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FEDERAL RESERVE BANK
OF ST. LOUIS
MARCH 1978
The Federal Open Market
Committee in 1977
Bank Reserve Requirements and
Their Enforcement: A Comparison
Across States ...........................
Vol. 6 0 , No. 3
22
The Federal Open Market Committee in 1977
RICHARD W. LANG
I H E p olicy objectives o f the Federal O pen Market
Committee (F O M C ) in 1977, as repeatedly expressed
in the dom estic p olicy directive to the Federal R e
serve Bank o f N ew York, were “to foster bank reserve
and other financial conditions that will encourage co n
tinued econom ic expansion and help resist inflationary
pressures, while contributing to a sustainable pattern
o f international transactions.”1 By lowering their longrun ranges for growth o f the monetary aggregates,
the Committee also intended to m ove gradually to
ward longer-run rates o f monetary expansion con
sistent with general price stability.2
The desire of the F O M C to reduce gradually the
growth o f the monetary aggregates to rates con
sistent with general price stability was also expected
to help “re-establish a foundation for econom ic
stability over the longer term.”3 Elaborations of this
position are found in Chairman Burns’ quarterly re
ports o f the Board o f Governors of the Federal R e
serve System to Congress. Chairman Burns noted in
February o f last year that “a healthy and prosperous
econom y can be achieved only by pursuing policies
that are consistent with steady progress toward resto
ration o f general price stability.”4 H e went on to note
that “ substantial further reduction in growth rates of
all the major monetary aggregates will be needed
over the next few years if our Nation is to succeed in
halting inflation.”5
Chairman Burns did not anticipate that moving
toward rates o f monetary expansion consistent with
price stability could com e rapidly or without diffi
culty. But he observed in M ay that failure to adhere
Note: Unless otherwise stated, citations throughout this paper
are from either the “ Record of Policy Actions of the Federal
Open Market Committee” or “ Statements to Congress,” Fed
eral Reserve Bulletin (February 1977-February 1978).
1“ Record” (July 1977), p. 665. Also see “ Records” of March
1977 through February 1978.
2“ Record” (March, June, September, December 1977), pp. 256,
570, 831, 1069, respectively.
to policies aimed at bringing about noninflationary
econom ic growth w ould reduce the chances o f sus
taining the recovery and reducing unemployment.
In concluding this morning, I am obliged to ob
serve that we have still a considerable distance to go
in putting our financial house in order. Too often in
the past, we have lacked the courage or the patience
to stay long enough on a monetary and fiscal path
that will lead to noninflationary economic growth.
W e cannot afford to backslide once again. Unless we
achieve a less inflationary environment, there will be
little chance of sustaining the expansion that is now
in progress or of significantly reducing the high level
of unemployment that is blighting the lives of mil
lions of Americans. That, in a sentence, is the Board’s
central message to the Congress.8
As to h ow much o f a reduction in m oney growth
w ould b e required to achieve general price stability
over the next few years, Chairman Burns indicated
that m oney growth w ould have to b e less than the
long-run growth rate o f total output.
The long-run growth rate of physical production at
full employment has declined in recent years and is
probably around 3% per cent at present. Judging by
the experience of the past two or three decades, a
stable price level would require a rate of expansion
in M -l that over the long run is well below the
growth rate of total output.7
Thus, Chairman Burns envisioned in February 1977
that over a span o f a few years the F O M C would
have to reduce the growth rate o f M l from about 5%
percent in 1976 (from fourth quarter 1975 to fourth
quarter 1976) to a rate o f less than 3% percent.
In 1977, however, no progress was made towards
achieving the F O M C ’s long-run objective o f a reduc
tion in the growth o f M l. Instead M l growth acceler
ated to a 7.4 percent rate in 1977 (from fourth quarter
1976 to fourth quarter 1977). T o understand how
m oney stock growth could vary to such an extent
from the F O M C ’s intended objectives, one must con
sider the other factors w hich the F O M C took into
account in its shorter-run policy decisions. Further-
3“ Record” (M arch 1977), p. 256.
■“ Statements” (February 1977), p. 122.
•
8“ Statements” (M ay 1977), p. 468.
5Ibid., p. 124.
7"Statements” (February 1977), p. 124.
Page 2
FEDERAL RESERVE
MARCH
B A N K O F ST. L O U IS
1978
Table 1
F O M C O perating Ranges
1977
Sho rt-R u n
D ate of
M e e tin g
Ja n u a ry
1 7 -1 8 “
F e b ru a ry 15
Federal Funds
Rate R a n g e
In itial
Fed eral Funds
Rate Target
R an g e s1
A ctual G row th Rates
R a n g e s Specified
P erio d to which
M l 81 M 2 a p p ly
Ml
Ml
M2
M2
3 .1 %
8 .4 %
3.1
7.9
4 % -5 %
4 % -4 % %
Jan.-Feb.
3 -7 %
4 ' A -5
4 % -4 %
Fe b .-M a r.
3 -7
6 1/2 - 10 1/2
4i/2 - 8 i/2
7 -1 1
1 2 .4
11.1
8-12
10.1
9.1
7 -1 1 %
M a rc h 15
4 % -5 %
4 % - 4 3/4
M a r .-A p r.
A p ril 1 9
4 % -5 'A
43/4
A p r.-M a y
M a y 62
4 i/j-5 %
5 ’
/4
M a y 17
5 % -5 V 4
5%
M a y -J u n e
0 -4
2.6
6 .4
Ju n e
5 % -5 %
5 3/,
Ju n e -J u ly
2 1/2 - 6 1/2
6-10
1 1 .4
1 2 .4
J u ly 19
5 % -5 %
5%
J u ly -A u g .
3 1 /2 - 71/2
61/2-10'/2
12.1
11.6
August 5 2
5 %-6
53/4
A u g u s t 16
5 % -6 %
6
A u g .-Se p t.
0 -5
3- 8
6.6
7 .2
6 1/4
Sept.-O ct.
2 -7
4- 8
9 .7
9.1
21b
Sep tem b er 20°
O cto b e r
1 7-1 8 d
N o v e m b e r 15
6-6 Vi
6-10
3 1 /2 - 71/2
6 V *-6 y4
6%
O ct.-N o v .
3 -8
51/2- 91/2
5 .3
7 .4
6 '/4 -6 3/4
6 1/2
N ov.-Dee.
1 -7
5- 9
3.1
5 .2
Dec.-Jan.
2 i/2 - 8 i/2
6-10
7 .4
7 .0
Decem ber 1 9 - 2 0 e
6 % - 6 3/4
6 Vi
J a n u a r y 9, 1 9 7 8 2
6 V2 -7
63/4
L on ger-R u n
T arget
Period
D ate of
M e e tin g
Jan u ary
A p ril
J u ly
1 7 -1 8
19 f
198
O cto b e r 1 7 - 1 8 h
Ml
Ranges3
M2
M3
C redit
P ro x y 4
IV / 7 6 - IV / 7 7
4 '/ 2 - 6 '/j %
7 -1 0 %
8 1/2 - I 1 1/2 %
1/77-1/78
4 '/ 2 -6 '/ j
7 - 91/2
8 1/2 - H
7 -1 0
11/77-11/78
4 - 6 '/2
7 - 91/2
8 1/2 - I I
7 -1 04
111/77-111/78
4 - 6 '/ ,
6 1/2 - 9
8 - 1 0 Va
7 -1 0 %
7 -1 0
1S h o r t-r u n ra n g es w e re a d o p te d a t e a ch o f the F O M C ’ s r e g u la r ly scheduled m e e tin g s. T h e r a n g e s f o r the m o n e ta r y a g g r e g a te s w e re s p e cifie d
in te r m s o f t w o -m o n t h sim p le a n n u a l r a te s o f c h a n g e f r o m th e m o n th p r io r to th e m e e tin g s a t w h ic h th e r a n g e s w e re establish ed t o the
m o n th fo llo w in g th e m e e tin g . T h e r a n g e s f o r th e F ed era l fu n d s ra te w e re sp e c ifie d to c o v e r th e p e r io d f r o m th e m e e tin g a t w h ic h the
r a n g e s w e re a d o p te d t o th e f o llo w in g r e g u la r ly sch edu led m e e tin g . S h o r t -r u n r a n g e s w e re m a d e a v a ila b le in th e “ R e c o r d o f P o lic y A c t io n s
o f th e F ed era l O p e n M a r k e t C o m m itte e ” a p p r o x im a t e ly 30 d a y s a ft e r e a ch m e e tin g .
2T e le p h o n e o r te le g ra m co n s u lta tio n s w e r e h eld b e tw e e n sch edu led m e e tin g s f o r th e p u r p o s e o f m o d ify in g in t e r m e e tin g r a n g e s f o r th e F ed era l
fu n d s rate.
3C h a irm a n o f th e F ed era l R e s e r v e B o a rd A r t h u r F . B u rn s a n n o u n c e d in te n d e d g r o w t h rates o f m o n e ta r y a g g r e g a t e s o v e r th e in d ica te d o n e y e a r
p er io d s in sta tem en ts p r e s e n te d b e fo r e C o n g r e ss io n a l C o m m itte e s a t in te rv a ls o f a p p r o x im a t e ly 90 days.
4A t th e J u ly 19 m e e tin g th e C o m m itte e d ecid ed t o r e p la c e b a n k c r e d it p r o x y w ith a b r o a d e r m e a s u re o f all c o m m e r c ia l b a n k c r e d it. T h is ch a n g e
w as due in p a r t becau se o f th e g r o w t h in im p o r t a n c e o f n o n m e m b e r b a n k s (c r e d it p r o x y is ba sed o n d a ta so le ly f o r m e m b e r b a n k s ) a n d in
p a r t b eca u se th e p r o x y d oe s n o t in clu d e c e r ta in b o r r o w in g s b y b a n k s fr o m th e n o n b a n k p u b lic.
a M r. B alles dissen ted a t th is m e e tin g b e ca u se h e belie v e d th a t real G N P a n d p r ic e s n o w b o r e a clo s e r r e la tio n s h ip t o th e b e h a v io r o f M 2 th a n
t o th a t o f M l. H e w as c o n c e r n e d th a t g r o w t h in M 2 had b een e x c e e d in g th e C o m m itte e ’s lo n g e r -r u n r a n g e an d a b o u t th e c o n s e q u e n t im
p lic a tio n s f o r fu t u r e in fla tio n . T h e r e fo r e , he p r e fe r r e d a h ig h e r u p p e r lim it o n th e F ed era l fu n d s ra te r a n g e t h a n w a s a d o p te d , a n d p r e fe r r e d
th a t th e S y stem a im in itia lly f o r a fu n d s r a te o f 4 % in ste a d o f 4 % -4 % .
b M r. C oldw ell d issen ted a t th is m e e t in g b e ca u se he fa v o r e d a w id e r fu n d s ra te r a n g e o f 5 t o 5 % p e r c e n t, in o r d e r t o p r o v id e m o r e le e w a y
f o r a r e d u c tio n o f th e F e d e ra l fu n d s ra te should th e rates o f g r o w t h in M l a n d M 2 a p p e a r t o b e n e a r o r b e lo w th e lo w e r lim its o f th e ir
s p ecified r a n g e s f o r th e J u n e -J u ly p e rio d .
c M essrs. L illy a n d W a llic h disse n te d a t th is m e e tin g b e ca u se th e d ir e ctiv e a llo w e d m o r e fir m in g in m o n e y m a r k e t c o n d itio n s th a n th e y th o u g h t
a p p r o p r ia t e in v ie w o f th e ir ju d g m e n t th a t th e e c o n o m ic situ a tio n w as n o t v e r y s t r o n g . I n a d d itio n , M r. L illy belie v e d th at fu r th e r tig h t e n in g
in m o n e y m a r k e t c o n d itio n s w o u ld n o t b e e ffe c tiv e in d e a lin g w ith the u n d e r ly in g s tru ctu ra l in flation .
M essrs. M o r ris a n d R o o s disse n te d o n th e g ro u n d s th a t th e p o lic y a d o p te d r e p re s e n te d an in a d eq u a te r e s p o n s e t o th e ra p id rates o f m o n e
ta r y g r o w t h o v e r r e c e n t m o n th s . M r. R o o s f e lt th a t, u n less a c tio n w a s ta k e n t o re d u ce M l g r o w t h n o w , in fla tio n w o u ld a c c e le r a te a n d m o re
d r a s t ic a c tio n w o u ld n eed t o b e ta k e n la te r.
d M r. M o r ris dissen ted a t th is m e e t in g b e c a u s e he w as c o n v in c e d th a t th e C o m m itte e sh ou ld ta k e m o r e a g g r e s s iv e a c tio n t o c u r b e x ce s s iv e
g r o w t h in th e m o n e ta r y a g g r e g a te s . H e th o u g h t th a t s h o r t-te r m in te re s t r a te s co u ld rise fu r th e r w ith o u t s ig n ific a n t ly d a m a g in g s h o it -t e r m
p r o s p e c ts f o r e c o n o m ic a c tiv ity .
e M r. R o o s dissen ted a t th is m e e t in g b eca u se h e belie v e d th a t th e u p p e r lim it o f th e D e c e m b e r -J a n u a r y r a n g e f o r g r o w t h in M l a llo w e d f o r
th e p o s s ib ility o f t o o r a p id g r o w t h in th a t a g g r e g a t e . In his o p in io n , M l g r o w t h o v e r th is p e r io d a t a r a te in e x c e s s o f 6% p e r c e n t w ou ld
re q u ir e a n e x ce s siv e ly r e s tr ic tiv e p o lic y la te r i f th e F O M C ’ s lo n g e r -r a n g e g r o w t h ta r g e ts w e r e to b e a ch ie ve d .
f M r. P a rte e d issen ted . S ee f n . 15 o f te x t.
g M essrs. C oldw ell, J a c k s o n , a n d R o o s dissen ted . S ee fn .
19 o f te x t.
h M r. W a llic h dissen ted . S ee f n . 23 o f te x t .
Page 3
FEDERAL. RESERVE
MARCH
B A N K O F ST. LO U IS
more, strong growth of credit in 1977 along with un
certainties about the relationship o f m oney growth to
econom ic activity affected the short-run implementa
tion o f the F O M C ’s operating objectives.
This article reviews the decisions of the F O M C in
1977. Table I summarizes the F O M C ’s econom ic
p olicy directives in 1977, and a Supplement at the
end o f the article presents a more detailed meetingby-m eeting summary o f F O M C discussions and
decisions.
FOMC OPERATING TARGETS IN 1977
For the third consecutive year, the F O M C in 1977
publicly announced longer-run ranges for the major
monetary aggregates, M l, M2, and M3. This policy
was begun in early 1975 at the request o f Congress as
expressed in House Concurrent Resolution 133, which
was passed on March 24, 1975. The substance o f this
resolution was made law in N ovem ber o f last year
with the passage o f the Federal Reserve Reform Act
o f 1977. This A ct requires that the Board o f Governors
o f the Federal Reserve System consult with Com m it
tees o f the Congress on a quarterly basis with respect
to its objectives and plans for the ranges o f grow'th of
the monetary aggregates over the next twelve months.
During 1977 Chairman Burns met with Congres
sional Committees at roughly 90-day intervals to
present the intended ranges o f growth o f the m one
tary aggregates that the F O M C decided upon at its
most recent meeting. These yearly ranges are based
on the quarterly average for the most recent quarter
to the quarterly average for one year in the future
(see Chart I). The F O M C has repeatedly empha
sized that targets o f this nature are “ subject to review
and m odification at subsequent meetings” and that
“short-run factors might cause growth rates from
month to month to fall outside the ranges contem
plated for the year ahead.”8
The m onth-to-m onth flexibility in the growth o f the
monetary aggregates is reflected in the shorter-run
ranges which are set b y the F O M C . These short-run
ranges are specified over m oving two-month periods.
For example, the F O M C at its January meeting speci
fies short-run ranges for the monetary aggregates for
the two-m onth January-February period.9 Then at the
February meeting the F O M C sets new ranges fo r the
February-M arch period. These two-m onth ranges,
along with the longer-run ranges, are shown in
Table I. All o f the two-month ranges fo r both M l and
M 2 in 1977 were wider than the longer-run ranges an
nounced by the FO M C .
Longer-Run Ranges
The F O M C began 1977 with longer-run growth
ranges o f 4% to 6 V percent for M l, 7% to 10 per
2
cent for M2, and 9 to 11% percent for M3. These
ranges, which had been announced in N ovem ber
1976, covered the period from third quarter 1976 to
third quarter 1977. The F O M C review ed these
longer-run ranges at its January m eeting and decided
to reduce the low er limits o f the M 2 and M 3 ranges
b y V of a percentage point while leaving the M l
2
range unchanged. W hen Chairman Burns announced
the new M 2 and M3 ranges in February 1977, he
stated that the downward adjustment o f the ranges
“largely reflects technical considerations” concerning
the shifting o f existing stocks o f financial assets among
market securities and time and savings deposits.10 In
addition, he went on to state that:
Besides these technical considerations, the adjust
ment of the lower limit of the projected ranges for
M-2 and M-3 reflects the Federal Reserve’s firm
intention to continue moving gradually toward rates
of monetary expansion that over the longer run are
consistent with general price stability. . . .
The projected range for M -l in the year ahead
reflects our assumption that the financial innovations
now in train will continue to reduce materially the
proportion of transactions balances that are held in
the form of currency and demand deposits.11
At the January meeting at which the above ranges
were set, the Committee agreed that the outlook for
econom ic activity had im proved after the “pause” in
the fourth quarter o f 1976. But there was still concern
expressed about the current high rates o f unem ploy
ment and inflation, as well as the possible effects of
the severe winter weather and the new Administra
tion’s proposed fiscal package.12
By the time o f the April meeting when the longerrun ranges were again reviewed, the Administration’s
fiscal program had been substantially changed. The
econom ic outlook had proceeded to im prove during
the first quarter, although there still remained some
uncertainties about the impacts o f proposed Adminis10“ Statements” (February 1977), pp. 123-24.
8“ Record” (M arch 1977), pp. 256-57.
9Since the FOM C meets in mid-month, these 2-month ranges
are actually set when a quarter of the 2-month period is over.
Page 4
1978
n Ibid., p. 124.
12“Record” (M arch 1977), p. 254.
FEDERAL
RESERVE
B A N K O F ST. LO U IS
MARCH
1978
C h a rt I
T w e lve -M on th
1976
R an ge s Announced During 1977
1977
1978
N ote: Th e l o n g e r - r u n r a n g e s a n d a c tu a l M ] le v e ls r e p r e s e n t th e m o s t c u rr e n t s e a s o n a l l y a d ju s t e d m o n t h ly d a ta .
Page 5
FEDERAL RESERVE
B A N K O F ST. LO U IS
tration policies — notably the energy program — and
there was still concern about possible increases in
inflation during the year.1
3
A t the April meeting there was general agreement
that the longer-run ranges should be reduced, but
that only small reductions could be made at this time.
. . . members of the Committee were almost unani
mous in believing that a reduction of some kind
would be appropriate at this time as another step
toward the ultimate objective of achieving longerrun rates of monetary expansion consistent with gen
eral price stability. However, opinions differed as to
the specific reduction to be made. . . .
Partly because of the uncertainties associated with
the energy program, there was little sentiment for
making more than small reductions in the longer-run
ranges at this time.14
The Committee decided in April to reduce the upper
limits o f the M 2 and M 3 ranges b y V o f a percentage
2
point — changing the ranges to 7 to 9V percent and
2
8Va to 11 percent, respectively — while keeping the
M l growth range unchanged at 4% to 6V percent.15
2
In announcing these ranges to Congress on M ay 3,
1977, Chairman Burns noted:
The trend of growth in monetary aggregates is still
rapid, perhaps much too rapid. To be sure, the Fed
eral Reserve has moved fairly steadily toward lower
ranges for monetary expansion during the past 2
years. But that movement has been extremely grad
ual; indeed, at the current pace it would require
nearly a decade to reach rates of growth that are
consistent with a stable price level.
I must report, moreover, that despite the gradual
reduction of projected growth ranges for the aggre
gates during the past 2 years, no meaningful reduc
tion has as yet occurred in actual growth rates.18
[Emphasis added.]
T he longer-run ranges set in April follow ed a first
quarter in w hich M l grew at a quarterly average rate
slightly below the low er limit o f the long-run range of
4V percent set in January, and M2 was reported to
2
have grown at a quarterly average rate close to the
m idpoint o f the long-run range set in January. In con
trast, the July meeting follow ed a second quarter in
w hich M l grew at a quarterly average rate o f about
MARCH
1978
8V percent, w ell above the longer-run range’s upper
z
limit o f 6 V percent set in April. M 2 was reported to
2
have grown in the second quarter at an annual rate
in the upper half o f its long-term range.17 The F O M C
took these second quarter rates o f growth o f the
monetary aggregates into account when discussing
the longer-run ranges in July.
Moreover, it was observed that the annual rate of
growth in M -l from the first to the second quarter of
1977 had exceeded the range adopted by the Com
mittee at its meeting in April; that despite the grad
ual reduction of projected ranges of growth for the
aggregates during the past 2 years, no meaningful
reduction had as yet occurred in actual rates of
growth . . . ,18 [Emphasis added.]
The Committee then decided at this meeting to re
duce the low er limit o f the M l range b y % o f a per
centage point, while leaving the ranges for M 2 and
M3 unchanged.19
Although some members wanted to reduce the
ranges o f M 2 and M 3 or wanted to reduce the upper
limit o f the M l range as well, the majority o f the
F O M C rejected additional changes. It was suggested
that reducing the upper as w ell as the low er limit of
M l might “run the risk o f undesirable pressures in
financial markets, a principal effect o f w hich w ould be
to slow growth in real GNP m ore than p rojected .”20
At the O ctober 1977 meeting, members o f the C om
mittee agreed that the expansion in econ om ic activity
w ould likely continue for some time. M ost members
agreed with staff projections that growth in real GNP
w ould accelerate in the fourth quarter and would
continue at a moderate pace in 1978, although some
members indicated that uncertainties about the out
look had increased recently.21
In reviewing the longer-run ranges, consideration
was given to the fact that both M l and M 2 had in
creased in the third quarter at rates above the upper
limits o f their longer-run ranges — M l increased at a
17After data revisions, the first quarter rate of growth o f M2
was revised upward to an annual rate of 10.3 percent,
slightly above the upper limit of the range set in January.
The second quarter rate of growth of M2 was also revised
upward — to 9% percent, the upper limit of the range set
in April.
13“ Record” (June 1977), pp. 568-69.
18“ Record” (September 1977), p. 831.
14Ibid., p. 570.
19Ibid., pp. 832-33. Messrs. Coldwell, Jackson, and Roos dis
sented from this action. They favored reducing the upper
limit of M l, and Messrs. Coldwell and Jackson also wanted
to reduce the ranges of the broader monetary aggregates.
15Ibid., p. 571. Mr. Partee dissented from this action because
he opposed implementing a downward adjustment at this
particular time, although not opposing it as a long-term
objective.
20Ibid., p. 832.
16“ Statements” (M ay 1977), p. 467.
21“ Record” (D ecem ber 1977), p. 1064.
Page 6
FEDERAL. R ESERVE
B A N K O F ST. LO U IS
9.7 percent rate while M 2 increased at a 10.7 percent
rate. The F O M C again sought to make clear its
determination to reduce the ranges o f monetary
growth, while at the same time assuring that growth
in the aggregates w ould be sufficient to facilitate the
expansion of econom ic activity. But it was also felt
that the F O M C should emphasize that the Com m it
tee’s basic goal was to contribute to the satisfactory
performance o f the econom y rather than to pursue
predetermined rates of monetary growth. Although
this position is generally implicit at all meetings, it
was felt that it should be emphasized at this meeting
due to various uncertainties regarding recent M l
growth.
Uncertainty was expressed about the underlying
causes of the expansion of the demand for money
(narrowly defined) in the second and third quarters
and about the implications of that expansion for
policy. . . .
Because of the uncertainty about the underlying
causes of the recent expansion in the demand for
M -l and about the prospects for its velocity, some
members indicated that they now had less confi
dence in the behavior of the monetary aggregates as
guides to monetary policy than they might have had
earlier.22
MARCH
1978
Thus, in the last three quarters o f 1977 the quarterto-quarter growth rates o f M l exceeded the upper
limit o f the longer-run ranges set b y the FO M C . After
data revisions, M2 growth during the first three quar
ters of 1977 was at, or exceeded, the upper limits of
the F O M C ’s long-run ranges. Although M2 growth in
the fourth quarter slow ed substantially due to the rise
in market rates o f interest, M 2 increased 9.6 percent
from fourth quarter 1976 to fourth quarter 1977. This
rate of growth was near the upper end of the long
term range set at the beginning o f 1977 (see Table I ),
but was above the upper limit o f the long-term range
announced in November.
On balance, the quarter-to-quarter growth rates of
the monetary aggregates in 1977 often exceeded the
rates o f growth which the F O M C had established for
the year ahead and which it felt w ould be consistent
with its long-run objective o f gradually reducing the
growth rates o f the aggregates. The reasons for this
result involve the shorter-run objectives o f the FO M C .
As noted earlier, the F O M C has repeatedly stated
that shorter-run factors may lead to monthly m oney
growth that falls outside the longer-run ranges.25
Shorter-Run Ranges
The Committee decided in O ctober to reduce both
the upper and low er ranges for M 2 and M 3 by V of
z
a percentage point, while leaving the range for M l
unchanged.23 This action reduced the M 2 and M3
ranges to 6 V to 9 percent and 8 to 10l/2 percent,
2
respectively.
In the fourth quarter o f 1977, the quarterly average
growth rate for M l was still outside the longer-run
range o f 4 to 6 V percent; M l increased at a 7 per
2
cent annual rate betw een the third and fourth quar
ters. The growth rate o f M 2 was within its longer-run
range, however; M2 increased at a 7.8 percent rate
betw een the third and fourth quarters. The slowdown
in the growth o f net time deposits reduced M 2 growth
in late 1977 as market rates o f interest approached or
rose above the ceiling rates o f interest that could be
legally paid on these types o f deposits.24
--Ibid., p. 1067-69.
23Ibid., pp. 1070-71. Mr. Wallich dissented from this action
because he favored widening the M l range by raising the
upper limit to 7 percent while lowering the lower limit to
3 percent.
24Net time deposits are defined as: savings deposits, time de
posits open account plus time certificates o f deposit ( other
than negotiable time certificates of deposit issued in denom
inations of $100,000 or more by weekly-reporting large
commercial banks).
At each monthly meeting, the F O M C sets short-run
ranges for M l, M2, and the Federal funds rate that
are thought to be consistent with the longer-run goals
o f monetary policy. The shorter-run ranges for the
growth rates o f M l and M2 are stated in terms of
average growth rates over two-month periods, and
are generally w ider than the longer-run ranges for
M l and M2.
The shorter-run objectives for the Federal funds
rate are stated in terms o f both a range and a specific
level that is thought to be consistent with the short-run
ranges set for M l and M2. For example, at the m eet
ing held on April 19, 1977, the F O M C stated that the
growth rates o f M l and M 2 were “ likely to be associ
ated with a weekly-average Federal funds rate of
about 4% per cent.”-8 However, if the two-month
growth rates o f M l and M 2 appeared to “ deviate
significantly from the midpoints o f the indicated
ranges, the operational objective for the Federal funds
rate shall be m odified in an orderly fashion within a
range o f 4% to 5lA per cent.”27
23“ Record” (March, June, September, December 1977), pp.
257, 571, 832, 1071, respectively.
26“ Record” (June 1977), p. 574.
27Ibid.
Page 7
FEDERAL RESERVE
B A N K O F ST. LO U IS
The April dom estic policy directive was an “ aggre
gates directive” since it gave greater weight to growth
rates o f M l and M 2 than to m oney market conditions.
Alternatively, the F O M C could have given the Open
Market Desk a “m oney market directive” which w ould
have given greater weight to m oney market condi
tions than to growth rates o f M l and M2. During 1977
there were four “m oney market directives” and eight
“ aggregates directives.”28 The differences between
these tw o types of directives during 1977 can be more
readily observed b y citing the entire paragraph from
the domestic policy directive which relates to the
short-term operational objectives o f the FO M C .
The aggregates directive o f the April 19, 1977
meeting stated:
The Committee seeks to encourage near-term
rates of growth in M -l and M-2 on a path believed
to be reasonably consistent with the longer-run
ranges for monetary aggregates cited in the preced
ing paragraph. Specifically, at present, it expects the
annual growth rates over the April-May period to be
within the ranges of 6 to 10 per cent for M -l and 8 to
12 per cent for M-2. In the judgment of the Com
mittee such growth rates are likely to be associated
with a weekly-average Federal funds rate of about
4% per cent. If, giving approximately equal weight
to M-l and M-2, it appears that growth rates over
the 2 -month period will deviate significantly from
the midpoints of the indicated ranges, the opera
tional objective for the Federal funds rate shall be
modified in an orderly fashion within a range of
41/2 to 51/4 per cent.21 [Emphasis added.]
1
In contrast, the m oney market directive o f the O cto
ber 17-18, 1977 m eeting stated:
At this time, the Committee seeks to maintain
about the prevailing money market conditions dur
ing the period immediately ahead, provided that
monetary aggregates appear to be growing at ap
proximately the rates currently expected, which are
believed to be on a path reasonably consistent with
the longer-run ranges for monetary aggregates cited
in the preceding paragraph. Specifically, the Com
mittee seeks to maintain the weekly-average Federal
funds rate at about 6 V per cent, so long as M -l and
2
M-2 appear to be growing over the October-November period at annual rates within ranges of 3 to 8 per
cent and 5% to 9 % per cent, respectively. If, giving
approximately equal weight to M-l and M-2, it ap
pears that growth rates over the 2 -month period are
approaching or moving beyond the limits of the
indicated ranges, the operational objective for the
28“ Money market directives” were given to the Desk in June,
October, November, and December. “ Aggregates directives”
were given to the Desk in January, February, March, April,
May, July, August, and September.
29“ Record” (June 1977), p. 574.
Page 8
MARCH
1978
weekly-average Federal funds rate shall be modified
in an orderly fashion within a range of 6 Vi to 6%
per cent.30 [Emphasis added.]
All o f the aggregates directives in 1977, except
January’s, were o f the same general form as the above
April directive, while all o f the m oney market direc
tives in 1977 were o f the same general form as the
above O ctober directive.31 In both forms o f the direc
tive, a level o f the Federal funds rate is specifically
given as a near-term operating target (see Table I ).
Thus, in follow ing an aggregates directive, the Open
Market Desk still uses a Federal funds rate as its
operational objective.
The O pen Market Desk’s implementation o f the
F O M C ’s dom estic p olicy directives in 1977 resulted
in rates o f m onetary growth that often exceeded the
longer-run target ranges set b y the F O M C (Chart I),
and which often exceeded the shorter-run ranges as
well (see Chart II). The Federal funds rate, on the
other hand, was almost always kept within its shorterrun ranges during 1977 (see Chart III). This result is
not surprising given that the short-run implementation
o f p olicy remained, as in previous years, keyed to
control o f the Federal funds rate. Since the short-run
Federal funds target was set not just in terms of
a range but also in terms o f a level within a range,
one could expect that the Federal funds rate w ould
fluctuate less than the m onetary aggregates.
Under a m oney market directive, the O pen Market
Desk in 1977 sought to alter the Federal funds rate in
response to growth o f the monetary aggregates only
if these aggregates grew, or were projected to grow,
at rates approaching or outside the limits o f their
ranges. Since the shorter-run ranges for the aggregates
were w ider than the longer-run ranges, and since the
F O M C in 1977 instructed the Desk to give equal
weight to M l and M2 in implementing policy, there
could b e substantial fluctuations in either M l or M2
from the midpoints o f their specified ranges without
leading the Desk to change its operating target level
for the Federal funds rate.
30“ Record” (D ecem ber 1977), pp. 1073-74.
31The January directive had a less specific format than other
domestic policy directives in 1977. In January the Committee
sought “ to achieve bank reserve and money market condi
tions consistent with moderate growth in monetary aggre
gates over the period ahead.” See the “ Record” (M arch
1977), p. 259. As was the case in previous years, specific
ranges for the monetary aggregates and Federal funds rate
were given in the “ Record of Policy Actions” at the January
meeting, instead of in the domestic policy directive. In addi
tion, the January “ Record” did not specify that the Federal
funds rate should be changed in response to deviations from
the midpoints of the monetary growth ranges, as was the
case in other aggregates directives in 1977.
FEDERAL RESERVE
B A N K O F ST. L O U IS
MARCH
1978
Chort II
F O M C Sho rt-R un R a n g e s for M o n e ta r y A g g r e g a t e s
1*77
1977
1978
|_ Weekly averages of daily rotes
J
[2 At eoch regularly scheduled meeting during 1977 the FOMC established a range for the Federal funds rate. These ranges
are indicated for the first full week during which they were in effect.
the meeting at which the ranges were adopted to the month following the meeting
u_ Actual growth rates ore based on the most current seosonally adjusted monthly doto
12 The shaded areos represent two-month ranges odopted by the Committee at eoch regularly scheduled meeting The ranges
Under an aggregates directive, with the exception
o f January’s directive, the Open Market Desk in 1977
sought to alter the Federal funds rate in response to
growth o f the monetary aggregates only if these ag
gregates grew, or were projected to grow, at rates
significantly different from the midpoints of their
ranges. However, since the F O M C again instructed
the Desk to give equal weight to M l and M2 in
implementing policy, there could be substantial fluc
tuations from the m idpoint o f the range o f one of the
aggregates without leading the Desk to change its
operating target level for the Federal funds rate, p ro
vided that the other monetary aggregate was growing
at a rate close to the m idpoint of its shorter-term
range.
UNCERTAINTIES AFFECTING
SHORT-RUN OPERATING
TARGETS IN 1977
The possibility o f w ide short-run fluctuations in M l
and M2 was increased further in 1977 b y the cautious
approach taken b y the F O M C in interpreting changes
in these monetary aggregates. At the January m eet
ing, the Committee took into account the fact that
growth o f M l in 1976 had been significantly slower
than expected due to the spread o f various financial
innovations that reduced the public’s demand for d e
mand deposits for transactions purposes. In contrast,
growth o f the broader m oney measures (M 2 and M 3)
had been more rapid than expected in 1976. Several
members o f the Committee suggested that these ad
justments to financial innovations were expected to
have less impact in 1977, so that M2 and M 3 were
expected to grow at somewhat slower rates in 1977
than they did in 1976.3Since the duration o f the effects o f these financial
innovations could only be very roughly foreseen, the
FO M C at the beginning of 1977 was faced with some
uncertainty as to what extent future changes in the
pattern o f growth o f the aggregates w ould b e influ
enced by these innovations. This tended to lead the
F O M C to react cautiously to changes in m oney
growth. H owever, members of the F O M C reacted
cautiously to changes in m oney growth for a number
o f other reasons as well, as can be seen b y examining
the Com mittee’s discussions at various meetings.
For example, at the March meeting it was observed
that increased econom ic activity over the weeks ahead
w ould tend to increase the “demands for transactions
balances” and thereby tend to increase the growth
rates of the monetary aggregates.33 At the April meet
ing, the Committee decided it w ould be willing to
tolerate two-month ranges for monetary growth that
were higher than the longer-run ranges determined at
this meeting (see Table I ) “ because o f the expectation
that the forces contributing to rapid expansion in M -l
s- “ Record” (M arch 1977), pp. 255-56, and “ Statements” (F e b
ruary 1977), pp. 123-24.
33“Record” (M ay 1977), p. 481.
Page 9
FEDERAL
RESERVE
B A N K O F ST. L O U IS
in early April w ould prove to b e transitory and that
the bulge in growth for the month as a w hole w ould
for the most part b e offset by slower growth later
o n .”34 At this meeting there was also discussion of
uncertainties associated with the energy program,
w hich some members of the Committee felt limited
reductions in the longer-run growth ranges.38
At the M ay m eeting the Committee reduced their
two-m onth ranges for M l and M2, as they took ac
count o f a staff study which suggested that the large
increase in M l in April “raised the m oney stock suffi
ciently to accom m odate m uch of the public’s need for
additional transactions balances in the second quarter
and, consequently, that monetary growth was likely
to b e slow .”36 The conclusions of this study were also
taken into account in setting the two-month growth
ranges at the June meeting. However, a staff study
indicated that demand deposits were likely to be in
creased more than usual in July as a result of the
early distribution of social security checks. D ue in
part to the uncertainty which this technical factor
introduced into the growth of money during July, the
F O M C adopted a m oney market directive for the
first time in 197737
The F O M C returned to an aggregates directive at
the July m eeting after m oney growth was m oderate
in June. Although m oney growth was very rapid in
July, data on M l and M2 that becam e available after
the July m eeting were considered to be very tentative
because o f unusual patterns in the data received just
after the pow er failure in N ew York City. In addition,
the Committee at its August meeting expected money
growth to slow in August and September. Conse
quently, an aggregates directive was maintained and
the two-m onth ranges for m oney growth were low
ered (see Table I).
H owever, at the September meeting it was noted
that m oney growth had not slowed in August as much
as was expected at the August m eeting and that
m oney growth was also expected to increase in Sep
tember. Some members o f the Committee thought
that the recent higher growth in M l reflected the end
o f the effects o f earlier financial innovations. Thus,
they thought the demand for m oney may have in
creased, returning to a m ore “typical” relationship
betw een m oney and G N P.38 There was considerable
34“ Record” (June 1977), p. 572.
MARCH
1978
disagreement among Committee members as to the
appropriate ranges for the monetary aggregates and
Federal funds rate at this meeting. The Committee
decided on an aggregates directive with a higher
range for M l growth than that adopted at the August
meeting (see Table I ), but there were four dissenting
votes. Messrs. Lilly and W allich dissented because
they felt the directive allow ed more firming in m oney
market conditions than was appropriate at the time,
while Messrs. Morris and Roos dissented because they
felt the directive was an inadequate response to re
cent rapid growth o f the monetary aggregates.39
At the O ctober meeting, the growth rates for M l
and M 2 were expected to increase at or above the
upper limits o f their Septem ber-October ranges. U n
certainty was expressed at this m eeting as to “the
underlying causes o f the expansion o f the demand for
money (narrowly defined) in the second and third
quarters. . . .”40
It was suggested that various changes in financial
technology that had been resulting in substitution
of income-earning deposits for demand deposits had
become less powerful and, consequently, that in
creasing demands for transactions balances in the
latest two quarters had had a greater effect on
growth in M -l.41
Because o f uncertainty about the causes o f recent
rapid M l growth, some members “had less confidence
in the behavior of the monetary aggregates as guides
to monetary p olicy” and thought that it was “ impor
tant to emphasize that the Committee’s basic goal
was to contribute to the satisfactory perform ance of
the econom y rather than to pursue pre-determined
rates o f monetary grow th.”42 Against this background
o f uncertainty, the F O M C decided on a m oney mar
ket directive and raised the two-m onth ranges for
M l and M2 grow th.4
3
M oney market directives were also decided upon
at the N ovem ber and D ecem ber meetings, while
growth of the monetary aggregates slowed dow n dur
ing the last tw o months of the year. In N ovem ber the
Committee favored maintaining stable conditions in
the m oney market and were willing to accept a wider
3i'Ibid., pp. 1005-6.
40“ Record” (D ecem ber 1977), pp. 1063 and 1068.
41Ibid., p. 1068.
ssibid., p. 570.
4-Ibid., p. 1069.
30“ Record” (July 1977), p. 663.
43Ibid., p. 1072. Mr. Morris dissented from this action because
he preferred that the Committee take “more aggressive action
to curb excessive growth in the monetary aggregates. . . .”
(Ibid., p. 1074).
37“ Record” (August 1977), pp. 736-37.
38“ Record” (November 1977), pp. 1002-3.
Page 10
FEDERAL RESERVE
B A N K O F ST. LO U IS
MARCH
1978
Organization of the Committee in 1977
The Federal Open Market Committee (FOM C)
consists of the seven members of the Federal Reserve
Board of Governors and five of the twelve Federal
Reserve Bank Presidents. The Chairman of the Board
of Governors is also, by tradition, Chairman of the
Committee. The President of the New York Federal Re
serve Bank is a permanent member of the Committee
and, also by tradition, its Vice Chairman. All Federal
Reserve Bank Presidents attend the meetings and pre
sent their views, but only the Presidents who are mem
bers of the Committee may cast votes. Four member
ships rotate among the Bank Presidents and are held
for one-year terms beginning March 1.
Members of the Board of Governors in 1977 in
cluded Chairman Arthur F. Bums, Vice Chairman
Stephen S. Gardner, Philip E. Coldwell, Philip C.
Jackson, Jr., David M. Lilly, J. Charles Partee, and
Henry C. Wallich. In addition to Paul A. Volcker,
President of the Federal Reserve Bank of New York,
the following Presidents served on the Committee dur
ing January and February 1977: John J. Balles (San
Francisco), Robert P. Black (Richmond), Monroe
Kimbrel (Atlanta), and Willis J. Winn (Cleveland).
In March the Committee was reorganized and the
four rotating positions were filled by: Roger Guffey
(Kansas City), Robert P. Mayo (Chicago), Frank E.
Morris (Boston), and Lawrence K. Roos (St. Louis).
The Committee met regularly once each month
during 1977 to discuss, among other things, economic
trends and to decide upon the future course of open
market operations. However, as in previous years, oc
casional telephone or telegram consultations were held
between scheduled meetings.1 During each regularly
scheduled meeting, a directive was issued to the Fed
eral Reserve Bank of New York stating the general
economic goals of the Committee and providing gen
eral guidelines as to how the Manager of the System
Open Market Account at the New York Federal Re
serve Bank should conduct open market operations to
achieve these goals. Each directive contained a short
review of economic developments, the general eco
nomic goals sought by the Committee, and operating
instructions to the Account Manager. These instructions
were stated in terms of money market conditions and
near-term rates of growth of M l and M2 which were
considered to be consistent with desired longer-run
growth rates of the monetary aggregates. Special fac
tors, such as conditions in foreign exchange markets,
were also taken into account.
Consultations were held on May 6 and August 5, 1977 and
on January 9, 1978 for the purpose of modifying inter
meeting ranges for the Federal funds rate.
Decisions regarding the exact timing and amount
of daily buying and selling of securities in fulfilling the
Committee’s directive are the responsibility of the Sys
tem Open Market Account Manager at the trading
desk of the New York Bank. Each morning the Ac
count Manager and his staff decide on a plan for open
market operations to be undertaken that day. In de
veloping this plan, money and credit market condi
tions and aggregate targets desired by the Committee
are considered, as well as other factors which may be
of concern at the time. Each morning, the Account
Manager, in a conference call, informs one voting
President and staff members of the Board of Governors
about present market conditions and open market op
erations which he proposes to execute that day. Other
members of the Committee are informed of the daily
program by wire summary.
A summary of the Committee’s actions is presented
to the public in the “Record of Policy Actions of the
Federal Open Market Committee.” The “Record” is
released approximately 30 days after each meeting.
Soon after it is released, the “Record” appears in the
Federal Reserve Bulletin and, in addition, “Records”
for the entire year are published in the Annual Report
of the Board of Governors. The “Record” for each
meeting during 1977 generally included:
1) a staff summary of recent economic develop
ments, such as prices, employment, industrial
production, and components of the national in
come accounts; and projections concerning real
output growth for two or three quarters ahead;
2) a discussion of recent international financial de
velopments and the U.S. foreign trade balance;
3) a discussion of recent credit market conditions
and recent interest rate movements;
4) a discussion of open market operations, the
growth of monetary aggregates, and bank re
serve and money market conditions since the
previous meeting;
5) a discussion of current policy considerations, in
cluding money market conditions and the move
ments of monetary aggregates;
6) conclusions of the FOMC;
7) a policy directive issued by the Committee to the
Federal Reserve Bank of New York;
8) a list of the members’ voting positions and any
dissenting comments;
9) a description of any actions and consultations
that may have occurred between the regularly
scheduled meetings.
Page 11
FEDERAL RESERVE
B A N K O F ST. L O U IS
growth range for M l which included relatively low
growth. Slower growth o f the aggregates in the last
tw o months o f the year was acceptable to the C om
mittee in view o f their earlier rapid rates of growth.
At the D ecem ber meeting the Committee again fa
vored maintaining stable m oney market conditions.
Taking account o f the performance of the economy,
the slowing in the growth of the aggregates, and
uncertainties in financial markets associated with the
end of the year, the F O M C did not feel that increases
in short-term interest rates were warranted. On the
other hand, with the decline in the value of the dol
lar on foreign exchange markets, the F O M C did not
feel that decreases in short-term rates were warranted
either.44
The uncertainties about the monetary aggregates
expressed at the monthly meetings reflect various
cases of m ore general uncertainties. In presenting the
quarterly report o f the Board o f Governors to C on
gress, Chairman Burns stated on February 3, 1977:
I must note, however, as I have repeatedly in the
past, that profound uncertainties surround the rela
tionships among the various monetary aggregates
and between rates of monetary expansion and eco
nomic performance.45
Furthermore, in the quarterly report presented to
Congress on M ay 3, 1977, Chairman Burns discussed
one o f the reasons why monetary growth objectives
are difficult to achieve. After noting that there had
been no meaningful reduction in actual rates of
m oney growth over the past tw o years despite reduc
tions in the F O M C ’s longer-run ranges, he stated:
That unintended consequence is pardy the result of
data deficiencies that complicate the already formi
dable task of adjusting or approximating monetary
growth objectives. Initial estimates of the monetary
aggregates sometimes differ considerably from esti
mates made later when fuller data became available.
A factor contributing to the measurement problem
has been the inadequacy of deposit data for non
member commercial banks.46 [Emphasis added.]
Mr. J. Charles Partee, a m em ber o f the Board of
Governors, presented the views of the Board o f G ov
MARCH
1978
ernors to Congress on September 27, 1977, concerning
the rapid rates o f monetary growth betw een February
and August. In his statement to Congress, he dis
cussed sources o f uncertainty in controlling the m one
tary aggregates.
Some would argue that the Federal Reserve
should have responded more forcefully to the April
and July bulges in the money supply. Indeed, a few
would say that the reserves necessary to support the
deposit expansion simply should not have been pro
vided, letting financial markets and the economy
suffer whatever consequences might result. But the
FOMC continues to believe that the wiser course is
to limit the speed with which money market condi
tions are adjusted to changing monetary growth
rates. W e believe this partly because the monetary
aggregates — particularly M -l — have proved to be
inherently unstable in the short run. Bulges of a
month or two in duration are often reversed subse
quently, as was the case in the spring and summer
of 1975 and again in 1976. Prudence in our actions is
dictated also by the fact that the relationship be
tween the various measures of monetary growth and
the performance of the economy is loose and unre
liable, since it is subject to rather abrupt shifts as the
result of changing financial practices and economic
conditions.47 [Emphasis added.]
Instability in the demand for m oney is o f particular
importance to implementation o f the F O M C ’s policy
directives to the Open Market Desk, since in the
short run the Desk seeks to accom m odate the public’s
demand for money.
The FOMC’s instructions to the Manager of the
System Open Market Account regarding the man
agement of bank reserves provide — to a consider
able extent — for the accommodation of the public’s
demand for money in the short run, while at the
same time prescribing a response when growth of
money appears inconsistent with the Committee’s
long-term objectives.48
If the public’s demand for m oney is unstable in the
short run, a point on w hich economists disagree,
accom m odating these shifts b y holding short-term
interest rates constant requires frequent changes in
the supply of bank reserves. As a result, money
growth rates could fluctuate considerably from
month-to-month.
44“ Record” (January, February 1978), pp. 23, 106.
45“ Statements” (February 1977), p. 124.
47“ Statements” (O ctober 1977), p. 890.
46“ Statements’’ (M ay 1977), p. 467. The problem of data de
ficiencies mentioned by Chairman Bums became more diffi
cult as 1977 progressed. Benchmark revisions based on 1977
Call Report data from nonmember banks were not made.
Due to a reporting problem, no quarterly Call Reports from
nonmember banks in 1977 were used to update the monetary
aggregates.
48“ The Implementation of Monetary Policy in 1976,” Federal
Reserve Bulletin (April 1977), p. 326. This article was
adapted from a report submitted to the FOMC by Alan R.
Holmes and Peter D. Sternlight, Manager and Deputy Man
ager of the System Open Market Account, respectively. John
S. Hill and Christopher J. McCurdy were primarily respon
sible for its preparation.
Page 12
FEDERAL RESERVE
B A N K O F ST. LO U IS
CREDIT AND MONEY GROWTH
Month-to-month fluctuations in m oney growth can
also be related to changes in the demand for credit.
In his quarterly report o f the Board of Governors to
Congress on N ovem ber 9, 1977, Chairman Burns dis
cussed the growth of credit during 1977 as an addi
tional reason for the rapid growth of money.
There is no rigid link between the total volume of
credit outstanding in the economy and the Nation’s
stock of money, but movements in credit and money
do tend, of course, to be positively related. If the
demand for credit begins to strengthen at a time
when financial institutions are relatively liquid, a
good amount of credit expansion can occur without
much — if any — change in monetary balances. But
as the economy grows and credit expansion con
tinues, sooner or later a need for enlarged money
balances will arise in order to facilitate the enlarged
total of credit transactions. Such a process has un
questionably been at work this year, and it explains
in some measure why the growth of M -l — the
narrow money stock — has accelerated recently in
relation to money growth earlier in this expansion.40
At almost every F O M C meeting in 1977, data on the
expansion of bank credit was reported as being strong
(see Supplement).
T o the extent that the short-term operating target
of the Federal Reserve is keyed to stabilizing the
Federal funds rate, increases in the demand for credit
which put upward pressure on this interest rate will
tend to be accom m odated by the Open Market Desk.
Thus, increased credit demands may be accom m o
dated just as an increase in the demand for m oney is
accom m odated b y the Open Market Desk. As pointed
out in the above quotation by Chairman Burns, such
an accom modation of increased credit demands ap
parently occurred in 1977.
Since an increase in the demand for money and an
increase in the demand for credit can both be sources
o f upward pressure on the Federal funds rate, it may
be difficult in practice for the Federal Reserve to
distinguish between the two. Thus, by stabilizing the
Federal funds rate through changes in bank reserves,
the Federal Reserve may accom m odate an increase in
the demand for credit, with the result that the money
stock rises.
MONETARY POLICY IN 1977:
TIGHT OR EASY?
If the tightness or easiness o f monetary policy is
defined solely in terms o f the changes in interest
MARCH
rates, then monetary policy in 1977 was “tight” be
cause interest rates increased during the year. On the
other hand, if the tightness or easiness of monetary
policy is defined in terms o f the behavior of bank re
serves or the m oney stock ( M l ) , then monetary policy
in 1977 was “ easy” because these reserve or monetary
aggregate measures increased more rapidly in 1977
than they did in 1976.
General descriptions of monetary policy — such as
“tight,” “ easy,” or “moderate” — rarely appear in the
monthly “ R ecord o f Policy Actions o f the F O M C .”
However, in the “ R ecord” for the September 20, 1977
meeting it is mentioned that most F O M C members
favored finding some “m iddle ground” in terms of a
policy response to rapid growth in M l and M 2.50 In
discussing FO M C actions in the first ten months of
1977, Chairman Burns in N ovem ber also described
monetary policy as taking a “m iddle course.”
Under the circumstances, we have judged it wise
to move cautiously in adapting policy. . . . We well
realize that the middle course actually followed —
that of gradually limiting the availability of bank re
serves and thereby slowing the growth of money —
has left us open to the charge of temporizing. In
fact, we did not temporize at all, but we did move
prudently.
On the one hand, restrictive action vigorous
enough to have kept M -l growth within the pro
jected ranges would, we believe, have forced a far
steeper climb in short-term interest rates than actu
ally has occurred since April. This could have
proved destructive to the smooth functioning of
financial markets and might eventually have brought
serious injury to our economy.
On the other hand, a determined effort by the
Federal Reserve System to prevent any rise in inter
est rates during recent months would have produced
— in the face of the credit pressures that have been
experienced —• a rate of monetary expansion well
above the rise that has actually occurred. That would
have been very damaging, for it would have prac
tically destroyed any remaining hope of achieving
mastery over the inflationary forces that now move
our society. . . .
By taking measures to curb the growth of money, we
have demonstrated that we remain alert to the dan
gers of inflation. As a consequence, long-term inter
est rates, which nowadays are extremely sensitive to
expectations of inflation, have remained substan
tially stable.5
1
Thus, Chairman Burns felt that in 1977 the Federal
Reserve m oderated increases both in interest rates and
50“ Record” (November 1977), p. 1003.
4l)“ Statements” (November 1977), p. 990.
1978
51“ Statements” (November 1977), pp. 991-92.
FEDERAL
RESERVE
B A N K O F ST. L O U IS
MARCH
in m oney growth, and at the same time avoided in
creases in inflationary expectations.
SUMMARY AND CONCLUSIONS
The Federal funds rate was generally within the
F O M C ’s short-run ranges during 1977. Growth of M l
and M2, on the other hand, frequently exceeded the
F O M C ’s shorter-run ranges. Strong growth o f credit in
1977 and uncertainties about the relationship of
m oney growth to econom ic activity were both im por
tant factors affecting the implementation
FO M C ’s short-run operating objectives.
1978
of
the
O ne o f the F O M C ’s long-run objectives in 1977
was to reduce gradually the growth o f the m one
tary aggregates over time to rates consistent with
general price stability. During the year the F O M C
reduced its longer-run ranges for growth o f the m one
tary aggregates in pursuit of this policy. H owever,
due to the rapid growth o f M l and M 2 during the
second and third quarters o f the year, actual growth
rates o f the monetary aggregates were not consistent
with the F O M C ’s longer-run objectives.
SUPPLEMENT
FOMC Discussions in 1977
This supplement consists o f selected excerpts from
the “ R ecord o f Policy Actions” for each of the F O M C
meetings in 1977. Each “R ecord” includes analyses of
current and projected econom ic developments, dis
cussions o f current p olicy actions, and long- and shortrun operating instructions issued b y the F O M C to the
Trading Desk. The full text o f each “ R ecord o f Policy
Actions” appears in issues o f the Federal Reserve
Bulletin.
Meeting Held on January 17-18, 1977
Over most of the inter-meeting period incoming
data suggested that the aggregates were growing at
about the expected rates, and the Manager of the
System Open Market Account conducted operations
with a view to maintaining the Federal funds rate
close to 4% per cent — the level prevailing at the
time of the December meeting. Near the end of the
inter-meeting period, incoming data began to sug
gest that over the December-January period growth
in M -l would be somewhat above the range that had
been specified by the Committee but that growth in
M-2 would be near the midpoint of its range. With
the Committee scheduled to meet in a few days, the
Manager continued to aim for a Federal funds rate
of about 4% per cent, although with a little greater
willingness to tolerate small deviations above that
rate than below it.
In the discussion of the economic situation at this
meeting, members of the Committee agreed that the
outlook for growth in real output of goods and serv
ices had strengthened. . . . It was also observed,
however, that even if growth in real GNP during
1977 were significantly greater than projected by the
staff, rates of resource use in the fourth quarter of
Page 14
the year still would not appear to be excessive;
indeed, unemployment would still be relatively high.
Although Committee members in general now
held a more favorable view of the economic situa
tion and outlook than they had a month or two ago,
attention was called to a number of problems. For
one, the severity of the winter weather and its im
pact on the availability of fuels for industrial use
posed a threat to output and employment in some
parts of the country. Even though the unemployment
rate was still unacceptably high, current and pro
spective rates of inflation also remained a source of
major concern.
A measure of concern was also provoked by cer
tain aspects of the Federal budget, after incorpora
tion of assumptions about the new administration’s
fiscal proposals.
It appeared likely that over-all demands for funds
in securities markets would continue to be sizable
during the months just ahead.
. . . most members preferred to have operating
decisions in the period ahead based primarily on the
behavior of the monetary aggregates.
Meeting Held on February 15, 1977
Throughout the inter-meeting period incoming data
suggested that growth in both M -l and M-2 over the
January-February period would be well within the
ranges that had been specified by the Committee.
Accordingly, the Manager continued to direct op
erations toward maintaining the Federal funds rate
in the area of 4% to 4% per cent.
In their discussion of recent economic develop
ments and prospects, members of the Committee
FEDERAL
RESERVE
B A N K O F ST. LO U IS
agreed that the underlying situation was strong and
that the losses in output, hours of work, and income
resulting from the weather would soon be made up.
Most members agreed with the staff projections
suggesting that growth in real GNP would accelerate
to a rapid pace in the second quarter — reflecting
not only the recovery from the weather-induced
losses but also the disbursement of tax rebates and
related payments — and then would continue at a
relatively good rate throughout the second half of
the year.
However, one or two members expressed concern
that the weather disturbance and the tax rebates
might cause large swings in business inventory in
vestment and therefore in total GNP.
Looking to the latter part of 1977 and into 1978,
some questions were raised about the adequacy of
industrial capacity. . . . Concern was expressed that
the margin of unused plant capacity that could be
drawn into production might be low in relation to
the amount of unemployed labor. It was also ob
served that rates of capacity utilization varied con
siderably among industries and that during business
expansions bottlenecks begin to spread through the
industrial system long before over-all measures of
capacity utilization reach relatively high levels.
It was suggested that the rise in prices might
become more rapid as activity expanded during the
period ahead.
Total credit at U.S. commercial banks increased
considerably in January, following a small rise in
December. Data for both months, however, were
distorted by special influences — particularly a sub
stantial increase in bank holdings of bankers accept
ances late in 1976 that was largely reversed in
January.
As to policy for the period immediately ahead,
Committee members in general advocated continua
tion of about the current stance. They differed little
in their preferences for ranges of growth in the
monetary aggregates over the February-March
period.
Meeting Held on March 15, 1977
Throughout the interval since the February meet
ing, the Manager of the System Open Market Ac
count had continued to aim for a Federal funds rate
in the area of 4% to 4% per cent. In the early weeks
of the interval, incoming data had suggested that
growth in both M -l and M-2 over the FebruaryMarch period would be close to the midpoints of the
specified ranges. Estimates of the 2-month growth
rates subsequently were revised downward, but they
remained reasonably well within their specified
ranges.
In the discussion of the economic situation at this
meeting, members of the Committee were in general
agreement with the staff projection that real GNP
MARCH
1978
would expand at a rapid rate in the second quarter
of 1977 and at a more moderate, but still rather
substantial, rate in subsequent quarters.
Several members expressed concern about the re
cent and prospective behavior of prices.
It was observed during the discussion that, given
the longer-run ranges for growth in the monetary
aggregates adopted at the< January meeting, the
projected rates of increase in nominal GNP implied
a rise in the income velocity of money that was large
for this stage of a business expansion. In that connec
tion it was noted that significant upward pressures
on interest rates might develop later in the year,
particularly if prices should rise more rapidly than
projected or if inflationary expectations should
strengthen. On the other hand, one member re
marked that, while interest rates played a role, the
predominant determinant of velocity changes was
the state of confidence. On the basis of his judgment
that confidence was improving, he thought it was
likely that the rate of increase in velocity would be
quite high. Another member observed that in almost
every business expansion since World War II, the
rate of increase in velocity had reached a primary
peak, then dropped back before reaccelerating to a
secondary peak not quite so high as the first one.
Total credit at U.S. commercial banks rose more in
February than in any other month since the summer
of 1974. Acquisitions of U.S. Treasury securities were
especially large, holdings of other securities rose
somewhat for the first time since November, and
total loans continued to expand.
It appeared likely that over-all credit demands
would remain strong in the period immediately
ahead.
As to policy for the period immediately ahead,
members of the Committee did not differ greatly
in their preferences for ranges of growth for the
monetary aggregates over the March-April period. It
was suggested that the forces that had contributed
to particularly slow growth in the monetary aggre
gates in February might be reversed and might con
tribute to rapid growth in March, and that such a
development should not necessarily cause concern.
It was also observed that the upward momentum of
economic activity in the weeks ahead would tend to
expand demands for transactions balances and thus
to exert some upward pressure on growth rates for
the monetary aggregates.
Meeting Held on April 19, 1977
Over most of the interval between the March and
April meetings, incoming data suggested that the
2-month growth rates for M -l and M-2 would be well
within their respective ranges. Consequently, the
Manager of the System Open Market Account con
tinued to aim for a Federal funds rate in the area of
4% to 4% per cent. Near the end of the period,
however, it appeared that growth in M -l would
Page 15
FEDERAL RESERVE
MARCH
B A N K O F ST. LO U IS
exceed the upper limit of its 2-month range and that
growth in M-2 would be in the upper part of its
range. In those circumstances, the Manager aimed
for a Federal funds rate of around 4% per cent.
The staff projections for subsequent quarters
corporated revised assumptions for fiscal policy,
a result of the President’s announcement on April
of changes in his package of measures designed
stimulate growth in economic activity.
in
as
14
to
Growth in real GNP over the next few quarters
was still projected to be substantial, reflecting
strength in consumer demands and expansion of
business investment in both fixed capital and inven
tories. The projections continued to suggest that the
rise in the fixed-weighted price index for gross busi
ness product would be less rapid in the quarters
immediately ahead than in the first quarter, when it
had accelerated because of the adverse effects of
severe weather. Upward price pressures over the
next several quarters were nonetheless expected to
be somewhat greater than had been anticipated
earlier, partly because of further deterioration in the
outlook for prices of some foods and partly because
of the prospect of another increase in the minimum
wage soon after midyear.
Withdrawal of the proposal for tax rebates was
thought to be of considerable significance. Some
members expected that this change, especially in
conjunction with the measures aimed at reducing
inflation, would contribute to improvement in busi
ness and consumer confidence and in that way would
add strength to the economic outlook.
Attention was drawn to other potentially trouble
some aspects of the developing economic situation.
Thus, one member commented that growth in
nominal GNP over the quarters ahead at the rate
indicated in the staff projections — which did not
take the energy program into account — might well
be accompanied by considerable strain in financial
markets.
Over the first quarter, expansion in total bank credit
was greater than in any other quarter in 2% years.
For the period immediately ahead, the principal
new factor in the outlook for credit demands was
the prospective shift in the position of the U.S.
Treasury from a sizable net borrower to a temporary
repayer of debt. At the same time, however, business
demands for credit were still expected to expand as a
result of continuing improvement in economic activ
ity. Projections of consumer expenditures implied a
continued high rate of growth in consumer credit
outstanding, and expansion of mortgage debt was
anticipated to remain large. State and local govern
ment borrowing was also expected to remain sizable.
As to policy for the period immediately ahead, the
Committee members were willing to tolerate growth
in the monetary aggregates over the April-May
period within ranges that were higher than those
adopted for the year ahead because of the expecta
Page 16
tion that the forces contributing to
in M -l in early April would prove
and that the bulge in growth for
whole would for the most part be
growth later on.
1978
rapid expansion
to be transitory
the month as a
offset by slower
Meeting Held on May 17, 1977
Data that had become available in the days imme
diately after the April meeting suggested that over
the April-May period both M -l and M-2 would
grow at rates well within their specified ranges,
although it appeared that growth in April would be
strong. Accordingly, the Manager of the System
Open Market Account sought to maintain the Fed
eral funds rate at about 4% per cent or a shade
higher. By late April, however, incoming data sug
gested that over the 2-month period M -l was likely
to grow at a rate considerably above the upper limit
of its specified range and that M-2 was likely to grow
at a rate close to the midpoint of its range. In those
circumstances System operations in late April and
early May were conducted with a view to raising the
Federal funds rate toward 5% per cent, the upper
limit of its specified range.
On May 6 the Committee voted to increase the
upper limits of the range for the Federal funds rate
from 5V* to 5% per cent, with the understanding
that the Manager would use the additional leeway
only if new data becoming available before May 17,
the date for this meeting, suggested that the aggre
gates were strengthening significantly further on bal
ance. Such additional strength did not develop in
that period, and the Manager continued to aim for a
funds rate of around 5V4 per cent. In the final days
of the period, the rate actually fluctuated between
5Vi and 5% per cent.
With respect to the economic situation and out
look, members of the Committee generally were of
the view that the expansion in business activity was
quite strong. In particular, they expected over-all
growth to remain substantial for a number of quar
ters ahead.
The recent acceleration in the rate of price rise
was a source of concern.
At U.S. banks, growth in total credit accelerated
during April from the already brisk pace of the first
quarter. All major loan categories expanded significandy further, and holdings of tax-exempt securities
increased sharply for the first time since November.
As to policy for the period immediately ahead,
members of the Committee thought that relatively
slow growth in monetary aggregates over the MayJune period would be appropriate in order to com
pensate at least in part for the exceptionally rapid
growth in April. In considering the ranges of growth
to be specified for the 2-month period, they took
account of a staff analysis that suggested that the
extremely large expansion in M -l in April appeared
FEDERAL
RESERVE
B A N K O F ST. LO U IS
to have raised the money stock sufficiently to accom
modate much of the public’s need for additional
transactions balances in the second quarter and, con
sequently, that monetary growth was likely to be
slow.
Most Committee members did not wish to see a
rise in the weekly-average Federal funds rate above
5% per cent during the inter-meeting period - at
—
least not without further consultation. . . . In sup
port of constraining the upper limit to 5% per cent,
it was suggested that a further rise of 50 to 60 basis
points — roughly the magnitude of the increase
since the April meeting — was likely to have more
significant repercussions on financial markets and
that considerable uncertainty existed about the un
derlying strength of the monetary aggregates.
Meeting Held on June 21, 1977
Throughout the inter-meeting period, incoming data
suggested that over the May-June period M -l and
M-2 on the average would grow at rates well within
the specified ranges. Accordingly, the Manager con
tinued to aim for a weekly-average funds rate of
about 5% per cent, and the rate remained close to
that level during the period.
Staff projections suggested that in the second half of
1977 and in early 1978 the rate of growth in real
GNP would be fairly rapid, although significantly
less so than in the first half of this year. The projec
tions also suggested that the rate of increase in prices
would moderate from that in the first half but would
remain comparatively high.
It was also suggested that confidence has been
enhanced by System policies — specifically, by the
promptness with which open market operations dur
ing the period between the April and May meetings
responded to the April surge in monetary growth.
The magnitude of recent declines in yields on long
term bonds was cited as partial evidence for this
view.
At U.S. banks, growth in total credit slowed some
what in May from the relatively rapid pace of April,
but the rate was close to the average for the
January-April period.
In considering policy for the period immediately
ahead, the members of the Committee took account
of the likelihood that growth in M -l would remain
relatively slow in June — continuing to respond to
the April surge - but that growth from the first to
—
the second quarter would nevertheless exceed the
Committee’s longer-run range for that aggregate. In
July, according to staff analysis, expansion of M -l
was likely to be magnified by a purely technical
factor — namely, distribution of social security
checks earlier in the month than usual, thereby
causing demand deposits to be larger than they
otherwise would be over the 3-day weekend includ
ing July 4.
MARCH
1978
Most members favored giving greater weight than
usual to money market conditions in conducting
open market operations in the period until the next
meeting because of uncertainty about M -l growth
rates in the near term. However, a number of the
members expressed a preference for continuing to
have operating decisions in the period ahead
based primarily on the behavior of the monetary
aggregates.
Almost all members favored directing operations
— at least initially — toward maintaining the Fed
eral funds rate at about its prevailing level of
5% per cent.
Meeting Held on July 19, 1977
Throughout the inter-meeting period, incoming data
suggested that over the June-July period M -l and
M-2 would grow at rates within those [their] ranges.
Accordingly, the Manager of the System Open Mar
ket Account sought to maintain the Federal funds
rate around 5% per cent.
Staff projections suggested that the rate of growth
in real GNP would be less rapid in the second half
of 1977 than in the first and that it would slow
somewhat further into 1978. The projections also sug
gested that the rate of increase in prices would
moderate from that in the first half but would remain
high.
In their discussion of the economic situation, mem
bers of the Committee agreed with the general out
lines of the staff projections, which were described
as presenting a fairly optimistic picture of prospec
tive developments. Despite the broad consensus on
the outlook, several members suggested that expan
sion in some sectors of demand might prove to be
less strong than expected by the staff and that
growth in real GNP was more likely to fall short of
than to exceed the projected rates.
At U.S. commercial banks, growth in total credit
slowed somewhat further in June and was slightly
below the average for the first 5 months of the year.
The slowing in June reflected declines in net acquisi
tions of Treasury and other securities. Growth of real
estate loans accelerated to near-record pace, and
growth of most other major categories of loans was
substantial.
All members favored a return to basing decisions
for operr market operations in the period immedi
ately ahead primarily on the behavior of the mone
tary aggregates. At its meeting in June the Commit
tee had decided to give greater weight than usual
to money market conditions in conducting operations
in the period until this meeting.
Almost all members favored directing operations
initially toward the objective of maintaining the
Federal funds rate at its current level of 5% per
cent, but a few members suggested that operations
Page 17
FEDERAL RESERVE
B A N K O F ST. LO U IS
be directed toward achieving a slightly higher rate
within a short time.
Subsequent to the meeting, on August 4, nearly
final estimates indicated that in July M -l had grown
at an annual rate of about I8V per cent and M-2 at
2
a rate of about I 6 V per cent. For the July-August
2
period staff projections suggested that the annual
rates of growth for both aggregates would be well
above the upper limits of the ranges specified by the
Committee in the next-to-last paragraph of the
domestic policy directive issued at the July meeting.
The Manager of the System Open Market Account
was currently aiming at a funds rate of 5% per cent,
the upper limit of the inter-meeting range specified
in the directive.
Against that background. Chairman Bums recom
mended on August 4 that the upper limit of the
range for the Federal funds rate be increased to 6
per cent so that the Manager might have some addi
tional leeway for operations, while continuing to take
account of the current Treasury financing and finan
cial market developments. He further recommended
that this additional leeway be used very gradually,
and only in the event that the aggregates continued to
register values far beyond the Committee’s objectives.
Meeting Held on August 16, 1977
Data that had become available in the days imme
diately following the July meeting suggested that
over the July-August period both M -l and M-2
would grow at rates in the upper parts of their
specified ranges. These data were considered espe
cially tentative, however, because unusual patterns
in the figures received just after the power failure in
New York City suggested that the failure might have
introduced statistical distortions. The System Ac
count Manager, therefore, continued to seek a Fed
eral funds rate of about 5% per cent. Later, however,
when new data not only confirmed the initial signs
of strength but also suggested that growth in the
aggregates would be somewhat above the upper
limits of the specified ranges, System operations were
directed at achieving a higher Federal funds rate.
Information that became available on August 4
suggested that the growth rates in the aggregates in
the July-August period would be well above the
ranges specified by the Committee, and on August 5
the Committee voted to increase the upper limit of
the range for the funds rate to 6 per cent. It was
understood that the Manager would use this addi
tional leeway very gradually and only in the event
that the aggregates continued to register values far
in excess of the Committee’s objectives. When such
strength in the aggregates did persist, the Account
Manager aimed at a Federal funds rate of about
6 per cent.
In the Committee’s discussion of the economic
situation, the members agreed that the expansion
was likely to continue for some time.
Page 18
MARCH
1978
Total loans [in July] rose more rapidly than in any
other month since last October, reflecting strength in
most major categories.
In considering policy for the period immediately
ahead, members of the Committee noted that growth
in the monetary aggregates was expected to slow
markedly in August and September. Because of the
sharp increases in July, however, expansion in the
third quarter as a whole — particularly in M -l —
would be relatively rapid. It was observed that con
siderably slower growth rates would be needed in
subsequent quarters if monetary growth for the year
ending with the second quarter of 1978 was to be
kept within the ranges that the Committee had de
cided upon in July.
While the views of members on appropriate shortrun policy did not differ greatly, a number of mem
bers placed particular stress on the need to resist
further sizable increases in the monetary aggregates,
noting that continued rapid growth would foster in
flationary expectations and weakening of confidence
within the business community. Other members put
more emphasis on the sizable increase that had oc
curred since late April in the Federal funds rate and
other short-term interest rates, and some expressed
reluctance to seek further tightening in the money
market at a time when growth in economic activity
was showing signs of moderating. These members
suggested that, in the absence of unusual behavior in
the monetary aggregates, it would be desirable to
maintain relatively stable conditions in the money
market for the time being.
The members agreed that, in view of the July
bulge in the monetary aggregates, no easing of
money market conditions should be sought in the
coming interval even if growth rates in the aggre
gates during the August-September period appeared
to be quite low.
Meeting Held on September 20, 1977
Data that had become available in the weeks
immediately following the August FOMC meeting
suggested that over the August-September period
M -l was growing at a rate in the upper half and
M-2 at a rate near the midpoint of their respective
ranges. Accordingly, the System Account Manager
continued to seek a Federal funds rate of around
6 per cent. Near the end of the inter-meeting period,
growth in M -l for the 2-month period appeared to
be exceeding the upper limit of its range and growth
in M-2 appeared to be in the upper half of its range.
Therefore, the Manager sought a firming in the Fed
eral funds rate to around 6 Vs per cent, and the rate
averaged close to that level in the 5 days just prior
to this meeting of the Committee.
In the Committee’s discussion of the economic
situation and outlook, the members agreed — as
they had at the August meeting — that the expan
sion was likely to continue for some time, and most
FEDERAL
RESERVE
B A N K O F ST. L O U IS
of them expected that real GNP would grow at
about the moderate pace projected by the staff.
However, some members expressed doubts about
the vigor of the expansion.
Concern was expressed about the outlook for both
unemployment and prices. It was remarked that
even if real GNP grew at a moderate pace over the
next year, little progress would be made in reducing
the unemployment rate. . . . Moreover, one member
observed, recent experience had shown that high
unemployment did not greatly reduce the rate of
inflation, and the staff projections did suggest per
sistence of both a rapid rate of inflation and a high
rate of unemployment.
At U.S. commercial banks, growth in total credit
accelerated during August to a rate somewhat above
the average for the first 7 months of 1977.
In their discussion at this meeting of policy for the
immediate future, Committee members differed in
their views on the appropriate response to the re
cent rapid growth in the monetary aggregates. It
was noted that growth in M -l and M-2 had not
slowed so much in August as had been expected and
that it apparently was picking up somewhat in Sep
tember — making it likely that the rates of monetary
expansion in the third quarter would be high relative
to the Committee’s longer-run ranges. Some mem
bers thought that the Committee’s primary objective
in the period immediately ahead should be to resist
continued rapid expansion in the aggregates, in light
of the implications of such expansion for inflation
and inflationary expectations. On the other hand,
some members advocated avoiding substantial in
creases in interest rates at present, in light of their
doubts about the economic outlook. It was also noted
that the recent high rate of growth in M -l might
represent a return to a more typical relationship
between that rate and the growth rate in nominal
GNP — following a period in which the demand for
money had been held down by changes in financial
practices — and accordingly that it might not war
rant the kind of policy response that would be ap
propriate under other circumstances. Most members,
however, were of the opinion that the Committee
could not afford to ignore either the uncertainties in
a generally favorable economic outlook or the recent
high rates of monetary growth, and they favored
finding some middle ground.
Meeting Held on October 17-18, 1977
In accordance with the Committee’s decision, the
Manager of the System Open Market Account began
immediately after the September meeting to seek
bank reserve conditions consistent with a Federal
funds rate of around 6% per cent. Data that were
becoming available at the same time suggested that
over the September-October period M -l and M-2
would grow at rates at or above the upper limits of
the ranges specified by the Committee, and the esti
MARCH
1978
mates of these growth rates were raised further on
the basis of the data that became available in sub
sequent weeks. Therefore, the Manager sought a
gradual firming in the Federal funds rate to 6’/2 per
cent, the upper limit of its specified range.
In the Committee’s discussion of the economic
situation, the members agreed that the expansion in
activity was likely to continue for some time to come.
They differed, however, in their assessments of the
prospective vigor of the expansion.
Uncertainty was expressed about the underlying
causes of the expansion of the demand for money
(narrowly defined) in the second and third quarters
and about the implications of that expansion for
policy. It was suggested that various changes in
financial technology that had been resulting in sub
stitution of income-earning deposits for demand de
posits had become less powerful and, consequently,
that increasing demands for transactions balances in
the latest two quarters had had a greater effect on
growth in M -l. One member suggested that the
demand for money had also been raised recently by
increased uncertainty of various kinds — about con
ditions in the job market, about prices of securities,
about foreign exchange rates, and about other ele
ments in the economic situation — and that this had
contributed to the apparent decline in the income
velocity of M -l in the third quarter. In his view,
however, the decline in velocity more fundamentally
reflected the sluggishness of economic expansion in
the third quarter, and a pick-up in the pace of ex
pansion once again might be accompanied by a
sharp rise in velocity.
Because of the uncertainty about the underlying
causes of the recent expansion in the demand for
M -l and about the prospects for its velocity, some
members indicated that they now had less confi
dence in the behavior of the monetary aggregates
as guides to m onetary p olicy than they m ight have
had earlier. It was felt, moreover, that those uncer
tainties made it particularly important to emphasize
that the Committee’s basic goal was to contribute to
the satisfactory performance of the economy rather
than to pursue pre-determined rates of monetary
growth.
At U.S. commercial banks, growth in total credit
was small in September following substantial expan
sion in the preceding 2 months.
As to policy for the period immediately ahead,
members of the Committee were in relatively close
agreement with respect to their preferences for
ranges of growth for the monetary aggregates over
the October-November period.
The members were agreed that little or no decline in
the Federal funds rate should be contemplated
under foreseeable circumstances, but views were
divided with respect to the upper limit that should
be set for the rate . . . .
Page 19
FEDERAL RESERVE
B A N K O F ST. L O U IS
Meeting Held on November 15, 1977
Immediately following the [October] meeting, in
coming data had suggested that over the OctoberNovember period M -l and M-2 would grow at rates
within their specified ranges. Accordingly, the Man
ager of the System Open Market Account sought to
maintain the Federal funds rate at around 6 Vz per
cent. In late October, however, additional data sug
gested that M -l and M-2 were growing at rates
approaching or moving beyond the upper limits of
their ranges. Therefore, the Manager sought a slight
firming in the funds rate. Still later, available data
again suggested that growth in both aggregates
would be within the ranges; hence the Manager’s
objective for the funds rate was returned to 6 V per
2
cent.
Staff projections suggested that growth in real GNP
would continue at a moderate, although gradually
diminishing, pace throughout 1978. It was also ex
pected that the rate of increase in prices would
remain high.
In the Committee’s discussion of the economic sit
uation, the members agreed that the staff projections
— suggesting that growth in real GXP would con
tinue at a moderate, although gradually diminishing,
pace throughout 1978 — were reasonable. There
were, however, some shadings of view about pros
pects for the economy.
It was noted during the discussion that, according
to projections of the Federal budget on a “high
employment” basis, fiscal policy would move from a
highly stimulative stance in the second half of 1977
to approximate neutrality by the end of 1978, unless
some new fiscal initiatives were undertaken.
At U.S. commercial banks, growth in total credit
accelerated in October from the relatively slow pace
recorded in September. The pick-up reflected a
vigorous expansion in bank lending that was offset
only in part by a further reduction in holdings of
Treasury securities.
In the discussion of policy for the period immedi
ately ahead, members noted that growth in the
monetary aggregates appeared to be slowing sharply
in November. It was observed that for a number of
reasons growth rates for December were particularly
difficult to project, but even if they also proved to
be low, two consecutive months of slow growth
would be acceptable in view of the rapid monetary
expansion of recent months. The comment was made
that the sharp slowing in early November suggested
that the aggregates might grow at reasonably satis
factory rates over the November-December period,
assuming continuation of a Federal funds rate at
about its current level. Many members indicated
that they would like to maintain stable conditions in
the money market for a time and that they were
willing to accept a rate of growth in M -l over the
November-December period within a somewhat
Page 20
MARCH
1978
wider range than usual, encompassing relatively low
growth.
Most members expressed a preference for con
tinuing to give greater weight than usual to money
market conditions in conducting open market opera
tions in the period until the next meeting of the
Committee. However, a number of members were in
favor of basing operating decisions primarily on the
behavior of the monetary aggregates.
Meeting Held on December 19-20, 1977
Throughout the period between the November
and December meetings, incoming data suggested
that growth in M -l and M-2 would be well within
the ranges that had been specified by the Commit
tee. Accordingly, the Manager of the System Open
Market Account sought to maintain reserve condi
tions consistent with a Federal funds rate of 6¥2 per
cent.
Staff projections for the year ahead, which were
based on assumptions that did not include reductions
in Federal income taxes, differed little from those
prepared just before the November meeting of the
Committee; they suggested that real GNP would
continue to grow at a moderate, although gradually
diminishing, pace throughout 1978. It was also ex
pected that the rate of increase in prices would re
main high and that the unemployment rate would
decline gradually.
In the Committee’s discussion of the economic
situation, the members were in agreement that the
expansion in activity was likely to continue through
out the year ahead. A number of members expressed
the view that growth in real GNP during 1978 would
be as strong as or stronger than that suggested by
the staff projections. Other members foresaw sub
stantial strength for the period immediately ahead
— in response to the recent pick-up in final sales and
consequent adjustment of inventory positions — but
less strength later in 1978. It was noted, however,
that the administration was planning to propose a
substantial reduction in taxes on individual and busi
ness incomes in the new year, and that such reduc
tions — depending upon their nature and timing —
could have a significant effect on the course of
activity.
. . . it was also observed that enlarged deficits in the
Federal budget might be accompanied by increases
in interest rates as the year progressed. It was sug
gested, moreover, that the rate of inflation could
prove to be higher than expected and could, there
fore, hamper the progress of the expansion.
In the Committee’s discussion, serious concern was
expressed about the recent weakness of the dollar in
foreign exchange markets. While it was noted that
depreciation of the dollar might in time contribute
to improvement in the U.S. trade balance, it was
pointed out that it contributed to the rate of inflation
FEDERAL RESERVE
B A N K O F ST. LO U IS
in this country and weakened business confidence
both here and abroad. Excessive appreciation of for
eign currencies, it was suggested, could have ad
verse effects on over-all economic activity abroad
and, consequently, on the U.S. trade balance. The
observation was made that the position of the dollar
would be strengthened by adoption in this country
of an effective energy program, of a tax policy con
ducive to business investment here, and of a more
effective attack on inflation, as well as by pursuit
abroad of faster rates of economic growth.
At U.S. commercial banks, expansion of total credit
in November was close to the fast pace in October.
Bank loans continued to grow at a rapid rate, and
the strength was broadly distributed among major
loan categories.
In the Committee’s discussion of policy for the
period immediately ahead, the members took note
of the slowdown in the growth of the monetary ag
gregates in recent weeks and of the uncertainties in
financial markets usually associated with the yearend. Against that background and in light of the
performance of the economy, it was observed that
increases in short-term interest rates were probably
MARCH
1978
not warranted at this time. On the other hand, it was
suggested, the weakness of the dollar in foreign ex
change markets argued against declines in such
rates. Accordingly, most members were in favor of
the maintenance of prevailing conditions in the
money market for the time being and of continuing
to give greater weight than usual to money market
conditions in conducting open market operations in
the period until the next meeting of the Committee.
However, some members indicated a preference for
basing operating decisions in the period ahead pri
marily on the behavior of the monetary aggregates.
The Committee decided to include in the next to
last paragraph of its directive to the Federal Reserve
Bank of New York the following sentence: “In the
conduct of day-to-day operations, account shall be
taken of emerging financial market conditions, in
cluding the unsettled conditions in foreign exchange
markets.” This instruction was added to provide the
Manager with somewhat greater flexibility, in part
because of the Committee’s view that pressures on
the dollar in foreign exchange markets might appro
priately influence the nature and timing of domestic
open market operations from day to day.
Page 21
Bank Reserve Requirements and Their Enforcement:
A Comparison Across States
R. ALTON GILBERT and JEAN M. LOVATI
T HE
A
proportion o f com m ercial banks that are
Federal Reserve members has been declining steadily
in recent years, continuing a trend o f over three
decades. By the end o f 1976, the percentage o f com
mercial banks belonging to the Federal Reserve
System had declined to 39 percent, com pared to 45
percent at the end o f 1966.
The reason banks mention most frequently for
withdrawing from Federal Reserve membership is the
cost o f reserve requirements im posed on members
relative to reserve requirements o f the various states
for nonm em ber banks.1 Thus, an examination o f the
nature o f state reserve requirements forms an im
portant part o f any analysis o f declining Federal R e
serve membership.
T able I
MEM BER B A N K RESERVE REQUIREMENTS
T yp e o f D ep osit
(A m o u n ts in M illio n s o f D o lla rs )
Percent
N et D e m a n d :1
first $ 2
$2-
$10
7
$ 1 0 -$ 1 0 0
1 1 .7 5
$ 1 0 0 -$ 4 0 0
1 2 .7 5
ove r $ 4 0 0
1 6 .2 5
S a v in g s
3
Time:
In itia l m aturity of 3 0 - 1 7 9 d a y s:
first $ 5
3
ove r $ 5
6
In itia l m aturity o f 1 8 0 d a y s to 4 y e a rs
O f the previous studies dealing with state reserve
requirements, the most comprehensive is that by
R obert E. Knight.2 Knight listed the reserves required
b y each state on various classes of deposit liabilities
and the bank assets which qualify as reserves. In the
four intervening years since the Knight study was
published, reserve requirements have been changed
in several states. The description o f reserve require
ments in this paper expands upon those in previous
studies by including information on how states m on
itor the reserve positions o f nonmember banks and
enforce reserve requirements.
RESERVES REQUIRED OF
FEDERAL RESERVE MEMRERS
M em ber bank reserve requirements are discussed
b efore considering state reserve requirements to facili
tate comparison between them. Reserve requirements
o f Federal Reserve members on net demand deposits
are graduated, marginal requirements being higher
for larger banks (see Table I ) . Reserve requirements
on time deposits also tend to be higher for larger
banks because of the higher requirement on that por
tion o f tim e deposits with initial maturities between
30 and 179 days in excess o f $5 million.
’ Peter Rose, “ Exodus: W hy Ranks are Leaving the Fed,” The
Bankers Magazine (W inter 1976), pp. 43-49.
2Robert E. Knight, “Reserve Requirements: Part 1: Compara
tive Reserve Requirements at Member and Nonmember
Ranks,” Federal Reserve Rank of Kansas City Monthly Re
view (April 1974), pp. 3-20.
Page 22
%
9 .5
2.5
In itia l m aturity of o v e r 4 y e a rs
1
*N et d e m a n d d e p o s its equal g r o s s d e m a n d d e p o s its less de m a n d
b a la n ce s d u e fr o m o th e r d o m e s tic b a n k s an d cash ite m s in the
p r o c e s s o f c o lle c tio n .
M em ber banks must hold their reserves as either
vault cash or reserve balances with their Federal
Reserve Banks. They must m eet their required re
serves on a w eekly average basis. The average reserve
balance a m em ber bank must h old at its Reserve
Bank during each settlement week (seven-day period
ending each W ednesday) is based upon its average
deposit liabilities tw o weeks earlier less the bank’s
average vault cash tw o weeks earlier.
A t the end o f each reserve settlement week, m em
ber banks must file reports on daily deposit liabilities
and reserve balances. These reports are used to d e
termine whether m em ber banks are m eeting their
reserve requirements. If the banks are not meeting
their reserve requirements, penalties are assessed in
amounts equal to the average reserve deficiencies
times an interest rate tw o percentage points per an
num above the prevailing Reserve Bank discount
rate.3
3The penalty is waived if a reserve deficiency is two percent
or less of required reserves for a settlement week and offset
by excess reserves of equal dollar value in the following set
tlement week. Also, a member bank with excess reserves in
one settlement week equal to two percent or less of required
reserves can have a reserve deficiency of equal dollar amount
in the following settlement week without a penalty. For a
more detailed discussion of Fed reserve requirements, see
Robert E. Knight, “ Guidelines for Efficient Reserve Manage
ment,” Federal Reserve Bank of Kansas City Monthly Review
(November 1977), pp. 11-23.
FEDERAL RESERVE
B A N K O F ST. L O U IS
MARCH
NATURE OF STATE RESERVE
REQUIREMENTS
Specification of Required Reserves and
Reserve Assets
Information on reserve requirements o f individual
states for various classes o f deposit liabilities and on
the types o f assets that are counted as reserves is
presented in Table II. This information was obtained
from the bank supervisors o f each state.4
Reserve requirements differ greatly among states,
with Illinois being the only state with no statutory
requirements. Most states have higher reserve re
quirements on demand deposits than, on time and
savings deposits, and in three states the reserve re
quirement ratios apply to total deposits. T w o states,
Massachusetts and Rhode Island, do not require any
reserves on time and savings deposits. In 19 states
various types o f deposit liabilities, primarily govern
ment deposits, are not subject to reserve requirements.
All states with reserve requirements count vault
cash and demand deposits at correspondent banks as
reserves.5 In 27 states the banking authorities must
approve correspondent banks as depositories if d e
mand balances due from those banks are to be
counted as reserves b y nonmember banks. In 18 states
cash items in the process o f collection (C IP C ) are
4Most of the state bank supervisors provided this information
in October or November o f 1977.
5Correspondent banks hold deposit balances of other banks
and provide services to those banks.
1978
also counted as reserves. N onm em ber banks may
meet various proportions o f their required reserves
with earning assets in 22 states, with remaining shares
o f required reserves to be met with cash assets. In six
states nonmember banks may meet all o f their reserve
requirements with interest-earning assets, generally
unpledged U.S. Treasury securities or state and local
government securities; therefore, they have no cash
reserve requirements.
Comparison of Federal Reserve and State
Reserve Requirements
Reserve requirement ratios are higher in some
states than those for Federal Reserve mem ber banks,
as indicated by com paring Tables I and II. However,
reserve burdens o f member banks relative to those
o f nonmembers cannot be determined just by com
paring reserve requirements o f the Federal Reserve
to those o f the various states because o f several d if
ferences in the types o f assets that are counted as
reserves for members and nonmembers.
N onm em ber banks m ay h old their cash reserves in
the form o f vault cash and demand balances at cor
respondents. Eighteen states allow nonmember banks
to count cash items in the process o f collection as
reserves, and in other states many nonmember banks
effectively count C IPC as reserves b y classifying their
uncollected funds as demand balances due from cor
respondents. M em ber banks, on the other hand, may
h old their cash reserves only as vault cash and reserve
balances at their Reserve Banks. M em ber bank reserve
T a b le II
STATE RESERVE REQUIREMENTS
Reserve A sse ts E lig ib le
to M e e t R equirem ents
State
A la b a m a
X
X
3%
X
X
20%
X
X
8%
X
X
C urrent Reserve
R equirem ent Ratios
T Dem
TS
A la s k a 1
V a ult
C a sh
10%
D e p o sits Subject to
R eserve R equirem ents
Dem and
B a la n ce s
D ue From
Banks
T D em -U Sd-SLd
T S-U St-SL t
A rk a n sa s
10%
X
X2
T S-U St-SL t-R t
A r iz o n a 1
4%
X
X2
T Dem
FR
X
3%
X
X2
3 % first $ 5 m illion , plu s
5 % o v e r $ 5 m illion
X
O th e r
X2
S
Securities
X2
T D em -U Sd -SLd-Rd
T
1
C IP C
C IP C 4
Page 23
FEDERAL RESERVE
B A N K O F ST. LO U IS
MARCH
STATE RESERVE REQUIREMENTS
(Continued)
Reserve Assets Eligible
to Meet Requirements
C a lif o r n ia 1
C o lo r a d o 1
Connecticut
C urrent Reserve
R equirem ent Ratios
V a u lt
C a sh
T D em -U Sd -SLd-Rd
-C IP C -D u e From 5
FR
X
X2
T S-U St-SL t
State
Dem and
B a la n ce s
D ue From
Banks
5%
D e p osits Subject to
Reserve Requirem ents
T D ep -U Sd -SL d
-U St-SLt
T D e m -D u e From
-C IP C
1 2 % first $ 5 m illion, p lu s
m
1 2 . 5 % over $ 5 m illion
G e o r g ia 1
)
^
7 % first $ 1 0 0 m illion p lus /
9 % ove r $ 1 0 0 m illion
in
\
T D em -U Sd -SLd
<
° n V -!° *th }
{
X"
(
}
{
“ P ' ° ° n e ' SiX, h7
}{
a t least 5 0 % 2 8
3%
T D e p -U Sd -SL d
-U St-SLt
up to 5 0 %
20 %
15%
5%
T D em -U Sd -SLd-Rd
T S-U St-SL t
Id a h o
( u p to 8 0 % ) 6
3%
T S-U St-SL t-R t
H a w a ii
O th e r
X6
(
\
T S-U StSL t
F lo rid a 1
( at least 2 0 % )
15%
T
D e la w a re 1
Securities
( u p to 5 0 % ) 1
X 13
C D s*
12%
5%
T Dem
(a t le ast 5 0 % ) a
15%
T D em -U Sd -SLd
5%
TS
Illin o is
( N o statutory reserve req uirem ents)
In d ia n a
T Dem
10%
3%
TS
X
C IP C
X
C IP C
L o u isia n a
X2
3%
X2
T Dem-USd-SLd
FR
X
FR
X
T Dem
7%
( a t le a st 7 5 % ) 1
TS
K entucky
7%
TS-U St-Slt
K a n sa s1
T Dem
TS
Io w a
3%
T D e m -C IP C
13% $ 100-
I
TS
M a in e
T D em -TT l
3%
4%
NOW
8%
T D e m -U Sd -S ld
T S -U S t -S lt
M ic h ig a n
I
up to 5 0 % J
2%
T
M a ssa c h u se tts
at least
50%
10%
S
M a r y la n d
X
/ 7 . 5 % first $ 2 m illion, plu s \
1 1 0 % $ 2 - $ 1 0 m illion , p lus I
/ 1 2 % $ 1 0 - $ 1 0 0 m illion, p lu s \
$ 4 0 0 m illion , plu s
1 4 % ove r $ 4 0 0 m illion
( u p to 2 5 % )
T Dem p lu s time
d e p o sits subject to
w ith d ra w a l w ithin
30 days
T Dem
TS
Page 24
15%
3%
(a t le ast tw o -th ird s)
(u p to o n e -th ird )
X 21
Bosto n - 2 0 %
O th e rs - 1 5 %
11%
6%
X
X2
( a t least 1 0 % ) 2
(u p to 9 0 % )
C D s*
1978
FEDERAL RESERVE
B A N K O F ST. LO UIS
MARCH
1978
STATE RESERVE REQUIREMENTS (Continued)
Reserve Assets Eligible
to Meet Requirements
State
M in n e s o ta
C urrent Reserve
R equirem ent Ratios
D e p osits Subject to
Reserve R equirem ents
V a u lt
C a sh
The fo llo w in g p erce nta ge s
are not m a rg in a l re q u ire
ments but a p p ly to total
d e m a n d d e p o sits:
7 % $ 0 - $ 2 m illion
9 . 5 % $ 2 - $ 1 0 m illion
1 1 . 7 5 % $ 1 0 - $ 1 0 0 m illion
1 2 . 7 5 % $ 1 0 0 - $ 4 0 0 m illion
1 6 . 2 5 % o v e r $ 4 0 0 m illion
T Dem
Securities
at least 7 0 % ’
up to 3 0 %
at least 7 0 %
O th e r
up to 3 0 %
3%
3 % m atu ring in 3 0 - 1 7 9 d a y s ^
2 . 5 % m atu rin g in 1 8 0 d a y s
v
to 4 ye a rs
V 2 % m atu rin g in 4 o r m ore
^
y e a rs
(
M o n tan a
FR
FR
T Dem
FR
TS
M is s o u r i
T Dem
TS
M is s is s ip p i
3%
T Dem
!
at least 5 0 % ,
in clu d in g C IR C 2
up to 5 0 % 2
7 . 5 % first 2 m illion, plus
1 0 % ove r $ 2 m illion
3%
X
X2
D ue to B a n k s 24
10%
X
X2
T Dem
15%
5%
TS
N e b r a sk a
TS
at least 5 0 %
N e w H a m p sh ire
at least 6 0 %
T D em -U Sd -SLd
FR
FR
up to 4 0 %
X
T S-U St-SL t
N evada1
up to 5 0 %
X
12%
T Dem
TS
N e w M e x ic o
T Dem
FR
X
C IP C
TS
N e w Je rse y
5%
FR
X
C IP C
12%
TS
N e w Y o rk
T D e m -C IP C
-D ue From 5
T D em -U Sd -SLd
in c lu d in g local C IP C 2
FR
8 % first $ 2 m illion, p lu s N
1 0 % $ 2 - $ 1 0 m illion, plu s i
1 2 % $1 0 - $ l 0 0 m illion , p lus
1 3 % $100$ 4 0 0 m illion, plu s
1 5 % ove r $ 4 0 0 m illion
,
C IP C
3%
C IP C
U
S
u
T -U St-SLt
f
I
N o rth D a k o ta
M a t u r in g w ith in 1 8 0 d a y s :
3 % first $ 5 m illion
6 % ove r $ 5 m illion
M a t u r in g in 1 8 0
d a y s o r more:
3%
'\
T Dem
TS
up to 5 0 %
S a m e as FR except o n e p e r
ce n tage p o in t low e r o n all
d e p o sit size cate g orie s
TS
N o rth C a r o lin a 1
at le a st 5 0 % ,
4%
T Dem
C IP C
X2
2%
X2
Page 25
FEDERAL RESERVE
MARCH
B A N K O F ST. LO U IS
STATE RESERVE REQUIREMENTS
1978
(Continued)
Reserve Assets Eligible
to Meet Requirements
State
O h io
C urrent Reserve
Requirem ent Ratios
D e p o sits Subject to
Reserve R equirem ents
V a u lt
C a sh
D em and
B a la n ce s
D ue From
B a n ks
Securities
O th e r
7%
T Dem
3%
S
me d e p o sits of $ 1 0 0 , 0 0 0
a n d ove r m atu rin g in less
than 6 m onths:
3 % first $ 5 m illion
6 % o v e r $ 5 m illion
O th e r time d e p o sits: 3 %
T
P
I
up to 6 0 % *
at least 4 0 % 28
T Dem
FR
C IP C
TS
O k la h o m a
FR
C IP C
P e n n s y lv a n ia
12%
C IP C
T S-U S t
O re go n
4%
C IP C
T Dem
12%
T D em -U Sd
S
3%
T
3 % first $ 5 m illion, plus
5 % ove r $ 5 m illion
up to 5 0 % c
at least 5 0 %
R h o d e Is la n d 1
15%
T D em -U Sd
( n o reserve requirem ents on time a n d s a v in g s d e p o sits)
So u th C a ro lin a
T Dem
7%
X
C IP C 3:
TS
3%
X
C IP C 3
So u th D a k o t a 1
T en ne ssee
T D e p -U S d -S ld
-U St-SLt
T Dem
TS
T exa s
T Dem
TS
1 7 .5 %
10%
3%
(u p to 6 0 % ) 2
(u p to 6 0 % ) '
(a t least 4 0 % ) 2
Local
C IP C
X
X
15%
5%
C IP C
Tim e D e p o sits
a n d C IP C 33
V e rm o nt1
T Dem
FR
X
X
TS
U tah
FR
X
X
27%
X
X
6 .5 %
X
X
T D em -U Sd -SLd
T S-U St-SL t
V irg in ia
W a s h in g t o n
T Dem -Rd
TS-Rt
T Dem
10%
3%
X
(a t least 7 5 % )
C IP C
X 11
11 15
(u p to 2 5 % ]
7 % first $ 2 m illion , plus
9 . 5 % $ 2 - $ 1 0 m illion, p lus
1 1 .7 5 % $10$1 0 0 m illion , plus
1 2 . 7 5 % $ 1 0 0 - $ 4 0 0 m illion,
p lu s 1 5 % ove r $ 4 0 0 m illion
C IP C
M a t u r in g in 3 0 - 1 7 9 d a y s :
first $ 5 m illion - 3 %
ove r $ 5 m illion - 6 %
M a t u r in g in ove r 4 ye a rs:
TS
C IP C
1%
O th e r m aturities: 3 %
W is c o n s in
T Dem
7%
at least
C IP C
TS
W e st V irg in ia
3%
20 %
C IP C
T Dem
Reserve B a n k s 3
1
2 0%
O th e r
12%
Page 26
at le ast tw o-third s
i!
up to o n e -th ird
FEDERAL RESERVE
B A N K O F ST. LO U IS
MARCH
1978
STATE RESERVE REQUIREMENTS (Continued)
Reserve Assets Eligible
to Meet Requirements
State
W isc o n sin
D e p o sits Subject to
R eserve R equirem ents
C urrent Reserve
Requirem ent Ratios
Securities
O th e r
TS
R eserve B a n k s 36
20%
O th e r
12%
T D em -U Sd -SLd
at least five-tw elfths
20%
T S -U S t -S lt
W y o m in g 1
V a u lt
C a sh
Dem and
B a la n ce s
D u e From
Banks
10%
at least 5 0 % 2 15
| up to s e ven -tw elfths3
!i
up to 5 0 % 38
1E x e m p t io n a p p lie s o n ly t o p u b lic d e p o s its w h ic h a r e se cu re d b y p le d g e d se cu ritie s.
2D em a n d b a la n ces a t a p p r o v e d d e p o s it o r y b a n k s.
3U n p le d g e d U .S . G o v e rn m e n t se c u r itie s m a t u r in g w ith in s ix m o n th s.
4C ash item s in th e p r o c e s s o f co lle c tio n o n in su re d loca l b a n k s , w h e r e loca l b a n k s a r e th o s e d o m icile d in th e sa m e o r im m e d ia te ly a d jo in in g
m u n ic ip a litie s .
5D em a n d b a la n ce s a t b a n k s o th e r th a n a p p r o v e d d e p o s it o r y b a n k s.
6U n p le d g e d n e g o tia b le d ir e c t U .S . G o v e rn m e n t o b lig a tio n s .
7U .S . G o v e rn m e n t b on d s.
8U n s e cu re d tr u s t fu n d s held as d e m a n d d e p o s its d u e f r o m o th e r b a n k s m a y n o t b e c o u n te d a s p a r t o f reserv es.
*U n p le d g e d d eb t o b lig a tio n s o f th e S ta te , its p o litic a l s u b d iv is io n s, o r th e U n ite d S tates.
10I f a m o u n t o f d e p o s it is in e x ce ss o f 10 p e r c e n t o f d e p o s it in g b a n k ’s c a p ita l a n d su rp lu s, s ta te m u s t a p p r o v e d e p o s ito r y .
1IN e t o f r e c ip r o c a l d e p o s its .
12U n p le d g e d U .S . G o v e rn m e n t o r a g e n c y o b lig a tio n s m a t u r in g w ith in o n e y e a r, o r c e r tific a te s o f d e p o s it m a t u r in g w ith in o n e y e a r . T h e m a x i
m u m a m o u n t d e p o site d w ith a n y o n e b a n k shall n o t e x c e e d $100,000 o r 10 p e r c e n t o f th e d e p o s it in g b a n k ’ s re s e rv e r e q u ire m e n t, w h ic h e v e r
is g r e a te r .
13U n p le d g e d U .S . G o v e rn m e n t o r a g e n c y o b lig a tio n s .
14U n p le d g e d c e r tific a te s o f d e p o s it n o t u sed t o m e e t r e s e r v e re q u ire m e n ts a g a in s t d e m a n d d e p o sits.
15In clu d es C IP C .
16U p to 25 p e r c e n t o f re s e rv e re q u ir e m e n ts a g a in s t d e m a n d d e p o s its m a y b e m e t w it h U .S . G o v e rn m e n t o r a g e n c y o b lig a tio n s m a t u r in g w ith in
o n e y e a r o r c e r tific a te s o f d e p o s it o f a n y K e n tu c k y ba n k .
17C ertifica tes o f d e p o s it o f a n y K e n tu ck y ba n k .
18U p t o o n e -h a lf o f req u ire d reserves m a y b e m e t w ith u n p le d g e d d ir e c t U .S . G o v e rn m e n t o b lig a tio n s m a t u r in g w ith in o n e y e a r o r o b lig a tio n s
o f the S tate o f L o u is ia n a m a t u r in g w ith in t w o y e a rs , e x c e p t th a t s ta te o b lig a tio n s m a y a c c o u n t f o r n o m o r e th a n o n e -fo u r t h o f to ta l re
qu ired reserves.
19U n p le d g e d U .S . G o v e rn m e n t o r a g e n c y o b lig a tio n s m a t u r in g w ith in o n e y e a r.
20D e b t o b lig a tio n s o f th e S ta te , its p o litic a l su b d iv isio n s, o r th e U n ite d S tates.
21D e b t o b lig a tio n s o f th e S tate o r th e U n ite d S tates.
22U p t o 30 p e r c e n t o f req u ire d re se rv e s m a y b e in vested in d ir e c t o b lig a t io n s o f th e U .S . T r e a s u r y o r o th e r o b lig a t io n s fu lly g u a ra n te e d by the
U .S . G o v e rn m e n t w h ic h m a tu r e w ith in o n e y e a r ; a p o r t io n o f th e 30 p e r c e n t m a x im u m , n o t t o e x c e e d o n e -h a lf, m a y be m e t w ith n e g o tia b le
c e r tific a te s o f d e p o s it issued b y M is s is s ip p i b a n k s w h ic h m a tu r e w ith in o n e y e a r.
23U p t o 50 p e r c e n t o f req u ire d reserves m a y b e in vested in u n p le d g e d U .S . G o v e rn m e n t o b lig a tio n s m a t u r in g w ith in fiv e y e a r s a n d u n p le d g e d
F ed era l fu n d s sold t o a p p r o v e d d e p o s ito r ie s .
24N o n m e m b e r b a n k s d esig n a te d as re s e rv e d e p o s ito r ie s m u st m a in ta in , in a d d itio n t o the rese rv e re q u ir e m e n ts o n all dem a n d d e p o sits, reserves
o f 10 p e r c e n t o n d em a n d d e p o s its d u e t o o t h e r ban k s.
25U p t o o n e -h a lf o f req u ire d reserves m a n y b e m e t w ith u n p le d g e d U .S . G o v e rn m e n t s e cu ritie s , a t m a r k e t v alu e, o r o b lig a tio n s o f th e C o m m o d
ity C red it C o r p o r a t io n , a t fa c e valu e.
26U .S . G o v e rn m e n t o b lig a tio n s m a t u r in g w ith in t w o y e a rs.
27D ir e c t u n p le d g e d U .S . G o v e rn m e n t o b lig a tio n s m a t u r in g w ith in 100 d ays.
280 f req u ired reserves o n tim e a n d s a v in g s d e p o sits, 5 p e r c e n t m a y c o n s is t o f u n a ss ig n e d v alu es o f life in s u r a n c e p o lic ie s o w n e d b y th e ba n k ,
c o v e r in g th e lives o f d ir e cto r s , officers, o r e m p lo y e e s o f th e b a n k , u n d e r w h ic h th e b a n k is s o le b e n e ficia r y o f th e c a s h s u r r e n d e r v a lu e o f the
p o lic y .
29D e b t o b lig a tio n s issu ed, in su red, o r g u a r a n te e d b y th e U n ite d S tates.
30D eb t o b lig a tio n s o f th e C o m m o n w e a lth , its p o litic a l su b d iv isio n s, the U n ite d S tates, o r o th e r m a rk e ta b le o b lig a tio n s a p p r o v e d b y th e state
b a n k in g a u th orities.
31U .S . G o v e rn m e n t o r a g e n c y o b lig a tio n s m a t u r in g n o t m o r e th a n 91 d ays f r o m c o m p u ta tio n o f reserves.
32C ash ite m s c o llectib le w ith in 10 d a y s.
33T h e reserv e r e q u ir e m e n t o n tim e a n d s a v in g s d e p o s its m a y b e m e t w it h tim e d e p o s its a t a p p r o v e d d e p o s ito r ie s .
340 f tota l req u ired reserve s, 40 p e r c e n t m u s t b e in th e fo r m o f v a u lt c a s h , d e m a n d b a la n ce s d u e f r o m o th e r c o m m e r c ia l ban k s, a n d d ir e c t U .S .
G o v e rn m e n t o b lig a tio n s m a t u r in g w ith in o n e y e a r . T h e r e m a in in g 60 p e r c e n t m a y b e held in U .S . G o v e rn m e n t o r a g e n c y o b lig a tio n s o f an y
m a tu r ity , a n d o n e -th ir d o f th is 60 p e r c e n t m a y b e o b lig a tio n s o f th e S ta te o f V e r m o n t .
35U n p le d g e d U .S . T r e a s u r y o b lig a tio n s m a t u r in g w ith in o n e y e a r.
36A p p r o v e d b y s ta te b a n k in g a u th o r itie s as r e s e r v e ba n k .
37U .S . G o v e rn m e n t se c u r itie s a n d g e n e r a l o b lig a t io n b o n d s a n d n otes o f th e S ta te o f W is c o n s in m a t u r in g w ith in 18 m o n th s.
3SU n p le d g e d U .S . T r e a s u r y bills.
KEY TO CODING
FR
T D ep
T D em
T
S
U Sd
U St
SLd
S am e a s re s e rv e re q u ir e m e n ts o f F e d e ra l R e se rv e
T o ta l d e p o sits
T o ta l d em a n d d e p o s its
T im e d e p o s its
S a v in g s d e p o s its
U .S . G o v e rn m e n t d e m a n d d e p o s its
U .S . G o v e rn m e n t tim e d e p o sits
S ta te a n d loca l g o v e r n m e n t d e m a n d d e p o sits
SLt
D ue F rom
S tate a n d lo ca l g o v e r n m e n t tim e d e p o s its
D e m a n d d e p o s its d u e f r o m d o m e s tic c o m m e r c ia l ba n k s
Rd
Rt
C IP C
TTL
R e c ip r o c a l d e m a n d d e p o s its
R e c ip r o c a l tim e d e p o s its
C ash item s in p r o c e s s o f co lle c tio n
T r e a s u r y ta x a n d loan a c c o u n ts
NOW
CD
N e g o tia b le O rd e rs o f W ith d r a w a l
C e rtifica te o f D e p o s it
Page 27
FEDERAL RESERVE
B A N K O F ST. L O U IS
balances are only collected reserves since members
receive credit to their reserve accounts for checks
deposited with their Reserve Ranks on a time sched
ule which approximates the time required for collec
tion o f the checks.
M ost m em ber banks with total deposits up to
about $50 million hold dem and balances at corre
spondents almost as large as the demand balances
held b y nonm em ber banks o f similar size.6 An im
portant explanation o f this behavior b y member
banks is that most o f them in that size range make
little use o f Reserve Rank services, using those o f
correspondent banks instead.7 As a result, member
banks tend to h old substantially higher ratios o f cash
to total deposits than nonmembers o f comparable
size.
Monitoring and Enforcing Reserve
Requirements
State reserve requirements have little relevance for
banks unless states establish methods o f monitoring
the reserve positions o f nonmember banks and fo rc
ing them to keep their reserves up to required levels.
In the survey, state bank supervisors were asked to
describe their methods o f monitoring and enforcing
reserve requirements. Their responses are presented
in Table III. This information does not indicate
whether state reserve requirements actually influence
behavior o f nonmember banks, but is presented to
fill a void in information available on state reserve
requirements.
One aspect o f reserve requirements presented in
Colum n (1 ) is reserve settlement periods, that is, the
periods over w hich reserves and deposit liabilities are
averaged in determining whether banks are meeting
their reserve requirements. H alf o f the states have
either tw o week or semimonthly reserve settlement
periods, while 15 states have w eekly reserve settle
ment periods. Eight supervisors indicated that either
reserves o f nonmember banks in their states are not
averaged or no reserve settlement period is specified.
In such states examiners determine a bank’s reserve
assets and required reserves as o f the examination
date. If a bank’s reserves are not adequate as o f that
day, some states then average reserves held and re
quired reserves over longer periods o f time. Other
6Knight, “ Reserve Requirements: Part 1,” p. 11.
7R. Alton Gilbert, “ Utilization of Federal Reserve Bank Serv
ices by Member Banks: Implications for the Costs and Benefits
of Membership,” this R eview (August 1977), pp. 2-15.
Page 28
MARCH
1978
states give the bank a specified period o f time to bring
their reserves up to required levels.
M onitoring procedures are described in Column
(2 ) o f Table III. In 11 states nonmember banks are
required to file reports with their supervisors on daily
reserves and deposit liabilities at the end o f each
reserve settlement period. In 28 other states banks
are required to keep such records for inspection by
state bank examiners, but do not send reports on
reserve positions to their supervisors. Eight states
require banks to send notice o f reserve deficiencies
to their supervisors within a fe w days after reserve
settlement periods in which such deficiencies occur.
States generally im pose fines on banks which do not
send such notices.
One o f the ways states enforce reserve require
ments is to impose dollar penalties for reserve defi
ciencies; 19 states have dollar penalties for reserve
deficiencies. Information on those penalties is pre
sented in Colum n (3 ) o f Table III. Some supervisors
indicated that in their states dollar penalties are sel
dom imposed, either because their banks seldom have
reserve deficiencies or because penalties are often
waived. H owever, other supervisors indicated that
penalties are imposed often in their states, giving
specific frequencies and total dollar amounts.
States that do not have dollar penalties for reserve
deficiencies generally have other enforcem ent powers.
The most com m on non-dollar penalties are prohibi
tions on making loans or paying dividends while
banks have reserve deficiencies. Also, in 14 states
bank supervisors have authority to declare banks
with reserve deficiencies unsound and to close them.
The supervisors indicated that these non-dollar pen
alties are seldom imposed.
SUMMARY
The reasons m ost com m only given for declining
Federal Reserve membership deal with the level and
form o f reserve requirements on Federal Reserve
m em ber banks relative to those im posed b y states on
nonm em ber banks. U pon examination, how ever, com
parisons o f reserve requirements o f m em ber and non
mem ber banks are difficult. Deposits subject to reserve
requirements differ betw een the Federal Reserve and
state banking agencies, and among states. The periods
over which reserve accounts must be settled also vary
among states, from weekly periods (as with the Fed
eral Reserve) to monthly periods (as in one state).
FEDERAL RESERVE
B A N K O F ST. LO UIS
MARCH
1978
T a b le III
EN FO RCEM ENT O F STATE RESERVE REQUIREMENTS
in
State
Reserve Settlem ent
______ Period______
( 2)
Periodic Reports
(3 )
P e n a lty fo r Deficiencies
(4 )
C om m ents
Penalties on reserve deficiencies
becam e effective in D ecem ber
1 9 7 5 . From then to A p ril 1 9 7 7 ,
$ 6 , 0 0 0 in p e n a ltie s w ere co l
lected. The h ig h d eficiency rate
w a s d u e to elim in a tio n o f local
cle a rin g s a s reserve a sse ts in
D ecem ber 1 9 7 5 .
A la b a m a
W e e k ly
None
F ed eral Reserve d iscou n t rate
p lu s 2 percent per a n n u m on
each $ 1 , 0 0 0 o f a v e r a g e d e
ficiency
A la s k a
Reserves not a v e ra g e d
None
N o d o lla r p e n a lty .5 P o ssib le
p e n a lty fo r fa ilu re to keep rec
ord s o f reserve p o sitio n s —
$ 5 ,0 0 0 .
A riz o n a
B iw e ek ly
Biw e e k ly
N o d o lla r p e n a lty
A rk a n sa s
15 days
None1
8 percent p er a n nu m
C a lifo rn ia
B iw e e k ly
B iw e ekly
P en a lty rate r a n g e s from 6 p e r
cent to 12 percent per a n n u m
d e p e n d in g u po n size of d e
ficiency relative to total d e
posits.7
C o lo ra d o
W e e k ly
None
N o d o lla r p e n a lty
Connecticut
Sem im o n th ly
None3
N o d o lla r p e n a lty 4 5 7
D e la w a re
S e m im o n th ly
Sem im o n th ly
N o d o lla r p e n a lt y 7
F lo rid a
3 0 days
None
N o d o lla r p e n a lty 5 7
R eserve asse ts are co m p ared to
req u ire d reserves a s of the e x
a m in a tio n date. If reserves are
deficient that d a y , a 3 0 d a y
a v e r a g e is calculated.
G e o r g ia
B iw e e k ly
None1 *
$ 5 0 p er d a y fo r fa ilu re to n o
tify state of deficiency4 5 7
V io la tio n s o f reserve
m ents occur rarely.
H a w a ii
W e e k ly
None1
N o d o lla r p e n a lty 4 7
Id a h o
B iw e e k ly
Biw e e k ly
N o d o lla r p e n a lty 4 5
In d ia n a
B iw e e k ly
None1
5 days
None
$ 1 0 0 per d a y of reserve
deficiencies
K a n sa s
N one
None1
B iw e e k ly
None1
N o d o lla r p en a lty
L o u isia n a
S e m im o n th ly
None1 :
If reported d eficiency in reserves
is not restored w ith in p erio d
sa tisfa c to ry to state, o r if state
b a n k in g a u th orities d isco v e r u n
reported deficiency, p e n a lty of
6 percent p er a n n u m m a y be
im posed.
M a in e
W e e k ly
W e e k ly
A b a n k m a y not m ake a d d i
tion al lo a n s w h ile its reserves
a re
deficient.
This
p e n a lty
w o u ld be im p ose d o n ly after
tw o w a rn in g s.
N o d o lla r p e n a lty
K entucky
re q u ire
N o d o lla r p e n a lty4 5
Io w a
N u m e ro u s reserve deficiencies
w ere discove re d d u rin g e x a m i
n a tio n s p rio r to 8 percent p e n
alty, b ut such occurrences h a ve
d ecre ase d since in stitutin g the
p enalty.
P en a lty at v a ria b le rate not to
exceed 1 0 percent p er a n n u m ;
im p ose d
w h en
deficiency is
gre a te r than 2 percent o f re
q u ire d reserves4
C o m p lia n ce w ith reserve re
q uirem ents is checked a s of
e x a m in a tio n period. Reserve d e
ficiencies a re in freq u en t a n d
p e n a ltie s a re a p p lie d o n ly as
a last resort.
Reserve deficiencies d o not oc
cur frequently.
Page 29
FEDERAL RESERVE
B A N K O F ST. LO U IS
MARCH
1978
EN FO RCEM ENT O F STATE RESERVE REQUIREMENTS (Continued)
(l)
State
R eserve Settlem ent
Perio d ______
(2)
P eriodic Reports
(3 )
P en a lty for Deficiencies
(4)
C om m e nts
M a r y la n d
Reserves not a v e ra g e d
None.
Reserve
re
q uirem ents are c a l
culated on a d a y -to d a y b a sis at the time
of ex a m in a tio n .
N o d o lla r p enalty. C o n tin u e d
v io la tio n s can le a d to rem oval
of directors a n d officers o f a
bank.
M a ssa c h u se tts
W e e k ly
W e e k ly
N o d o lla r p e n a lty a s se ss e d for
reserve deficiency. P en a lty for
not
re p o rtin g
deficiency
is
$ 1 , 0 0 0 p er w e ek o r im p riso n
ment for not m ore tha n on e
year.
M ic h ig a n
B iw e e k ly
B iw e e k ly
No
p e n a lty
R ep eated
reserve deficiencies
could b rin g a b o u t a ce ase a n d
desist o rd e r from the state. A
p e n a lty o f $ 5 0 is a s se ss e d fo r
not filin g reports on reserve
p osition s.
M in n e s o ta
Biw e e k ly
None1
For each b iw e e k ly p e rio d o f
reserve deficiency, p e n a lty of
$ 5 0 o r 12 percent p er a nnum
o n reserve deficiency, w h ic h
ever is gre a te r
Pen altie s fo r reserve defici
encies a s se ss e d on 5 4 out of
5 4 7 n on m e m b e r b a n k s in 1 9 7 6
M is s is s ip p i
B iw e e k ly
None1
$ 5 0 fo r each d a y a b a n k 's
reserves a re deficient, unless
covered b y excess reserves in
the p re v io u s o r fo llo w in g b i
w e e k ly p e rio d
In recent h istory all reserve d e
ficiencies h a v e been covered b y
excess reserves in the p re viou s
or fo llo w in g b iw e e k ly p eriods.
M is s o u r i
W e e k ly
None1
N o d o lla r p e n a lty 4 6
M o n ta n a
W e e k ly
None1
No
N e b rask a
W e e k ly
None1
8 percent per a n n u m o n re
serve deficiencies p lu s $ 5 per
d a y of reserve deficiencies4 5 7
Nevada
15 d a y s
None1
N o d o lla r p e n a lty
N e w H a m p sh ire
Reserves not a v e ra g e d
N one
N o d o lla r p e n a lty 4 5
N e w Je rse y
S e m im o n th ly
None
N o d o lla r p e n a lty 6
N e w M e x ic o
Reserves not a v e ra g e d
N o n e .2 Reserves
a re checked a s of
e x a m in a tio n date.
If reserve deficiency is d isc o v
ered a s o f e x a m in a tio n date,
the p e n a lty is $ 1 0 0 p e r d a y
w h ile deficiency continues.
N e w Y o rk
W e e k ly , with la g g e d re
serve requirem ents a n d
carry - o v e r
p ro v isio n
id entical to that of the
Fed eral Reserve
W e e k ly
Penalties r a n g e from 6 p er
cent to 12 percent per a n nu m ,
d e p e n d in g u po n size o f d efi
ciency rela tive to d e p o sit size of
b a nk.
Penalties are not m a n d a to ry,
but im p o se d o n ly if a b a n k is
deficient for two consecutive
weeks.
N o rth C a ro lin a
B iw e e k ly
None
N o d o lla r p e n a lty 4 5
Penalties a re not im p o se d with
sign ific a n t freq uency.
N o rth D a k o ta
W e e k ly
None1
If a b a n k is deficient in re
serves a s o f e x a m in a tio n date,
it h a s 3 0 d a y s to rectify, or
the state m a y im p o se a p e n
a lty o f $ 1 0 0 o r 7 percent per
a n n u m on deficiency, w h ic h
ever is greater.
Page 30
d o lla r
d o lla r
p e n a lty 4
E x a m in a tio n s d isc lo se fe w re
serve deficiencies, a n d most of
those are o f o n e w e ek d uration .
Excessive o r co ntin ue d
d efi
ciencies discove re d d u r in g e x
a m in a tio n s are reported to b a n k
m a n a g e m e n t a n d B o a rd of D i
rectors. B a n k s h a ve 6 0 d a y s
after e x a m in a tio n to rectify re
serve deficiencies.
V io la tio n s of reserve
ments are infrequent.
re q u ire
FEDERAL RESERVE
B A N K O F ST. LO U IS
MARCH
1978
EN FO RCEM ENT O F STATE RESERVE REQUIREMENTS (Continued)
State
( 1)
Reserve Settlem ent
Period
(3 )
P en a lty for Deficiencies
{2)
Periodic Reports
(4 )
Com m ents
O h io
B iw e e k ly
None2
N o d o lla r p e n a lty 6 7
O k la h o m a
S e m im o n th ly
S e m im o n th ly
A fter tw o consecutive p e rio d s
of deficiency, p e n a lty at rate
o f 2 perce ntage p oin ts per a n
num a b o v e the Fed eral Reserve
d iscou n t rate is a sse sse d .
O re go n
Reserves not a v e ra g e d
None1
If b a n k h a s a reserve d efi
cien cy on a n y d a y , it h a s three
d a y s to elim ina te the deficiency,
o r a p e n a lty is a sse sse d . The
p e n a lty rate is 2 p erce nta ge
p oin ts per a n n u m a b o v e the
Fed eral Reserve d iscou n t rate.
P e n n sy lv a n ia
B iw e e k ly
None
N o p e n a lty fo r reserve d efi
ciency, but a $ 5 0 fine a sse sse d
per d a y for not re p o rtin g a
d eficiency w ith in three d a y s
In 1 9 7 6 , 13 p e n a ltie s w ere
a s se ss e d on 7 b a n k s. Penalties
m a y be w a ive d , but this is
ra re ly d o n e , except fo r pen altie s
under $25.
R ho d e Isla n d
W e e k ly
S e m ia n n u a lly
N o d o lla r p e n a lty 4 5 7
So u th C a ro lin a
R eserves not a v e ra g e d
None1
N o d o lla r p e n a lty
Sou th D a k o ta
W e e k ly
None1
$ 5 0 p er
ficiency
Tenne ssee
W e e k ly
None1
N o d o lla r p e n a lty 4 5 7
T exas
W e e k ly
None1
Three gra ce p e rio d s per year,
fine o f $ 5 0 for fourth w e ek ly
p erio d o f reserve deficiency,
w ith fines in c re a sin g
up to
$ 5 0 0 p er p e rio d fo r 1 0 o r m ore
p e rio d s o f reserve deficiency
U tah
B iw e e k ly
N one
N o d o lla r p e n a lty 4 7
N o record of pen altie s for re
serve deficiencies ever h a v in g
b ee n im p osed
Verm ont
R eserves not a v e ra g e d
None3
N o d o lla r p e n a lty
O n l y o c c a s io n a lly are b a n k s
fo u n d to h a ve reserve defi-
V irg in ia
B iw e e k ly
None1
N o d o lla r p e n a lty
V io la tio n s o f reserve re q u ire
m ents could be p u n is h a b le a s
a m isd e m e anor. State b a n k in g
a u th o rity is not a w a re of the
p e n a lty ever h a v in g b ee n im
posed.
W a s h in g t o n
Sem im o n th ly
P e n a lty is $ 1 0 0 p er reserve
settlem ent p e rio d of deficiency
o r prim e rate plu s 2 p erce nt
a g e p oints times a v e r a g e d e
ficiency, w h ich e ve r is sm aller.
In 1 9 7 6 , 11 fines w ere im posed.
W e st V irg in ia
B iw e e k ly
B iw e e k ly
P en a lty rate is 2 p erce nta ge
p oin ts p er a n n u m a b o v e F e d
eral Reserve d isco u n t rate.4
In 1 9 7 5 , 19 p en a ltie s im p osed
fo r
reserve
deficiencies,
in
1 9 7 6 , 3 8 p e n a ltie s im p ose d
W is c o n s in
Biw e e k ly
None1
If b a n k d o e s not m ake up d e
ficiency w ithin 3 0 d a y s after
notice from state, a fine of
$ 1 0 0 fo r each b iw e e k ly p e rio d
o f reserve d eficiency m a y be
im p osed .4 7
V io la tio n s occur in freq u en tly,
a n d n o p e n a ltie s h a ve been
im p ose d d u r in g the p a st 15
ye ars.
W y o m in g
B iw e e k ly
B iw e ek ly
N o d o lla r p e n a lty 4 5 7
day
of
V e ry few reserve deficiencies
fo u n d b y ex a m in ers
reserve
de
V e ry fe w p en a ltie s each y e a r
1R e c o r d s o f re s e rv e p o s it io n s m ust be k e p t b y b a n k s f o r in s p e c tio n b y e x a m in e rs .
2B a n k s m u st r e p o r t re s e rv e d e fic ie n c ie s t o s ta te s h o r tly a f t e r d e fic ie n c ie s o c c u r .
3R e serv es a r e ch eck ed a t tim e o f e x a m in a t io n . S p o t ch e ck s a r e m a d e f o r p e r io d s b e tw e e n e x a m in a tio n s .
4M a k in g lo a n s is r e s tric te d d u r in g p e r io d s o f re s e rv e d e ficie n cy .
5D e c la r in g d iv id e n d s is r e s tric te d d u r in g p e r io d s o f r e s e r v e d e ficie n cy .
6B a n k s w ith re se rv e d e ficie n cie s m a y b e fo r c e d t o c o m p ly w ith re s e rv e r e q u ire m e n ts th r o u g h cease a n d d e s is t o rd e rs .
7C on tin u ed fa ilu r e t o c o m p ly w ith r e s e r v e re q u ir e m e n ts c a n lead t o liq u id a tio n o f th e h a n k b y th e state.
Page 31
M ore importantly, the form in w hich reserves may
b e held differs crucially betw een requirements o f the
Federal Reserve and those o f the states. W hile m em
ber banks must hold their reserves in cash or as
deposits in their Federal Reserve Banks, nonmember
banks in a majority o f states may invest their re
serves in interest-earning assets. Nonm ember banks
in seven states have no cash reserve requirements; in
six o f those states they m ay m eet all o f their reserve
requirements with interest-bearing assets, and in Illi
nois, nonmember banks have no statutory reserve
requirements.
It is also important to note that enforcem ent o f re
serve requirements b y most states is not as strict as
that b y the Federal Reserve. Thirty-seven states do
not require nonmem ber banks to file frequent reports
detailing reserve positions. M oreover, 30 states have
no dollar penalties assessed on banks with reserve
deficiencies.
@FedFRASER