JO H N G. HEIM ANN
Chairman
Global Financial Institutions
N ew York, N.Y.

MATHIS C ABIALLA VETT A
Executive Vice President and Member of the Executive
Board
Union Bank of Switzerland
Zurich, Switzerland

JO H N M. HENNESSY
Chairman and Chief Executive Officer
CS First Boston, Inc.
N ew York, N.Y.

MEINHARD CARSTENSEN
Member of the Board of Managing Directors
Dresdner Bank Aktiengesellschaft
Frankfurt, Germany
JO N CORZINE
Senior Partner and Chairman
Goldman, Sachs and Co.
N ew York, N.Y.
BRUCE C. GALLOWAY
Senior Executive Vice President
Corporate Banking
Royal Bank of Canada
Toronto, Canada
ING. RICARDO GUAJARDO TOUCHE
Director General
Bancomer
La Colonia Xoco, Mexico




JAN KALFF
Chairman, Managing Board
ABN /A m ro Bank
Amsterdam, The Netherlands
HENRY KAUFMAN
President
Henry Kaufman and Company, Inc.
N ew York, N.Y.
KOICHI KIMURA
Deputy President
Daiwa Securities Co., Ltd.
Tokyo, Japan
YOH KUROSAWA
President
The Industrial Bank of Japan, Ltd.
Tokyo, Japan

111

International Capital Markets Advisory Committee (Continued)
KENNETH LIPPER
Chairman
Lipper & Company, LP
N ew York, N.Y.

EUGENE B. SHANKS, JR.
President
Bankers Trust N ew York Corporation
N ew York, N.Y.

TOSHIO MORIKAWA
President
The Sumitomo Bank, Ltd.
Tokyo, Japan

ANDREW M. TUCKEY
Chairman
Baring Brothers Limited
London, England

H. O N N O RUDING
Vice Chairman
Citicorp - Citibank
N ew York, N.Y.

Thrift Institutions Advisory Panel
DAVID E. A. CARSON
President and Chief Executive Officer
People’s Bank
Bridgeport, Conn.

JAMES M. LARGE, JR.
Chairman and Chief Executive Officer
The Dime Savings Bank, FSB
Hewlett, N.Y.

HERBERT G. CHORBAJIAN
Chairman, President, and Chief Executive Officer
Albany Savings Bank, FSB
Albany, N.Y.

THOMAS M. O ’BRIEN
Chairman, President, and Chief Executive Officer
North Side Savings Bank
Floral Park, N.Y.

JOSEPH P. GEMMELL
Chairman, President, and Chief Executive Officer
Bankers Savings
Perth Amboy, N.J.

WILLIAM E. SWAN
President and Chief Executive Officer
Lockport Savings Bank
Lockport, N.Y.

EDWARD C. GIBNEY
President
Boiling Springs Savings Bank
Rutherford, N.J.

CHARLES M. WHITNEY
President and Chief Executive Officer
Empire Corporate Federal Credit Union
Albany, N.Y.

LEONARD S. GUDELSKI
President and Chief Executive Officer
Hudson City Savings Bank
Paramus, N.J.

112



OFFICERS OF THE
FEDERAL RESERVE BANK OF NEW YORK
WILLIAM J. M cDO NO UG H , President
JAMES H. OLTMAN, First Vice President
ERNEST T. PATRIKIS, Executive Vice President3

THOMAS C. BAXTER, JR., Executive Vice President
and General Counsel, Legal

FREDERIC S. MISHKIN, Executive Vice President and
Director of Research, Research and Market Analysis

SUZANNE CUTLER, Executive Vice President,
Banking Services

KATHLEEN A. O ’NEIL, Executive Vice President,
Corporate

CHESTER B. FELDBERG, Executive Vice President,
Bank Supervision

ROBERTA J. PUSCHEL, Executive Vice President,
Bank Supervision

PETER RYERSON FISHER, Executive Vice President,
Markets

ISRAEL SENDROVIC, Executive Vice President,
Automation and Systems Services

Audit
ROBERT M. ABPLANALP, General Auditor and
Senior Vice President

LORETTA G. ANSBRO, Audit Officer

ROBERT J. AMBROSE, Assistant General Auditor

EDWARD J. CHURNEY, Manager, Auditing
Department

IRA M. LEVINSON, Assistant Vice President

DAVID TICK, Manager, Auditing Department

AUTOMATION AND SYSTEMS SERVICES GROUP
ISRAEL SENDROVIC, Executive Vice President

Automation Planning and Support
JAMES H. GAVER, Vice President

Building Services
JO H N F. SOBALA, Vice President
JASON M. STERN, Assistant Vice President
JEROME P. PERLONGO, Manager (Night Officer)

RICHARD L. PRISCO, Manager, Building Services
Department
D O NA LD J. ROHRBACH, Manager, Administrative
Support Services Department

‘l A ppointed First Vice President effective 6 /1 /9 5 following retirem ent of James H . O ltm an on 5/31/95.




113

AUTOMATION AND SYSTEMS SERVICES GROUP (Continued)
Data Processing
PETER J. FULLEN, Vice President
PETER M. G O R DO N, Assistant Vice President
GERALD HAYDEN, Assistant Vice President
IRA S. ADLER, Manager, Contingency Operations
and Quality Assurance Department

LEONARD E. FRIEDMAN, Manager, Fedwire and
Communications Operations Department
LENNOX A. MYRIE, Manager, General Computer
Operations Department
ISAAC B. OBSTFELD, Manager, Operations and
Communications Support Department

JEFFREY C. BLYE, Data Processing Technical
Officer, Operations and Communications Support
Department

Security Control
RALPH A. C A N N , III, Senior Vice President

RICHARD P. PASSADIN, Assistant Vice President

HERBERT W. WHITEMAN, JR., Vice President

Statistics
SUSAN F. MOORE, Vice President
FRANK C. EISEMAN, Vice President

PAULA BETH SCHWARTZBERG, Manager,
Data Reporting Department

KENNETH P. LAMAR, Manager, Financial Reports
Department

Systems Development
RALPH A. C A N N , III, Senior Vice President
OM P. BAGARIA, Vice President
PATRICIA Y. JUNG, Vice President
MONIKA K. NOVIK, Vice President
CLAUDIA H. CO UCH, Assistant Vice President
MICHAEL J. RECUPERO, Assistant Vice President
MIRIAM I. WIEBOLDT, Assistant Vice President
STANLEY G. BARWINSKI, Manager, Data Systems
Department
DESM OND W. BURKE, Manager, Electronic
Payments Systems Department

MAUREEN G. COZZI, Manager, Markets and
Accounts Systems Department
VIERA A. CROUT, Manager, Advanced Technology
Staff
CHRISTOPHER M. KELL, Systems Development
Officer, Special Projects Staff
PETER SMEJKAL, Manager, Operations Systems
Department
MARIE J. VEIT, Manager, Electronic Payments
Systems Department
HARRY M. ZIMBALIST, Manager, Open Systems
Support Department

BANK SUPERVISION GROUP
CHESTER B. FELDBERG, Executive Vice President

114



ROBERTA J. PUSCHEL, Executive Vice President

BANK

SUPERVISION GROUP

(C ontinued)

Advisory and Technical Services
CHRISTINE M. CUMMING, Senior Vice President

BARBARA A. KLEIN, Manager

GEORGE R. JUNCKER, Vice President

JEANNETTE M. PODGORSKI, Manager

ADAM GILBERT, Assistant Vice President

THOMAS WINES, Manager

JOSEPH L. GALATIII, Manager

Bank Analysis
CHRISTINE M. CUMMING, Senior Vice President
GARY HABERMAN, Adviser

SARAH DAHLGREN, Manager, Bank Analysis
Department

KAUSAR HAM DANI, Assistant Vice President

Banking Applications
WILLIAM L. RUTLEDGE, Senior Vice President

DAVID L. FANGER, Assistant Vice President

JO H N S. CASSIDY, Assistant Vice President

Community Affairs
WILLIAM L. RUTLEDGE, Senior Vice President

ELIZABETH RODRIGUEZ JACKSON, Manager

JAMES K. HODGETTS, Vice President

Compliance Examinations
WILLIAM L. RUTLEDGE, Senior Vice President
JAMES K. HODGETTS, Vice President

ASSUNTA MUGLIA, Examining Officer,
Compliance Examinations Department

ELIZABETH S. IRWIN-McCAUGHEY, Assistant
Vice President

Financial Examinations
DO NALD T. VANGEL, Senior Vice President

CARMINE GIOIOSO, Examining Officer

ROBERT A. O ’SULLIVAN, Senior Vice President

JO H N A. GRECO, Examining Officer

N A N C Y BERCOVICI, Vice President

JO H N HEINZE, Examining Officer

FRED C. HERRIMAN, JR., Assistant Vice President

THOMAS A. ORAVEZ, Examining Officer

ALBERT J. RUBBO, Assistant Vice President

R O NA POCKER, Examining Officer

WALTER W. ZUNIC, Adviser

ROBERT SCHLINDRA, Examining Officer

MARIO ABBATTISTA, Examining Officer

D O NA LD E. SCHMID, Manager

MARGARET E. BRUSH, Examining Officer

LISA STEPHENS, Examining Officer

B. GERARD DAGES, Manager

ALBERT TOSS, Manager




115

BANK SUPERVISION GROUP (Continued)
Supervision Support
WILLIAM L. RUTLEDGE, Senior Vice President

MARK MINDLIN, Manager

ELAINE D. MAURIELLO, Vice President

JANE W. THOMAS, Manager

N A T H A N BEDNARSH, Assistant Vice President

BANKING SERVICES GROUP
SUZANNE CUTLER, Executive Vice President

Accounting
JO H N M. EIGHMY, Senior Vice President

LEON R. HOLMES, Assistant Vice President

RICHARD J. GELSON, Vice President

VALERIE I. RAINFORD, Manager, Accounting
Department

Bank Services
BRUCE A. CASSELLA, Bank Services Officer

Cash
JO H N M. EIGHMY, Senior Vice President
JOSEPH P. BOTTA, Vice President
THOMAS J. LAWLER, Assistant Vice President

FELICIA WIGGIN, Manager, Paying and Receiving
Department
MICHAEL L. ZIMMERMAN, Manager, Operations
Support Department

L. W ENDY WEBB, Manager, Currency Verification
Department

Central Bank Services
MICHELE S. GODFREY, Senior Vice President
FRANCIS J. REISCHACH, Assistant Vice President

TIMOTHY J. FOGARTY, Manager
Central Bank Services Department

Check
JO H N M. EIGHMY, Senior Vice President
PAUL L. McEVILY, Vice President
D O N A LD R. ANDERSON, Regional Check
Manager, Jericho Office
ANGUS J. KENNEDY, Regional Check Manager,
Utica Office
MATTHEW J. PUGLISI, Regional Check Manager,
East Rutherford Operations Center

116



A N T H O N Y N . SAGLIANO, Regional Check
Manager, Jericho Office
RICHARD P. CASSERLY, Manager, Check Services
Department
KENNETH M. LEFFLER, Check Officer

BANKING SERVICES GROUP (Continued)
Electronic Payments
STEVEN J. GAROFALO, Vice President
HENRY F. WIENER, Vice President
ANDREW HEIKAUS, Assistant Vice President
MICHAEL W. MOWBRAY, Assistant Vice President
ROBERT T. ASHMAN, Manager, Electronic
Operations Support Department

GARY M. BERTONE, Manager, Electronic
Operations Support Department
PATRICIA HILT, Manager, Funds Transfer
Department
GERALD V. LOMBARDO, Manager, Securities
Transfer Department

EROC Administrative Services
JO H N M. EIGHMY, Senior Vice President

JOSEPH D. J. DeMARTINI, Manager, EROC
Administrative Services Department

Fiscal Services
STEVEN J. GAROFALO, Vice President
WHITNEY R. IRWIN, Vice President
GEORGE W. RYAN, Vice President

ROBERT G. KRAUS, Manager, Government Bond
Department
CHRISTINA H. RYAN, Manager, Safekeeping
Department

H ILDO N G. JAMES, Assistant Vice President

Strategic Planning Support
A N N E F. BAUM, Manager

CORPORATE GROUP
KATHLEEN A. O ’NEIL, Executive Vice President

Equal Employment Opportunity
WILLENE A. JO H N SO N, Vice President

Human Resources
ROBERT C. SCRIVANI, Vice President
ELIZABETH G. MINDLIN, Assistant Vice President
EVELYN E. KENDER, Manager, Human Resources
Services Department
GERALD L. STAGG, M.D., Medical Director, Human
Resources Services Department

ROSEANN STICHNOTH, Manager, Human
Resources Services Department
JO ANN E M. VALKOVIC, Manager, Human
Resources Operations and Support Department
SH ARON T. W ONG, Manager, Human Resources
Operations and Support Department

RO NA B. STEIN, Manager, Human Resources
Services Department, and Assistant Secretary




117

CORPORATE GROUP (Continued)
International Affairs
SUSAN A. HICKOK, Assistant Vice President

Loans and Credits
JANET K. ROGERS, Vice President

M ARYANN M ARON, Manager, Loans and Credits
Department

Office o f Corporate Consultancy
NIRMAL V. MANERIKAR, Vice President

Office of Regional Strategies
ELIZABETH RODRIGUEZ JACKSON, Manager

Planning and Control
NIRMAL V. MANERIKAR, Vice President

LORRAINE J. PRENTIS, Manager, Management
Information Department

Public Information
PETER BAKSTANSKY, Senior Vice President
M. AKBAR AKHTAR, Vice President

STEVEN R. MALIN, Secretary and Assistant Vice
President

Secretary ys Office
STEVEN R. MALIN, Secretary and Assistant Vice
President

R O N A B. STEIN, Manager and Assistant Secretary

DO RO TH Y M. SOBOL, Assistant Vice President and
Assistant Secretary

Service
ROBERT V. MURRAY, Vice President
MARTIN P. CUSICK, Assistant Vice President

JOSEPH R. PRANCL, JR., Manager, Food and Office
Services Department

WILLIAM J. KELLY, Manager, Protection
Department

Emerging Markets
TERRENCE J. CHECKI, Adviser to the President

118




MARILYN E. SKILES, International Adviser

LEGAL GROUP
THOMAS C. BAXTER, JR., Executive Vice President
and General Counsel
JOYCE M. H ANSEN, Deputy General Counsel and
Senior Vice President
RALEIGH M. TOZER, Deputy General Counsel and
Vice President
ELIZABETH TIBBALS, Counsel and Vice President
HAERAN KIM, Counsel

MARTIN C. GRANT, Counsel
TIMOTHY D. MAHONEY, Manager, Legal
Department
ERIC A. MARTIN, Counsel
MICHAEL S. NELSON, Counsel
JO N A TH A N I. POLK, Counsel
KAREN A. WEST, Counsel3

WEBSTER B. WHITE, Counsel

MARKETS GROUP
PETER RYERSON FISHER, Executive Vice
President

JO AN E. LOVETT, Senior Vice President

MARY R. CLARKIN, Senior Adviser

Foreign Exchange
DIN O KOS, Vice President

GEORGE G. BENTLEY, Assistant Vice President

Market Accounting and Operations
PAULINE E. CHEN, Vice President
ROBERT W. DABBS, Assistant Vice President

LAUREN A. HARGRAVES, Manager, Operations
Development Staff

DANILO G. D U N G C A , Manager, Accounting and
Settlement Department

Market Surveillance
BETSY BUTTRILL WHITE, Senior Vice President

DEBORAH A. PERELMUTER, Manager, Market
Surveillance Department

Open Market
SANDRA C. KRIEGER, Vice President

ANN-MARIE MEULENDYKE, Adviser

KENNETH J. GUENTNER, Assistant Vice President

R. SPENCE HILTON, Manager, Trading and
Analysis Staff

a O n leave of absence.




119

RESEARCH AND
MARKET ANALYSIS GROUP
FREDERIC S. MISHKIN, Executive Vice President
and Director of Research

MARGARET L. GREENE, Senior Vice President and
Economic Adviser

PAUL B. BENNETT, Senior Vice President and
Deputy Director of Research

Banking and Payments Studies
CHRISTOPHER J. McCURDY, Senior Vice President

LAWRENCE J. RADECKI, Assistant Vice President

MARYSUE FISHER, Vice President

LAWRENCE M. SWEET, Assistant Vice President3

BARBARA L. WALTER, Vice President

JO H N W ENNINGER, Adviser

BEVERLY J. HIRTLE, Assistant Vice President

Domestic Research
CHARLES STEINDEL, Assistant Vice President
ETH AN S. HARRIS, Research Officer and
Senior Economist

RICHARD W. PEACH, Research Officer and
Senior Economist

Financial Markets and Institutions
ARTURO ESTRELLA, Vice President
ROBERT N . McCAULEY, Assistant Vice President
JO H N KAMBHU, Research Officer and Senior
Economist

International Finance
RICHARD M. CANTOR, Assistant Vice President

International Macroeconomics
HOW ARD J. HOWE, Research Officer and
Senior Economist

Publications
DO RO TH Y M. SOBOL, Assistant Vice President and
Assistant Secretary

Research Support
BARBARA L. WALTER, Vice President

a O n leave of absence.

120



PATRICIA C. MOSSER, Research Officer and
Senior Economist4
ELI M. REMOLONA, Research Officer and
Senior Economist

WHOLESALE PRODUCT OFFICE
JAMES H. OLTMAN, First Vice President and
Wholesale Product Director

DANIEL C. BOLWELL, Vice President
DARA H U N T , Vice President

CAROL W. BARRETT, Senior Vice President and
Wholesale Product Manager




OFFICERS—BUFFALO BRANCH
CARL W. TURNIPSEED, Senior Vice President and Branch Manager

Banking Services; Secretary of the Board
PETER D. LUCE, Assistant Vice President

Savings Bond Operations
GARY S. WE1NTRAUB, Cashier

Administrative Services; Facilities; Protection
ROBERT J. McDONNELL, Operations Officer

121

T H E

S E C O N D

F E D E R A L

R E S E R V E

D IS T R IC T

CLINTON

FRANKLIN
ST. LAWRENCE

NEW YORK
JEFFERSON

WASHINGTON

ONEIDA
NIAGARA

° RLEANS
MONROE

BUFFALO •




FULTON

w ayne

ONONDAGA

GENESEE

MADISON

ONTARIO
CAYUGA
ERIE

OTSEGO

WYOMING
YATES
[CHENANGO

CATTARAUGUS

ALLEGANY

STEUBEN
BROOME

SULLIVAN
PUTNAM
ORANGE

FAIRFIELD.
CONN.

SUSSEX

W

- E

JERICHO

NEW JERSEY

HEAD
OFFICE
(N Y C )

BUFFALO BRANCH TERRITORY
HEAD OFFICE TERRITORY