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tg! Federal Reserve Bank of Dallas EI Paso· Houston· San Antonio August 1980 1 Since You Asked 3 Benefits of Crude Oil Price Decontrol Largely Offset by Windfall Profit Tax 11 "Fed Quotes" 13 Less Meat, Higher Prices 16 Bank Loans in a Recession 22 Regulatory Briefs and Announcements 24 Now Available from the Federal Reserve This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) ??77???????????????????????????????????? ttL I ••• ~LLLLLLLLLLLllLlLLLLlLLLlllLLLLLLLLLL A fringe benefit of working at a Federal Reserve Bonk is the frequent invitation to speak before various groups. And speeches inevitably generate questions. This is a brief response to tIle question asked most frequently foHowing speeches during the past month. Question: When we succeed in killing off inflation, what rate of increase in wage rates would you expect to be consistent with a noninflationary economy? Answer: No precise answer can be given; probably it would be about the same as the average annual change in production per hour. Prod . ill b UChon per hour increased around 35 percent ill oth the 1950's and the 1960's. In the 1970's, it ac~t'eased less than half as much. In 1979, it llaUy declined. Ill;hanges in compensation per hour have been cha~h lar~er and, seemingly, quite independent of Per g~s 1U production per hour. Hence, labor cost bitt unlt of production has increased at a variable [illff:c.celerating pace. Unit labor costs and prices hon) have moved "neck and neck." '---~----------------------ProdUction Compensation per hour per hour ~19 50' 1960's • '. 1970': '" 197 ' " ~ Unit labor cost . Prices (lnnalionJ Percent changos 37 34 14 -1 74 67 120 9 27 25 93 10 26 23 87 9 1'h ~elt e early 1960's are often cited as one of the erI perlO . d s among recent years. In 1959-64, both or ab costs and prices increased about 5 per- ~nit ~~gust 1 9aO/Voice cent, roughly 1 percent per year. Unit labor costs rose fairly slowly in the period primarily because of a relatively slow rise (24 percent) in compensation per hour; production per hour increased at about the same rate as in the 1950's. The parallel movement of unit labor costs and prices does not necessarily indicate a cause-effect relationship. Both may be determined largely by other things, such as rates of increase in money . ". and credit, fiscal policy, exchange rates, etc. The relation of hourly wage rates and prices is affected also by a number of economic forces. In the current environment, it is affected by a decline in the "terms of trade" between the United States and the rest of the world. The sharp increases in prices of imported crude oil, for example, have eroded the U.S. terms of trade. More exports are required to pay for a barrel of imported oil. This reduces the increase in compensation per hour that would be consistent with price stability. The relation may be affected also by changes in the trend of hours paid for but not worked-for 1 example, vacations, holidays, and sick leave; changes in the proportion of the population working and the proportions working in relatively high output industries; changes in the capital equipment available to the work force and the state of technology; changes in the effectiveness of management; changes in Government regulations that affect productivity or prices; and so on. It is obvious, however, that money wages cannol buy more goods and services than are produced. Real income is determined by production, not hourly wage rates. And production is a function of .. output per hour and hours worked. Thus, while the relation is not precise and the causes are diverse, a noninflationary economy probably would yield up changes in hourly wage rates roughly comparable with the changes in production per hour. Undoubtedly, this is one reason for the recent surge of interest in policies designed to improve production per hour. -Ernest T. Baughman President, Federal Reserve Bank of Dallas New member banks Bumble National Bank, Humble, Texas, a newly organized institution located in the territory served by the Houston Branch of the Federal Reserve Bank of Dallas, opened for business July 1, 1980, as a member of the Federal Reserve System. The new member bank opened with capital of $1,000,000 and surplus of $1,000,000. The officers are: J. Mike Keller, Chairman of the Board; Robert T. Curry, President; Stephen G. Marshall, Vice President; and Charliene L. Hebert, Cashier. . The Woodlands National Bank, The Woodlands, Texas, a newly organized institution located in the territory served by the Houston Branch of the Federal Reserve Bank of Dallas, opened for business July 1, 1980, as a member of the Federal Reserve System. The new member bank opened with capital of $625,000 and surplus of $625,000. The officers are: A. W. Schmidt, Chairman of the Board; Daniel E. Hauser, President; J. Jack McBride, Vice President and Cashier; and Alice F. Bean, Lobby Service Officer. First United Bank-Richland, N.A., North Richland Hills, Texas, a newly organized institution located in the territory served by the Head Office of the Federal Reserve Bank of Dallas, opened for business July 21, 1980, as a member of the Federal Reserve System. The new member bank opened with capital of $625,000 and surplus of $625,000. The officers are: Robert Harrison, President and Chairman of the Board; Jim Turner, Vice President; and Joy Lawrence, Vice President and Cashier. Pioneer National Bank, Richardson, Texas, a newly organized institution located in the territory served by the Head Office of the Federal Reserve Bank of Dallas, opened for business July 25, 1980, as a member of the Federal Reserve System. The new member bank opened with capital of $700,000 and surplus of $700,000. The officers are: Max W. Wells, Chairman of the Board; Larry C. Shumate, President; Albert A. Shirley, Vice President and Cashier; and Glenn Smith, Auditor. 2 Federal Reserve Bank of Dallas o e y a r ce x Ey Edward L McClelland Phased d iniU econtrol of domestic crude oil prices was ord ated last year to allow oil prices to rise in latee~ to re~uce domestic consumption and stimudec OtnestlC production. As an integral part of the Wi~;;rol, the Congress also passed the Crude Oil Fed all Profit Tax Act of 1980 to capture for the eral Government a portion of the projected rise in t two otal revenues of oil producers. Together, the iner programs will help restrain consumption and M.ease crude production. inve o:t o~ the windfall tax revenues will not be is n~t e~ In energy production or conservation. It crea d nown, of course, to what extent the inwin~: II flow of crude oil revenues, absent the Produ~t' tax, would have been invested in energy WOUld ~on or how successful that investment Ply. It tn aVe been in expanding domestic oil supOf de ay be presumed, however, that the impact been COntrol without the windfall tax would have the w·sOtnewhat greater than for decontrol with indfall tax. l) et'egul t' CrUd ~ Ion of crude oil prices . .. it hal: 011 production has been regulated for nearly by 111 ~entury. Most regulations were implemented SUres ~Jor producing states as conservation meafUI P1' ~ pr~vent what were perceived to be wasteo UctlOn practices, to limit domestic output, J\llgu St I9BO/vo'lce and to support prices. Production was limited so that crude output would equal a forecast level of demand at a given market price. In the 1950's the Federal Government established import quotas to insulate domestic production from fast-growing supplies of inexpensive foreign oil. In the 1970's, several fundamental changes took place in petroleum markets. U.-S. crude production peaked in 1970 at 9.6 million barrels a day, but input to U.S: refineries, at 10.9 million barrels a day that year, continued to grow. By 1979, domestic output had declined to 8.5 million barrels a day, even though Alaskan production had added about 500,000 barrels a day. Crude input to refineries averaged 14.5 million barrels a day. The difference was made up by a growing volume of imports. Last year, crude oil imports supplied 44 percent of total refinery input, up from 12 percent in 1970. Another change, direct regulation of domestic prices of crude oil and petroleum products by the Federal Government with the enactment of the Economic Stabilization Act (ESA) of 1970, was laid atop state production controls. The wage-price freeze in August 1971 was not aimed specifically at petroleum prices, but subsequent programs were. Phase IV of the price control program, initiated in August 1973 and authorized under the ESA, created two classes of oil and a two-tier price system- old oil, whose price was controllerl, 3 and new oil, whose price was not controlled. 1 This was followed by a parade of regulatory legisla tion. In December 1973, following the Arab oil embargo in November that year, the Emergency Petroleum Allocation Act (EPAA) was adopted. The EPAA adopted the concept of a two-tier system of oil prices established by the ESA and increased the ceiling price of old oil. Effective in February 1976, the Energy Policy and Conservation Act established a composite, or weighted-average, Price for crude oil and essentially put a ceiling on the price of upper-tier production- new, stripPer, and released oil. Finally, in August 1976 the Energy Conservation and Production Act was Passed and set up a three-tier price structure by deregulating stripper production and retaining a composite price for lower- and upper-tier oil. Regulation of domestic oil has held U.S. crude Prices well below the world level and encouraged consumption and growth of oil imports. One meaSUre of the disparity between domestic prices and world prices is the refiner acquisition cost- or the average of domestic and imported oil costs, inclUding transportation and fees, that refiners may Pass on to their customers. In 1979, for example, D.S. refiners paid an average of $17.72 a barrel for crude oil. Price con troIs held the cost of domestic oil to $14.27, while the price of imported oil averaged $21.67 a barrel. Thus, the cost advantage to D.S. consumers over the world price was nearly $4 a barrel. Without controls, domestic crude oil would have sold at the world price. Higher prices would have Provided more stimulus to domestic production and greater restraint on consumption, both tending to reduce imports. In order to restrain consumption, promote domestic oil production, and reduce' dependence on foreign oil supplies, a program of phased decontrol of domestic oil prices was initiated on June 1, 1979. The period of phased decontrol extends to September 30 1981 with the lifting of price ceilings varying by category of oil. Prices of newly diScovered oil from wells drilled after June 1, 1979, ~nd incremental production of tertiary oil employlng specified enhanced-recovery techniques were 1. "Old" oil was defined as output from ail properties, ~l(cept stripper wells, that were producing prior to 1973. New" oil w as defined as that from stripper wells and Oil reserves discovered after 1972. Stripper oil is production from wells whose daily output is 10 barrels Or less. 4 decontrolled immediately, that is, on June 1, 1979. Phased decontrol of upper-tier oil and 20 percent of all marginal oil was begun January 1, 1980. At the same time, the conversion rate of lower-tier oil to upper-tier oil- the mechanism by which lowertier production is decontrolled- was doubled to 3 percent per month. Regulation of domestic oil has held U.S. crude prices well below the world level and encouraged consumption and the growth of oil imports. Deregulation of domestic prices is estimated to boost gross revenues of domestic oil producers about $1 trillion above the level they would have been if controls were continued during the 11 years from 1980 through 1990. The equivalent increase in after-tax revenues is estimated to be about $402 billion. If this increase in revenues were plowed back into domestic oil production, annual output is estimated to rise an additional 2.0 million to 2.5 million barrels a day by the end of the decade, according to the industry. But even that increase probably would not have been ~nou.gh to off~et the continuing decline in domeshc 011 productIon, so total output at the end of the decade would likely be below the current level. ... the windfall profit tax ... The windfall profit tax is perhaps the largest tax ever imposed on a single industry. Moreover. the tax is not a levy on profits, as its name implies. It is an excise tax levied on the increased revenues expected to result from decontrolling domestic .oil prices. The tax applies to revenue from both eXIsting and future wells. The Joint Committee on Taxation has estimated the windfall profit tax will divert $402 billion of the projected $1 trillion increase in oil revenues to the U.S. Treasury. It is estimated that oil producers will also pay an additional $157 billion in corporate income taxes, raising direct tax payments to the Federal Government by around $559 billion. Under current tax laws and without the windfall profit tax, oil producers would pay the Treasury about $332 billion more in corporate income taxes, or about $227 billion less than they are estimated Federal Reserve Bank of Dallas to pay with the windfall tax in place. Severance and income taxes will still be paid to state governments, and taxes on royalty and dividend income will continue to be paid to all levels of ~overnment. Under the windfall tax law, oil proucers will retain about 29 percent of total rev;~ues, compared with about 43 percent without . e tax, a reduction of one-third. The windfall tax ~~ now planned to be in effect through 1990 or until }. e U.S. Treasury collects the additional $227 bilIan on the projected increase in oil revenues. d The Windfall tax is imposed on the first sale of ames tic crude oil and is limited to 90 percent of nelt income. It is levied on the difference between s~.es price less state severance tax and a base price ~9)usted for inflation since the second quarter of p ?9. The base price is the portion of the sales Urlce that is exempt from the windfall profit tax. f ' for example, production from a given well sells par $36.00 a barrel, the state severance tax is 5 pe:cent of the sales price, and the adjusted base drIce is $15.20, the appropriate windfall tax rate, aep~nding on whether the producer is a major or en Independent, is applied to $19.00- the differnCe of $36.00 less $1.80 ($36.00 x .05) less $15.20. CHART 1 Decontrol of domestic crude prices will substantially increase the oil industry's tax liabilities from 1980 through 1990 with or without the windfall tax 600 BILLION DOLLARS - - - - - - - - - - 500 - 400 - ESTIMATED TAXES ON INCREASED REVENUES RESULTING FROM DECONTROL 300 200 D 100 ~ GROSS WINDFALL PROFIT TAX ------------------------------------The windfall profit tax is not a levy on profits, as its name implies. It is an excise tax levied on the increased revenues expected to result from decontrolling domestic oil prices. ---------------------------------sj The tax rate varies by type of production and eS~:b o.f producer. The oil production categories grQ hsh~d by the U.S . Department of Energy were ~ uPed mto three new categories by the Internal loev en ue Service for tax purposes. Tier 1 is largely b er- and upper-tier oil that was in production ') e. ore 1979 and is taxed at a 70-percent rate. Tier c. IS st . Ii rIpper output and production from the Napanal Petroleum Reserve and is taxed at a 60o~rcent rate. Tier 3 is newly discovered oil. heavy ta' and incremental tertiary production and is ~ed at a 30-percent rate. Ind roducers are classed as majors or independents. Sal ependents are producers with gross annual iii es of $5 million or less and with refining capacta es of no more than 50,000 barrels a day. The )( rates applied to all oil properties are the same, 7 I\Ug Ust 1980/Voice CORPORATE INCOME TAX o WITHOUT WITH WINDFALL WINDFALL TAX TAX SOURCE: Joint Committee on Taxation, U.S. Congress. except the first 1,000 barrels a day of Tier 1 and Tier 2 production by independents are taxed at reduced rates of 50 percent and 30 percent, respectively. Royalty owners are taxed according to production category of their properties but are not allowed the preferential tax rates on the first 1,000 barrels a day of production as are independent producers. Although an economic argument can be made for taxing the increased revenues resulting from phased decontrol of prices of existing production, 5 CHART 2 Market Demand and Supply Curves for Crude Oil PRICE P ~--------~~------~~-------- D a QUANTITY QOOMESTIC QTOTAL taXation of future production somewhat reduces t~e incentive and capital available to develop new all wells. The windfall tax, being an excise tax in~te~d of a tax on profits, becomes a cost of doing t USlUess. Industry estimates indicate the windfall a~ :-vill reduce future domestic production by 1.0 ~llhon to 2.0 million barrels a day in the late ~.8~'s and offset much of the increase of 2.0 . lllIo n to 2.5 million barrels a day in domestic ~~odUction that would result from price decontrol. 1> ~se estimates, of course, are based on current f rOJections and could vary if crude oil prices rise d~s.ter than anticipated and a large number of adllltl ona l marginal oil fields are brought into roduction. ~ . and an economic analysis tr ~Otnprehensive analysis of the effects of decon,,~ and the windfall profit tax quickly becomes tiory complex. Under the windfall tax 16 produc'1 ~ categories, 7 producer-owner categories, and ax categories are defined. Therefore, the pos- sible combinations of production situations are numerous. The process is further complicated by producers' adjustments over time to changes in production costs and market prices and by consumers' reactions to rising prices. Despite the complexities, the basic forces underlying any given situation can be identified and explained in general terms by an analysis of the interactions of the crude oil market and a single production unit. In the U.S. market, domestic con.sumption of oil greaLly exceeds domestic production, so the difference is supplied by foreign sources. Moreover, the leadership in oil pricing was taken over by the Organization of Petroleum Exporting Countries (OPEC) with the Arab oil embargo in November 1973, and its price decisions were made effective by controlling production. Current market conditions are illustrated in Chart 2. The demand curve for crude oil (D) slopes downward to the right, indicating smaller quantities of oil will be consumed at higher prices. The supply curve for domestic crude (SdomeBtic) slopes upward, suggesting greater quantities of crude oil will be supplied as prices increase. Market price (P)- which for simplification can be considered a weighted average of domestic and foreign pricesis set by OPEC and maintained by adjusting production. The total supply curve (Sto tal) is abc. The quantity of domestic crude oil supplied (Qdom 6atlo) is determined by P and S domcBlio . The quantity of foreign oil supplied is the excess of demand D at price P, or total quantity (Qt otal) less QaomCBtio. As the price of crude oil increases under the decontrol program and with further OPEC price hikes, two adjustments occur. First, consumers cut back on consumption as prices rise. Total demand for petroleum products declined 2.2 percent la$t year in response to the sharp rise in crude prices and is expected to fall 6.5 percent this year, aided in part by the current recession. Second, higher prices should stimulate crude production. The number of active drilling rigs is up over 40 percent from a year ago and is at a 24-year high. Unfortunately, the acceleration in drilling is not expected to significantly increase domestic oil supplies but may only slow the decline in crude output. Domestic crude production declined 2.0 percent last year and is expected only to rise 1.3 percent this year. Therefore, imports appear destined to continue to be a substanti al share of total U.S. oil consumption. Individual oil producers respond Lo changes in 6 Federal Reserve Dank of Dallas CHART 3 About 160 of the more than 5,300 Texas oil producers account for 89 percent of the state's crude output -= 25 PERCENT OF TOTAL FORTEXAS---------------------------------------OIL PRODUCERS % 0. CRUDE OIL PRODUCTION 20- 15 - 10 - 1,000 or more BARRELS OF CRUDE PER DAY SOURCES: Oil Directory of Texas. Federal Reserve Bank 01 Dallas. A.Ug Ust 19ao/V OIee . 7 Illarket conditions. Because of the large number of Wells and producers and with no firm dominant, the production end of the oil industry approximates a Purely competitive market. In Texas, for ex~mple, there are about 170,000 oil wells operated 'Y more than 5,300 producers. 2 However, the average well produces less than 17 barrels a day, and ~o Percent of all producers extract less than 25 ~rrels a day. About 160 producers- 3 percent of a I Texas producers-extract more than 1,000 barr~ls a day, but they account for nearly 90 percent ~ total crude production in the state. The three argest producers (Exxon Company, U.S.A.; A.moco Production Company; and Shell Oil Com~an~) account for about 30 percent of total proUChon in the state. Profits at the producer level of production are ~aximized by increasing crude output of indiVIdual wells until the revenue derived from the Sale of a barrel of oil is equal to the additional ~osts incurred to extract the oil. Because nearly .alf of U.S. oil consumption is supplied by for~Ign sources and domestic crude prices are set I'Y regUlation or OPEC, domestic producers-both t~r~e and small- face highly elastic demands for elr output and are price takers rather than price makers. Market conditions for an individual well , where marginal revenue (MR) is equal to the demand ~rve faced by producers (D/irm) and market price ), are illustrated in Chart 4. The marginal cost [Me) rises as production is increased and repreS~nts also the producer supply curve. The quantity o Output (Ql) is determined where MR equals MC. • The windfall tax, because it is an excise tax, <a' /ses both the average cost (AG) and marginal cost ~ production by an amount equal to the tax (t). tnposition of the tax raises the marginal cost to, ~ay, MC' and reduces production at all price 1~\1els. At price P, output would be reduced to Q2. h' the market price does not rise enough (to p' or ~ 19her) to offset the tax, production would be heduced. The size of the reduction depends on t Ow much marginal costs are raised with respect ~ rn~rginal revenues. If the windfall tax increased tharglnal production costs of some wells above e market price, those wells would be shut down ~r production might be reduced to put the wells nthe stripper category to be taxed at a lower rate. 6OJ) Directory of Texas (Austin, Tex.: R. W. Byram & Oillpany, 1979). CHART 4 Producer Demand and Cost Curves for Crude Oil PRICE P' PI---:-~~---t-+---;lr'-T-----:T OUANTITY PRODUCED 0, 0, Imposition of the windfall tax, therefore, shifts the supply curve-marginal cost- of individual producers upward and to the left. Since the market supply curve is the sum of all firm supply curves, it too is shifted upward and to the left. But because prices of newly discovered oil are decontrolled and rising and additional production is coming on stream, the decrease in crude supply resulting from the tax is offset by higher prices increasing the quantity of output along the shifting market supply curve. The current scramble for available drilling rigs and the backlog of orders for new rigs indicate producers expect prices of newly discovered oil to offset much of the windfall tax. Incidence of the windfall tax Where the windfall tax finally comes to rest is subject to a large degree of uncertainty. With domestic prices decontrolled and OPEC setting prices by controlling production, a straightforward approach in determining who will shoulder the tax becomes a complex problem. However, the incidence of the windfall tax will be uneven because few taxpayers may be able to pass on a portion of their increased tax liability to consumers in I( Federal Reserve Bank of Dallas ' . rtheI .fo rm 0f hIgher pnces. Taxpayers that are e atlVely small in size will likely bear a disproPart'10nate amount of the tax. While they are nUmero of t us, t h ey account for only a small portion of lotal domestic production. But even the ability b ~ger firms to raise prices may be constrained t e possibility of importing greater quantities ~rude and refined products. w UoYalty Owners who sell mineral rights where ta e ~ are drilled cannot pass on the cost of the Th" ecause they do not have title to production. nonoperating mineral interests and are gr ey hold a fie d ' . fanted ox portIOn of productIOn as payment oUr ownership. Most owners of mineral rights to alte~ell.s producing prior to 1979 may have no tho ahve other than absorbing the tax, even cr ugh decontrol permits crude oil prices to indreas~. Also, some wells in Tier 1 production will 10 op Into the stripper category and be taxed at a w~er rate. Royalty owners of future production Cov not be taxed as heavily because newly dissurnered bIoI'1'IS taxed at the lowest rate and, preto . a y, domestic crude oil prices will continue rIse. 0'1 win~f producers bear unequal taxes under the ext all tax, depending on their size and the ent Lar .to which they are vertically integrated. e rna gk o.t! companies with production, refining, and to r ~hng capabilities have a better opportunity r sorn : fluc~ :~eir. tax b~rden because they have of hi h eX1?1~lty m passmg on the tax in the form have gle er fill1s.h~~-product prices. Small produce~s tut Ss flexlblhty and may be less able to insh. . . e and sust· .a m pnce mcreases. The very smallest Produc Or no cers.- lIke royalty owners- may have little sell th ~olce, because of location, as to whom they unabl elr crude production and, therefore, may be e to pass on to refiners the cost of the tax. or nistributi The on of windfall tax revenues Price P~rpose of phased decontrol of domestic oil disc s IS to allow crude prices to rise in order to incr~urage consumption and provide incentive for profit~ed pro~uction. Originally, the windfall funds t~X was l.n~ended to divert to special trust ers th e unantICIpated revenues from oil producto b at resulted from decontrol. Those funds were energe Used t a fi nance development of alternative sUPPlr sources to reduce dependence on foreign oil reVen es. !nstead, Congress placed all windfall tax Ues In the general revenue fund and identified three broad areas for their use. To date, only a small portion of the revenues have been committed by Congress to specific uses. Less than $30 billion has actually been allocated to specific uses. On June 30 the President signed a bill establishing the United States Synthetic Fuels Corporation, which can spend $20 billion to promote a domestic synthetic fuels industry. Also enacted were a $3.1 billion energy conservation and solar bank, a $1.4 billion biomass-to-energy program to be run jointly by the Departments of Energy and Agriculture, and other incentives to use renewable sources of energy. The purpose of phased decontrol of domestic oil prices is to allow crude prices to rise in order to discourage consumption and provide incentive for increased production. About 15 percent, or $34 billion, of the windfall tax revenues have been earmarked to fund energy development, largely indirectly. Consumers will receive $600 million. Consumer tax credits are provided for the purchase and installation of solar and wind equipment. Homeowners in the Southwest could have higher than average participation because the southwes tern climate favors these types of investments. Businesses will receive $8.3 billion in tax credits to subsidize development of alternate sources of energy. Businesses are eligible for the same kinds of assistance as consumers plus additional tax credits for geothermal and oceanderived energy and equipment using or producing coke, coke gas, or fuel from biomass. One aspect of the energy tax credits risks a misallocation of economic resources if significant breakthroughs in reducing the costs of alternative energy supplies are not achieved. At present, commercial development of many alternative energy sources would be more expensive than developing additional domestic oil supplies. For example, some applications of solar or wind energy, priced on an oil-equivalent basis. cost about $50 a barrel or more. At the same time, new oil and tertiary production, which many estimate can be accomplished more cheaply and in greater quantities, is subject to the windfall tax. That, however, does I\UIh • .... at 1980/VOlec . 9 nt Suggest the development of alternative sources 0'1 energy should not be undertaken, as domestic ~I production is on the decline. But before huge i~vestments are committed for commercial facil.Ide~. careful consideration should be given to deCI Ing w h'ICh I' a ternahves are the most economical. . A qUarter of the windfall tax revenues $57 bilIIOn h ' f ' ave been earmarked to help low-income Call1ilies pay utility and heating bills, although Ongress has not worked out the details of this ~~rt of the benefits program. It was estimated that Out 20 million families, including 12 million that are b I h e ow t e poverty level, would be eligible for energy . w'u assIstance. Most of those funds, however, . anid go to beneficiaries located in the Midwest . Northeast because oil is a maJ'or heating fuel In th t . Se?hon. of the country. Nearly 80 percent of a I res1dentIal heating oil is consumed there, ~O~ared with a miniscule one-tenth of 1 percent e Eleventh Federal Reserve District. N-atural gas who h' W' IC 1S used to heat most homes in the Southwill not be subsidized. As a result, there will bees~, dlS . h pa F r1't'les m t e amount of assistance received. a~r e~ample, Pennsylvania residents will receive $83 estu~~ted $197 million in 1981, compared with mllhon for Texas, which has a greater POPUlation. t or ~~e all?c~tion of the remaining 50-percent share, 37 bilhon, has yet to be laid out by Congress. However, that share was earmarked to offset cuts in individual and corporate income taxes. All consumers could benefit from a slim reduction in tax payments as the windfall tax revenues are distributed. However, a reduction in personal income tax payments from current levels is not anticipated, since the revenues are only large enough to slow the rise in future tax liabilities for individuals. An average taxpayer may realize a "saving" of about $80 a year over the decade from what he might otherwise have been expected to pay. Phased decontrol of oil prices and enactment of the windfall profit tax. therefore, are changing the oil industry. It is moving from a market environment of price controls on domestic production without a significant excise tax to an environment of decontrolled prices with a substantial excise tax but where an effective domestic price ceiling is still established by actions of the OPEC nations. The recent proposal to tax imports was not approved by the Congress. With domestic decontrol. oil prices. profits. investment. and production will rise. All would have risen further with domestic decontrol without the windfall tax. Crude imports will not be reduced considerably in any event until alternative sources of fuel are developed in substantial volume. absent, of course, action by OPEC to further curtail production. 10 Federal Reserve Bank of Dallas Ped Quotes 99 Brief EXcerpts from Recent Federal Reserve Speeches, Statements. Publications, Etc. d' "In recent years, the performance of productivity in our economy has been ~ma1. We do not know all the reasons why. and that will limit our ability to deal \ ectively with the problem. We do know, however, that a substantial increase in the ~ are of national output will have to be devoted to capital formation if we are to ~~~ .much hope of increasing the rate of productivity advance. Since the need for al Ihonal capital to deal with our nation's energy and environmental problems will a So be large, it will be critical to adopt tax and expenditure policies that free up resources_real resources as well as financial resources-to make that possible. "The need for a higher rate of business capital formation is critical to the longrun health of Our economy. Holding down the share GNP devoted to federal ~?enditures will contribute importantly to that effort. So also will the orientation f or future tax cuts toward business investment incentives. But these efforts may go b naught if we do not control carefully the share of national resources absorbed Y ;,ederal credit programs." Some federal credit programs affect the economy much like direct federal exPenditures. Loan guarantees for low-income housing and foreign military assistance are the most obvious examples. Others provide only marginally lower interest rates, Or ma . II . d othe r~llla y better nonprice credit terms, to borrowers. whose credIt need~ w~ul if rWlse probably have been met by the private financial market. These dIffenng eh ects, moreover, do not bear any necessary relation to whether credit is supplied t rough d' " Irect loans or loan guaran tees." The proportion of total borrowing in financial markets that is federally assisted ~a~ be used as an indicator of credit resources whose direction is governed by f:d eral lending programs. Similarly, the share of GNP accounted for by the total of re leral expenditures plus credit activities is a rough measure of the proportion of a resources whose USe is directed by the Federal government." Lyle E. Gramley, Member. Board of Governors of the Federal Reserve System (Before the Budget Committee's Special Subcommittee on Control of Federal Credit. U.S. Senate, June 19, 1980) August 1980/ V Olce . 11 "In sum, we may well be experiencing an unusual recession. Its sharp beginning y ;a reflect an abrupt one-time shift of leads and lags in consumer spending patterns. ut some components of expenditure could turn up fairly quickly. The chances of ~hat o~tcome are improved by one key factor. The damages to the fabric of our . nanclal markets and to the financial condition of business, damages which had been ~nflicted by worsening inflation, are now being repaired as a result of the declines in Interest rates and the likely turn in price performance. This financial recuperation strengthens the underlying resiliency of the economy and it justifies some optimism that the recession may prove largely self-limiting both in depth and duration. To be sure: the ensuing recovery probably would be only moderate by historical standards. But It could lead into a balanced expansion more reasonably geared to the economy's growth potential. "Frankly, many factors could spoil the prospects for an early but moderate :~covery--:-for .e xample, the failure to regain consumer confidence or some new th ock ~o ~l~ prIces. B.ut o~e mistake I would especia~ly be concerned about would be e re-IgmtIng of an mflatIOnary psychology. An untImely move toward fiscal and ~onetary stimulus could be taken as signaling acquiescence to excessive rates of Inflation, and price expectations could easily worsen again. The result could be a renewed weakening of the bond markets, higher long-term interest rates, the ~onse.quent postponing of a housing recovery, and greater caution towards business Xed Investment. These are tangible costs and it is important to avoid them. We have to b ' b e immensely careful we do not stunt the prospects for recovery, not by neglect, ut by misplaced good intentions that have unwelcome side effects ." Anthony M . Solomon, President, Federal Reserve Bank of New York (Before the Fourth Annual International Conference of the National Association of Business Economists, New York. New York, June 24, 1980) 12 Federal Reserve Bank of Dallas Less Meat, Higher :rices By Don A. Riffe Nt' ca~llonal news stories this summer have graph i- st \ revealed the vulnerability of crops and liveh Oc to the vagaries of weather. While reports of meat-related deaths of livestock in several states ay have caused concern among consumers about Prospectiv . sig'fi e supp I'les and pnces of meat, of greater h nl cance are the indications as of midyear that og and pou I try producers have finally decided to red Uce output. Record hold . supp l'les of pork and poultry helped to a first h lId on meat prices in late 1979 and in the in th alf of 1980. In fact, average retail meat prices earl' e second quarter of 1980 were below yearstit l~r levels. Consumers have been able to subon u e meats successfully whenever the price of de erase r eI a t'Ive to another, thereby imposing a Wir{~: of rest~a~nt o~ prices for all meats. This of P k more dIfficult III the near future as supplies Or and poultry begin to decline. PrOduce Man I' rs react to cost-price squeeze ... on a Y. Ivestock producers have been losing money adju~::als marketed since last fall. But production POult ents are not made quickly. Also, hog and outpu7 ~roducers may have delayed cutting Lack cYeliealI eeause they knew cattle numbers were WOuld Y low and that the reduced supply of beef What tend to hold up prices of pork and chicken. about e:~~ th.e reasons for their earlier reluctance Produ lustmg production plans, hog and poultry ing th eers seem to have changed their minds durBee~ second q.uarter of 1980. in the productIOn registered a year-to-year gain ters. T~~~ond quarter for the first time in 14 quarand P I happened concurrently with record pork ineom au thr y output and declining real consumer e, t us keeping livestock and meat prices A.u.". " .. st 1980/Voice under downward pressure. Apparently, this was the last straw for many hog producers. A survey of hog producers by the U. S. Department of Agriculture as of June 1 indicated that hog numbers were at the peak for this production cycle. While there was a record number of hogs on farms in June, the number of hogs kept for breeding was down 8 percent from a year earlier, and producers indicated plans to farrow 8 percent fewer sows in June-November 1980. This means that pork will continue to be relatively plentiful for the rest of 1980 because of the large June 1 number of hogs on farms. However, if hog producers follow their June intentions, pork production would begin to decline from year-earlier levels toward the end of the year and would dip sharply in the first half of 1981. Poultry producers have also moved toward reducing output. Broilers typically account for more than 75 percent of total poultry production, and in April the number of broiler chicks hatched fell below year-earlier levels for the first time in 32 months. Fewer broiler-type pullets were placed in ha tchery supply flocks in the second quarter than in the same period last year, and on June 1 the number of broiler eggs in incubators was 4 percent below the level on that date in 1979. Broiler output is expected to be significantly lower in the last half of 1980, with fourth-quarter production falling as much as 4 or 5 percent from a year earlier. Cattlemen placed about 9 percent fewer cattle in feedlots in the second quarter than in the same three months of 1979. Fed beef production is expected to decline in the last half of 1980, but increased slaughter of nonfed cattle could keep total beef production very near the level of a year ago. 13 ~iVestock prices were generally elow break-even costs through the first half of 1980 60 DOLLARS PER HUNDREDWEIGHT - - (QUARTERLY FIGURES) ESTI MATED BREAK·EVEN LEVEL 50 _ 40 - BARROWS AND GILTS, 7 MARKETS 30 - ~ 0 _________________________ 40 CENTS PER POUND _ _ _- - - - - 30 _ BROILERS, LlVEWEIGHT The second-quarter data suggest that the stage is being set for significantly lower supplies of pork and chicken by early 1981. The magnitude of any declines, and thus the impact on meat prices, will be determined by the extent to which producers hold to their indicated course of action. ... but recent price strength may temper reductions Shortly after the U.S. Department of Agriculture's June 1 survey of hog producers, livestock prices generally began to improve. In fact, hog prices increased more than 30 percent between mid-June and mid-July as the number of hogs sold for slaughter declined markedly. In July, livestock and poultry prices were once again approaching or exceeding break-even levels for many producers. This alone will not be enough to erase all plans for reduced output, but it could have some effect on the meat supply and price situation for early 1981. If livestock prices con tinue to average near or above break-even level s throughout the third quarter, producers-will have less incentive to decrease output and the potential for sharply higher meat prices in 1981 will be reduced. Heat wave exerts influence It is too early to know how much meat production 20 _ - - - ' " - . ,Y ESTIMATED BREAK·EVEN LEVEL l' o - _ _ _ _ _ _ _ _ _ __ 80 DOLLARS PER HUNDREDWEIGHT _ __ 60 _ ,Y ESTIMATED BR EAK·EVEN LEVEL 1 - o --r '9~78-'--~-r-"9~79-'--~-r-1~98-0~-- SOURCE: Us .. Department of Agriculture. ---------------------- will be affected by the prolonged heat wave that began in June in the South Central United States. Heat-related animal deaths have been relatively insignificant on a national scale. However, the heat wave is influencing meat production in other ways. In the near term, one effect of the hot, dry weather will be to provide a small boost to beef production. Beef production in the last half of 1980 is expected to be down slightly from a year ago. But it could be somewhat higher than anticipated, depending on how severely cattle herds have had to be reduced in several states to reach stocking levels that dry pastures and short supplies of hay could support. For poultry, third-quarter output will be less than earlier expected not only because of death losses but also because of the marketing of birds at lower weights, owing to heat stress. Pork output may also be less than anticipated. Thirdquarter production was expected to be about 6 percent higher than a year ago, but the number of hogs coming to market early in the quarter did Federal Reserve Bank of Dallas not meet expectations and average slau~hter Weights were running slightly below a year earlier. The heat has delayed hog marketings in some ?reas, as the animals have gained weight less rapIdly in the hot weather. Thus, the near-term effects may be a "bunching" of hog marketings in September and October and slightly lower than anticipated pork production in the last half of the year as a result of reduced slaughter weights. While the near-term effects of the heat wave will be somewhat mixed, the longer-term influence on meat production will be more negative. Although cattlemen have undoubtedly been reluctant to cull more cows than usual from their breeding herds, sOllle in severely drought-stri~ken areas have had no choice. Many others may have retained the size of their breeding herds by selling calves earlier than usual and at lighter weights but will not be able to expand their herds as they might under more normal conditions. This will simply stretch the time required to rebuild the nation's cattle inVentory from the current relatively low level. And the loss of some feed grain and forage crops can n1y put upward pressure on feed costs for all IVestock producers, thus discouraging increased output. This tendency will be augmented by the recently announced increases in Government price Supports for grains. f ~trength o~ consumer demand is u~certain. ust 1980/Voicc .90 ---------::(Q::u7:A::R::T::ER::L-::Y;-:F:7IG~U:::R:::E:::::S) .80 - .70 - .60- .50 - .40 - 30 BROILER·BEEF ___..... PRICE RATIO . hhe magllltude of any increases III meat prIces III t e near future will depend on the behavior of f.onsumers at a time when purchasing power is Ikely to be declining. However, a downturn in the ~eneral economy does not usually have the same YPe of adverse effect on the demand for meat as on the demand for durable goods. One possible ~~sult of reduced consumer purchasing power in e next few months is a change in relative prices ~.rn.ong meats. Chicken and pork have been priced vel' f . . 1 .y avorab1y relative to beef, and these prIce reatlOnships may be in for a "correction" as consUlllers continue to look toward pork and chicken ~~ sub~t~tutes for higher-priced beef in the face dechlllng supplies. of Meats and poultry account for about 20 percent fOod expenditures in the calculation of the conS Utner Pflce . mdex. . In the first half of 1980, re t al'1 rn. eat p . rn. flces were relatively stable' and prOVl'd e d a th~derating influence on food prices. Early in the n;;d qUarter, sharply higher livestock prices c~uld have been sustained unless retail meat prIces I\Ug Pork and chicken prices have been low relative to beef pr.ices .20- .10 - SOURCE: U.S. Department of Agriculture. r1'sl'ng · Meat prices in the last . halfh of were aIs o 1980 are expected to be significantly hIgher t ~n in the first half, and prices could show subst~nhal .. hog year- t o-ye ar ga1'ns in the first quarter of 19811f and poultry producers reduce output as antlcipated. 15 a c ss o BYMory G, Grandstaff Loans outst d' District ' an mg at member banks in the Eleventh about Increased 2 percent in the firs t half of 1980, riod Tone-fifth the growth in the ye ar-earlier pe10 d I' ber 'b otal a k ' ans ec med 1,0 percent at all mem1980 a~ds ~n the District in the second quarter of banks Th ,9 percent at large weekly reporting e weakness in loan growth this year has been the Yea Ue to record-high interest rates early in Cons 1', a special restraint program, and recession. UlU tel', refl : r loans fell sharply in the second quarectIng a d , sales and inst't, severe rop'm automoblle n gram byl of the Special Credit Restraint Prostanding Ie Federal Reserve. Business loans outthese I a so fell substantially. The decline in . oans Wa d ' , s ue partIally to more cautIOus InVentor last re y ~ccumulation by businesses since the cesSIon R I COntinUed ' , ea estate loans, however, have :Year as d relatIvely strong at District banks this Hal desPit elUa~d ,for homes has remained substanof mort e a slgI1lficant tightening in the availability lenders g;g~ funds (rates reached record highs, and Ig tinUed t tened their nonrate terms). The cons rength' h . , nOw of m t e DIstrIct economy and the to the su Pt~ple into the region have contributed lntere ~ alned demand for houses. rates have fallen substantially from their record llrograln e~els, and the Special Credit Restraint receSSion ,as ~een phased out. Nevertheless, the IS for a whil shll here and apparently will remain e, As a result, District bank loans are d ;;:10 t likely to be somewhat depressed until economic activity picks up. Although loans at District banks have fallen earlier in the current economic downturn, a look backward at the behavior of Eleventh District bank loans during the last recession may have some relevance to the situation now. In the year ended March 1975 (the "trough" date of the prior recession, as designated by the National Bureau of Economic Research), total loans at member banks in 'the District increased 6.6 percent. Hence, loans outstanding continued to rise during the declining phase of the business cycle. In the early recovery period, however, loan growth was somewhat slower- 5.1 percent in the year following the trough. And virtually all that growth occurred in the final five months; seven months after the trough, loans outstanding at District member banks were almost 2 percent below their March 1975 level. At the large weekly reporting banks in the District, the growth in loans following the economic trough was even slower. Loans at these banks did not regain their March 1975 level until 11 months later. Data for large weekly reporting banks also indicate diverse patterns of change for the major types of loans. Loans to businesses continued an irregular but moderate rising trend throughout the recession. Consumer and real estate loans, on the other Federal Reserve Dank of Dallas Total loans outstanding at Eleventh District banks rose sharply as the economy slid into recession, then declined sharply, especially at the large banks 24 BILLION DOLLARS _ _ _ _ _~----BILLION DOLLARS15 ALL MEMBER BANKS -14 23 - -13 22 - -12 21 LARGE WEEKLY REPORTING BANKS 20~~_ _~_ _~---~----,------.-----r-11 -15 .\Uo-., ., .. st 1980/V Olce . -10 - 5 0 5 10 15 MONTHS FROM MARCH 1975 CYCLICAL TROUGH 17 Industrial production in the nation fell markedly in the last quarter of 1974 and the first quarter of 1975 135 (1967 = 100) - - - - - - - - - - - - - - - - 130 - 125 - 120 - 115 - 110~1~1~IM~I~I~I~JI~I~ls~I~I~I~DI~1rIMTITI'I~JI'I~ISrITIII~DlllrcIMr-I 1974 1975 1976 SOURCE: Board 01 Governors. Federal Reserve System. Federal Reserve Bank of Dallas hand, started to decline prior to the trough month and b ' th oth types of loans decreased appreciably ere after. ?e rnand weakened .•. ? 1974. the United States suffered the worst inflatIOn th SInce the early post-World War II period. At it e lsame time, the national economy moved into s ongest and deepest recession of the postwar Period. . Businesses cut both production and capital spendIng plans as orders were reduced or canceled as ~ result of weak demand. Nevertheless, the financ~ng needs of businesses remained substantial since :entory-to-sales ratios rose to historical highs a en final sales fell so sharply. (Businesses had C~~mulated inventories at a very rapid pace preCe Ing the recession because of widespread con~ern ?ver material shortages in several industries.) thesPlte extensive efforts to reduce inventories as abe economy moved into recession, they stayed at ti g~Ormally high levels until well into 1975. The rn ter inventory policies since the last recession fa ard?e~p to keep business loans from growing as p y In the current recession. ea ~he Contraction in loans to consumers during of ~y 19:5 partially reflected a relatively high level out! ebt hquidation by these borrowers. In addition, fin ay.s for consumer goods-and, thus, consumer dr: ncIng needs-slowed as real disposable income Ve p~ed sharply and consumer attitudes were adgr~~' y affected by continuing rapid inflation and Ing unemployment. in ;hnsumer loans could follow a similar pattern rne e current economic downturn. The un employas ~erate is ~xpected to move significantly hig~er com recesslOn deepens. Disposable personal In,sum e may not keep pace with inflation, and conalre:~s ~ight well be hesitant to increase their n y hIgh level of short-term debt. 1975emand for mortgage loans in late 1974 and clin dweakened when residential construction defarn?l markedly, as both single-family and multian 1 y housing starts were adversely affected by tigh~ve.rsu~ply of new units and by a growing The ~nIng In the availability of mortgage funds. tion epressed conditions in multifamily construchav' al~o reflected the difficulties owners were lng incr .In achieving rent levels sufficient to cover A. e~.sl~g costs of construction and operation. c IVlty in Single-family starts did begin to deAugu 8t I980/Voice rive some benefits in 1975 from Federal support programs that provided below-market interest rates for some home buyers and offered special income tax rebates to others on certain purchases made before 1976. In addition, the cost of mortgage credit for homes fell somewhat during 1975 when the availability of funds improved as savings inflows picked up. Growth in real estate loans may be somewhat stronger in the current recession. Mortgage rates already have fallen and should decline further as other credit demands weaken. Vacancy rates are relatively low, and prospective homeowners may opt to acquire homes before inflation pushes prices higher. Moreover, real estate investment trusts, which were partially responsible for the weakness in real estate loans in 1974 and 1975, are not expected to be a major factor in the current downturn. ... and the availability of funds tightened Business borrowing at banks was extremely heavy in the first half of 1974. By spring the demand for bank funds was advancing at a record pace. The prime rate had risen to 111/4 percent, and banks were aggressively seeking funds in the money market, especially through certificates of deposit (in the CD market, the banks raised over $10 billion just in April and May). Such intensive bidding for funds also caused yields in other credit markets to rise sharply. Loans-to-deposit ratios at many banks rose to high levels in 1973 and 1974 as a result of inflationinduced borrowings by businesses and others. Bank liquidity had eroded seriously, and as banks became increasingly concerned about borrowing heavily to finance the growth in loans, they began to reduce their reliance on nondeposit sources of funds. The widespread news of the major liquidity difficulties confronting a sizable U.S. bank-and the failure of an important foreign bank soon thereafter-brought further shifts in borrowing and lending patterns. Many banks became considerably more cautious in the management of their liquidity positions and reduced the amount they would lend to individual borrowers. Even though loans continued to increase sharply until the end of 1974, banks were trying to slow the growth through widespread tightening of both price and other lending terms. The tightening extended across all types of borrowers-business, consumer, and real estate. 19 Loans to businesses continued to trend upward at large District banks during most of the recession and rose faster than other loans after the trough 5.5 BILLION DOLLARS - - - - - . - - - - - - BILLION DOLLARS 2.0 BUSINESS LOANS -1.9 5.4 - -1.8 5.3 - -1.7 5.2 - -1.6 5.1 - -1.5 5.0 - -1.4 4.9 - REAL ESTATE LOANS 4.8 - -1.3 -1.2 4.7 CONSUMER LOANS -1.1 4.6 - -1.0 4.5 - - 4.4 - .9 4.3 __r -____~----~-----+-----.----~r-----r- .8 15 -10 - 5 0 5 10 -15 MONTHS FROM MARCH 1975 CYCLICAL TROUGH o Federal Reserve Bank of Dallas The prime rate had jumped to 12 percent by the surnmer f rn 0 1974. However, that was still below any market rates, so banks increased their compe~sating balance requirements and stiffened evalUatIOns of 1oan app l'lcants. Net busmess . t. loan exenslOns leveled off for a while but turned sharply uPWard '. 1 agam mate 1975 after the demand for g d oo. ~ picked up substantially and bank liquidity POSltrons had b . N een re bUl'1 t to more desIrable leve1s. evertheless, the restrictive policies toward busin ess lend' . 197 m~ were m effect throughout most of o 5. The pnme rate dropped 3 1/2 percentage points v~r the year to 7 percent, but it generally reamed r . W. high re I a lve to k mar et alternatives. rn ~th lower interest rates in money and capital b a~ ets in 1975 and early 1976 encouraging many Us messes t fi . te b ~ re nance much of theIr recent shortbar~ orrowmg with longer-term debt, commercial w n dS began gradually to loosen their policies tosu~~ lconsumer and real estate loans. Demand for ga oans, however, was slow to return. Mortel sge rates remained high relative to historical levhe ,. nd consumers generally maintained a fairly in:ld:~t atti!ude toward extending their outstandA . t until well after the cyclical trough. lar S m the Eleventh District, loans outstanding at fai gt weekly reporting banks in the nation were r Y strong until well into the recession. In the Ye ar pre d' in th c~ mg the trough, these loans rose more e na tlon (6.2 percen t) than in the District (5.3 rn t Augu at 1980/Voice percent). In the year after the trough, however, loans at large banks declined 6.4 percent in the nation but rose 1.1 percent in the District. Virtually all of the greater strength in District loans during the first year of recovery reflected higher levels of borrowing by businesses; both consumer and real estate loans were depressed somewhat more in the District than in the nation at the end of a year. A large portion of the increase in business loans at District banks during that period resulted from significant borrowing by the large number of District firms engaged in the production of energy and energy-related productsareas of major strength during the 1974-75 recession. The District economy-and, thus, financing requirements-should again be stronger than the national economy during the current recession. The more cyclically sensitive industries, such as automobiles and metals, which generally lead an economy into recessions and remain weak throughout, are not heavily concentrated in the Eleventh District. The District economy is, instead, well diversified in a number of industries that should be less affected by the current cyclical downturn-most notably, perhaps, industries related to the production of energy. These industries expanded sharply in the 1974-75 recession and are expected to remain strong in the current downturn. 21 ~egulatory ~riefs and c/lnnouncements Board Issues PoIicy Statement The Board f Syst h 0 Governors of the Federal Reserve obli en: as determined that commercial paper gahons is' sue db yank b ' compames , should holdmg face (lt~ommently indicate in bold type on their and (2) ~ at they are not obligations of a bank Depo at they are not insured by the Federal POse ~l nsurance Corporation, The Board's purnot c lS to en sure t h at b ank customers or investors ' 1paper Issued ' hOldionstrue c ommerCla by a bank oblig ~~ Company as being an insured bank I a Ion or deposit. n cases wh Posses ' ere purchasers do not take physical , SlOn ' vIded 'h of th e mstrument, they should be proWIt a ' d cOlll pa prl~te advice that states the holding is not ,ny paper IS not an obligation of a bank and Insured b y t h e FDIC, Further, employees engaged' Convey t~~ t?e sale of such paper should also and an IS mformation verbally to each purchaser, in the y commercial banking subsidiary involved lllarket' . Paper sh I mg 0 f hI' 0 dmg company commercIal the retailO~ed se?arat~ the sale, of su~h .paper from dures sh I poslt-takmg funchon, SImIlar procesale of Ou d also be followed for the issuance or commer ' 1 of bank hold' CIa paper of nonbank subsidiaries subsidi h mg companies where the nonbank affiliatea~y kas a name similar to that of any of its Vestors Inan s or there is a possibility that inbank sub ~y,confuse the obligations of the nonOr any of sldlary ' WI'th t h ose of the holding company On). 6 lts subsidiary banks, , !Vlarch 14 1 Interest r t I' ' 980, the Board established b a e Im't ' . Ya bank h I ,1 atlOns on debt instruments issued $100,000 0 ~ dJng company in denominations of foUl' Year r ess and with original maturities of FDIC "1'h s or less, Similar action was taken by the 'J. ese l' ' . reqUired to b Imlt~tlOns apply only to obligations e regIstered with the Securities and '/1 Exchange Commission under the Securities Act of 1933 ; consequently, they do not apply to commercial paper issued by a parent bank holding company, In the Board's view, debt obligations issued by a bank holding company in denominations of less than $10,000 ordinarily will not qualify for the commercial paper exemption from registration under the Securities Act of 1933. Accordingly, in the absence of any other exemption provision, such debt obligations will be subject to the interest rate limitations set forth in Section 217,7 of the Board's Regulation Q and Section 329,6 of the regulations of the FDIC, Deregulation Committee Proposes Interest Rate Ceiling Changes The Depository Institutions Deregulation Com- , mittee has issued for public comment several changes in interest rate ceilings on interest-bearing transaction accounts , which include negotiable order of withdrawal (NOW) accounts; savings accounts subject to automatic transfers, telephone transfers, and preauthorized nonnegotiable transfers; and savings accounts that permit payments to third parties by means of an automated teller machine, remote service unit, or other electronic device. Specifically, the committee has proposed four options for the level of the ceiling rate on all interest-bearing transaction accounts at commercial banks, mutual savings banks, and savings and loan associations, Of the four options, the first three would establish a uniform ceiling rate on all transaction accounts at 5, 51/4, or 51/2 percent. The fourth alternative would set the ceiling rate higher than 51/2 percent. The committee believes Federal Reserve Bank of Dallas that ' a um'f orm celhng ' , rate on transa ' establ'IS h mg e cho~ accounts would provide competitive t ~uahty among depository institutions, To facilia e the conduct of monetary policy, the committee :~nts to encourage depositors to differentiate pe ~een active and inactive interest-bearing def OS11s by establishing a ceiling rate that is higher or ~ontransaction savings accounts than for savIngs ' accounts, I accounts used as transactIon th n addition ,to requesting public comment on b e ~roposed mterest rate ceilings on interestearIng transaction accounts, the committee annO~ced ~e following actions: Jndi ~akIng the rules governing withdrawals from vIdual Retirement Accounts (IRA's) and Koegh :c~olunts the same for accounts held at savings e~ oan associations and accounts held at banks, eCUve July 2, d ; Setting December 31, 1980, as the effective el~ e,for any action it might take to restrict or 11llInate premiums or gifts offered depositors, • De ' a request to make changes, at this time ' nymg, wh' ' In the SIx-month money market certificate, of lch would have given it some characteristics a 1ll0ney market mutual fund share, Credit Restraint Measures Phased Out • Phaseout of the Special Credit Restraint Program, effective July 28, Under this program, banking institutions and finance companies were asked to limit domestic loan growth to a range of 6 to 9 percent in 1980, Even though the credit restraint programs have been phased out, the Board has emphasized that its general objective of achieving restrained growth in money and credit aggregates is unchanged. Proposed Regulation D Extends Time for Identifying Exempt Deposits The Federal Reserve Board has changed the datefrom July 15 to September 1, 1980-on or after which depository institutions must have affixed to certain time deposits, those issued to natural persons in amounts less than $100,000, a statement that the deposits are not transferable. This notice, in effect, makes such a deposit a "personal" time deposit and thereby exempts it from the reserve requirements applying to "nonpersonal" time deposits under the proposed revision of Regulation D, which will implement reserve requirement provisions of the Monetary Control Act of 1980, The F d no e eral Reserve Board on July 3, 1980, ancre~~ced pla~s to complete the phaseout of the y It restramt programs initiated on March 14 this o~~~ as an anti-inflation measure, The final phaseIncluded the following actions: , of the remaining 5-percent margin• IEI"11llmatlOn of reserve requirement on managed liabilities eig a~ge banks and agencies and branches of forthe~_ anks, effective July 24, At the same time, appl' percent supplementary reserve requirement wa ICI~bl,e to member banks on large time deposits s e 11llInated de; R,e 1ll0 val of the remaining 71/2-percent special Cov OSIt requirement that applied to increases in • e~~~ c,ons?mer credit, effective July 24, sp , 11llmatlOn of the remaining 7 1/2-percent eClal depo SI' reqUIrement t' ' crease' th at app I'Ie d to mfund s m covered assets of money market mutual A.u s and other similar institutions, effective gUst 11, t AUgust 19BO/Voice 23 (}Vowc/lvailable ~~~nt1y issued Fed~ral Reserve circulars. speeches. statements to Congress. publications. etc .. may be St ~lned by contacting the Bank and Public Information Department. Federal Reserve Bank of Dallas. a on K. Dallas. Texas 75222. unless indicated otherwise. CirCUlars Financ'la I R ecordkeeping and Reporting of Currency and Foreign Transactions. 7 pp. Circular No. 80-130 (July 2,1980). Proposed Guidelines Concerning Required Reserve Balance Pass-Through Procedures. 7 pp. Circular No. 80-131 (July 3, 1980). Regulati on Y- Bank Holding . . . Companies and Change m ~ank Control: Notice of Proposed Rulemaking RelatIng to Nonbanking Activities. 5 pp. Circular No. 80-132 (July 7, 1980). Altlend ment to Regulation T [Credit by Brokers and Ph Dealers}. 10 pp. Circular No. 80-133 (July 10, 1980) . aBe-out of Credit Restraint Program. 14 pp. Circular No. 80-135 (July 10, 1980). Policy St atement: Sale of Bank Holding Company Com1" Iltlercial Paper. 3 pp. Circular No. 80-139 (July 17, 1980). It e 12 Ch apter XII-Interest on Deposits: Proposed Interest Rate Ceiling on Interest-bearing Transaction ~ccounts; Withdrawals at Savings and Loans from RRi\ and Keogh Accounts; Change in Effective Date for estrictions Regarding Premiums. 10 pp. Circular No. 80-140 (July 16, 1980). ReViSion f • 0 Proposed Regulation D-Reserves of DeposI~ory Institutions (Including U.S. Branches and AgenCies of Foreign Banks and Edge Act and Agreement Corporations That Have Transaction Accounts or Nonrre~sonal Time Deposits). 3 pp. Circular No. 80-141 l' u Y 21 , 1980). ruth •. . t' in Lendi ng.. Ad mlDlstratlve Enforcement of Resti'tu- Speeches and Statements Remarks by Henry C. Wallich ("The World Monetary System After Postponement of the Substitution Account") to the HWWA-Institut fuer Wirtschaftsforschung, Hamburg, Germany. 15 pp. June 12, 1980. Statement by J. Charles Partee before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate. 15 pp., including Appendix. July 1, 1980. Re'marks by Lyle E. Gramley ("Monetary Policy and Inflation"), Denver, Colorado. 12 pp. July 17, 1980. Statement by Paul A. Volcker before the Committee on Banking, Housing. and Urban Affairs, U.S. Senate. 14 pp. July 22, 1980. Statement by Nancy H. Teeters before the Subcommittee on Consumer Affairs of the Committee on Banking, Housing, and Urban Affairs, U.S. Senate. 3 pp. July 24, 1980. Statement by Henry C. Wallich before the Committee on Banking, Housing, and Urban Affairs. U.S. Senate. 7 pp. July 25, 1980. Pamphlets, Brochures, and Reports Midyear Monetary Policy Report to Congress Pursuant to the Full Employment and Balanced Growth Act of 1978. Prepared by the Board of Governors of the Federal Reserve System. 45 pp. July 22, 1980. I~n. 9 pp. Circular No. 80-142 (July 23, 1980). Quesho n d C ~ an Answers Regarding the Phase-out of the (J redlt Restraint Program. 2 pp. Circular No. 80-143 S uly 24, 1980). Ysteltlw' d I p i e mplementation of Automatic Charge of Casb Crocessing for Matured Corporate and Municipal Arn oUpons. 1 p. Circular No. 80-145 (August 4, 1980). e:~ent to Regulation Z [Truth in Lending}. 4 pp. Cirl' u ar No. 80-148 (July 30, 1980). entative S h d tr c e ule for Implementing the Monetary Con19~1 Act of 1980. 4 pp. Circular No. 80-149 (July 31, 0). Federal Reserve Bank of Dallas
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