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The Federal Reserve Bank of St. Louis \ 1994 Annual Repor A Price Stability Objective for Monetary Policy 1994 A N N U A L R E P O R T President's Message In recent years, members of Congress, monetary p o l i c y m a k e r s a n d e c o n o m i s t s have a r g u e d that the Federal Reserve System should commit to a single long-run goal of price stability for monetary policy. While the motivations of these voices for change are disparate, all focus on a single underlying problem: Under the current system, the Federal Reserve has too many goals, some of them mutually incompatible, and this m i g h t inhibit the Fed from doing all it can to enhance real incomes and raise the standard of living in the United States. But while there may be a growing consensus on the need to reassess Fed goals, many questions Robert H. Quenon (left), Chairman oj the Board, and Thomas C.Meher, President and Chief Executive Officer remain. W h a t types of improvements in economic performance can be expected from a more focused monetary policy? W h a t criteria should be used to evaluate performance with respect to the goal? And what kinds of details might be important in moving to such a program? Although we may not have the definitive answers to all these questions, I believe that the arguments on the pages to follow establish a strong case for price stability as the sole goal of the Federal Reserve's monetary policy. Before we begin, however, I want to recognize the contributions and counsel provided by the following directors who retired from the St. Louis and Branch boards in 1994: Henry G. River, St. Louis; and Barnett Grace, Little Rock. As usual, we have benefited greatly from their input on local economic conditions, as well as their private-sector management perspective in which quality and efficiency are paramount. THOMAS C. MELZER President and Chief Executive Officer The Federal Reserve Bank of St. L o u i s Too Many Goals H _ \ The main monetary policymaking arm recent p a s t , t h e C o m m i t t e e has i n c l u d e d t h e of the Federal Reserve is the Federal phrase "and contribute to an improved pattern Open Market Committee (FOMC), of international transactions." which meets eight times each year to These short statements illustrate the main d e l i b e r a t e a b o u t m o n e t a r y policy. problems with the Fed's current setting of goals. After each meeting, the FOMC issues a First, as many as three objectives are mentioned, directive, which contains instructions for policy maybe more depending on how one interprets the until the next meeting, to the open market desk phrase "pattern of international transactions." And at t h e F e d e r a l R e s e r v e B a n k of N e w Y o r k . second, the objectives are vague. H o w can outside A portion of the directive—reaffirmed at each observers tell if the Committee succeeded or failed meeting—is a statement of what the Committee to "seek conditions"? If we w a n t to judge the is trying to achieve through its monetary policy FOMC based on outcomes, what is the meaning of a c t i o n s . For s o m e y e a r s , t h e F O M C ' s p o l i c y "price stability," "sustainable output growth" and directive has stated that the C o m m i t t e e "seeks "improved pattern of international transactions"? monetary and financial conditions that will foster Perhaps more i m p o r t a n t , w h a t is the tradeoff price stability and p r o m o t e sustainable g r o w t h between the various goals—to what extent is one in o u t p u t . . . ." A t t i m e s , t h o u g h n o t in t h e goal to be pursued at the expense of others? These 1994 A N N U A L R E P O R T are some of the questions being asked by those price level. Both cross-country studies and the who feel it is a fundamental problem for monetary U.S. historical record demonstrate that, in the policy t h a t t h e goals c u r r e n t l y in use are too long run, inflation reflects the past, present and numerous and too vague. expected future g r o w t h of t h e money supply. Short-term fluctuations around the trend rate of One m i g h t counter that the Fed is a creation of inflation typically correspond to such unusual the federal g o v e r n m e n t and, further, t h a t the factors as weather, natural disasters and oil embarpolicy directive can only reflect the fact t h a t goes. A l t h o u g h these factors can significantly Congress, most recently through the Humphreyaffect prices, their effects tend to be transitory, H a w k i n s legislation of 1 9 7 8 , has assigned the ending when supply returns to normal. Fed multiple goals. To some extent, that is exactly the point: The problem of numerous objectives for monetary policy arises in part because the legisla- The Close Relationship Between Money and Inflation (1960-93) tion addressing this issue is vague, ill-defined and somewhat dated. From t i m e to t i m e in recent years, legislation has been introduced in Congress that would give the Fed a single long-run goal of p r i c e s t a b i l i t y . B u t t h e m a i n a r g u m e n t here concerns not the politics of the situation, but the appropriateness of the Fed's current goals. The first, and overriding, problem is that there are too many goals. The Fed implements virtually all monetary policy decisions through a single type of action: T h e open m a r k e t desk adds or removes 3 4 Money growth minus output growth (percent) reserves from the b a n k i n g system. As common sense suggests, it is difficult to try to achieve Figure 1 illustrates the long-run connection m u l t i p l e goals w i t h a single policy lever. A n d between the M2 measure of money and inflation. furthermore, from a macroeconomic point of view, In t h i s f i g u r e , m o n e y g r o w t h m i n u s o u t p u t the Federal Reserve's only power in the long run growth is on the horizontal axis and inflation is on lies in its ability to control the monetary base, the vertical axis. Both the inflation and money which in turn is a major influence on the mone- growth data are moving averages so that they are tary aggregates, nominal demand growth and the free of the influence of factors that only temporarily The Federal Reserve Bank of St. L o u i s influence the inflation rate. This figure illustrates m a t t e r s because lags between monetary policy an i m p o r t a n t fact: H i g h e r i n f l a t i o n t e n d s to actions and their effects on real output growth are be a s s o c i a t e d w i t h h i g h e r m o n e y growth. typically thought to be anywhere from six months Money growth, in turn, is influenced by the Fed's to a year. This creates a key problem w i t h the decisions concerning the supply of base money. s t a b i l i z a t i o n approach to m o n e t a r y policy: It Economists often cite evidence like that in the causes policymakers to rely heavily on forecasts of chart to argue that, in the long run, the inflation a future real activity. Unfortunately, such forecasts c o u n t r y e x p e r i e n c e s is d e t e r m i n e d by p o l i c y are notoriously inaccurate. actions that influence money growth. The notion that we do not have sufficient infor- The Fed implements virtually all monetary policy decisions through a single type of action: The open market desk adds or removes reserves from the banking system. m a t i o n to i m p l e m e n t a successful stabilization policy is an old one, and the fact that forecasts are poor is often a c k n o w l e d g e d , b u t just as often ignored. So it m i g h t be useful to ponder for a While this evidence suggests that a central bank m o m e n t t h e q u e s t i o n of t h e accuracy of real like the Fed has considerable control over long- output growth forecasts from quarter to quarter. run inflation trends, there is much less evidence F i g u r e 2 shows forecast e r r o r s for real G D P t h a t a central bank can reliably influence real growth, two quarters ahead, in Blue Chip Economic output growth, the other goal most consistently Indicators, a monthly newsletter that summarizes mentioned in FOMC directives. the forecasts of 50 or so top prognosticators of the Some argue that the goal of "sustainable growth U.S. economy. In the figure, the date of the fore- in real o u t p u t " can be a t t a i n e d by e n a c t i n g a cast, which ranges from January 1980 t h r o u g h stabilization policy. The notion is that when real December 1992, is given on the horizontal axis. output is expected to grow at less than its trend Plotted points represent the forecast error associ- pace, the Fed should pursue an easier p o l i c y — ated w i t h the t w o - q u a r t e r ahead "consensus," lowering short-term nominal interest rates, hope- or a v e r a g e , forecast of t h e B l u e C h i p g r o u p . fully e n c o u r a g i n g i n v e s t m e n t a n d c o n s u m e r T h e main p o i n t is simple: These errors can be spending and causing real output to grow more very large. It is not unusual for them to exceed rapidly. The opposite tack would be taken when 3 percentage p o i n t s , for example, and some of output is expected to grow faster than its trend the largest errors exceed 9 p e r c e n t a g e p o i n t s . pace. Importantly, in conducting such a stabiliza- W h a t is worse, the largest errors occur around tion policy, it is expected growth in o u t p u t that times of recession, such as 1980-82 and 1990-91, 1994 ANNUAL REPORT Errors in Blue Chip Forecasts of Real Output Growth Errors calculated as forecast minus actual. Forecast errors, percentage points 10 4 2 lllll .l.lll 0 m -2 -4 -6 -8 -10 iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii Jan. 1980 Jan. 1982 Illllll|llllllllllllllllllllll|l!illllllllllllllilllll|llllll1llll[||lllllllli|llllllll!ll Jan. 1984 Jan. 1986 Jan. 1988 Jan. 1990 Jan. 1992 just the points when a stabilization approach to is essentially no systematic long-run relationship policy relies most on the accuracy of the forecast as between any of these variables and either mone- a guide to policymaking. Because forecasts can be tary factors or the price level. Moreover, examples q u i t e inaccurate, one should place a near-zero abound of how the price level can be destabilized reliance on them in making policy; yet stabiliza- when monetary policy is directed toward such tion policy requires heavy use of such forecasts. inappropriate objectives. During both world wars, Perhaps the most persuasive argument against the stabilization approach to monetary policy Is that It Is simply unwise to direct single-lever monetary policies at multiple variables. But perhaps the most persuasive argument against the stabilization approach to monetary policy is for instance, efforts to keep interest rates unduly low fueled inflation. Similar efforts to keep interest rates low in the late 1970s, to lower unemploym e n t and c u s h i o n financial i n s t i t u t i o n s from disintermediation, backfired: Monetary g r o w t h and inflation accelerated, causing nominal interest rates to rise to unprecedented heights. t h a t it is simply unwise to direct single-lever These arguments suggest that output stabilization monetary policies at multiple variables. It is also is an unwise goal for monetary policy. It is a diffi- unwise to direct policy at variables over which the cult goal to achieve, and the likely gains to U.S. Fed has no l o n g - r u n control, like real interest citizens are small. Moreover, such a policy can rates, unemployment and real G D P growth. There easily end up causing more harm than good. The Federal Reserve Bank of St. L o u i s Why Price Stability? A comforting feature of a single allocation. Inflation disrupts this market process long-run goal of price stability and makes it less efficient. It is difficult for a for m o n e t a r y p o l i c y is t h a t p a r t i c i p a n t in the economy, seeing a rise in a a c h i e v i n g t h e goal is feasible. particular price, to discern w h e t h e r t h a t price T h e evidence t h a t , in the long change is due to changing supply and demand run, countries have considerable control over their conditions for that good or to a change in the trend inflation rates is abundant and clear. But overall level of prices. By m a s k i n g the signals achievable goals are not desirable per se. A long- g i v e n by changes in relative p r i c e s , inflation run goal of price stability, however, has added distorts decisions about where to use resources, benefits, in part because higher inflation is often w h a t to p r o d u c e , w h a t to c o n s u m e , where to more uncertain inflation. By allowing markets to invest, what to save, what to throw away, even function without confusing price signals caused w h a t to s t u d y — t h e s u b s t a n t i v e decisions on by u n c e r t a i n t y a b o u t i n f l a t i o n , t h e F e d e r a l which economic well-being depends. Reserve can act to raise the welfare of participants But it is not just inflation uncertainty that is the in the economy. problem. Even correctly anticipated inflation can Since the time of Adam Smith, economists have cause economic duress. An example of this is the used the term "invisible hand" to describe how U.S. tax c o d e . Because t h e code is n o t fully markets change relative prices to signal resource EVOLUTION TOWARD A PRICE STABILITY OBJECTIVE The U.S. Constitution gives and supply of gold. Although stability. During the 1930s, the United States and the Congress the responsibility the price level was stable the gold standard was aban- overhang of for both t a x a t i o n and the over the Long run, there doned by almost every nation, dollars made the existing monetary standard, the latter were substantial short- and and much of the history of exchange rates untenable. having been delegated to the medium-term fluctuations. monetary policy since then Federal Reserve System under The Federal Reserve was has been a search for a new Congressional oversight. This created to provide an elastic standard to anchor the value of delegation occurred in 1914 source of currency, to smooth money. The post-World War I I with the founding of the Fed. out extreme seasonal and Bretton Woods agreement was cyclical fluctuations, within an a t t e m p t to l i m i t s , by freely exchang- a modified gold standard, ing gold for currency at a w i t h the U.S. dollar t i e d fixed price. to gold and other currencies At the time the Federal Reserve was created, the United States was on a gold standard and the price level was determined by factors The gold standard provided affecting the demand for the anchor for long-term price return to tied to the dollar; that system was abandoned in the 1970s as i n f l a t i o n accelerated in foreign-held On an unbacked paper money standard, the price level is determined by the way the central bank supplies the paper money. Understanding this, Milton Friedman, among others, advocated stabilizing the growth rate of the money supply around the growth rate of the real economy as a way of stabilizing the price level. 1994 ANNUAL REPORT A long-run goal of price stability has added A n t i c i p a t e d inflation also wastes resources by benefits. In part because higher Inflation c r e a t i n g a c t i v i t y t h a t w o u l d n o t o c c u r in Is often more uncertain Inflation. the absence of inflation. For instance, with high inflation and high interest rates, buyers have an indexed for inflation, even moderate inflation can incentive to delay their p a y m e n t s while sellers double effective tax rates on capital. The effect of have an incentive to speed them up. Both expend the interaction between taxes and inflation is so resources to overcome the efforts of the other. large that many people advocate indexing the tax R e s o u r c e s are also h i r e d to p r e d i c t i n f l a t i o n rate on capital, and such indexing has been wideand its effects. In the 1960s and 1970s, financial spread in countries with high rates of inflation. In i n s t i t u t i o n s s o m e t i m e s found t h a t p r e d i c t i n g the United States, indexation of the tax rate on inflation correctly was as important as predicting capital gains has been slow in coming, but more t h e p r o f i t a b i l i t y of i n d i v i d u a l projects or the to the point, indexation is an example of a policy creditworthiness of individual borrowers. The end change—made at the cost of considerable political result was t h a t firms paid less attention to the resources—that is simply a response to another economic fundamentals in their industries and policy. If inflation were zero—and were credibly more attention to government policy. expected to remain z e r o — a d j u s t m e n t s such as indexation would not be needed. "TTT^ For a t i m e , i t was widely s t a b i l i z e the price l e v e l . early 1990s, dissatisfaction has led the FOMC to de- thought that stabilizing the Despite the downward trend with emphasize them, growth rate of money would in inflation in the 1980s and short-term monetary targets the usefulness of The Federal Reserve Bank of St. L o u i s ? What Do We Want from Monetary Policy; The u l t i m a t e goal of economic are not distorted by high and variable inflation. policy is to achieve the highest So what we want from monetary policy is both s t a n d a r d of living possible for a lower and a more p r e d i c t a b l e inflation rate. American citizens. But the Fed's There is a growing consensus among policymakers direct influence over the l o n g - t e r m t r e n d s in around the world that the long-run objective of o u t p u t and e m p l o y m e n t is n e g l i g i b l e . These monetary policy is appropriately price stability. trends instead depend largely on population and A series of i n f l a t i o n t a r g e t s w o u l d p r o v i d e technology growth, the skill and education levels information to the public about the intentions of the work force and the accumulation of capital. of monetary policymakers. Since 1978, that inforThe only lasting contribution monetary policy can mation has been transmitted in the announcement make to the real output growth trend is to create of the annual monetary targets in the Humphreyan e n v i r o n m e n t c o n d u c i v e to g r o w t h , one in Hawkins testimony. The FOMC was able to use which relative price signals are clear and markets THE MOVE TOWARD INFLATION TARGETING IN OTHER countries with the best Since 1990, several countries, for the future by reducing policymaking including New Zealand, the uncertainty. accountable to the public and records in controlling infla- the necessity to insulate tion are typically those with their decisions from short- independent central banks, United Kingdom and Canada, have directed their central banks to make inflation control their main objective. Other countries, like France, and Italy, have moved toward less formal "quantified inflation objectives." Although the details differ from country to country, there are common threads in the more formal plans. In each country, the central A central bank's commitment to long-term price stability can be strengthened permitting by a temporary suspension of the inflation targets in the face of extreme events, like oil price shocks. In such circumstances, a pressure. like Germany, Switzerland and Policymakers must be able to the United States. When the term Look beyond the next six central bank is an arm of the Treasury or is otherwise in political, inflation rates are controlling Average Inflation: 1955-88 tion is tolerated only until the crisis has passed. By Spaing permitting such flexibility, the policy of achieving price 7 - is made more credible. 6 In New Zealand, the United 5 announcing its target, the central bank firmly commits itself to a course of action, while helping the public plan usually higher. temporary increase in infla- target range for inflation— inflation will be reduced. By inflation. As Figure 3 below illustrates. stability over the long run as well as the pace by which political months, or the next election, bank has announced a low typically zero to 2 percent— institutions COUNTRIES Kingdom and other countries, ftl New Zealand ' ^ Italy United Kingdom /tl Australia ^^ France, Norway,^ Sweden /•f Denmark Japan ^ Canada / • r 4 - ^ inflation targeting has been ^he Netherlands ^ United States Switzerland Vl Germany accompanied by increased central bank independence. I n a democracy, there is always a tension between the 0 1 2 3 Index of Central Bank Independence SOURCE: Alesina and Summers (1993) 1994 A N N U A L R E P O R T these monetary targets to stop the acceleration of well above current inflation rates. And market- inflation and eventually reduce the level to the based signals, such as l o n g - t e r m b o n d yields, c u r r e n t range. T h e i n t e n t i o n s i m p l i e d by the continue to include a substantial p r e m i u m for m o n e t a r y t a r g e t s , however, became m u c h less expected inflation as far out as 30 years. clear as they were de-emphasized in setting policy A commitment to a long-term objective is needed over the last decade or so. As a result, since the to reduce the welfare loss that accompanies unpreearly 1980s, further progress toward price stability dictable changes in the trend rate of inflation. has been slow. In addition, there is uncertainty Credibility is paramount if the Fed is to reduce about the FOMC's policy intentions. l o n g - t e r m i n t e r e s t rates and r e m o v e t h e risk Under the current regime, there is a commitment p r e m i u m that investors require because the to price stability at some unspecified time in the long-term inflation rate is uncertain. O n e way future. But the public isn't buying it: Opinion to enhance credibility is by committing to a price- surveys show l o n g - t e r m inflation expectations level objective. the most independent central Of course, even the best governor of the central bank monetary policy can be foiled can be dismissed if he fails to bank in the world. Although by irresponsible fiscal policy. meet the inflation objective. the country's inflation target If the government can't pay its bills, i t may be tempted to force the central bank to pump out money to fund budget deficits or finance the operations of state-owned enterprises. To reduce this threat, and to lend credibility to inflation control, countries often adopt budgetary reforms. Thus far, the governor of the Bank of New Zealand has kept his job. Indeed, the experiments in New Zealand, Canada and the United Kingdom seem to have been quite successful in bringing down inflation. These countries have recently enjoyed lower rates of underlying i n f l a t i o n and higher The nations that have chosen output growth than the aver- to pursue inflation targeting age OECD country. have given their central banks an explicit mandate to control inflation as well as the independence to act as needed to achieve the o b j e c t i v e . Central bank officials are held accountable for meeting the i n f l a t i o n targets. In New Zealand, for example, the Perhaps because of its long history of poor inflation performance (see f i g u r e ) , New Zealand has taken the most serious measures to commit to its inflation targeting policy. Today, the Bank of New Zealand is probably is set by the government under the Reserve Bank Act, the government is forbidden from instructing the Bank on the operation of monetary policy. New Zealand has also implemented fiscal reforms to reduce its deficit, and thereby lessen the likelihood that its central bank will be called upon to finance government expenditures. How successful has i t been since these reforms were i n s t i t u t e d ? New Zealand's inflation rate declined precipitously in 1991 during a severe recession t h a t saw unemployment rise. After the f a l l of i n f l a t i o n , however, long- and short-term interest rates f e l l , output began to recover and unemployment began to fall again. Currently, New Zealand is enjoying the best of both worlds, w i t h underlying i n f l a t i o n below 2 percent and very strong output growth. The Federal Reserve B a n k of St. L o u i s An Objective for the Outcome, Not a Rule for Behavior Because the term "price stability" choosing an appropriate index to target and an does not have the same meaning exact n u m e r i c a l goal, d e c i d i n g how to h a n d l e to all i n t e r e s t e d o b s e r v e r s , an unforeseen contingencies, and developing tactics explicit price-level to achieve the long-run objective. would remove objective ambiguity. An explicit long-term objective could still provide A p r i c e - l e v e l o b j e c t i v e w o u l d offer a form of a framework within which to apply judgment and long-run commitment. If such a policy is credible, discretion. Discretion is needed because strict then long-term interest rates will reflect only the rules cannot be optimal in all situations. But a expected real rate of return to capital, plus the c o m m i t m e n t to a l o n g - t e r m objective is also expected inflation rate; in other words, there will needed to inform people about policy intentions be no i n f l a t i o n u n c e r t a i n t y p r e m i u m . If, in so t h a t p o l i c y can be flexible w h e n new and addition, the expected long-run rate of inflation is unexpected situations arise. The idea is to increase near zero, real interest rates will be as low as they the incentive for policymakers to keep an eye on can be, consistent with real factors, simply because the long-run objective, even as they respond to both the expected inflation component and the special c i r c u m s t a n c e s , t h u s l e a d i n g to b e t t e r expected variability of inflation will be near zero. policy and enhanced credibility. The details of such a plan can be important, but debate about them should not be allowed to interfere with the adoption of long-run price stability as the Fed's primary goal. These details include 1994 A N N U A L R E P O R T Let's Return to Low Long-Term Interest Rates In the long run, monetary policy borrowing in the past year is a measure of is the principal d e t e r m i n a n t considerable market uncertainty about future of the price level. Because both inflation. In the early 1960s, a time of quite low inflationary trends in the price inflation, the federal government borrowed long level and uncertainty about term at about 4 percent. Monetary policymakers future price levels cause distortions in market need to re-establish that kind of credibility. price signals and waste resources, the Federal Reserve should not only use its influence to stabilize the price level in the long run but also announce precisely its long-term price level The Federal Reserve should not only use its influence to stabilize the price level in the long run but also announce precisely its long-term price level objective. objective. That the federal government has paid as much as 8 percent interest on long-term Announcing a long-term price stability objective and then directing monetary policy toward achieving it represents the best that monetary policy can do to provide an economic environment within which labor, credit and goods markets can function effectively to generate jobs, saving and growing standards of living. The Federal Reserve Statement of Condition (thousands Bank of St. L o u i s of dollars) December 3 1 , December 3 1 , 1994 1993 ASSETS Gold certificate account"' Special Drawing Rights certificate account*^' Coins Loans to depository institutions $ Securities: Federal agency obligations U.S. government securities Total Securities $ 392,000 168,000 21,650 1,250 144,632 14,496,995 163,772 11,722,725 $14,641,627 $11,886,497 194,541 30,097 815,347 4,307,572 246,352 30,861 783,320 1,856,794 $20,697,976 $15,386,724 $19,229,277 $14,005,725 940,714 3,079 22,461 906,693 3,183 9,254 Cash items in process Bank premises (net) Other assets Interdistrict settlement account Total Assets 429,000 168,000 22,548 89,244 LIABILITIES Federal Reserve notes Deposits: Depository institutions Foreign banks Other deposits Total Deposits $ Deferred availability credit items Other liabilities Interdistrict settlement account 966,254 $ 919,130 157,555 175,340 0 214,670 98,533 0 $20,528,426 $15,238,058 $ 84,775 84,775 $ 74,333 74,333 Total Capital Accounts $ 169,550 $ 148,666 Total Liabilities and Capital $20,697,976 Total Liabilities CAPITAL ACCOUNTS Capital paid in Surplus $15,386,724 '"This Bank's share of gold certificates deposited by the U.S. Treasury with the Federal Reserve System '^'This Bank's share of Special Drawing Rights certificates deposited by the U.S. Treasury with the Federal Reserve Bank of New York 1994 Income and Expenses (thousands A N N U A L R E P O R T of dollars) December 31, 1994 December 31, 1993 EARNINGS Interest on loans to depository institutions Interest on government securities Earnings on foreign currency Revenue from priced services Ail other income Total Current Income $ 2,163 737,666 19,592 31,044 173 $ 692 537,604 28,783 30,570 210 $790,638 $597,859 Current operating expenses Less reimbursables Current net operating expenses $ 88,200 (11,156) $ 77,044 I 80,832 (10,541) $ 70,291 Cost of earnings credits Current net expenses 4,865 $ 81,909 3,603 $ 73,894 Current net income $708,729 $523,965 $ 0 52,906 0 $ 1,226 6,080 0 $ 52,906 $ 7,306 $ $ 0 0 $ 988 0 7 $ 995 $ 31,391 CURRENT PROFIT EXPENSES AND LOSS Additions to current net income: Profit on sale of government securities (net) Profit on foreign exchange transactions (net) All other additions Total Additions Deductions from current net income: Loss on sale of government securities (net) Loss on foreign exchange transactions (net) All other deductions Total Deductions Net additions or deductions Cost of unreimbursed Treasury service Assessment by Board of Governors: Expenditures Federal Reserve currency costs Net Income Available for Distribution DISTRIBUTION OF NET $ 31,391 51,911 (1,821) (24,085) (1,774) (3,224) (14,994) (3,187) (14,141) $740,601 ,778 INCOME Dividends paid Payment to the U.S. Treasury (interest on Federal Reserve notes) $ (4,765) $ (4,293) (725,338) (472,140) Transferred to surplus Surplus, January 1 10,498 $ 74,277* Surplus, December 31 $ 84,775 4,345 $ 69,932 $ 74,277* *The 1993 Surplus amount on the Statement of Condition ($74,333) differs from the amount shown on the Income and Expenses statement ($74,277) by $36,000. This amount represents cancellation of Federal Reserve Stock that should have occurred in 1993. Notification, however, was not received until January 1994. The Federal Reserve Bank of St. L o u i s Operating Statistics OPERATIONS Number of Pieces Handled Dollar Amount (thousands) 1994 1993 1994 1993 Check Services: U.S. government checks Postal money orders Commercial checks 28,815,000 200,060,000 648,181,000 29,055,000 191,950,000 611,673,000 22,650,000 23,764,000 385,435,000 22,760,000 22,207,000 390,836,000 ACH Services: Commercial U.S. government 135,249,000 28,952,000 115,076,000 26,683,000 526,357,934 67,882,000 480,344,000 62,959,000 U.S. Government Coupons Paid Currency Received and Counted Wire Transfer of Funds Loans to Depository Institutions 14,494 834,639,000 3,494,343 1,000 23,348 772,778,000 3,322,167 570 5,869 12,178,573 4,603,192,000 1,602,000 10,903 9,771,590 4,452,005,000 900,000 163,686 275,644,000 158,219 267,666,000 245,548,000 1,371,881 315,931,000 1,348,243 S E R V I C E S TO DEPOSITORY SERVICES TO INSTITUTIONS U.S. TREASURY Transfer of Government Securities Food Stamps Redeemed 1994 A N N U A L R E P O R T Boards of Directors B O A R D OF ST. LOUIS D I R E C T O RS Chairman Robert H . Q u e n o n M i n i n g Consultant St. Louis, Missouri Deputy Chairman J o h n F. McDonnell Chairman of the Board McDonnell Douglas Corporation BOARD LITTLE OF D I R E C T O R S ROCK Chairman J a n e t M. Jones President The J a n e t Jones Company Little Rock, Arkansas Lunsford W. Bridges President & Chief Executive Officer Metropolitan National Bank Robert M. Hall Owner East Fork Growers Farm Seymour, Indiana T h o m a s E. Spragens, Jr. President Farmers National Bank Lebanon, K e n t u c k y Charles D . Storms President & Chief Executive Officer Red Spot Paint & Varnish Co., Inc. Evansville, Indiana St. Louis, Missouri Little Rock, Arkansas Michael A. Alexander Chairman of the Board & President First National Bank of M o u n t Vernon M o u n t Vernon, Illinois Betta M. Carney Chairman & Chief Executive Officer World W i d e Travel Service Inc. Little Rock, Arkansas Richard E. Bell President & Chief Executive Officer Riceland Foods, Inc. Stuttgart, Arkansas Robert D . N a b h o h , Jr. Chief Executive Officer Nabholz Construction Corporation Conway, Arkansas W. D . Glover Chairman & Chief Executive Officer First National Bank of Eastern Arkansas Forrest City, Arkansas J a m e s V. Kelley Chairman, President & Chief Executive Officer First U n i t e d Bancshares, Inc. El Dorado, Arkansas Chairman Woods E. Eastland President & Chief Executive Officer Staple C o t t o n Cooperative Association Greenwood, Mississippi Warren R. Lee President W. R. Lee & Associates, Inc. Louisville, Kentucky Mahlon A. Martin President W i n t h r o p Rockefeller Foundation Little Rock, Arkansas Lewis F. Mallory, Jr. Chairman, President & Chief Executive Officer N B C Capital Corporation Starkville, Mississippi Douglas M. Lester Chairman of the Board & President Trans Financial Bancorp, Inc. Bowling Green, Kentucky Mark A. Shelton, III President M. A. Shelton Farming Company Altheimer, Arkansas Veo Peoples, Jr. Partner Peoples & Hale St. Louis, Missouri B O A R D OF D I R E C T O R S LOUISVILLE Sandra B. Sanderson President & Chief Executive Officer Sanderson P l u m b i n g Products, Inc. C o l u m b u s , Mississippi FEDERAL COUNCIL ADVISORY MEMBER Andrew B. Craig, III Chairman, President & Chief Executive Officer Boatmen's Bancshares, Inc. St. Louis, Missouri Chairman Daniel L. Ash Senior Consultant Wenz-Neely Company Louisville, Kentucky Malcolm B. Chancey, Jr. Chairman of the Board & Chief Executive Officer Liberty National Bank and Trust Company Louisville, Kentucky Laura M. Douglas Legal Director Louisville & Jefferson County Metropolitan Sewer District Louisville, Kentucky J o h n A. W i l l i a m s C h a i r m a n & Chief Executive Officer C o m p u t e r Services, Inc. Paducah, K e n t u c k y B O A R D OF MEMPHIS DIRECTORS J o h n V. Myers President Better Business Bureau M e m p h i s , Tennessee A n t h o n y M. Rampley President & Chief Executive Officer Arkansas Glass Container Corporation Jonesboro, Arkansas Benjamin W. Rawlins, Jr. C h a i r m a n & Chief Executive Officer U n i o n Planters Corporation M e m p h i s , Tennessee Katie S. Winchester President First Citizens National Bank Dyersburg, Tennessee The Federal Reserve Bank of St. L o u i s Economic Advisory Council IBank Officers ECONOMIC ADVISORY COUNCIL Carol Barnes Secretary & Co-Owner The Missouri Peddlers Florissant, Missouri Cletus C. Coughlin Vice President Kim D. Nelson Assistant Vice President William T Gavin Vice President Frances E. Sibley Assistant Vice President R. Alton Gilbert Vice President Robert J. Taylor Assistant Vice President Lynn M. Greenwood Vice President Daniel L. Thornton Assistant Vice President Raymond H. Laurence Vice President Richard G. Anderson Research Officer William C. Leslie Vice President Bernard E. Berns Public Affairs Officer Dr. Bert Greenwalt Partner Greenwalt Company Farm Hazen, Arkansas Jean M. Lovati Vice President Dennis W. Blase Supervisory Officer Martha L. Ferine Vice President Michael W DeClue Supervisory Officer Lowell Guthrie President Trace Die Cast, Inc. Bowling Green, Kentucky Michael D. Renfro General Auditor Patricia A. Marshall Assistant Counsel & Assistant Secretary to the Board Bruce Brumfield Partner Brumfield Plantation & FTB Farms Inverness, Mississippi Dr. Brady Deaton Office of the Chancellor University of Missouri Columbia, Missouri James L. Laird Waltonville, Illinois Robert Reynolds President Shuler Drilling Company, Inc. El Dorado, Arkansas Lucy Shaw Common Denominator, Inc. Memphis, Tennessee William Sprague Sturgis, Kentucky ST. L O U I S O F F I C E R S Thomas C. Melzer President James R. Bowen First Vice President Henry H. Bourgaux Senior Vice President Joan P. Cronin Senior Vice President William G. Dewald Senior Vice President William J. Sneed Vice President Randall C. Sumner Vice President Lynn M. Barry Assistant Vice President John W. Block Assistant Vice President Harold E. Slingerland Credit Officer Leisa J. Spalding Audit Officer Timothy A. Bosch Assistant Vice President LITTLE ROCK BRANCH Karl W Ashman Vice President & Manager Martin J. Coleman Assistant Vice President Thomas R. Callaway Assistant Vice President Judith A. Courtney Assistant Vice President Marilyn K. Corona Operations Officer Jeffrey M. Dale Assistant Vice President LOUISVILLE Hillary B. Debenport Assistant Vice President W Howard Wells Vice President & Manager Edward A. Hopkins Assistant Vice President Thomas A. Boone Assistant Vice President Robert A. Hopkins Assistant Vice President Thomas O. Short Assistant Vice President Jerome J. McGunnigle Assistant Vice President Mary H. Karr Senior Vice President, General Counsel & Secretary John P. Merker Assistant Vice President Kristi D. Short Senior Vice President Michael J. Mueller Assistant Vice President Steven N. Silvey Information Systems Officer BRANCH MEMPHIS BRANCH John P. Baumgartner Vice President & Manager Michael R. Sinnett Assistant Vice President Eighth Federal Reserve District FEDERAL RESERVE OF ST. L O U I S 411 Locust Street St. Louis, Missouri 63102 314.444_8444 LITTLE ROCK BANK BRANCH 325 West Capitol Avenue Little Rock, Arkansas 72201 501-324-8300 LOUISVILLE BRANCH 410 South Fifth Street Louisville, Kentucky 40202 502-568-9200 MEMPHIS BRANCH 200 North Main Street Memphis, Tennessee 38103 901-523-7171
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