Full text of Federal Reserve Notes : July 1983

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

•

July 1983

Serving Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah & Washington

ORGANIZATIONAL
CHANGES AT
S.F. FED

The San Francisco Fed recently
completed a series of major organi
zational changes that included two
senior management promotions
and a new division of responsibili
ties among its executive manage
ment group.

Michael J. Murray was promoted to
senior vice president with responsi
bility for directing the newly formed
Personnel and Administrative Serv

ices group. This Division consists of
the Corporate Personnel Depart
ment, the Administrative Services

Michael Murray

Department and the Protection and
Building Services Departments.
Patricia K. Lang was elevated to
vice president and has succeeded
Murray as officer in charge of the
Corporate Personnel Department.
Ms. Lang is responsible for directing
all major personnel functions, in
cluding employment and training,
compensation, benefits and em
ployee relations for the District's
2200 employees.
One major change in executive
management responsibilities in
volved the transfer of responsiblity
for the Bank's financial planning,
accounting and control functions to
executive vice president Kent Sims,
who has been named the Bank's
chief financial officer. In a related

In testimony before Congress on
July 20,1983, Paul A. Volcker, new
ly reappointed Chairman of the
Federal Reserve Board, gave his
mid-year review of the course of
monetary policy. He spoke at length
on the economic recovery that
seems to be progressing faster than
anyone had expected, the continu
ing demands on the credit market of
"growing structural deficits" that
may crowd out the recovery, and the
international dimension to the eco
nomic outlook in which the "extra

ordinary strength of the dollar" and
the debt problems of the developing
world figure prominently.
Excerpted below are Volcker's
statements regarding monetary pol
icy in 1983 and beyond. For copies
of his complete testimony, please
(Continued on page 3)

In announcing the Bank directors'

approval of the reorganization,
Bank president John J. Balles said it
was undertaken to improve the bal
ance in the work loads of individual

members of executive management
and to smooth the transition to a

new first vice president. Effective
upon his retirement August 1, John
B. Williams, first vice president, was
succeeded by executive vice presi
dent Richard T. Griffith.

move, John J. Carson, a senior vice

Griffith will retain the executive

president, was named controller.
Another addition to Sims' responsi

management responsibility for the
Bank's Computer Services Group
and its District Operations and

bilities was the Bank's Facilities

Patricia Lang

VOLCKER REPORTS
POLICY TO CONGRESS

Planning Department, which over

branches. In addition, the new Per

sees the Bank's new building proj

sonnel and Administrative Services

ects in San Francisco and Los

Division headed by Murray will also

Angeles.

report to Griffith.1j|j)

IMPROVING THE GAP
MANAGEMENT MODEL

ASILOMAR CONFERENCE
PROCEEDINGS AVAILABLE

From November 28 through 30, 1982, the Federal Reserve Bank of San
Francisco sponsored a conference on interest rate deregulation and mon
etary policy at Asilomar in Monterey, California. The proceedings of the
Conference have been published by the Bank and copies are available from
the Public Information Department at $5.00 a copy. Address requests to P.O.
Box 7702, San Francisco, CA 94120 or call (415) 974-2246. Checks should be
made payable to the Federal Reserve Bank of San Francisco. An outline of the
contents of the published proceedings follows.
Contents of Proceedings

Opening Remarks

John J. Balles, President
FRB San Francisco

Defining the Issues

Stephen Axilrod, Staff Director
Monetary and Financial Policy
Board of Governors

Frank E. Morris, President
FRB Boston

Monetary Targeting in a
Zero Balance World

Richard G. Davis, Senior Economic Adviser
FRB New York

(Author's Comments)
Discussants:

William Poole, Council of Economic Advisers

John Paulus, Morgan Stanley and Company
Financial Change and
Monetary Targeting in the
United States

John P. Judd, Research Officer

John L. Scadding, Research Officer
FRB San Francisco
Discussants:

Stephen Goldfeld, Princeton Univ.
John H. Makin, Univ. of Washington and IMF
Roundtable

Financial Innovation,

unexpected fluctuations in interest
rates have had a major impact on
depository institutions' net interest
income, prompting institutions to

search for systematic methods of
reducing their interest rate risk. One
popular management tool has been
the "gap management" model,
where "gap" refers to the dollar
value difference between rate-

sensitive assets and rate-sensitive

liabilities. Alden Toevs, while a

Visiting Scholar at the San Fran
cisco Fed, developed a gap model
that offers several advantages over
current models. His "Duration Gap
Model" is fully described in the

Spring 1983 issue of the Bank's
Economic Review.

According to the conventional gap
management model, a bank would
hedge the interest rate risk of its net
earnings by keeping the gap equal
to zero in the time interval over

which net earnings are to be hedged.
Toevs, however, notes two serious

shortcomings. First, he believes that
the existing model "unnecessarily
constrains a bank's choice of assets

and liabilities" in creating a hedge.
The constraints, in turn, reduce "the

bank's ability to accommodate cus
tomer demands for bank services."

Second, the model is unable to gen

V. Vance Roley, FRB Kansas City

erate "a simple and reliable index of
interest-rate risk exposure."

David H. Howard, Senior Economist
Karen H. Johnson, Economist
Board of Governors
Discussants:

Charles Freedman, Bank of Canada
Michael Parkin, Univ. of Western Ontario

Yoshio Suzuki, Inst, for Monetary and Economic
Studies and Bank of Japan
Panel Presentation:

James I. Pierce, Univ. of California, Berkeley

Alternative Intermediate

Neil Wallace, Univ. of Minnesota
Donald D. Hester, Univ. of Wisconsin, Madison

Instruments of Monetary
Policy

cal to their outcome. In recent years,

Thomas Mayer, Univ. of California, Davis
David Laidler, Univ. of Western Ontario

Deregulation, and
Monetary Policy:
The Foreign Experience

Unpredictable events surround eco
nomic decisions and are often criti

Jerry L. Jordan, Univ. of New Mexico

To improve on the gap model,
Toevs developed a "duration gap
model" that, by incorporating the
timing of repricing decisions by the

bank and by using more general
conditions for hedging interest rate
risk, "reveals a larger set of asset

and liability choices to financial
institutions" to hedge net interest
income.

With his model, Toevs shows that a

bank can develop "risk-return fron
tiers" to quantify opportunities
available to it for positioning its
balance sheet to profit from interest
rate forecasts.

Ranges for M2 and M3
Looking ahead, the Committee de

VOLCKER REPORTS
(Continued from page 1)

and at 1 percent lower—4 to 8 per
cent—for 1984. Thus, the Commit

cided that the growth ranges estab
lished early in the year for M2 and
M3 during 1983 (7-10 percent and
61/2-91/2 percent, respectively) are
still appropriate. The most recent
data, while showing somewhat larger

tee, in the light of recent develop
ments, looks toward substantially

tinued, and, with inflation subsiding,

increases in June, are still within

in earlier recoveries.

reserve pressures on the banking
system were relaxed. Growth in
money and credit has been, quite
plainly, adequate to support growth
in economic activity—indeed more
growth in the first half of 1983 than
had been generally anticipated...

(M2), or about at the upper end
(M3), of those ranges...

contact the Public Information De

partment at (415) 974-2246.
As you are well aware, interest rates

dropped sharply during the second
half of 1982 as the recession con

Over the more distant future, bal
anced

and sustained economic

growth—with strong housing and
business investment—would ap

pear more likely to require lower
rather than higher interest rates.
That outcome, however, can be as

sured only if the progress against
inflation can be consolidated and

extended. In considering all these

factors, the FOMC basically con
cluded that the prospects for sus
tained growth and for lower interest
rates over time would be enhanced,

rather than diminished, by modest
and timely action to restrain exces
sive growth in money and liquidity,
given its inflationary potential. But I
must emphasize again that the best

The Committee also decided to con

tinue the associated ranges for
growth in total domestic non-finan
cial credit of 8V2 to 11V2 percent...

Monitoring M1 and Debt
Decisions concerning appropriate
targets for M1 were more difficult.
As discussed further in an Appendix
to this statement, the velocity of
M1...has varied significantly from
usual cyclical patterns, dropping
more sharply and longer during the
recession and failing to "snap back"
as quickly. While a number of more
temporary factors have contributed,
a significant part of the reason ap
pears to be related to the fact that a
major portion of the narrow "money
supply" now pays interest... For a
time at least, uncertainty about the
financial and economic outlook, and
less fear about inflation, may also
have bolstered the desire to hold

slower, but not a reversal, of M1

growth in the future. Velocity is ex
pected to increase, although not
necessarily to the extent common

...The targets, by themselves, do
not necessarily imply either further
interest rate pressures or the re
verse in the period ahead—much
will depend on other factors. In par
ticular, progress in the budget and
continued success in dealing with
inflation should be powerful factors
reducing the historically high level
of interest rates over time, to the

benefit of our private economy and
the world at large.

"Targeting" Other Economic
Variables

... I believe there are strong reasons

why it would be unwise to cite "ob
jectives" for nominal or real GNP
rather than "projections" or "as
sumptions" in these Reports.
.. .The Federal Reserve alone can

not achieve within close limits a par
ticular GNP objective—real or
nominal—it or anyone else would
choose. The fact of the matter is

etary policy can in fact do its part by
avoiding excessive monetary growth
within a framework of a growing
economy and reduced interest rates

Growth in M1—in running well
above our targets for nine months—

monetary policy is not the only force
determining aggregate production
and income. Large swings in the
spending attitudes and behavior of

has not, however, been confined to
NOW accounts alone. Moreover,

fect overall income levels. Fiscal

over time lies not in the tools of cen

there are signs that the period of
velocity decline may be ending. In
looking ahead, with the economy
expanding and with ample time for

money.

assurance we could have that mon

tral banking alone, but in timely fis
cal action.

individuals and others to have ad

The duration gap model also yields
a single number to quantify the risk
position of the financial institution.
This number is useful if interest rate

risk for the entire bank is to be

hedged in the futures market. Final
ly, the duration gap model can be
generalized to hedge the market
value of bank capital against unex
pected changes in interest rates.

Copies of the Spring 1983 issue of
the Bank's Economic Review are

available through the Public Informa
tion Department at (415) 974-2246.
W

justed to the rapid decline in interest
rates last year, we must be alert to
the possibility of a rebound in veloc
ity along usual cyclical patterns,
even though the longer-term trend
may be changing.
In monitoring M1, the Committee
felt that an appropriate approach
would be to assess future growth
from a base of the second quarter of
1983, looking toward growth close
to, or below, nominal GNP. Specific
ally, the range was set at 5 to 9 per
cent for the remainder of this year,

businesses and consumers can af

policy plays an important role in
determining economic activity.
Within the last decade, we also have

seen the effects of supply-side
shocks, such as from oil price in
creases, on aggregate levels of ac
tivity and prices. In the last six
months, even without such shocks,

the economy has deviated substan
tially from most forecasts, and from
what might have been set as an ob

jective for the year.ljfii

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CHECK FLOAT
RETURN ITEMS

Following its announcement of a
one-day deferral of credit for interterritory returned items implement
ed on August 1, 1983, the Federal

SECURITIES SAFEKEEPING
AND NONCASH

COLLECTION FEES
The Federal Reserve Board re

quested comment on proposed revi
sions to the fee structures for its

definitive securities safekeeping
and noncash collection services by
August 8, 1983.

Intraterritory returned items will

The definitive securities safekeep
ing service consists of vault storage,
primarily of municipal and corporate
securities. (With the exception of
arranging purchases and sales of
Government and Agency securities,

ability, if deposited in separately
sorted return item letters. This pro
cedure will eliminate daily average
interterritory return item float of
$130 million nationally. Institutions
may continue to deposit mixed re
turn item cash letters if they choose
but mixed cash letters will receive a

one-day deferral of credit.

Intraterritory return items are those
items that bear endorsements from

depository institutions located in
the same Reserve Office territory.
Since the current procedures do not
identify the type of return item cash
letter, the Fed asks depository insti
tutions to stamp "LOCAL" clearly on
separately sorted intraterritory let
ters. This change became effective
August 1, 1983.

Only return item cash letters marked
in this manner will be given immedi
ate availability. It is not necessary to
identify interterritory or mixed return
item cash letters.

For further information, please con-

postage and insurance would con
tinue to be based on the value of the

Reserve issued new procedures re
garding intraterritory returned items
on July 7, 1983.
continue to receive immediate avail

coupon envelope collected, as does
the current structure. The fees for

the Twelfth District offers definitive

securities services only for collater
al accounts.) Noncash collection
provides a payments mechanism
designed to collect items that cannot
be processed through normal check

coupons being collected. For bond
redemptions, fees would be as
sessed for each redemption trans
action, as opposed to the current
fee for each item in a transaction.

Actual charges for postage and
insurance would continue to be

charged for each bond redemption
transaction.

The Board also requested that dis
cussion of the future role of the
Federal Reserve in the definitive

securities safekeeping and non
cash collection services be included

in comments.

collection channels. In accordance

Copies of the Board's notice are
available from our Corporate Ser
vices Department at (415) 974-2752.

with the Monetary Control Act, the
Federal Reserve began pricing

tact the Securities Services Officer

these services in October 1981.

at your local Federal Reserve Office.

The proposed noncash collection
fee structure would include fees per
tact the Check Officer of the Federal

Reserve Office serving your institu
tion: Douglas Knudsen in San Fran
cisco at (415) 974-2069, Sally
Hackett in Los Angeles at (213)
683-8351, H. William Pennington in
Portland at (503) 221-5903, Robert

Richards in Salt Lake City at (801)
322-7887, and Kenneth Peterson in

Seattle at (206) 442-5105.

For further information, please con

PROPOSED 1983 PRICES:
TWELFTH DISTRICT
Definitive Safekeeping
Purchases and Sales

(per transaction)

$23.50

Noncash Collection
Bond Collection

(per transaction)

35.50

Local Collection

(per envelope)
Per $1000 coupon value

6.00
1.00