arfr_1988

€/Innual'Report

X^> 1988

Board of Governors of the Federal Reserve System

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Letter ofTransmittal

BOARD OF GOVERNORS OF THEFEDERAL RESERVE SYSTEMWashington, D.C., May 15, 1989

THE SPEAKER OFTHE HOUSE OF REPRESENTATIVES

Pursuant to the requirements of section 10 of the Federal Reserve Act, I am pleasedto submit the Seventy-Fifth Annual Report of the Board of Governors of the FederalReserve System.

This report covers operations of the Board during calendar year 1988.

Sincerely,

Alan Greenspan, Chairman


Contents

Part 1 Monetary Policy andthe U.S. Economy in 1988

3 INTRODUCTION

5 THE ECONOMY IN 19885 The household sector7 The business sector8 The government sector9 The labor markets

10 Price developments

12 MONETARY POLICY AND FINANCIAL MARKETS IN 198812 Monetary policy in 198815 Monetary aggregates16 Credit market developments

19 INTERNATIONAL DEVELOPMENTS20 Foreign economies22 U.S. international transactions24 Foreign currency operations

25 MONETARY POLICY REPORTS TO THE CONGRESS25 Report on February 23, 198841 Report on July 13,1988


Part 2 Recordsy Operations, and Organization

63 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS63 Regulation C (Home Mortgage Disclosure)63 Regulation D (Reserve Requirements of Depository Institutions)64 Regulation K (International Banking Operations)65 Regulation T (Credit by Brokers and Dealers)65 Regulation Y (Bank Holding Companies and Change in Bank Control)65 Regulation CC (Availability of Funds and Collection of Checks)67 Policy statements68 1988 discount rates

73 RECORD OF POLICY ACTIONSOF THE FEDERAL OPEN MARKET COMMITTEE

73 Authorization for domestic open market operations75 Domestic policy directive76 Authorization for foreign currency operations78 Foreign currency directive78 Meeting held on February 9-10, 198889 Meeting held on March 29, 198897 Meeting held on May 17, 1988

104 Meeting held on June 29-30, 1988114 Meeting held on August 16, 1988121 Meeting held on September 20, 1988126 Meeting held on November 1, 1988134 Meeting held on December 13-14, 1988

143 CONSUMER AND COMMUNITY AFFAIRS143 Regulatory matters147 Community affairs148 Examination procedures149 Compliance with consumer regulations151 Economic effect of the Electronic Funds Transfer Act152 Complaints against state member banks153 Unregulated practices154 Community Reinvestment Act155 Consumer Advisory Council156 Testimony and legislative recommendations158 Recommendations of other agencies


159 LITIGATION159 Bank holding companies—antitrust action159 Bank Holding Company Act—review of Board actions160 Other litigation involving challenges to Board procedures and regulations

163 LEGISLATION ENACTED163 Omnibus Trade and Competitiveness Act of 1988164 Management Interlocks Revision Act of 1988164 Anti-Drug Abuse Act of 1988165 Fair Credit and Charge Card Disclosure Act of 1988165 Home Equity Loan Consumer Protection Act of 1988166 Women's Business Ownership Act of 1988166 Housing and Community Development Act of 1987

167 BANKING SUPERVISION AND REGULATION168 Risk-based capital168 Supervision for safety and soundness172 Supervisory policy174 Regulation of the U.S. banking structure178 International activities of U. S. banking organizations179 Enforcement of other laws and regulations182 Federal Reserve membership

183 REGULATORY SIMPLIFICATION183 Availability of information183 Home mortgage disclosure183 Debt-equity swaps184 Issuance of foreign currency deposits184 OTC margin bond184 Efforts to assist regulatory compliance

185 FEDERAL RESERVE BANKS185 Regulation CC186 Other developments in the pricing of Federal Reserve services

and in the payments mechanism189 Examinations189 Income and expenses190 Federal Reserve Bank premises191 Holdings of securities and loans191 Volume of operations191 Financial statements for priced services


197 BOARD OF GOVERNORS FINANCIAL STATEMENTS

203 STATISTICAL TABLES204 1. Detailed statement of condition of all Federal Reserve Banks combined,

December 31, 1988206 2. Statement of condition of each Federal Reserve Bank, December 31,1988andl987210 3. Federal Reserve open market transactions ,1988212 4. Federal Reserve Bank holdings of U. S. Treasury and federal agency securities,

December 31, 1986-88213 5. Number and salaries of officers and employees of Federal Reserve Banks,

December 31, 1988214 6. Income and expenses of Federal Reserve Banks,1988218 7. Income and expenses of Federal Reserve Banks, 1914-88222 8. Acquisition costs and net book value of premises of Federal Reserve

Banks and Branches, December 31, 1988223 9. Operations in principal departments of Federal Reserve Banks, 1985-88224 10. Federal Reserve Bank interest rates, December 31, 1988225 11. Reserve requirements of depository institutions226 12. Initial margin requirements under Regulations T, U, G, and X227 13. Principal assets and liabilities and number of insured commercial banks,

by class of bank, June 30, 1988 and 1987228 14. Reserves of depository institutions, Federal Reserve Bank credit,

and related items—year-end 1918-88, and month-end 1988232 15. Changes in number of banking offices in the United States ,1988233 16. Mergers, consolidations, and acquisitions of assets or assumptions

of liabilities approved by the Board of Governors, 1988

241 FEDERAL RESERVE DIRECTORIES AND MEETINGS242 Board of Governors of the Federal Reserve System244 Federal Open Market Committee245 Federal Advisory Council246 Consumer Advisory Council247 Thrift Institutions Advisory Council248 Officers of Federal Reserve Banks, Branches, and Offices

271 INDEX

280 MAPS OF THE FEDERAL RESERVE SYSTEM


PartiMonetary Policy andthe U S. Economy in 1988


Introduction

Overall, 1988 was another year ofprogress for the U.S. economy, withfurther substantial increases in outputand employment and a significant im-provement in the balance of trade. Al-though the dramatic stock market breakof October 1987 seemed to slow realactivity for a time around the start of1988, the underlying strength of the econ-omy soon showed through, and apartfrom losses of farm output caused by thedrought, growth proceeded at a relativelystrong pace throughout the year.

Inflation remained in check during1988. Even so, developments were a bitworrisome as, for a second year, in-creases in prices were somewhat largerthan in earlier years of the expansion.Part of the pressure on prices in 1988came in the food area and reflected theinfluence of the drought. However, withlabor markets tightening, the rise ofwages and total hourly compensationquickened and affected prices moregenerally.

Federal Reserve policy mirrored thechanging economic circumstances of1988. Early in the year, as in late 1987,the Federal Reserve sought to limitrepercussions from the plunge in stockprices and, in particular, to guard againstthe possibility of a significant con-traction in business activity. Pressureson the reserve positions of depositoryinstitutions were eased a bit further inearly 1988, and interest rates edgeddown for a time, extending the declines

NOTE. This discussion of economic and financialdevelopments in 1988 is adapted from the MonetaryPolicy Report to the Congress Pursuant to the FullEmployment and Balanced Growth Act of 1978(Board of Governors, February 1989).

that had begun in October of 1987.Growth of M2 and M3 was fairly rapidduring this period, nearly reaching theupper bounds of the annual target rangesestablished by the Federal Open MarketCommittee.

As it became clear in the spring of1988 that the economy still was strong,the focus of Federal Reserve policyshifted. For much of the year, the rapidgrowth of spending and a continuedtightening of markets for labor andproducts caused concern about a worsen-ing of inflation. A sharp upswing in realnet exports of goods and services that hadbegun in 1987 continued into 1988; whilethis upturn was a welcome and necessarypart of the adjustment of the U.S. econ-omy toward a better balance in its externalaccounts, it also intensified the demandson U.S. producers at a time when theutilization of domestic labor and capitalalready was quite high. Accommodatingthe improvement in our external positionwhile limiting the risk of heightenedinflation required restraint on the growthof domestic demand.

The shift by the Federal Reservetoward restraint was reflected in a tight-ening of the reserve market that began inlate March and continued, in severalsteps, into 1989. Short-term marketinterest rates moved up during this pe-riod, influenced both by the System'stightening and the strength of the econ-omy, and the Board of Governors ap-proved a Vi percentage point increase inthe discount rate in August, to 6Vipercent. Growth of M2 moderated afterthe spring and ended the year just belowthe middle of the 1988 target range. Thegrowth of M3 also ebbed over the lasttwo quarters of the year as the needs of


Introduction

banks and thrifts to fund credit expansionslackened.

Short-term interest rates at the end of1988 were about 2Vi percentage pointshigher than they were early in the spring.Long-term interest rates, by contrast,changed little on net over that sameperiod; and the stock market moved upfairly steadily over the course of the year,recovering more than a third of the lossesof the previous October. These favorabletrends in the bond and stock markets, inthe face of rising short-term interest rates,suggested that investors maintained arelatively optimistic view of the long-runprospects for the U.S. economy.

If that optimism is, in fact, to bejustified by events, then both privatecitizens and the government must con-tinue to work to correct economic imbal-ances that remain and to address newchallenges. In the private sector, businessand labor are in the process of adjustingto a world economy that has become farmore competitive than it was over muchof the postwar period, and only part ofthat adjustment was accomplished in1988. Further progress will demand acontinuing commitment on the part ofU.S. firms to capitalize on the enhancedcompetitiveness resulting from the depre-ciation of the dollar since 1985. Thatcommitment must take the form not onlyof continued cost control and price re-straint but also of more intense efforts atmarketing abroad and investment in newcapacity where constraints are visible.Failure on these counts would almostcertainly leave the U. S. economy consid-erably less well off over the long haul.

Government policy can encouragebusinesses to make the longer-rangecommitments needed to bring aboutbetter balance in the economy and tofoster longer-run growth. A monetarypolicy directed steadfastly at movementtoward price stability is an essentialingredient for promoting sustainable

growth. But also crucial is furtherprogress toward balance in the federalbudget, along the lines specified in theGramm-Rudman-Hollings legislation.In that regard, any steps taken now toensure continuing progress toward ap-propriate fiscal restraint over the longerterm would likely have a particularlysalutary effect on the expectations ofbusinesses and investors and wouldthereby enhance considerably the long-run prospects for noninflationarygrowth. •


The Economy in 1988

The U.S. economy completed a sixthyear of expansion in 1988. Real grossnational product rose about 2% percentover the course of the year, the number ofjobs increased more than 3Vi million,and the unemployment rate remained ona downward course, closing the year at5.3 percent, its lowest level in 14 years.1

Progress also was made toward restoringexternal balance, as the merchandisetrade deficit fell sharply.

The year began on a note of uncer-tainty. The sharp break in the stockmarket in the fall of 1987 had raisedconcern that the economy might falter,and some signs of weakness did emergearound the start of 1988. By early spring,however, it became clear that the expan-sion still had considerable vigor, particu-larly from rising exports and a boom incapital spending. Households, mean-while, adjusted fairly readily to the lossof wealth in the stock market, and con-sumer spending rose at a strong pacethroughout the year. Toward the end ofthe year, net exports and capital spendingsoftened, but there was enough impetusfrom other sectors to keep real GNP on afirm upward course.

The rate of inflation, which had pickedup in 1987, remained somewhat higher in1988 than in earlier years. The step-up in1987 had resulted mainly from a reboundin the price of oil and the passthrough ofhigher prices for imports. In 1988, bycontrast, extra price pressures reflectedthe effect of drought on the price of foodand, more generally, a widespread pickupin labor costs in the domestic economy.

1. Except where noted, percent changes are overthe four quarters of the year indicated.

The rise in real GNP in 1988 wouldhave been about 3Vi percent but for asevere drought, one of the worst of thiscentury, which caused huge losses offarm output. These losses accounted formost of the slowdown in GNP growththat occurred after the first quarter of1988. Fortunately, inventories of farmproducts had been sizable coming into1988, and a drawdown of stocks helpedto buffer households and others from thedisruption to output. Within the farmsector, the drought strained the financesof some producers, but the financialcondition of many others was not seri-ously affected, and the sector as a wholeremained stronger fundamentally than inthe first half of the 1980s, when the boomof the previous decade was unwinding.

In most of the nonfarm economy, thegrowth of activity was robust in 1988.Production in the manufacturing sectorincreased 5Vi percent, nearly matchingthe previous year's gain, and factoryemployment rose sharply. Employmentalso continued to grow rapidly in retailand wholesale trade and among theproviders of business and health ser-vices. However, oil drilling activity,which had turned up in 1987 when oilprices were rising, weakened over 1988,intensifying economic stresses in someparts of the country.

The Household Sector

At the start of 1988, concern about thepossible effect of the stock market breakon the real economy centered on thehousehold sector. The drop in sharevalues had pared roughly one-half trilliondollars from household wealth, and the


6 The Economy in 1988

Indicators of Economic PerformancePercent change, Q4 to Q4

Real GNP

Percent change, Q4 to Q4

Real personal income and consumption

Disp,. ,

Consumption expenditures

Millions r»f unit* annual rate Percent of disposable income

Private housing startsSingle-family

Personal saving rate

1.0

0.5Multifamily

Percent change, Q4 to Q4 Billions of 1982 dollars

Real business fixed investment

Structure 5

1 Producers durable equipment

30

•10

Changes in real business inventories

ii LLull60

30

- 0

30

• . u •Percent Percent change, Q4 to Q4

Civilian unemployment rate GNP fixed-weight price index

1984 1986 1988 1984 1986 1988

The data are seasonally adjusted. The unemployment the Department of Commerce,data are from the Department of Labor; the rest are from


The Economy in 1988 7

degree to which spending would be cut inresponse to this loss of wealth was notclear.

In the event, the loss of wealth mayindeed have trimmed consumer demand.The personal saving rate rose after thecrash, and over the next year it was onaverage about 1 percentage point higherthan in the year preceding the crash. Butwith exports and capital investment boom-ing, the growth of jobs and real incomesremained strong in 1988, and the uncer-tainties spawned by the crash soon gaveway to renewed optimism among house-holds. Thus, after the initial jump in thesaving rate, real consumption expendi-tures grew at about the same pace as thetrend in real after-tax income; the riseover the year was about 3 % percent.

Consumer spending for durable goodswas brisk in 1988. The unit sales of lighttrucks and vans surged in 1988, maintain-ing the exceptional strength that has beenevident during the current expansion,and the sales of domestically producedautomobiles moved up a bit from the1987 pace. Among the household dur-ables, real outlays for furniture andappliances, which had slowed in 1987,increased 7 percent during 1988, renew-ing the strength that had been evidentover the 1983-86 period.

Real residential investment fell slightlyin the first half of 1988; but it turned up inthe second half and by the fourth quarterwas a little above the level of a yearearlier. Starts of multifamily housingunits, which had slumped in 1987, fellfurther in the first quarter of 1988 andthen flattened out over the remainder ofthe year. In the single-family sector, startsdeclined somewhat in the first half of1988 but then rebounded; activity in thefourth quarter was the highest since thethird quarter of 1987. By historicalstandards, these swings in single-familystarts were relatively mild; indeed, incomparison with the boom and bust

cycles of the 1970s and early 1980s,activity in the single-family market wasstable over the entire period from 1983 to1988. Nonetheless, total housing starts in1988 were down sharply from earlieryears of the expansion because of the bigdrop in construction of multifamily units.

The Business Sector

Virtually all indicators of business activ-ity exhibited strength in 1988. Businesssales, in nominal terms, rose 9 percentover the year. Hiring was brisk in mostsectors, and operating rates rose further;in the industrial sector, capacity utiliza-tion at the end of 1988 was at its highestlevel since 1979. Corporate profits re-mained healthy.

A surge in spending for businessequipment that had begun in 1987 ex-tended through the first half of 1988,when outlays grew in real terms at anannual rate of about 20 percent. Thesurge was led by sizable investment inhigh-technology items - computers, com-munication equipment, and the like—butoutlays for other types of equipment alsowere strong. The rise in equipmentspending slowed after midyear, and someweakness became evident toward the endof the year. At year-end, however, mostindicators suggested that the underlyingtrend in equipment spending still waspositive.

Business spending for new construc-tion declined in 1988, reversing themoderate increase of the previous year.Commercial construction, the biggestitem in the total, continued to be re-strained in 1988 by the big overhang ofvacancies that grew out of the buildingboom of the mid-1980s. Gas and oildrilling, following the lead of oil prices,fell back from the pace of late 1987, butremained above the lows of 1986. Con-struction of buildings for industrial usewas little changed over 1988; although



capacity utilization was high in manufac-turing, many producers appeared to belimiting their needs for additional spaceby shifting toward technologies that usemore compact equipment, by economiz-ing on inventories, or by conserving onspace in other ways.

Inventory investment, which had beensizable in late 1987, moderated in 1988,and with sales on an upward trajectory,stock overhangs were not a problem formost businesses. In manufacturing,stocks grew more rapidly in 1988 thanthey have in recent years, but much of theaccumulation was in industries in whichorders and shipments also were generallystrong; the ratio of inventories to salesfor all of manufacturing moved downduring the year from the already lowlevels of late 1987. In retail trade,concern about a possible overhang of thestocks of nondurables eased during theyear, and stocks at year-end did notappear to be burdensome. By contrast,auto dealers' stocks rose sharply in thefourth quarter; at the end of the year, automanufacturers seemed likely to turntoward enhanced sales incentives and,perhaps, a lower assembly rate in aneffort to pare inventories. For all ofmanufacturing and trade combined, theratio of inventories to sales varied littleover the course of 1988 and was near thelower end of the range in which it hadbeen since the business expansion began.

The Government Sector

Budgetary constraints limited the growthof government purchases in 1988, both atthe federal level and among many stateand local governments. The federal gov-ernment's purchases of goods and ser-vices—the part of federal spending thatadds directly to GNP - fell 3 Vi percent inreal terms from the fourth quarter of1987 to the fourth quarter of 1988.Roughly two-thirds of the decline re-

flected a drought-induced reduction inthe farm inventories owned or financedby the Commodity Credit Corporation(CCC), a reduction that is counted as anegative federal purchase. Excluding thisinventory swing, federal purchases weredown about 1 percent over the year—thefirst decline since 1976. Over the eightyears preceding 1988, real federal pur-chases other than those of the CCC hadrisen at an average pace of nearly 5percent, considerably faster than thegrowth of real GNP. The downturn in1988 reflected cuts in the defense area;other non-CCC federal purchases rosesomewhat over the year.

On a budget basis, total federal outlays,which are almost three times as great as

Government Surpluses and DeficitsBillions of dollars

Federal government

State and local government20

10

10

1984 1986 1988

The data on the federal government are for fiscal years.They are on a budget basis and come from the Departmentof the Treasury.

The data on state and local governments are for operat-ing and capital accounts. They are on a national incomeaccounts basis and come from the Department ofCommerce.


The Economy in 1988

federal purchases alone, were up 6percent for fiscal 1988 as a whole.Entitlements, demands on depositinsurance agencies, and net interestpayments all rose. Meanwhile, thegrowth of federal receipts slowed in1988 from the rapid pace of the previousyear. Receipts from social security taxesrose more than 10 percent, in partbecause of a rate increase in January1988, The growth in receipts frompersonal income taxes slowed, however,as increases in employment and nominalincomes were offset by final reductionsin income tax rates legislated in 1986.The federal budget deficit in fiscal year1988 was $155 billion, slightly abovethe level of the previous year.

The purchases of goods and servicesby state and local governments rose closeto 3 Vi percent in real terms over the fourquarters of 1988, more than in 1987 butless than the average rate of growth overthe preceding three years. Spending forconstruction was little changed for 1988as a whole, although some pickup wasevident in the fourth quarter. Employ-ment in the state and local sector in-creased 350,000 during 1988; a largeshare of the rise was among the teachersand other school workers needed to meetthe growth in the number of elementarystudents.

The Labor MarketsThe rise in the number of jobs during1988 was somewhat above that of 1987and brought the total increase in payrollemployment since late 1982 to about18^2 million. Virtually all parts of theeconomy shared in last year's gain.Manufacturing jobs rose 400,000; con-struction employment was up 300,000;close to 1 million new jobs were createdin retail and wholesale trade; and serviceemployment grew by 1.3 million jobs.Except for a brief slowdown in the

summer, employment expanded stronglythroughout the year.

The continued rise in employment lastyear led to a tightening of labor marketsand called attention to limits on thepotential growth of the supply of laborand of output. Growth of the working-age population has slowed in the 1980s,and the increase during 1988 was thesmallest annual rise in more than twodecades. This slowing of populationgrowth in the 1980s has led in turn to amore moderate rate of growth in thelabor force, even as the rate of labor forceparticipation, especially for adult women,has continued to rise. A big boost tooutput during the expansion has comefrom the hiring of unemployed workers;however, with the unemployment rate atless than 5V4 percent at the end of 1988,the labor force was more fully utilized

Labor Market ConditionsNet change, millions of persons, Q4 to Q4

Nonfarm payroll employment

Total—] f—| 4

IUn AManufacturing—^

i

L I L +— 0

Percent change, Dec. to Dec.

Employment cost indexTotal compensation

llllll1984 1986 1988

Payroll employment covers the total nonfarm sector; theemployment cost index is for private industry, excludingfarm and household workers. The data are from theDepartment of Labor.



than at any time in the last decade and ahalf.

The tightening of labor markets in1988 was associated with a pickup in therise of wages and labor costs. Theemployment cost index for wages andsalaries in the private nonfarm sectorincreased a bit more than 4 percent overthe year—almost 1 percentage point morethan in 1987. The pickup was mostpronounced among white collar workersand in the service-producing industries.The cost of benefits provided to employ-ees rose 63A percent over the year, nearlytwice the increase of 1987; the risereflected both the hike in the payroll tax atthe start of 1988 and a surge in the cost ofhealth benefits. Total compensation perhour—wages and salaries plus benefits —rose nearly 5 percent over the fourquarters of 1988, after two years in whichthe annual increases had been in theneighborhood of 3 VA percent.

Productivity gains slackened some-what in 1988. The rise in output per hourin the nonfarm business sector over thefour quarters of the year was only 0.7percent—about xh percentage point be-low the average over this decade. Thisslippage in productivity growth in 1988,combined with the faster rate of increasein hourly compensation, resulted in a 4percent rise in unit labor costs in the non-farm business sector over the four quar-ters of 1988—well above the average rateof increase during the previous five years.

Price Developments

The broader measures of prices — includ-ing the GNP price measures, the producerprice index, and the consumer price index(the latter two measured from Decemberto December)—all showed inflation to bein a range of 4 to AVi percent in 1988.Except for the CPI, which had moved upat a 4Vfe percent rate in 1987, thesemeasures showed some acceleration from

the previous year, and all of them—including the CPI-rose more rapidlythan in earlier years of the expansion. Incontrast to 1987, when the indexes wereboosted by a rebound in energy pricesand rising prices for imports, the infla-tionary pressures in 1988 were aug-mented by larger increases in labor costsin the U.S. economy and the drought'sinfluence on agricultural prices.

The drought's effects on retail foodprices appeared quickly, with increaseson a wide variety of items evident bysummer. Over the year as a whole, theincrease in consumer food prices was 5 lApercent—about 2 percentage points abovethe average of the preceding five years.

PricesPercent change, Dec. to Dec.

Producer finished goods

i:Consumer

• • • • I IConsumer excluding food and energy

Services less energy Commodities lessfood and energy

1IUU1984 1986 1988

The data are from the Department of Labor.


The Economy in 1988 11

Energy prices at the consumer level,particularly for oil and gasoline, hadrisen sharply in 1987 but were littlechanged in 1988-a pattern that resultedmainly from the continued gyrations inworld oil markets. The price of crude oilmoved lower for much of 1988 as theefforts of OPEC to restrain productionunraveled. In late 1988, however, a newagreement by OPEC to limit production,coupled with production shortfalls innon-OPEC countries and higher-than-expected oil consumption, caused spotprices to rise sharply once again, backtoward the upper end of the range inwhich they generally have been since thesummer of 1986.

Price increases for goods and servicesother than food and energy were larger in1988 than in 1987. The pickup, whilefairly moderate, was widespread andprobably reflected, in large part, theacceleration in hourly compensation andunit labor costs. By contrast, the pres-sures from rising import prices appearedto be a bit less pronounced than in 1987.Even so, higher prices for imports prob-ably were an influence in some areas; theretail prices of apparel, for example, rosenearly 5 percent for the second year in arow. The price increases for industrialcommodities slowed in 1988 after steepincreases during 1987; by most mea-sures, however, the year-to-year rate ofrise in these prices remained somewhatabove that of inflation in general. Theproducer prices of intermediate inputs,excluding food and energy, rose morethan 7 percent during 1988, reflecting thehigh levels of capacity utilization in anumber of industries, as well as thetightening of labor markets. •


12

Monetary Policy and Financial Markets in 1988

In 1988, as in other recent years, theFederal Reserve maintained a flexibleapproach to monetary targeting by re-sponding to emerging conditions in theeconomy and in financial markets as wellas to growth of the monetary aggregatesthemselves.

Early in the year, when the potentialfor fallout from the stock market crashstill was an overriding concern, mone-tary policy was eased, augmentingpolicy moves that had been taken in thefourth quarter of 1987. But as it becameclear that the economy still was strongand that the potential for heightenedinflation was increasing, the FederalOpen Market Committee tightenedreserve conditions in a series of stepsbeginning in the spring and continuinginto 1989.

Before the tightening began, the mon-etary aggregates had been running closeto the top of their 1988 growth ranges;but growth of the aggregates slowed afterthe spring, and they closed the year in themiddle portions of their 1988 targetranges.

In the credit markets the growth ofdomestic nonfinancial debt in 1988 wasslightly below that of 1987 and noticeablyslower than in previous years of theexpansion. Even so, debt continued togrow faster than nominal GNP, largelyreflecting the continued heavy demandsof the federal government and the in-creased financing needs of corporations.With the overall economy still quitehealthy in 1988, the incidence of financialstress among households and nonfinan-cial businesses was not widespread.However, in the financial sector, theproblems of the thrift institutionsworsened.

Monetary Policy in 1988

During the early months of 1988, theFederal Open Market Committee soughtto counter any economic weakness thatcould result from the stock market breakand to ensure the smooth functioning ofdomestic financial markets. In the realeconomy, sales had softened late in 1987,and inventories had risen sharply. Cou-pled with some softening in labor marketindicators early in 1988, these dataseemed to point toward a greater risk ofcumulative weakening in real activity. Inaddition, the financial markets remainedsomewhat unsettled during this period,and the Federal Reserve placed specialemphasis on monitoring domestic finan-cial markets for signs of any new distress.Against this backdrop, reserve conditionswere eased slightly in early February,contributing to reductions in short- andlong-term interest rates.

By early spring, however, the incom-ing economic data were suggesting thatthe real economy, rather than weakening,actually was still moving ahead withconsiderable momentum. Bond yieldsincreased during this period, as theindications of economic strength contra-dicted the earlier market forecasts of aslowing economy and raised concernsabout an uptrend in inflation. Because ofthe increased risk for higher wage andprice inflation—and in the context ofrapid growth in M2 and M3 - the FederalReserve firmed reserve conditions in aseries of steps beginning in March andculminating in early August, when thediscount rate was hiked Vi percentagepoint, to 6!/2 percent. These movesbrought about substantial increases inshort-term interest rates; but they were


Monetary Policy and Financial Markets 13

accompanied by only small increases inTreasury bond yields, as investors viewedFederal Reserve actions as heading off along-term acceleration of inflation. Theupturn in short-term interest rates, cou-pled with more optimistic expectations offuture inflation, also helped boost theforeign exchange value of the dollarduring this period.

In late summer and early autumn, someindicators suggested that economicgrowth might have started to moderate.

In view of the policy restraint already inplace—which was being reflected in aslower rate of growth in the monetaryaggregates—the Federal Open MarketCommittee postponed any further actionpending more information on the courseof the economy. The foreign exchangevalue of the dollar declined through muchof the autumn, partly in response to a risein foreign interest rates relative to thosein the United States and partly in responseto investors' concern over the lack of

Interest Rates

Long-term

A-rated utility bondsRecently offered

U.S. government bonds

State and local government bonds

1984 1985 1986

All the data are monthly averages.The federal funds rate is from the Federal Reserve.The rate for three-month Treasury bills is the market rate

on three-month issues on a discounted basis and is from theDepartment of the Treasury.

The rate for conventional mortgages is the weightedaverage for 30-year fixed-rate mortgages with levelpayments at savings and loan associations and is from theFederal Home Loan Mortage Corporation.

1987 1988 1989

The rate for A-rated utility bonds is the weighted averagefor recently offered 30-year investment-grade bonds ad-justed to an A-rated basis by the Federal Reserve.

The rate for U. S. government bonds is their market yieldadjusted to 30-year constant maturity by the Treasury.

The rate for state and local government bonds is a BondBuyer index based on 25 issues of 30-year revenue bonds ofmixed quality.


14 Monetary Policy and Financial Markets

progress in reducing the U.S. federalbudget deficit and a slower rate of im-provement in the U.S. trade deficit.

Inlate fall, data suggested thatpreviousmonetary restraint had not been sufficientto relieve the potential for higher infla-tion, and the Federal Open Market Com-

mittee resumed a tightening of reserveconditions that began in November andextended into the new year. As a result,short-term market interest rates rose. Incontrast, bond yields continued to fluctu-ate narrowly, signaling the market'scontinued confidence that inflationary

Reserves, Money Stock, and Debt AggregatesAnnual rate of change based on seasonally adjusted data unless otherwise noted, in percent'

Item 1986 1987 19881987

Q4

1988

Ql Q2 Q3 Q4

Depository institution reserves2

TotalNonborrowedRequiredMonetary base3

Concepts of money 4

MlCurrency and travelers checksDemand depositsOther checkable deposits

M2Non-Mi component

MMDAs (n.s.a.), savings, and small-demonimation time deposits

General-purpose and broker/dealermoney market mutual fundassets (n.s.a.)

Overnight RPs and Eurodollars (n.s.a.)

19.821.719.99.8

15.67.5

11.729.4

9.37.3

6.0

17.416.0

6.06.16.17.9

6.48.6

- . 813.8

4.23.5

3.2

5.84.3

3.2.7

3.27.0

4.38.0

-1.27.7

5.25.5

2.52.41.48.2

5.09.81.15.7

4.94.9

3.51.52.98.1

3.29.5

-4.77.1

6.17.1

5.8 4.3-6.5 2.5

7.2 4.07.4 6.7

6.47.91.1

11.0

6.97.1

5.27.2

.48.7

3.83.3

5.8 3.8 7.9 7.2

M3Non-M2 components

Large-denomination time depositsInstitution-only money market mutual

fund assets (n.s.a.)Term RPs (n.s.a.)Term Eurodollars (n.s.a.)

9.1 5.78.2 11.81.7 9.3

32.1 2.931.7 33.24.3 13.9

7.5-5.8

6.410.711.0

- .715.014.5

11.89.2

6.412.113.8

19.9.9

11.2

Domestic nonfinancial sector debt.FederalNonfederal

13.314.712.9

9.8 8.7 9.99.0 8.1 7.6

10.0 8.9 10.7

19.5-14.0

6.79.18.5

44.37.5

-22.7

8.08.08.0

3.22.6

7.28.39.1

-30.828.420.1

8.68.38.7

- . 75.3

- 1 . 45.0

2.36.7

-1 .83.3

3.64.1

3.9 3.6

- 2 . 9- 3 . 3

5.813.413.4

-23.313.047.7

9.8- 8 . 8

5.110.511.3

11.18.3

13.1

8.4 8.87.1 8.08.8 9.0

1. Changes are calculated from the average amountsoutstanding in each quarter. Annual changes are measuredfrom Q4 to Q4.

2. Data on reserves and the monetary base incorporateadjustments for discontinuities associated with regulatorychanges in reserve requirements.

3. The monetary base consists of total reserves plus thecurrency component of the money stock plus, for institu-tions not having required reserve balances, the excess ofcurrent vault cash over the amount applied to satisfycurrent reserve requirements.

4. Ml consists of currency; travelers checks of nonbankissuers; demand deposits at all commercial banks otherthan those due to depository institutions, the U.S. govern-ment, and foreign banks and official institutions, less cashitems in the process of collection and Federal Reservefloat; and other checkable deposits, which consist ofnegotiable orders of withdrawal and automatic transferservice accounts at depository institutions, credit union

share draft accounts, and demand deposits at thriftinstitutions. M2 is Ml plus money market deposit accounts(MMDAs); savings and small-denomination time depositsat all depository institutions (including retail repurchaseagreements), from which have been subtracted all individ-ual retirement accounts (IRAs) and Keogh accounts atcommercial banks and thrift institutions; taxable and tax-exempt general-purpose and broker/dealer money marketmutual funds, excluding IRAs and Keogh accounts;wholesale overnight and continuing-contract repurchaseagreements (RPs) issued by commercial banks; andovernight Eurodollars issued to U.S. residents by foreignbranches of U.S. banks worldwide. M3 is M2 plus large-denomination time deposits at all depository institutions;assets of institution-only money market mutual funds;wholesale term RPs issued by commercial banks and thriftinstitutions; and term Eurodollars held by U. S. residents inCanada and the United Kingdom and at foreign branches ofU.S. banks elsewhere.



pressures would be contained. This con-fidence, together with the firming ofpolicy, contributed to a renewed strength-ening of the foreign exchange value ofthe dollar toward the end of the year.

Monetary Aggregates

M2 expanded 5 lA percent over the fourquarters of 1988, a rate just below themiddle of its 4-to-8 percent target range.Although demands for M2 were sup-ported by strong growth in income andspending, they were reduced by increasesin its opportunity cost—that is, the differ-ence between market interest rates andthe yields on M2-type instruments. Earlyin the year, the opportunity cost ofholding M2 had declined in response todecreases in market interest rates in late1987 and early 1988 relative to depositrates. The lower opportunity cost led tostrong growth in M2 and a decline in itsvelocity-the ratio of nominal GNP toM2 - in the first quarter. But after March,deposit rates lagged behind the rise inmarket rates, and the velocity of M2increased; over the year, the rise invelocity was close to 2 percent.

The response of offering rates on de-posit accounts to changes in market rateswas especially sluggish in the last part of1988. One reason for this sluggishnessmay have been regulatory pressure onthrifts and the closing of many insolventinstitutions, which often had been overlyaggressive in pricing deposits. The extentto which thrifts were offering higher ratesthan banks on small time deposits wasgreatly reduced during this period, andpartly as a consequence, growth of retaildeposits was much stronger at banks thanat thrifts.

The patterns of change in deposit ratesand market interest rates also affected thecomposition of M2 growth during 1988.During the first half of 1988, liquid retaildeposits (such as interest-bearing check-

Monetary Aggregates, NonfinancialSector Debt, and Reserves

Billions of dollars

M2

1 i

Range

i i t i i i

Actual

l i l t !

8% 3 2 0 °; 3100

"~I% 3000

2900

i i

_L i i i i i i . i i i

Total domestic nonfinancial debt

Ml

i i I i i ' i i i i i i i i 1

Reserves

Total

Nonborrowed

3900

3700

9200

8800

8400

810

780

750

62

60

58

56

I i i i i i j i i

1987 1988

The ranges adopted by the FOMC for the monetaryaggregates and for total debt of the domestic nonfinancialsector were for the period from 1987:4 to 1988:4.

The reserve aggregates have been adjusted to removediscontinuities associated with changes in reserve require-ments. Nonborrowed reserves include extended credit.The difference between these two measures is adjustmentand seasonal borrowing.



ing accounts) expanded at a strong pace,largely reflecting increases in their rela-tive attractiveness stemming from de-clines in market interest rates and, to alesser extent, in rates on small time de-posits. However, the growth of thesedeposits slowed markedly over the lasthalf of 1988, following the reversal in thepattern of interest rate movements.Growth in small time deposits was partic-ularly robust throughout 1988. Theirexpansion in the early months of the yearmay have resulted, in part, from shifts inhousehold investment preferences awayfrom stocks and toward the safety ofthese savings instruments. Later, risingyields on small time deposits relative tothose on more liquid deposits led house-holds to shift funds from the latteraccounts to the former.

M3 grew 6 Vi percent last year, placingit slightly above the midpoint of its 4-to-8percent target range. This increase froma 5% percent growth rate in 1987 re-flected a modest pickup in the issuance ofmanaged liabilities in M3 to fund creditexpansion at banks and thrift institutions.M3 followed a trajectory near the upperend of its target range in the first half of1988, but moderated thereafter in associ-ation with slowing credit growth atdepository institutions. For the year,large time deposits and other managedliabilities included in M3 but not in M2grew rapidly, as inflows into M2-typedeposits were insufficient for banks tofinance their desired pace of asset expan-sion. This was particularly true in thesecond half of the year, when M2 growthmoderated.

To some extent, the pickup in M3growth last year also reflected a greaterreliance by banks on managed liabilitiesincluded in M3 than on non-money-stockinstruments, such as bank borrowingsfrom overseas branches. In contrast, asin other recent years, thrift institutions'heavy use of Federal Home Loan Bank

advances—which are not included inM3—had a moderating effect on thegrowth ofM3 in 1988.

At AlA percent, Ml growth last yearwas down more than 2 percentage pointsfrom its rate in 1987. Growth of interest-bearing checking accounts moderated,while demand deposits continued runningoff. As in recent years, the growth of Mldisplayed great sensitivity to changes inmarket rates of interest. Householdsshifted savings balances between NOWaccounts and those M2 components, suchas small time deposits, whose yieldsresponded to increases in market ratesmuch more quickly than those on NOWaccounts. Because substitutions of thistype are internalized within M2, M2 hasdisplayed less sensitivity to interest ratesthan has Ml in this decade. Demanddeposits are the other component of Mlhighly sensitive to interest rates; theydeclined again in 1988, partly reflectingincreases in their opportunity costs anddeclines in compensating balances. Com-pensating balances, funds that businessesmust hold in non-interest-bearing ac-counts to compensate banks for services,fall when interest rates rise.

Credit Market Developments

The debt of domestic nonfinancial sectorsincreased nearly 8% percent during1988, placing it near the midpoint of theFederal Open Market Committee's mon-itoring range of 7 to 11 percent andsomewhat below the 93A percent rise ofthe previous year. The growth of federaldebt slowed a little from the 1987 pace.In addition, the expansion in nonfederaldebt moderated as state and local govern-ments trimmed debt issuance and ashouseholds expanded their mortgage debtat a less robust pace in response to highermortgage rates. Growth of business debtpicked up a bit from its 1987 pace, withshort-term debt growing faster than long-



term debt. Corporate borrowing wasparticularly strong, reflecting increasedexternal financing needs for capital invest-ment and for mergers, buyouts, and stockrepurchases. Overall, the expansion ofdebt in the nonfinancial sectors in 1988was well below the pace of the mid-1980sbut still exceeded the growth of nominalGNR

With the economy growing stronglyand the financial markets settling downafter their initial skittishness followingthe stock market break, evidence offinancial stress among businesses andhouseholds was not widely apparent in1988. Nevertheless, financial develop-ments in certain markets and sectorswarranted the attention of policymakers.Of particular note were the worseningcondition of the thrift industry, the needto achieve sounder capitalization of com-mercial banking organizations, and therising indebtedness of businesses in-volved in restructuring activity.

As the year wore on, the dimensions ofthe problems facing the thrift industrybecame clearer. The losses of the industrydeclined somewhat during the secondhalf of the year, but this relative improve-ment appeared largely to reflect theassistance provided to more than 200institutions by the Federal Savings andLoan Insurance Corporation. For theyear as a whole, the industry's lossesexceeded $12 billion.

The turmoil in the thrift industry hasnot noticeably disrupted mortgage activ-ity. In part, the development of a deepsecondary mortgage market has sepa-rated the origination of loans from theneed to fund them. For this reason, thebase of mortgage credit has been broad-ened in recent years, making the provi-sion of mortgages far less dependent onthe condition of any one type of financialinstitution or on the regional supply ofloanable funds. During the 1980s theshare of home mortgage credit held in

securitized form has increased fromabout one-tenth to more than one-third.The spread between interest rates onfixed-rate mortgages, which have anaverage life of roughly 10 years, andyields on 10-year Treasury notes did notchange appreciably over 1988, whichalso indicates that the mortgage marketscontinued functioning well despite theproblems of many savings and loanassociations.

In contrast to those of the thrift indus-try, profits of U.S. commercial bankswere reasonably strong in 1988, evenafter excluding the one-time jump infourth quarter earnings associated withthe resumption of debt payments byBrazil. Moreover, most large money-center banks with a significant amount ofloans to developing countries have con-tinued to build capital, which provides acushion against default losses. Efforts toraise equity gained force from the agree-ment by bank supervisory authorities ofmajor industrial countries to set morestringent, risk-based standards of capitaladequacy. These standards, to be fullyphased in by 1992, place a greateremphasis on equity capital, take intoaccount the off-balance-sheet activitiesof banks, and provide a more uniformregulatory treatment of banks based indifferent countries.

In 1988, as in 1987, banks lent con-siderable sums to finance mergers andleveraged buyouts. Although banks havereported that these loans have had a lowerrate of loss than all other business loanscombined, and although LBO borrowerstypically obtain some insurance againsthigher loan rates, concern remains aboutbank exposure to losses in the event of anadverse turn in business conditions. Forthis reason, the Federal Reserve is mon-itoring closely the developments in thisarea; in particular, it has revised its bankexamination guidelines to ensure thatloans from member banks used to finance



buyouts and other highly levered corpo-rate restructurings meet prudent creditstandards.

Leveraged buyouts and other mergersand restructurings led to a record pace ofnet equity retirements by nonfinancialcorporations in 1988. Despite the largevolume of this activity in recent years,the overall corporate debt-to-equity ratiois not out of line with observations sincethe early 1970s, a stability that reflectsthe increased market valuation of equitiessince the early 1980s.

Much of the financial restructuring ofrecent years has been a response tofundamental economic factors; it mayimpose a discipline on corporate manage-ment, which in turn can stimulate effortsto improve productivity. Nevertheless,heavy commitments of cash flow toservice debt reduce a firm's ability tocope with stresses or industry-specificshocks. To some extent, the substitutionof debt for equity is motivated by simpletax-saving considerations, such as thefull deduction for interest payments andthe double taxation of dividends. Forthese reasons, reforming the corporatetax system should be a component ofpublic policy in addressing this difficultissue. •


19

International Developments

Economic growth in 10 major foreignindustrial countries continued strong at a3 lA percent pace over the four quarters of1988. Growth in non-OPEC developingcountries averaged about 4 percent in1988, nearly the same as in the previousyear. Some progress toward the adjust-ment of external imbalances among ma-jor industrial countries was achieved.Real net exports by the United States(national income accounts, 1982 dollars)rose $20 billion, contributing nearly Vipercentage point to the rise in grossnational product. Nearly all of this in-crease in real net exports was in the firsthalf of the year, however, as the rate ofgrowth of domestic demand picked up inthe second half while it slowed in severalof the major foreign countries. In nominalterms the U.S. trade deficit declined to$127 billion for 1988, $33 billion lessthan in 1987. The current account deficittotaled $135 billion, a $19 billion im-provement from the previous year.

The dollar moved over a considerablerange in exchange markets during 1988,but on a weighted average basis, its netchange over the year was fairly small.After recovering from its year-end 1987lows, the dollar fluctuated narrowly untilmid-April, when it began to appreciatesharply. The dollar rose from mid-Aprilto late August, at first under the influenceof Federal Reserve monetary tighteningand subsequently of monthly trade re-ports that brightened the market's outlookfor U.S. external adjustment. The dollarheld fairly steady through September;then it declined in October and Novemberwith a reversal of market perceptions ofrelative monetary stances among majorcountries and with trade reports thatseemed to suggest a stalling of the

adjustment process. The dollar recoveredsomewhat in December on the basis offurther tightening by the Federal Re-serve. On balance, the dollar appreciatedabout V/i percent in nominal terms,December to December, against aweighted average of the currencies of theforeign Group-of-10 (G-10) countries.The dollar appreciated substantiallyagainst continental European currencies,while declining moderately against theJapanese yen and more against the Cana-dian dollar. When adjusted for relativeconsumer price levels, the dollar appre-ciated somewhat more than in nominalterms, as the U.S. inflation rate exceededthe weighted average inflation rate ofother major industrial countries.

Exchange Value of the Dollarand Interest Rate DifferentialPercentage points Ratio scale. March 1973 = 100

Long-termreal interestrate differentialU.S. minus foreign

— 80

1975 1980 1985 1988

The exhange value of the U.S. dollar is its weightedaverage exchange value against currencies of other Groupof 10 (G-10) industrial countries using 1972-76 total tradeweights adjusted by relative consumer prices.

The differential is the rate on long-term U.S. governmentbonds minus the rate on comparable foreign securities,both adjusted for expected inflation estimated by a 36-month centered moving average of actual inflation or bystaff forecasts where needed.

All the data are quarterly.


20 International Developments

Central bank interventions, frequentlyconcerted pursuant to G-7 understand-ings on exchange market arrangements,sought to limit the extremes of the dollar'smovements, and gross official purchasesand sales of dollars were quite largeduring the year. Net intervention pur-chases of dollars by 14 major centralbanks were quite small, however,amounting to only about $2 billion, insharp contrast to the 1987 total of $100billion by these same central banks. U.S.intervention, alone, amounted to net salesof a little more than $1 billion for thecombined accounts of the Federal Re-serve and of the Exchange StabilizationFund of the Treasury.

Foreign Economies

Strong economic growth in the majorforeign industrial countries continued in1988, although some signs of slowingwere evident near year-end. Real growthin Japan was particularly noteworthy,with significant strength in both exportsand virtually all major components ofprivate demand. Germany and the relatedeconomies of continental Europe ex-panded somewhat less rapidly, thoughstill at rates above most expectations, asthe investment boom of the previous yearcarried over into 1988. In the UnitedKingdom, rapid growth was supportedprimarily by a surge in both consumptionand investment. In Canada, strong invest-ment expenditures sustained vigorousactivity during the first half of the year,with some evidence of slower growthemerging in later months.

Unemployment rates in foreign indus-trial economies continued to move down-ward on average. Although unemploy-ment levels in many instances still werehigh by historical standards, signs oflabor market tightness were evident insome countries. Unemployment in theUnited Kingdom declined about 2 per-

centage points in 1988 amid increases inwage pressure, and unemployment inboth Germany and Italy also movedlower. After registering a sharp declinein the previous year, the Canadian unem-ployment rate edged down further in1988 to a low level for that economy.Japanese unemployment rates remainedin a very low range—even falling slightlyduring the year—amid additional signsthat Japanese labor markets were tight.Unemployment rates in most other indus-trial countries were about unchanged.

GNP, Demand, and PricesPercent change from previous year

Gross national productConstant prices

10

Total domestic demandConstant prices

10

Consumer price index

Foreign

United States

1984 1986 1988

Foreign data are multilaterally weighted averages for the(G-10) countries, using 1972-76 total trade weights, andare from foreign official sources.

Data for the United States are from the Departments ofCommerce and Labor.

The GNP and domestic demand data are quarterly: theconsumer price data are monthly.


International Developments 21

Monetary conditions were generallyeasier early in the year in the wake of theOctober 1987 stock market crash, buteconomic activity proved more robustthan expected. As the year wore on,indications of increased inflationary pres-sure prompted authorities in many coun-tries to tighten monetary conditions.Increases in inflation rates were relativelysmall in most countries, with the conspic-uous exception of the United Kingdom,but signs of a pick-up in some othercountries emerged toward the end of theyear. U.K. authorities engineered a sharpincrease in short-term interest rates aftermid-year as the rate of inflation in thatcountry moved above 6 percent.

Despite the general shift to less accom-modative monetary stances as 1988 pro-gressed, monetary growth exceeded offi-cial targets in several countries duringthe year. Key money aggregates in bothGermany and the United Kingdom camein above target ranges; money growth inJapan remained quite rapid but was a bitbelowits 1987 pace. Fiscal policy abroad,as gauged by cyclically adjusted budgetdeficits calculated by the Organizationfor Economic Cooperation and Develop-ment, was broadly neutral in its impacton aggregate demand.

The combined current account surplusof the foreign G-10 countries declinedabout $30 billion in 1988, with much ofthe change attributable to a significantdeterioration in the U.K. current accountposition. Germany, among the countrieswith large surpluses, maintained a strongvolume of exports, and had a currentaccount surplus that was little changed onbalance. In Japan, the growth of importsrose, and the current account surpluscontracted by $7.5 billion, but exportvolume also remained strong, and thepace of external adjustment seemed toslow toward year-end.

The combined current account surplusof the newly industrializing economies of

Asia, which had been increasing forseveral years, fell more than $3 billion in1988, apparently having peaked in 1987at $31 billion. The $8 billion decline inTaiwan's surplus more than accountedfor the decline in the surplus of thisgroup; imports to Taiwan surged as aresult of exchange rate appreciation, theliberalization of import restrictions, andincreased official imports of gold.

The current account deficit of OPECcountries increased $10 billion in 1988,to $15 billion. Oil export revenues de-clined somewhat, with the effect of loweroil prices more than offsetting higherexport volumes. The combined currentaccount balance of non-OPEC develop-ing countries in 1988 fell about $8 billion,to a $3 billion deficit in 1988. The tradesurplus of this group fell $4 billion, to$15 billion. Rising prices of manufac-tures and commodities and rising vol-umes contributed to the growth of tradein non-OPEC developing countries. Im-ports expanded significantly for the sec-ond year in a row.

The current account deficit of theheavily indebted countries targeted bythe U.S. debt initiative announced bySecretary of the Treasury Baker in 1985was roughly unchanged from a yearearlier, at about $9 billion. The tradesurplus of this group expanded nearly $4billion in 1988, to about $30 billion.Brazil posted a record trade surplus ofabout $19 billion.

Economic progress in the heavilyindebted developing countries continuedto be uneven in 1988. Several countries(Chile, Colombia, Morocco, and thePhilippines) continued to achieve goodrates of economic growth, while eco-nomic activity in other countries stag-nated. Brazil, which had interruptedsome interest payments to banks inFebruary 1987, normalized its relationswith the international community in1988. A stand-by agreement with the



International Monetary Fund, a $62billion rescheduling package, and $5.2billion in new loans enabled Brazil toclear all its arrears to banks. Chilecontinued to make progress in managingits external debts in 1988 through buy-backs, conversions, and debt for equityswaps, thereby reducing its external debtto banks further in 1988. Argentina, onthe other hand, began in 1988 to incursignificant interest arrearages to banks.

During 1988, Mexico implemented asustained adjustment program aimed atinflation control, fiscal consolidation, andstructural transformation of its externalsector. In support of these policies, theU.S. Treasury and the Federal Reserveannounced in October 1988 that theywere prepared to develop a short-termbridge loan of up to $3.5 billion pendingMexico's development of loan programswith the World Bank and the IMF. Earlyin 1989, however, Mexico indicated thatit would not need this facility.

U.S. International Transactions

The U.S. merchandise trade and currentaccount deficits fell substantially in 1988.A $70 billion increase in merchandiseexports and a $37 billion increase inmerchandise imports yielded a tradedeficit of $127 billion for the year,compared with a deficit of $ 160 billion in1987. Meanwhile, a $15 billion declinein net receipts on service transactionsmainly reflected a reversal of capitalgains on the stock of U.S. direct invest-ment abroad as the 1987 depreciation ofthe dollar was followed by a smallappreciation in 1988. Excluding theinfluence of capital gains and losses, netservices improved by $3 billion in 1988as increases in operating income fromU.S. direct investment income abroadand receipts from other services were notquite offset by rising payments to foreign-ers on their portfolio investments. The

current account deficit for 1988 was $ 135billion, down from $154 billion in 1987.

The rise in the value of merchandiseexports in 1988 largely reflected a strongincrease in the volume of nonagriculturalexports, which rose almost 20 percentover the four quarters of 1988, a rate onlya bit below that over the preceding fourquarters. Much of the rise in U. S. exportsappeared to be associated with an im-provement in the price competitivenessof U.S. products, resulting from theearlier depreciation of the dollar andthe continued good performance of pro-ductivity and unit labor costs in U.S.manufacturing.

U.S. International TradeBillions of dollars

Balances

100current account ^—*s-

Merchandise trade

Ratio scale, billions of 1982 dollars

450

300

Total exports

Merchandise trade

1 i i L 150

Ratio scale, 1982 = 100

GNP fixed-weight price index

no• mports

1984 1986 1988

The data are quarterly, seasonally adjusted at annualrates, and are from the Department of Commerce.


International Developments 23

Demand for U.S. exports was alsosupported by fairly strong economicgrowth in the rest of the world. Thegrowth in export volume was spread overmost major categories of trade and wasespecially strong in capital goods (partic-ularly computers and computer parts).Although the fourth-quarter volume ofagricultural exports was about the samein 1988 as in 1987, increased deliveriesin the first half of 1988 (particularly to theSoviet Union) raised the total for the year8 percent above that for 1987. Prices rosebecause of the drought, and the value ofagricultural exports in 1988 was 30percent higher than in 1987.

The increase in the value of merchan-dise imports over the four quarters of

1988 reflected developments on pricingand volume. Significant price rises wererecorded for industrial supplies (ex-cluding oil), and smaller rises wererecorded for consumer goods, automo-tive products, and various categories ofmachinery. However, prices of someitems, notably oil and computers, fell andthereby held down significantly the in-crease in the implicit deflator for importsin the national income accounts. On afixed-weight basis, non-oil import pricesrose 7.4 percent. Most of the increase inthe volume of non-oil imports was con-centrated in capital goods, especiallycomputers and computer parts. Exclud-ing computers and parts, the volume ofnon-oil imports increased 1 percent.

U.S. International Transactionsl

Billions of dollars, seasonally adjusted

TransactionYear

1987 1988

Quarter

1987

Q4

1988

Ql Q2 Q3 Q4

Current accountMerchandise trade balance

ExportsImports

Investment income, netDirect investment, netPortfolio investment, net

Other services (including military transactions)Unilateral transfers, private and government

Private capital flowsBank-related capital, net (outflows, - )U.S. net purchases ( - ) of foreign securitiesForeign net purchases (+) of U.S. Treasury securities ..Foreign net purchases of U.S. corporate bondsForeign net purchases of U.S. corporate stockU.S. direct investment abroadForeign direct investment in United StatesOther corporate capital flows, net

Foreign official assets in United States (increase, + ) . .

U.S. official reserve assets, net (increase, - )

U.S. government foreign credits and other claims, net

Total discrepancySeasonal adjustment discrepancyStatistical discrepancy

1. Details may not add to totals because of rounding.•Less than $500 million absolute value.

-154 -135 - 3 4 - 3 7 - 3 4 - 3 3 - 3 2-160 -127 - 4 1 - 3 5 - 3 0 - 2 9 -32

250410

2042

- 2 1- 1

- 1 3

47- 4- 82715

- 4 442

5

45

9

1

180

18

320446

331

- 2 82

- 1 4

21- 72028

- 1- 2 0

42- 3

39

- 4

4

170

17

681091319

- 6*

- 4

- 86

- 2

2012

20

4

1

163

13

75110

7- 6

- 3

- 473

*- 7

72

25

2

- 1

440

79110- 2

5- 7

1- 3

411825911

13- 7

- 1

- 1 3

- 1 0

82111- 1

6- 7

1- 3

171

- 2371

- 5

- 3

- 7

2

24- 529

84116

512

- 7*

- 4

142

- 349

- 2- 913

n.a.

11

2

3

15

- 4

SOURCE. Department of Commerce, Bureau of Eco-nomic Analysis.



The value of oil imports declined in1988 as a decline in price more than offsetan increase in volume. The price of oildropped about $5 per barrel during 1988,reaching a low point of $12.90 per barrelin the fourth quarter. The average priceof oil in 1988 was about $14.40 perbarrel, less than the 1987 average, $17.33per barrel, and well below the rangerecorded during the 1980-1985 period,$25-$35 per barrel. Oil prices declinedduring 1988 in response to OPEC oilproduction in excess of quotas. In anaccord reached in December, however,OPEC agreed to limit production, andspot prices moved up sharply. The vol-ume of U.S. oil imports rose from anaverage of 7.4 million barrels per day inthe first three quarters of the year toalmost 8 million barrels per day in thefourth quarter in response to the earlierprice decline. Oil imports in 1987 hadaveraged 6.8 million barrels per day.

The substantial U.S. current accountdeficit in 1988 ($135 billion) was bal-anced by recorded net capital inflows of$119 billion and a statistical discrepancyof $17 billion. These net capital inflowsbrought the officially recorded U.S. netindebtedness to foreigners to about $500billion at the end of 1988, though this isprobably overstated if full account weretaken of current market values of U.S.direct investment assets abroad.

Official reserve holders, both U.S. andforeign, accounted for a large part of therecorded capital inflow in 1988 ($35billion). The bulk of the foreign officialinflows of $39 billion were invested inU.S. Treasury securities. Increases inreserves held in the United States wereparticularly large for certain smallerindustrial countries and newly industrial-ized countries. Reserve holdings in theUnited States by the G-10 countries alsoincreased; this change largely reflectedthe shifting of dollar investments fromthe Euromarkets and the accumulation of

interest earnings rather than exchangemarket intervention during 1988.

Private capital inflows were also large($75 billion) and were mainly accountedfor by securities transactions. Privateforeigners purchased, net, $20 billion inU.S. Treasury securities in 1988, incontrast to $8 billion in net sales in 1987.Private foreign purchases of U.S. corpo-rate bonds were substantial, as in 1987,but there were small net sales of U.S.corporate stocks.

Recorded U.S. direct investmentabroad fell in 1988, in part because of theeffect of currency translation oh rein-vested earnings and also because of thesale of assets by petroleum companies.Acquisitions of European companies byU.S. investors accelerated sharply inanticipation of the 1992 unification of theEuropean market, but they were of farsmaller scale than foreign acquisitions ofU.S. companies.

Foreign Currency OperationsIntervention sales of dollars againstmarks by U.S. authorities exceeded theirpurchases of dollars against yen. Of thenet intervention total of $1,039 millionsold, $600 million was for the FederalReserve System account. The Systemrealized profits of $435 million from itsintervention transactions. The rise in thevalue of the dollar against foreign cur-rencies over the year resulted in transla-tion losses of $1,121 million on Systemholdings of foreign currencies. At year-end the value of those balances, primarilymarks, was $9,129 million. The Systemadded to its balances of foreign cur-rencies during the year through purchasesagainst dollars from other official institu-tions. The only activity in the Federal Re-serve's Reciprocal Currency (Swap) Net-work was a drawing of $700 million bythe Bank of Mexico in August, a draw-ing completely repaid in September. •


25

Monetary Policy Reports to the Congress

Given below are reports submitted to theCongress by the Federal Reserve onFebruary 23, 1988, and July 13, 1988,pursuant to the Full Employment andBalanced Growth Act of 1978.

Report on February 23,1988

Monetary Policy and the EconomicOutlook for 1988

The national economy has scored majorgains in the past year. Growth of realgross national product at 3% percentover the four quarters of 1987 outstrippedmost expectations, and the unemploy-ment rate dropped below 6 percent forthe first time in this decade. With suchsectors as agriculture, mining, and man-ufacturing benefiting considerably froman improved competitive position inter-nationally, the expansion of the economywas better balanced than in 1985-86.Wage increases remained moderate andcontributed to favorable cost trends inmany sectors; however, a rebound in oilprices, coupled with the effects of thedollar's decline on the prices of importedgoods generally, pushed the rate of priceinflation back up to the 4 percent range bymost measures.

At times last year, soaring commodityprices and sharp declines in the dollar andbond prices signaled the possibility ofgreater inflationary dangers. With theeconomy moving toward higher levels ofresource utilization, the Federal Reservehad to be especially alert to these andother indications of pressures that mighthave led to a significant departure fromthe longer-run trend toward price stabil-ity. In these circumstances, monetarypolicy was characterized by a tendency

toward greater restraint through lastOctober; this was reflected in a moderaterise in money market interest rates, whichin turn damped growth of the monetaryaggregates. While M3 grew at a paceequal to the lower bound of the range setfor the year by the Federal Open MarketCommittee, M2 fell short of its range.After the plunge in the stock market inOctober, the System focused its effortsprimarily on ensuring adequate liquidityin the economy, and since that timeinterest rates have reversed a good part ofthe rise that occurred earlier in 1987.

However, conditions in financial mar-kets have yet to return fully to "normal,"and the edginess of participants continuesto be reflected in volatility and fairlysizable risk premia. Moreover, therehave been some signs of weakness in theeconomy recently. In particular, thefourth quarter of 1987 was marked by asharp rise in inventories in a few sectors,and there were indications of a slackeningin labor demand early this year. Againstthis backdrop, the system eased a bitfurther the pressures on reserve positionsof depository institutions in the pastseveral weeks.

But while the Federal Reserve has hadto be responsive to the risks of an eco-nomic downturn, it has not lost sight ofthe potential influence of policy actionson longer-term trends in the economy.The United States is in the process of animportant readjustment in the balance ofeconomic activity, after a period ofseveral years in which growth of domes-tic spending outstripped the pace ofdomestic production. Over that span, thetrade balance moved into deep deficit,and the nation began to amass a huge netexternal debt. It is important to allow


26 Monetary Policy Reports

room for a significant improvement inour trade balance, especially given thathigh rates of capacity utilization and lowunemployment evident in many segmentsof industry suggest the need for addedcare in maintaining progress toward pricestability.

These considerations underlay thedecisions of the Federal Open MarketCommittee when it met earlier this monthto chart its monetary policy strategy for1988. Such considerations also must bekept in the forefront as decisionmakerselsewhere in the government set policy.In particular, continuing fiscal restraintis crucial if we are to free up resources tofinance productivity-enhancing privateinvestment while bringing about an im-proved pattern of international transac-tions. Moreover, additional efforts atbringing greater coherence to policiesdomestically and internationally willpromote greater stability in financialmarkets and greater internal and externalbalance to the economy.

Monetary Policy Plans for 1988Decisions regarding the ranges for moneyand credit growth in 1988 were shaped inpart by the experience of 1987. LastFebruary, the FOMC established annualtarget ranges of 5Vi to %Vi percent forboth M2 and M3; both aggregates hadincreased more than 9 percent in 1986,but slower growth was expected to beconsistent with the Committee's goal ofsustaining business expansion whilemaintaining long-run progress towardprice stability.

The deceleration proved sharper thananticipated, and in July, the Committeestated that growth for the year around thelower ends of these ranges, or even belowthem, might be acceptable in certaincircumstances; velocity had increased inthe first half of the year partly under theinfluence of rising interest rates, and theCommittee agreed that if inflation forces

Ranges of Growth for Monetaryand Debt AggregatesPercent change, fourth quarter to fourth quarter

M2M3Debt

Aggregate 1988

4to84to87 to l l

1987

5*4 to 8 V451/2 t o g i / 2

8toll

were to exhibit renewed strength andinterest rates were to increase further inthe second half of the year, continuedslow money expansion might be appro-priate. Rates did move upward again inthe late summer, including an increase ofVi percentage point in the discount rateto counter potential inflation. M2 growthdid in fact fall substantially short of theCommittee's range, at 4 percent for theyear, while M3 growth, at 5Vi percent,was at the lower end of its range.

The velocity of M2 has exhibited asubstantial short-run sensitivity to move-ments in market rates of interest. Al-though deregulation has made it possiblefor institutions to keep rates on depositsin line with market interest rates, inpractice the adjustment of rates on manyinstruments has been sluggish. In addi-tion, savers seemingly have become moreattuned to alternative investment oppor-tunities, responding strongly to changesin relative returns. As a result, thesensitivity of money to movements inmarket interest rates seems to haveincreased since deregulation. In 1987, asrates rose, savers had incentives to favormarket instruments, and their responseheld down the growth of M2, and to alesser extent M3, resulting in increases intheir velocities. This outcome was inmarked contrast to 1986, when fallinginterest rates and inflation were reflectedin faster money growth and substantialdeclines in velocity.

For 1988, the Committee set ranges of4 to 8 percent for growth of M2 and M3.Expansion of money within these ranges,


Monetary Policy Reports 27

whose midpoints are one percentagepoint lower than those of the ranges forlast year, would be expected to supporteconomic growth at a pace that is consis-tent with continued external adjustmentand progress over time toward pricestability. In light of the experience ofrecent years, which have been marked bylarge swings in velocity, the ranges werewidened somewhat. Institutional changeis a source of continuing "noise" in therelationship of money growth to eco-nomic activity; in addition, there clearlyis a strong, systematic sensitivity ofvelocity to changes in market rates ofinterest. This sensitivity means that evensmall changes in rates occasioned byvariations in spending or prices can havesizable effects on the quantity of moneythe public wishes to hold. Combined withan uncertain outlook for the economy andinflation, this implies that wider rangesare needed to encompass possible out-comes for monetary growth consistentwith satisfactory economic performancein 1988. Thus, while the Committee atthis time expects that growth of M2 andM3 will be around the middle of theirranges, the outcome could differ if signif-icant changes in interest rates are requiredto counter unanticipated weakness inaggregate demand or an intensification ofinflation. In carrying out policy, theCommittee will continue to assess thebehavior of the aggregates in light ofinformation about the pace of businessexpansion and the source and strength ofprice pressures, with attention to theperformance of the dollar on foreignexchange markets and other indicators ofthe impact of monetary policy.

The Committee will continue to moni-tor the growth of debt in 1988. Theexpansion of the debt of domestic nonfi-nancial sectors is expected to slow some-what from the 9!/2 percent pace of 1987,to around the middle portion of a 7 to 11percent range. Growth of debt, however,

appears likely to outpace that of income,as it has for the past several years;although the debt of governmental unitsmay not grow as rapidly as it did lastyear, continued rapid expansion of pri-vate debt is probable, unless the currenttide of corporate restructurings ebbs.

The Committee decided not to estab-lish a range for M1 in 1988. It is especiallydifficult to anticipate the relationshipbetween growth in this aggregate and theperformance of the economy. The char-acter of this aggregate had been affectedmore than the broader monetary aggre-gates by deregulation, because it nowcontains a large volume of interest-earning accounts that serve as savings aswell as transactions vehicles. The rateson these accounts have proven especiallyslow to respond to market rates, andinflows to these accounts are very sensi-tive to differentials in interest returns.Because flows into and out of NOWaccounts frequently involve other retaildeposits, they do not greatly affect M2 orM3, but do result in sizable variations inMl growth. Moreover, demand depos-its, which have demonstrated increasedsensitivity to rate movements in recentyears, also are being affected by evolvingpractices in payments for bank servicesand in business cash management.

Economic ProjectionsAs table 2 indicates, the uncertaintiesattending the present economic situationare reflected in a considerable range offorecasts among Committee membersand other Reserve Bank presidents. How-ever, the central-tendency ranges shownencompass the vast majority of forecastsand point to growth in real GNP of 2 to2Vi percent in 1988.

This pace of activity would be expectedto generate appreciable gains in employ-ment over the year—about in line withlabor force growth—and the civilianunemployment rate is projected to change



Economic Projections for 1988Percent

Measure

FOMC members and otherFRB Presidents

Range Centraltendency

Admini-stration

GNP, change from fourth quarter to fourth quarterNominalRealImplicit deflator

Unemployment rate, average level in the fourthquarter

4to61/2V4to3

2Vi to 42to2V4

5% to6

6.42.43.9

5.81

little on balance between now and the endof 1988. Prices, as measured by theimplicit price deflator for GNP, areexpected to rise 314 to 3% percent, notappreciably different from the pace lastyear; consumer prices likely will increasea little faster than the deflator. Thecentral-tendency forecasts encompass theadministration's projections for real GNP,but are a bit more optimistic on prospectsfor price inflation.

Higher real net exports of goods andservice are expected to provide a majorimpetus to U.S. economic activity in1988. As reflected by the rapid growth ofreal exports of goods and services ofmore than 15 percent last year, theinternational competitiveness of U.S.producers has improved significantly. Byand large, U.S. manufacturers have letthe foreign currency prices of theirproducts decline with the depreciation ofthe dollar, achieving enhanced profitabil-ity through greater volume and aggres-sive efforts to increase efficiency andcontrol costs. This enhanced competitive-ness is expected to provide a furtherboost to export growth this year, whilethe increases in the relative prices offoreign goods apparently now in trainshould curb import growth. As a result,some improvement in the nation's currentaccount balance is anticipated this year.

In contrast, domestic demand is ex-pected to remain relatively subdued in

1988, as the economy moves toward abetter balance between domestic spend-ing and domestic production. Consumerdemand probably will be damped to adegree by the loss of household wealthassociated with the decline in stock priceslast fall. Some increase in personal savingwould be beneficial to the economy, as itwould aid investment and help reduceour dependence on foreign capital. How-ever, a severe retrenchment by consum-ers could have a significant deflationaryeffect; fortunately, the indications fromsurveys of household attitudes are thatthe sharp drop in confidence that occurredimmediately after the October shock hasbeen substantially reversed. Housingactivity should pick up some in comingmonths as a result of the recent decline inmortgage rates. In addition, businessspending on plant and equipment shouldbe buttressed by the desire to build uponthe progress made in regaining interna-tional competitiveness and by alreadyhigh levels of capacity utilization in anumber of major industries.

Although real GNP should rise moder-ately for the year as a whole, the patternof growth may be uneven over time. Anadjustment to the runup in inventoriesthat occurred in the fourth quarter of1987 could produce relatively slow out-put growth during the first part of theyear. Such an adjustment appears inprocess in the auto sector, in light of



domestic automakers' current assemblyschedules; there may also be similarpatterns in a few other sectors, but at thistime there are no signs that deep cutbacksin production will be necessary.

Although no significant change isanticipated in the overall pace of inflationthis year, the primary source of the rise inprices is likely to change. Assumingrelative stability in world oil prices,domestic energy prices should increaseonly a bit this year after their sharprebound in 1987. However, prices ofnon-oil imports likely will continue torise substantially further in the wake ofthe decline in the foreign exchange valueof the dollar in 1987, providing continu-ing impetus to domestic inflation. Thisimpulse to prices associated with thedollar's depreciation is an unavoidablecomponent of the process of correctingexternal imbalance, as an increase in therelative price of foreign goods encour-ages exports and discourages imports.However, if we are to maintain andextend the progress made in the 1980stoward price stability, it is crucial thatbusiness and labor continue to exerciserestraint in price and wage behavior. Theforecasts of the FOMC members andother Reserve Bank presidents anticipatethat such a pattern will persist throughthis year. It is important, too, that theCongress remain mindful of the effects oflegislation on the cost structure of Amer-ican industry.

The forecasts of the Federal Reservepolicymakers also assume furtherprogress in reducing the federal budgetdeficit. Continuing evidence of fiscalrestraint is viewed as crucial in main-taining financial conditions that are con-ducive to balanced growth and to animproved pattern of international trans-actions. It is critical, in that regard, thatthe package of deficit-reduction measuresagreed to in December for 1988 and 1989be fully implemented.

The Performance of the EconomyDuring the Past Year

The economy completed a fifth consecu-tive year of expansion in 1987, with realgross national product increasing aboutVA percent over the four quarters of theyear.l The overall growth in output notonly was greater than in 1986, but wasbetter balanced across industries andregions of the country. In addition, therise in activity supported a net gain ofmore than three million jobs last year,and the civilian unemployment rate stoodat 5.8 percent in January of this year,nearly a percentage point below its year-ago level.

Virtually all broad measures of infla-tion—after dropping sharply in 1986—rebounded in 1987 to about the pace seenin 1984 and 1985. In large part, thepattern of price movements over the pasttwo years reflected developments in oilmarkets, where prices rebounded lastyear after a sharp drop in 1986. How-ever, prices also rose sharply for someimported consumer goods and, at theproducer level, for a number of industrialcommodities. In contrast, wage trendsremained restrained last year, althoughtightening labor markets and the fasterpace of inflation stemmed the pattern ofwage deceleration evident in previousyears.

As suggested above, a number ofsectors that had been depressed in recentyears began to show signs of improve-ment in 1987. The turnaround was mostpronounced in manufacturing, whereproduction and employment, especiallyin capital goods and industrial materialsindustries, picked up sharply, in responseboth to stronger orders from abroad andto higher levels of capital spending bydomestic producers. However, improve-

1. Except where noted, all percent changes arefrom the fourth quarter of the previous year to thefourth quarter of the year indicated.



ment also was apparent in the domesticenergy sector, where, in response to thepartial recovery in oil prices, oil drillingretraced a small part of its earlier precip-itous decline, and in agriculture, wherehigher exports and continued federalsupport boosted farm income and helpedbring about some firming in land prices.

In addition, the composition of activitymoved toward a better balance betweendomestic spending and domestic produc-tion. Weak consumer spending reducedthe growth of domestic demand in 1987,while domestic production was supportedby the increased international competi-tiveness of U. S. industry as the continuedimprovement in productivity in manufac-turing and the moderate pace of increasein labor compensation permitted U.S.firms to lower the foreign currency pricesof their goods while expanding profits.Indeed, much of the improvement ineconomic conditions last year could betraced to the effects of this increasedcompetitiveness on the volume of importsand exports. Nevertheless, the combina-tion of a substantial increase in the valueof oil imports and rising prices of non-oilimports more than offset an improvementin real net exports, and the nominal tradedeficit widened to almost $160 billion in1987. In addition, a further erosion of netincome on investments and other servicetransactions pushed the current accountdeficit above $160 billion.

Although economic activity rose at abrisk pace for 1987 as a whole, theOctober stock market crash added sub-stantial uncertainty to the prospects forcontinued economic growth at year-end.The sharp drop in stock prices reducedhousehold wealth considerably, raisingthe possibility of a further slowing inconsumer spending, domestic businessinvestment, and housing construction. Itis too early to assess what the ultimateeconomic effect of the stock marketdecline will be, but that effect likely will

be offset at least in part by the decline ininterest rates since the crash.

The External SectorThe dollar depreciated by 14 percent innominal terms over the course of 1987relative to a trade-weighted average ofthe currencies of the other G-10 coun-tries, leaving the dollar by the end of theyear at a level almost 45 percent below itsFebruary 1985 peak and close to its 1980low. Although consumer prices in theUnited States rose somewhat more rap-idly on average than in major foreigncountries, the depreciation of the dollarwas almost as great in real terms. How-ever, the dollar fell only about 6V2percent in real terms over the year againstan average of eight leading developingcountries. The decline in the exchangevalue of the dollar was resisted bysubstantial official intervention purchasesof dollars and an apparent movement ofdifferentials in long-term real interestrates between the United States and majorforeign countries in favor of the dollar.Nonetheless, some depreciation in thedollar evidently was seen by participantsin foreign exchange markets as a neces-sary element in the adjustment of thehuge U.S. current account deficit.

The U.S. merchandise trade deficitwidened for 1987 as a whole, but leveledoff on balance in the latter part of theyear. The volume of imports increased,reflecting a moderate expansion in bothoil and non-oil imports. Moreover, non-oil import prices moved up further inresponse to the continuing decline in thedollar through 1987, and, with oil pricesalso up sharply, imports rose substan-tially in value terms. Higher importswere matched, to a large extent, bymerchandise exports, which also grewbriskly in 1987. Most of this growth wasin real terms, as prices of most exportsincreased only moderately in the face ofthe substantial decline in the dollar, and



prices of a few important products, suchas computers, continued to decline.Moreover, the expansion of foreign saleslast year was broadly based. Shipmentsabroad of capital goods showed particularstrength, and the volume of agriculturalexports also rose, as grain sales to theSoviet Union and China increased and asforeign soybean production dropped off.

Economic expansion abroad strength-ened only slightly in 1987, providingonly limited support for the improvementin the U.S. trade position. In the otherindustrial countries, economic activitypicked up somewhat by the middle of theyear after a slow start, but on average realGNP grew less than 3 percent over theyear. Outside of the industrial countries,real economic growth was uneven and onaverage tended to slow from its pace in1986. Activity expanded at a rapid rate inthe newly industrialized countries ofAsia, but slowed in Latin America, witha sharp decline in Brazilian growth morethan offsetting a small expansion inMexico. In the OPEC countries, outputfell as oil export volumes were con-strained in an effort to raise oil prices.

The Household SectorSpending by households, which had beena major contributor to growth in pastyears, slowed considerably in 1987. Realconsumer spending rose less than 1percent last year, after a 4 percent gain in1986. In large part, the cutback inspending reflected smaller increases inreal disposable income. Substantial em-ployment growth and increases in farmand interest income fueled continuedgains in nominal incomes, but a pickup inconsumer price inflation eroded much ofthat rise and reduced real income growthto about 2 percent last year, versus 3Vipercent in 1986. Moreover, although therise in stock prices added further tohousehold wealth through August andsupported consumption, the subsequent

stock market decline returned equitywealth to 1986 levels.

In general, consumers cut back theirexpenditures for both durable and nondu-rable goods, while spending on servicescontinued to increase at about the pace ofrecent years. Within the durables cate-gory, sales of new cars fell from 11V4million units in 1986 to about 10 lAmillion units last year. Some of thatdropoff can be traced to an especiallyslow pace of sales in early 1987, asconsumers shifted automobile purchasesinto 1986 to take advantage first of majorsales incentives and then of the sales taxdeduction available only under the oldtax law. Nevertheless, domestic autosales were relatively sluggish throughoutlast year, despite the availability much ofthe time of special incentive programs ona wide range of models.

Associated with the more cautiousspending patterns of consumers in 1987was a slowing in household debt accumu-lation. Consumer installment debt decel-erated sharply as households apparentlylimited their borrowing because of highdebt burdens and shifted toward homeequity loans in response to the reducedincentive, under the new tax law, tofinance expenditures with nonmortgagecredit. And, despite the growing popular-ity of home equity loans, growth of mort-gage debt also slowed last year as interestrates moved higher. Evidence as to theability of consumers to service theirexisting liabilities in 1987 was mixed.Delinquency rates for mortgage loansfell somewhat, but delinquency rates forconsumer loans changed little over theyear while loan charge-offs rose.

Housing activity in 1987 was dampedby the upward movement in mortgagerates, continued high multifamily va-cancy rates, and changes in the tax law.Total housing starts were 1.62 millionfor the year as a whole, about 10 percentbelow the 1986 total and the lowest in five



years. Single-family homebuilding beganthe year at a brisk pace, but weakenedconsiderably as conventional mortgageinterest rates rose beginning in April,reaching about 11 Vi percent for fixed-rate loans by mid-October. Althoughinterest rates on mortgages have droppedsubstantially since then, the stimulativeimpact of that change on housing demandmay have been offset thus far by stockmarket losses and reduced consumerconfidence. In the multifamily market,activity also weakened over the past year,as near record-high vacancy rates onrental units and tax-law changes thatreduced the profitability of rental housingcontinued to deter building in that sector.

The Business SectorBusiness spending on plant and equip-ment rose about 3 % percent in real termsin 1987. In large part, investment spend-ing was associated with the overall pickupin economic activity. However, financialconditions also were conducive to spend-ing, with cash flows strong and the costsof external capital fairly attractivethrough much of the year.

For equipment, the year began on theweak side, with first-quarter spendingdown sharply after firms shifted expendi-tures into late 1986 to take advantage ofthe favorable treatment of investmentunder the depreciation provisions of theold tax law. However, investment inequipment rebounded sharply in thesecond and third quarters of last year.Much of the strength was in the computerand other office equipment area, whereexpenditures picked up in 1987 afteressentially no growth in 1986. In con-trast, spending on industrial equipmentwas not especially brisk despite the stronggains in manufacturing production.

Outlays for nonresidential structuresalso turned up last year after a sharp dropin 1986. Much of the turnaround inspending reflected an improvement in the

energy sector in response to higher oilprices. In particular, oil and gas drillingwas up more than 20 percent over theyear after having dropped by 40 percentin 1986. Outside of the energy area,spending on structures was flat, afterfalling nearly 9 percent in 1986. Produc-ers were somewhat less reluctant toexpand industrial plant facilities owing tothe substantial rise in industrial produc-tion, while office construction, althoughdown a bit last year, held up surprisinglywell in view of the very high vacancyrates that have persisted in recent years.

Business inventory investment gener-ally moved in line with sales over most of1987, but a sharp accumulation of stocksin the fourth quarter suggested the possi-bility of excess inventory levels at someretailers. In manufacturing, inventorieschanged little on balance over the firsthalf of the year, but rose considerably inthe second half as activity picked up.Stockbuilding was most evident in capitalgoods industries, where orders and ship-ments strengthened substantially, as pro-ducers added supplies in anticipation ofhigher production levels. In the retailtrade sector, inventories of goods otherthan automobiles also rose over the year,pushing the inventory-sales ratio to arelatively high level by December. Theaccumulation was most pronounced forhome goods such as furniture and appli-ances and for apparel. At auto dealers,stocks generally rose in 1987, and, atyear-end, supplies appeared to be wellabove desired levels despite the preva-lence of special incentive programs andproduction cutbacks late in the year.

Before-tax profits of nonfinancial cor-porations increased substantially lastyear. Profits were especially strong inmanufacturing, where the volume ofshipments picked up and firming pricesand good cost control contributed toimproved margins. In other industries,before-tax profits were little changed



from 1986 levels. However, after-taxprofits fell a bit on an annual averagebasis last year for the sector as a whole,as increases in corporate tax liabilitiesassociated with the new tax laws morethan offset the overall rise in profits.

The Government SectorLast year, there was significant progresstoward reducing federal budget deficits.The FY1987 deficit, at $150 billion, wasabout a third lower than the record levelof the previous year, and the administra-tion and Congress reached agreement ondeficit reduction actions totaling morethan $30 billion in FY1988 and about $46billion in FY1989. However, a numberof factors that raised receipts and loweredoutlays in FY1987 are not likely to berepeated, and—absent further legislativeaction—deficits could expand again un-less there are particularly favorable eco-nomic circumstances.

About half the deficit reduction couldbe traced to these one-time factors, astax-reform effects boosted revenues, andasset sales and changes in the timing ofcertain payments reduced outlays. Theremainder of the reduction in the deficitreflected strong revenue growth and avery small underlying rise in outlays.The economic expansion boosted re-ceipts, while, on the outlay side, lowerinterest rates in FY1987 offset some ofthe increase in interest payments associ-ated with the rise in the size of the nationaldebt. In addition, the improvement in thefarm sector reduced agricultural supportpayments, and lower inflation in 1986held down cost-of-living adjustments formany entitlements. Spending restraintalso had a noticeable effect: the rise inmilitary spending slowed, and cuts indiscretionary programs reduced outlaysfor education, energy, and intergovern-mental assistance.

The state and local sector recorded asizable deficit in its operating and capital

accounts (which exclude social insurancefunds), as expenditures expanded morerapidly than receipts. Many states tookaction in early 1987 to deal with erodingfiscal positions. About half of the statescut their budgets last year and two-thirdsraised taxes, with many of the budgetadjustments in energy and farm states.However, pressing needs to expand andupgrade schools, highways, and correc-tional institutions continue to squeezemany state and local budgets.

Labor MarketsEmployment increased 3 million over the12 months of 1987, as the pickup ineconomic activity led employers to addworkers at a brisk pace. In contrast toprior years, when the labor market wascharacterized by sharp disparities acrosssectors, the strengthening in hiring in1987 was widespread by industry. Inmanufacturing, employment edged upover the first half of the year and then rosesubstantially in the second half in re-sponse to the sharp gains in industrialproduction. Moreover, the expansion ofjobs in the trade, service, and financeindustries remained sizable during mostof 1987, although hiring in trade andfinance apparently slowed somewhat inthe latter part of the year in the wake ofsluggish consumer spending and the stockmarket crash.

The demand for labor considerablyoutpaced increases in labor supply, andthe civilian unemployment rate droppednearly 1 percentage point over the year to5 % percent at year-end—the lowest levelsince 1979. The jobless rate for adultmen moved down to about 4 Vi percent bythe end of last year, reflecting stronggrowth in the industrial sector. The ratefor adult women fell to around 4%percent early in the year, but changedlittle in the second half.

As the unemployment rate droppedsharply, wage increases, which had been



decelerating for several years, leveledout; however, they showed little signs ofacceleration last year. Hourly compensa-tion, as measured by the employmentcost index, advanced 3 lA percent in the12 months ended December, about thesame pace as in 1986. The moderate risein compensation, which was fairly wide-spread across industries and occupations,occurred despite a substantial pickup inconsumer price inflation. As a result, realhourly compensation fell last year andhas averaged only about a Vi percentincrease annually since 1984.

Unit labor costs in the nonfarm busi-ness sector rose only VA percent lastyear, after a 2 percent increase in 1986.The continued restraint in labor costsprimarily reflected moderate compensa-tion growth, as productivity gains for thesector as a whole have improved littlefrom the sluggish pace of the 1970s. Incontrast, manufacturers apparently havemade significant progress in increasingefficiency and streamlining operations,and output per hour in this sector rosenearly 3 Vi percent in 1987. This advancein manufacturing productivity, coupledwith continued slow growth in manufac-turing wages, continued to put downwardpressure on factory unit labor costs lastyear.

Price DevelopmentsInflation rebounded in 1987, largelyreflecting higher energy prices and con-tinued price hikes for imported goods.The fixed-weighted price index for GNPincreased about 4 percent for the year as awhole, after a 2lA percent rise in 1986.The consumer price and producer priceindexes suggested an even sharper accel-eration in prices over 1987, owing to thegreater importance of energy in thoseindexes. The consumer price index wasup AVi percent in the 12 months endedDecember, after a 1 percent rise in 1986,

while the producer price index, whichincludes only prices of domesticallyproduced goods, rose 2lA percent overthe year, after dropping 2*4 percent in1986.

The overall rise in energy prices in1987 reflected both a sharp rebound inprices early last year and an additionalrunup in prices around midyear. Spotprices for West Texas Intermediate crudeoil (the benchmark crude oil in the UnitedStates) rose $3 per barrel in January oflast year to about $18.50 per barrel inresponse to lower OPEC productionlevels. Tensions in the Persian Gulfboosted prices further during the summerto a high of around $20 per barrel in earlyAugust. Precautionary stockbuilding dur-ing this period, coupled with higher levelsof production by OPEC and the absenceof any major disturbance in the Gulf,subsequently helped put downward pres-sure on crude oil prices, and oil pricessince late last summer have retreated toabout $17 per barrel. Retail prices forgasoline and home heating oil closelyfollowed movements in crude oil prices,rising around 20 percent through Augustand then falling somewhat in the latterpart of the year. In contrast, prices fornatural gas and electricity were down orlittle changed last year, reflecting afurther adjustment to the net decline in oilprices since 1985.

Outside of the energy area, priceincreases for goods picked up last year,while prices for nonenergy services roseabout AVi percent, a bit less than in 1986.A jump in used car prices accounted formuch of the acceleration in goods prices,but further increases in import pricesassociated with the falling exchange valueof the dollar also were evident in 1987.As a result, retail prices for many itemswith high import proportions, such aswomen's and girls' apparel, photographicequipment, and toys and music equip-ment, posted notable increases last year.



Prices for many industrial commodi-ties also rose considerably over thecourse of 1987. In addition to the increasein crude oil prices, copper prices morethan doubled last year, and steel scrapprices were up 36 percent by year-end.To some extent, the sharp rise in com-modity prices reflects the influence ofdollar depreciation on markets for inter-nationally traded goods. However, tem-porary supply shortages for some indus-trial metals and the firming in U.S.industrial activity undoubtedly also hadan important influence on commoditymarkets. In the agricultural sector, grainprices fell early in 1987 as farmers soldlarge amounts of grain received throughgovernment programs, but rebounded inthe latter part of the year as exportspicked up in response to the falling dollar.

Monetary Policy and FinancialMarkets in 1987

In 1987, the Federal Reserve continuedto face the difficult task of charting policyin an environment in which considerableuncertainties clouded the relationshipbetween the behavior of the monetaryaggregates and the performance of theeconomy. As a result, while the FederalOpen Market Committee set targets forsome of the monetary aggregates, it wasdeemed necessary to maintain a flexibleapproach in conducting its operations,looking at a broad range of information injudging when or if to adjust its basicinstruments—reserve availability and thediscount rate—in response to deviationsin monetary growth from expected rates.Such factors as the pace of businessexpansion, the strength of inflation andinflation expectations, and developmentsin exchange markets played a major rolein governing the System's actions, and inlight of the behavior of these otherfactors, growth in the targeted aggre-

gates, M2 and M3, was permitted to runat or below the established ranges.

During episodes beginning in thespring and then again in late summer, thedollar came under sustained downwardpressure and inflationary expectationsappeared to be on the rise, partially inresponse to the dollar's weak perfor-mance. With the economy expanding atrates sufficient to produce rising rates ofresource utilization, the FOMC soughtsome firming of pressures on reservepositions and increased the discount ratein September. When stock prices col-lapsed in mid-October, the resultingturmoil required that the focus of policybe on ensuring the liquidity of the finan-cial system. Over the remainder of theyear, emphasis in the conduct of openmarket operations shifted toward mainte-nance of steady and somewhat easiermoney market conditions to promote areturn of stability to financial marketsgenerally and to cushion the effects of thestock market decline on the economy.

Behavior of Money and CreditM2 increased only 4 percent in 1987,well below both the lower bound of its5Vi to 8!/2 percent annual growth rangeand its more than 9 percent rate ofexpansion over the preceding two years.The velocity of this aggregate picked upsubstantially, reversing a portion of thesharp decline that occurred in 1985-86.The rise in velocity may have reflected inpart a number of special factors affectingthe public's demand for M2 balances in1987, including a much-reduced rate ofsaving out of income and a preference fordrawing upon liquid assets—rather thanusing consumer credit—to finance pur-chases, the latter in the wake of taxreform measures reducing deducibilityof nonmortgage interest payments. How-ever, much of the pickup in velocityappears attributable to increases in thecompeting returns on other assets, which



raised the opportunity costs associatedwith holding M2 balances.

The widening gap between marketrates and offering rates was most pro-nounced for the more liquid retail de-posits, where rates are changed veryinfrequently. Early in the year, opportu-nity costs on these accounts were still lowand inflows were large. As market ratesrose, though, yields on these accountsbecame increasingly less attractive andgrowth slowed; by late in the year, therewere net monthly outflows from bothsavings and NOW accounts. Also, moneymarket deposit accounts declined, for thefirst year since this component of M2 wasintroduced in late 1982. Expansion ofmoney marketmutual funds was sluggish.

In contrast to the very liquid retaildeposits, small time deposits expanded in1987, after two years of zero or negativegrowth. Depository institutions tend tokeep the offering rates on these depositsfairly well in line with market alternativesof about the same maturity. Withintermediate-term rates rising more thanshort rates in 1987, the spread betweenyields on small time instruments andthose on more liquid retail accountswidened considerably, providing depos-itors with an incentive to shift funds intosmall time deposits from the more liquidretail instruments.

M3 was stronger than M2 over theyear, expanding 5V2 percent and endingthe year at the bottom of its 5Vi to SV2percent annual growth range. Its fastergrowth reflected heavy reliance by depos-itory institutions on large time depositsand on certain other instruments includedin M3 but not in M2. Both commercialbanks and thrift institutions stepped uptheir issuance of wholesale managedliabilities to fund more asset growth thancould be accommodated by greatly re-duced inflows of core deposits. Even so,M3 growth was subdued relative to prioryears, reflecting in part reduced overall

needs for funds as asset expansion atbanks and thrifts slowed. In addition,banks relied heavily on managed liabili-ties obtained from non-M3 sources,especially funds borrowed from their for-eign branches.

Growth of Ml slowed to 6*4 percentfrom the very rapid 15 V2 percent increaseposted the previous year, owing to asmall decline in demand deposits and asharply lower expansion of other check-able deposits. The velocity of Ml in-creased slightly, after a record postwardecline a year earlier. The sharp slowingof growth and the abrupt turnabout in itsvelocity are indicative of the increasedsensitivity to movements in market inter-est rates that has emerged for Ml inrecent years. As suggested by its compar-atively larger deceleration in 1987, Mlnow appears to have a greater sensitivityto changes in interest rates than thebroader aggregates.

In large measure, the greater sensitiv-ity of Ml reflects the increasing share ofother checkable deposits. Because NOWaccounts pay explicit interest, they serveas an attractive savings vehicle as well asa transactions account. The availableinformation suggests that owners ofNOW accounts are quite sensitive tochanges in opportunity costs, shiftingsavings balances between these accountsand other, less liquid retail deposits. Atthe beginning of 1987, market interestrates were very close to NOW accountrates, and with the opportunity cost solow, depositors apparently placed unusu-ally large amounts of interest-sensitivefunds in these accounts; as market ratesrose during 1987, these funds evidentlywere shifted out of NOW accounts insearch of higher yields.

The abrupt weakening of demand de-posits after two years of rapid expansionsuggests that this component of Ml alsois sensitive to interest rates. Highermarket interest rates obviously provide



Growth of Money and Debtl

Percent change at annual rate

Period

Fourth quarter tofourth quarter

1979 .1980 .1981

1982198319841985 .

19861987

Quarterly growth1987: 1

234

Ml M2 M3

Debt ofdomestic

non-financialsectors

7.7 8.2 10.4 12.37.5 8.9 9.5 9.65.2 9.3 12.3 10.0

(2.5)2

8.7 9.1 9.9 8.910.2 12.1 9.8 11.35.3 7.6 10.4 14.2

12.0 8.9 7.7 13.3(12.9)3

15.6 9.4 9.1 13.26.2 4.0 5.4 9.6

13.2 6.5 6.5 10.56.6 2.6 4.7 8.7

.8 2.8 4.5 8.13.9 4.0 5.6 9.7

1. Ml, M2, and M3 incorporate effects of benchmarkand seasonal adjustment revisions made in February 1988.Certain technical redefinitions affecting only Ml weremade at the same time.

2. Ml figure in parentheses is adjusted for shifts toNOW accounts in 1981.

3. Ml figure in parentheses is the annualized growthrate from the second to the fourth quarter of 1985.

incentives to economize on balances thatearn no interest. Higher rates also permitbusiness firms to reduce the amount ofbalances held with banks as compensa-tion for services provided but not paid forwith fees; because banks can earn greaterreturns by investing these funds whenrates are higher, they reduce the balancerequirements commensurately. Substan-tial amounts of demand deposits are heldunder compensating balance arrange-ments, which helps to explain a highinterest elasticity for demand deposits.Over time, though, there has been agradual movement toward the substitu-tion of explicit fees for compensatingbalances, and some reports indicate thatsuch shifts may have accelerated in late1987, thereby contributing to the steepdeclines in demand deposits near year-end. Higher mortgage rates also mayhave contributed to weakness in demand

deposits in 1987 by slowing the pace ofmortgage refinancing—an activity thattends to boost demand deposits tempo-rarily because the amount being prepaidon an old mortgage often is placed inescrow for a time in a demand depositaccount.

The collapse of equity prices boostedthe average level of all the aggregates abit in the fourth quarter, but M1 was mostnoticeably affected. Demand depositsrose sharply around the time of the crash,reflecting the increased volume of finan-cial transactions arising from the surge intrading activity. Other checkable de-posits also registered sizable inflows, assome funds withdrawn from the stockmarket probably were placed initially inthese accounts. Outside of Ml, sizableamounts of funds were transferred fromequity mutual funds into money marketmutual funds, which are included in M2.The boost to the aggregates was concen-trated in late October and proved tempo-rary, with deposits receding over themonth of November.

The debt of domestic nonfinancialsectors grew 9 Vi percent last year, endingthe year at the middle of the Committee'smonitoring range of 8 to 11 percent. Debtexpansion moderated considerably fromthe 13 VA pace of the two previous years,but still rose faster than income. Federaldebt growth slowed in 1987, as someprogress was made in reducing the fed-eral deficit. Borrowing by state and localgovernments fell substantially, partlyreflecting the damping effect of higherborrowing costs and the availability ofunspent funds from earlier financings. Inthe household sector, overall growth ofindebtedness slowed. Sluggish spendingand shifts toward greater reliance onhome equity lines of credit, in responseto the effects of tax reform in reducingdeducibility of interest payments onconsumer debt, held down use of con-sumer credit. However, a brisk pace of



home sales over most of the year helpedsustain the growth of mortgage debt atabout the elevated pace of 1986. Despitesome widening last year of the gapbetween internally generated funds andcapital expenditures, business borrowingdiminished in both short- and long-termmarkets. However, businesses continuedto retire equity last year through mergers,buyouts, and share repurchases, and thecredit needed to finance these retire-ments boosted the expansion of businessindebtedness.

Implementation of Monetary PolicyDuring the first half of 1987, monetarypolicy was carried out in an atmosphereof increasing concerns about the courseof inflation, arising in part from heavydownward pressure on the dollar. Growthof the economy was bringing aboutnoticeable increases in resource utiliza-tion, and inflation was picking up, reflect-ing the effect of a weaker dollar on importprices as well as a rebound of oil pricesfrom low 1986 levels. When the dollarcame under heavy pressure in late March,previously tranquil credit markets beganto exhibit concern about the effect thatdeclines of the dollar would have onprices. Long-term interest rates, in par-ticular, moved up strongly. In conjunc-tion with some easing moves abroad, theFederal Reserve sought somewhat greaterrestraint in the provision of reserves tothe banking system. Initially, this actionproduced further increases in interestrates, but subsequently, financial pres-sures eased somewhat. In response toreductions in interest rates abroad, tosome flattening in commodity prices, andto better news on the U.S. trade deficit,the dollar firmed and there was a broaddecline in interest rates, with long-termrates falling somewhat more than short-term rates.

When the FOMC met in July to reviewits growth ranges for money and credit,

all of the monetary aggregates had decel-erated considerably. The weakness inmonetary growth did not reflect anyevident weakness in the economy, how-ever; rather, the slower money growth,and accompanying strengthening in ve-locity, appeared largely attributable tothe rise in market rates of interest fosteredin part by the Federal Reserve's responseto adverse developments with respect tothe dollar and inflation. The Committeedecided to reaffirm its 1987 growthranges for M2 and M3; in doing so, itanticipated some pickup in the growth ofM2 over the remainder of the year, but itindicated that growth for all of 1987 nearor even below the bottom of the targetranges might be acceptable for bothaggregates, depending on the behavior oftheir velocities and other financial andeconomic developments, notably theevolving strength of inflationary pres-sures. The Committee also decided not toset a target range for Ml, given theunpredictability of the behavior of thisaggregate relative to economic activity.

For a short time after the July meeting,the dollar rose further but, with therelease of trade data in mid-August thatdisappointed market participants, thedollar again came under substantial down-ward pressure. Long-term bond yieldsmoved up sharply, as the dollar's weak-ness against a backdrop of strength in theeconomy spurred concerns about infla-tion and possible firming of monetarypolicy. Interest rates in short-term mar-kets also increased, but by lesser amounts.In light of the potential for greaterinflationary pressures, in part related toweakness in the dollar, the FederalReserve sought to reduce marginally theavailability of reserves through openmarket operations; it also raised itsdiscount rate Vi percentage point in earlySeptember to 6 percent. After the dis-count rate action, interest rates rosefurther, especially in short-term markets.



Stock prices, which had reached veryhigh levels relative to earnings and hadbeen falling since mid-August, plungedon October 19 in chaotic trading. Thestock market drop prompted a markeddecline in interest rates as investorssought refuge in the perceived safety offixed-income assets, especially Treasurysecurities. Although most stock indexesrecovered somewhat in the wake of thecrash, financial markets remained turbu-lent, with bond and equity prices fluctu-ating widely.

In a financial environment of extraor-dinary turmoil and apparent fragility, theFederal Reserve shifted the emphasis inthe conduct of open market transactionsto providing reserves generously to en-sure that adequate liquidity would beavailable to meet any unusual needs.Nonborrowed reserves grew rapidly inlate October to accommodate both a largeincrease in reserves required againstsurging transactions deposits and anenlarged demand for excess reserves. Aneasing of pressures on reserve positionsalso took place which, along with somediminution of inflation expectations, ledto a partial reversal of earlier increases ininterest rates. These actions helped tocalm the financial markets, althoughconditions remained somewhat unsettledover the rest of the year.

Early in 1988, as incoming data sug-gested that economic expansion over thefirst part of the year might be weak, bondrates dropped substantially and the Fed-eral Reserve sought some slight addi-tional easing in desired pressures onreserve positions. Better trade newsbolstered confidence in the dollar, andthe monetary aggregates showed signs ofrenewed strength.

Other Developments in Financial MarketsDespite the slower growth of debt and theoverall strength of the economy lastyear, there still were some signs of strain

and financial fragility in portions of theeconomy.

The nonfinancial corporate sector re-mained highly leveraged and thus poten-tially vulnerable to adverse changes inthe economic and financial environment.A combination of strong debt issuanceand massive net equity retirementsboosted the aggregate debt-equity ratioof these corporations, measured at mar-ket values at year-end, after a two-yeardecline resulting from increases in stockprices. Moreover, higher interest ratesalong with additional debt boosted bor-rowing costs, keeping the net interest-coverage ratio at about the very lowlevels recorded during the last recession.Reflecting the weakening of the financesof some corporations, the pace of down-gradings of corporate debt remained veryhigh in 1987, and a record $9 billion ofrated corporate bonds were placed indefault.

The household sector also exhibited afew signs of strain on personal finances.As noted previously, the pace of expan-sion of total household debt slowed lastyear, likely reflecting reduced deductibil-ity of consumer interest under the newtax code and weaker consumer spending.However, the growth of household debtstill outstripped that of disposable in-come, and the ratio of debt to incomereached new highs. For some individu-als , the strains posed by high debt burdensapparently remain quite severe, as thenumber of personal bankruptcies hasbeen growing rapidly over the last threeyears and setting new records. On theother hand, recent declines in the delin-quency rate on mortgage debt havebrought this indicator of financial stressmore into line with historical standards.

The banking industry was under somecontinuing stress in 1987, primarilyreflecting well-publicized difficulties withenergy and developing country loans, butin some parts of the country with agricul-



tural and real estate loans as well. Al-though most banks continue to be healthyand enjoy reasonable profits, souringenergy and agricultural loans in recentyears have led to record numbers of bankclosings, principally of smaller banks inthe midwestern and southwestern por-tions of the country; however, problemswith the quality of agricultural loansappear to be diminishing as the agricul-tural sector shows signs of improvement.

Provisioning by large banks for losseson troubled loan portfolios led to recordlosses in 1987 for the banking industryand to substantial declines in the bookvalue of shareholder equity of affectedbanks. Doubts regarding the ultimatecollectibility of loans to some heavilyindebted developing countries weigheddown the stock prices of many largebanks in 1987, but investor reaction tothe second-quarter decision to makeprovisions for substantial losses wasgenerally positive, and at the time shareprices rose for many banks taking thisstep. Difficulties persisted over the yearin making progress in handling the eco-nomic and financial problems of many ofthe developing countries, and in thefourth quarter a number of large banksannounced additional provisioning forlosses on such debt and, in some in-stances, write-offs of problem loans.

After several years of improvement,the financial condition of the thrift indus-try deteriorated in 1987. Aggregate earn-ings declined, with losses posted in thesecond and third quarters as a result ofheavy provisions for losses on assets,including a one-time write-off of accumu-lated insurance payments prepaid to theFederal Savings and Loan InsuranceCorporation (FSLIC).2 However, as has

2. In March 1987, the General AccountingOffice declared the FSLIC was insolvent because itwould be unable to meet all its future obligations oninsured deposits at failed but not yet closed

been true for some years now, theaggregate condition of the industrymasked extremes among individualthrifts. Many thrifts are well capitalizedand quite profitable, but severe problemswith asset quality have left a substantialminority insolvent and suffering massiveoperating losses that are steadily worsen-ing. Prior to the passage in 1987 oflegislation authorizing a recapitalization,the FSLIC had been unable to takeeffective remedial action with respect tothese insolvent institutions, owing to theinadequacy of its resources. Under theterms of the recapitalization plan ap-proved as part of the Competitive Bank-ing Equality Act, the newly-createdFinancing Corporation has begun raisingthe funds needed by the FSLIC throughissuance of long-term debt.

The stock market collapse gave veryclear warning of the vulnerability ofimportant elements of the financial sys-tem to sudden shocks. Although only afew small securities firms failed, themarket turbulence produced significantproblems for traders, specialists, andmarket makers on the stock exchanges;and, more generally, financial marketsgave evidence of fragility and instabilitythat have not entirely disappeared evenyet. Under the circumstances, it is essen-tial that the reexamination of our marketmechanisms and regulatory systems goforward, to identify any actions thatmight be needed to safeguard the strengthof our capital markets and lower the risksof economic disruption.

institutions. The Financial Standards AccountingBoard then ruled that the prepaid assessments,which were assets on the balance sheets of individ-ual thrift institutions, had to be written off immedi-ately. The FSLIC recapitalization plan included inthe Competitive Equality Banking Act of 1987provides that the affected thrifts will recover theamount of this writeoff over the next five years asnew funds are raised for FSLIC.



Report on July 13,1988

Monetary Policy and the EconomicOutlook for 1988 and 1989

The economy continued to expand rap-idly in the first half of 1988, displayingimpressive resilience in the wake of lastfall's stock market break. Especiallyencouraging has been the fact that theexpansion in activity this year has beenpropelled largely by rising exports andbusiness investment, which bodes wellfor the restoration of better balance in theeconomy.

With the industrial sector continuingto enjoy greater growth, capacity utiliza-tion rates have crept higher. At the sametime, the civilian unemployment rate hasdeclined since year-end, and the averageof 5 Vi percent in the second quarter wasthe lowest in nearly 15 years. Despite thetightening of labor markets, wage in-creases to date have been notably re-strained, on balance, helping to containcost pressures in many sectors. Mostmeasures of price inflation among fin-ished goods and services also have shownlittle if any pickup, although basic com-modity prices have risen considerably,most recently reflecting the effects ofdrought on agricultural markets.

During the first half of the year, theFederal Reserve continued to direct itspolicies toward providing monetary andfinancial conditions that would fosterprice stability over time, promote sustain-able economic growth, and contribute toan improved pattern of internationaltransactions. It was recognized thatprogress toward these goals in 1988would require relatively slow growth ofdomestic demand, which would allowthe economy to accommodate risingexternal demands on U.S. producerswithout generating overall inflationarypressures. Consistent with continuedexternal adjustment and with its commit-

ment to achieving price stability overtime, the Federal Open Market Commit-tee (FOMC) in February lowered its1988 target growth ranges for M2 andM3 to 4 to 8 percent.

At the beginning of the year, theconduct of monetary policy wascomplicated by exceptional uncertaintyabout the state of the economy. Somesigns of weakness had begun to emerge,seemingly lending support to the widelyheld view that economic activity wouldfalter after the stock market break. Inparticular, inventories had accumulatedat a rapid rate in the fourth quarter of1987, producing some overhang ofstocks at the retail level. Moreover,other indicators suggested that the rateof increase in labor demand hadslackened. At the same time, financialmarkets seemed to be somewhat fragile,as conditions had not yet returned tonormal following the plunge in stockprices. The Federal Reserve thus wasfaced with the challenge of counteringthe apparent near-term weakness of theeconomy, while taking account of thelonger-range need to ensure that growthin domestic demand would not becomeexcessive.

In this situation, and with the dollarfirming on foreign exchange markets,the Committee loosened slightly furtherthe easier reserve conditions that hadbeen adopted following the stock marketplunge. Market interest rates edgeddown, which —in conjunction withearlier declines in rates—helped lift M2and M3 to near the top of their 1988target ranges and resulted in a modestfall in their velocities (the ratio ofnominal GNP to the money supply)during the first quarter. Given the riskthat economic activity was weakening,as well as the still unsettled conditions infinancial markets, the Committeeviewed the more rapid growth in moneyas appropriate.



By early spring, however, the bulk ofthe incoming data indicated that businessactivity had, in fact, remained robust.Additional information available later inthe second quarter confirmed thestrength of the economy, and high andrising levels of resource utilizationpointed to a greater potential for abuildup of inflationary pressures. Thecosts of allowing inflation to reintensifywere seen as quite high, based on theexperience of the early 1980s, when thereversal of the inflation process ledunavoidably to sizable losses in outputand to an extended period of highunemployment.

Against this backdrop, the Committeetightened reserve conditions somewhatin a series of moves beginning in lateMarch. Market interest rates respondedto the strength in the economy and to theFederal Reserve's actions by movingupward. Over the past four months, mostshort-term interest rates have increasedaround 1 percentage point on balance.Long-term rates generally rose substan-tially through late May, but have declineda little on net since then. The betterperformance of the bond market recentlyhas occurred at a time when investorsentiment toward investment in dollar-denominated assets has been buoyed bybetter trade statistics and may also havereflected favorable market response tothe Federal Reserve's demonstrated re-solve to fight inflation.

Despite the Committee's tighteningactions, M2 and M3 continued to expandrapidly through April, in response toearlier decreases in interest rates and to abulge in transactions balances associatedwith unusually large individual tax pay-ments. As the tax-related surge unwoundand the influence of higher interest ratesbegan to be felt, the two broad aggregatesgrew at a reduced pace in May and June,and ended the first half of the year in theupper halves of their target ranges.

Monetary Plans for the Remainderof 1988 and for 1989

At its meeting last month, the FederalOpen Market Committee agreed to retainthe target growth ranges of 4 to 8 percentfor M2 and M3, measured from thefourth quarter of 1987 to the fourthquarter of 1988. In addition, the Commit-tee retained the monitoring range of 7 to11 percent for the debt of domesticnonfinancial sectors and again set norange for M1. Recognizing the variabilityof the relationship of these measures tothe performance of the economy, theCommittee agreed that operating deci-sions would continue to be made not onlyin light of the behavior of the monetaryaggregates, but also with due regard todevelopments in the economy and finan-cial markets, including attention to thesources and extent of price pressures andto the performance of the dollar in for-eign exchange markets.

In the absence of any significant eco-nomic and financial disturbances, theCommittee expected growth in M2 tomoderate over the remainder of the year,placing the aggregate around the middleof its target range at year-end. Growth inM3 this year is expected to exceed that ofM2 but to remain comfortably within itsrange, on the assumption that assetexpansion at depository institutionswould remain fairly robust in the secondhalf. The debt of domestic nonfinancialsectors is expected to remain near themiddle of its monitoring range, whichwould put its growth for the year aroundthe slowest annual pace registered in thepast decade.

For 1989, the Committee set, on atentative basis, target growth ranges of 3to 7 percent for M2 and 3 Vi to 7 Vi percentfor M3, measured from the fourth quarterof 1988 to the fourth quarter of 1989; themonitoring range over the same periodfor domestic debt was set at 6̂ 2 to IOV2



Ranges of Growth for Monetaryand Credit AggregatesPercent change, fourth quarter to fourth quarter

Aggregate

M2M3Debt

1987 1988 Provisional for1989

5%to8V4 4to8 3to75% to 8% 4 to 8 3V4to7%

8 to 11 7 to 11 6% to 10%

percent (table 1). Although uncertainabout how strong the economy might beover the coming year or so, the Commit-tee recognized that, given the currenthigh levels of resource utilization, it wasnecessary to be particularly attentive toinflationary risks. An acceleration ofinflation could undermine the sustainabil-ity of the economic expansion and theinternational competitive position of U. S.producers. The lower ranges tentativelyadopted for 1989 were believed consis-tent with a monetary policy that wouldcurb any tendency for inflation to worsenand would contribute over time to therestoration of price stability. However,the Committee also noted that develop-ments over the next half year could altersubstantially the rates of money growthneeded to foster satisfactory economicperformance in 1989 and beyond. Conse-quently, it stressed the provisional natureof its decision and the possibility that theranges for 1989 might need to be adjustedwhen they are reviewed early next year.

The Committee again decided not toset a range for Ml, given the sharpswings in its velocity in recent years,resulting in part from its increased sensi-tivity to movements in market interestrates since deposits were deregulated. Inconsidering narrow monetary measures,the Committee also has discussed whetherthe monetary base could play a usefulrole in the conduct of policy. Thismeasure comprises the major monetaryliabilities of the Federal Reserve Sys-tem—currency in the hands of the publicand reserves of depository institutions-

and represents, in a sense, the "base" ofthe broader monetary aggregates.1 TheCommittee decided against establishinga range for the monetary base because itseemed unlikely to provide a more reli-able guide for policy than the aggregatesfor which ranges already are established.Although the base has been less variablein relation to economic activity and pricesthan Ml, its velocity nonetheless hasfluctuated appreciably and rather unpre-dictably from year to year.

Economic ProjectionsAs is indicated in table 2, the centraltendency of the forecasts of Committeemembers and nonvoting Reserve Bankpresidents—premised on the monetarypolicy objectives outlined above—is forgrowth in real GNP of 2 % to 3 percent in1988, with a modest slowing of expansionin 1989. Such a pace of growth likelywould generate employment gains suffi-cient to hold the civilian unemploymentrate close to its average second-quarterlevel of 5 Vi percent. Prices, as measuredby the implicit deflator for GNP, aregenerally expected to rise 3 to 3 3A percentover the four quarters of 1988, similar tolast year's rate of advance. For 1989,projections of the increase in the GNPdeflator are of course more uncertain,and the central-tendency range widens to3 to 4 V6 percent.

The administration forecast for 1988 isquite similar to the central tendency offorecasts of FOMC members and nonvot-ing presidents. For 1989, the administra-tion is projecting stronger growth of realoutput than indicated by the FOMCforecasts, but its expectation for inflationis in the middle of the range of FOMCforecasts. The administration's projec-tion of nominal GNP in both years isaround the upper end of the central-

1. The characteristics of the base and its behaviorare discussed in detail in the appendix to this report.



Economic Projections for 1988 and 1989Percent

Measure

Change, from fourth quarter tofourth quarter

Nominal GNPRealGNPImplicit deflator for GNP

Civilian unemployment rate, averagelevel in the fourth quarter

Change, from fourth quarter tofourth quarter

Nominal GNPReal GNP . . .Implicit deflator for GNP

Civilian unemployment rate, averagelevel in the fourth quarter

FOMC members andnonvoting FRB presidents

Range

4to7lto3V4

2% to 4

5*4 to 6*4

4 to 7*4I to32to5

5to7

Central tendency

1988

5% to 6%2% to 3

3 to 3%

5*4 to5%

1989

5to72to2y23 to 4*4

5y2to6

Administration

6.63.03.5

5.5

7.13.33.7

5.3

tendency ranges and within the fullranges, suggesting that the administra-tion's economic forecast and the FOMC'smonetary ranges are broadly compatible.Continued improvement in the externalsector is expected to provide the mainimpetus to U.S. economic growth overthe next year and a half. Real exports ofgoods should remain on a strong upwardpath, reflecting the improved competitiveposition of U.S. producers. At the sametime, the growth of real imports is likelyto be restrained, owing to the laggedeffects of the depreciation of the dollarthrough the end of last year. This contin-ued shrinkage of the real trade deficit isexpected to be sufficient to generate somereduction in the nation's deficit on currentaccount during 1988 and a further declinein 1989.In contrast to the boost providedby the external sector, domestic demandis projected to remain relatively subdued.Consumer spending, in particular, hasbeen on a sluggish growth trend since late1986, and that pattern seems likely topersist. Moreover, in an environment of

more moderate growth of overall activ-ity, economy-wide spending on new plantand equipment may not rise as swiftly asit has on average over the past year. Evenso, within manufacturing, improvedprofitability and higher capacity utiliza-tion have stimulated a healthy pickup incapital spending, which should continuefor some time.The performance of theinterest-sensitive sectors, most notablyhomebuilding and business investment,will be influenced considerably by theextent to which the federal government iscompeting for available supplies of credit.Accordingly, continued fiscal restraint isessential if we are to free up resources tosupport private investment. In this re-gard, the budget summit agreementreached last December was a favorablefirst step, and the Federal Open MarketCommittee members and other ReserveBank presidents have assumed that thenecessary legislative action will be takento implement the agreement. There is aclear need for further initiatives to dealwith the out-year deficits, which remain



distressingly large; financial events laterthis year and in 1989 could be substan-tially affected by the developments in thefiscal arena. Although little change isexpected in the overall pace of inflationthis year, as compared with 1987, thesources of actual and potential pricepressure appear to have changed. In1987, a rebound in oil prices was a majorfactor boosting the general price level;assuming that world oil prices remainfairly stable, domestic energy pricesshould not be a significant inflationaryforce in 1988-89. Labor markets havetightened considerably since last year,however, and most measures of wageand compensation rates have firmed.Although the overall rate of industrialcapacity utilization is not high by histor-ical standards, plants are being used veryintensively in some materials-producingsectors; sharply rising materials priceshave raised costs for manufacturersgenerally. Food prices also have been aless favorable element in the inflationpicture recently, and are likely to experi-ence some further acceleration as aconsequence of drought conditions; how-ever, it is important to recognize thetemporary nature of this phenomenon,which should have no lasting effect onoverall inflation so long as it does notbecome embedded in wage trends.

For 1989, the FOMC central-tendencyrange for the GNP deflator widens on theupper end, suggesting the possibility of apickup in inflation from the pace thisyear. However, this apparent accelera-tion of prices largely reflects the arith-metic implication of an eccentric move-ment in the deflator for GNP in the firstquarter of this year. Shifts in the compo-sition of output caused the deflator to riseat an annual rate of less than 1 Vi percentduring that quarter; these shifts are notexpected to be so noticeable in comingquarters. The view that inflation nextyear will not differ significantly from the

pace anticipated over the final threequarters of 1988 reflects the expectationthat business and labor—recognizing therealities of a highly competitive interna-tional marketplace—will continue toexercise restraint in setting prices andwages.

The Performance of the EconomyDuring the First Half of 1988

The economy continued to expand brisklyin the first part of 1988. Activity wasboosted by strength in capital spendingand growth in foreign demand for U.S.goods. The rise in overall output duringthe first six months of this year supportedthe addition of about 1 % million jobs tononfarm payrolls, and the civilian unem-ployment rate, which had trended downthroughout 1987, dropped somewhatfurther since the beginning of the year toan average level of 5 Vi percent in thesecond quarter.

Despite the greater tightness in labormarkets and the higher rates of capacityutilization now prevailing in some indus-tries, tendencies toward additional infla-tion have been limited. Prices of materialsand components have risen sharply, butfor finished goods there are only hints ofprice acceleration outside the food sector.Wages, on the whole, have continued tobe fairly well behaved, suggesting arecognition on the parts of labor andmanagement of the need to maintaincompetitive cost structures.

The continued resurgence of manufac-turing has been one of the most notableeconomic developments this year. Dur-ing the first five months of 1988, indus-trial production expanded at nearly a 4percent annual rate, and the rate ofcapacity utilization for total manufactur-ing rose Vi percentage point betweenDecember and May to just over 83percent, the highest level during the1980s. Owing to these advances in



production, manufacturers have em-barked on substantial programs to investin plant and equipment, pacing aneconomy-wide pickup in the rate ofcapital spending. The better balance ofexpansion also has been visible in agri-culture, although the upturn in that sectorhas been jeopardized by recent droughtconditions.

The improvements in manufacturingand agriculture are, in part, reflections ofa broader adjustment of the U. S. externalposition. The combination of a lowerdollar and domestic cost containment hastranslated into a marked turnaround inreal net exports. That process also hasbeen aided by stronger economic growthin other large industrial countries.

The External SectorAfter having trended downward fornearly three years, the dollar appreciatedsubstantially over the first half of 1988against most major foreign currencies.The dollar rose sharply at the beginningof the year, responding in part to coor-dinated central bank intervention. Inrecent months, sentiment toward thedollar appears to have improved, owinglargely to the release of better-than-expected trade reports and to firmingactions by the Federal Reserve.

The U.S. merchandise trade deficit forthe first quarter was $144 billion at aseasonally adjusted annual rate, substan-tially below the figures for the fourthquarter and for 1987 as a whole. In April,the trade deficit narrowed further. Ex-ports have continued to expand rapidly,while import growth has slowed consid-erably. The strong growth of exports canbe attributed primarily to the increasedprice competitiveness of U.S. goods,which reflects the decline of the dollar inrecent years and the tight control overproduction costs exercised by domesticfirms. This growth of exports continuesto be broadly based, and foreign sales

have been particularly strong for indus-trial machinery and for computing equip-ment. On the import side, the volume ofpurchases rose less than 1 percent in thefirst quarter and apparently declined inApril. Imports of consumer goods exclud-ing autos were essentially unchanged inthe first quarter, continuing the pattern of1987, while auto imports fell somewhat.In contrast, imports of capital goods roseconsiderably, stimulated by the surge inequipment outlays by domestic firms.

Economic expansion abroad has con-tinued at a moderate pace, on balance, sofar this year, providing some support foran improved U.S. trade position. Activityincreased sharply in the major foreignindustrial countries in early 1988, whilegrowth in the smaller industrial nationsremained subdued. In the newly industri-alized countries of Asia, economic activ-ity continued to expand rapidly. In con-trast, growth slowed in Latin America,primarily due to a sharp deceleration ofactivity in Brazil. In the OPEC countries,activity appears to have stabilized in1988, after a decline in 1987, as highervolumes of oil exports have offset theeffects on government revenues of a slightsoftening in prices.

The Household SectorConsumer spending showed some vigorin early 1988, after declining in the fourthquarter of last year. Real outlays in-creased at a 3 % percent annual rate in thefirst quarter, as purchases of motorvehicles bounced back with the expansionof manufacturers' incentive programs,outlays for other durable goods werestrong, and expenditures on servicescontinued to post appreciable gains. Datafor April and May suggest, however, thatthe growth of consumer spending slowedfrom the rapid first-quarter rate.

The buoyancy of consumer spendingearly this year can be traced to robustincome growth. Real disposable personal



income rose at a 5 percent annual rate, onaverage, during the fourth quarter of1987 and the first quarter of 1988,substantially above the 2 percent rateposted for 1987 as a whole. However,disposable income growth appears tohave slowed considerably in the secondquarter, as a result of a spurt in nonwith-held tax payments and a slower pace ofemployment gains.

Although the pace of consumer spend-ing thus far this year has been strongerthan many expected, the stock marketbreak probably did exert some restrainingeffect. This is evident in the personalsaving rate, which has averaged 4Vipercent for the seven months after Octo-be r - 1 percentage point above the aver-age level during the first three quarters of1987. While most households experi-enced little direct loss of wealth from thestock market decline, the startling dimen-sions of the event obviously affectedconsumer sentiment last fall. With eachpassing month, however, confidence hasgrown and helped to sustain the growthof spending.

Residential construction was weakduring the first half of 1988. Totalhousing starts averaged about 1 Vi millionunits at an annual rate through May,almost 9 percent below the 1987 total. Inthe multifamily sector, building declinedfrom the already depressed 1987 level.Starts in this sector have been fallingsince the end of 1985, as near-recordvacancy rates and changes in the tax lawshave reduced the incentive to build newunits. In the single-family sector, build-ing has fluctuated from month to month,influenced by movements in interest ratesand perhaps by weather; on balance, theaverage level of starts through May wasroughly 6 percent below the 1987 pace.

The Business SectorBusiness fixed investment advancedsharply in the first quarter of 1988, owing

to a large increase in purchases of equip-ment. In recent months, spending appearsto have remained near the high first-quarter level. Surveys of capital spendingplans, taken this spring, point to appre-ciable growth in investment outlays overthe second half of 1988.

Real outlays for computing equipmentjumped at more than a 90 percent annualrate in the first quarter, but fell backconsiderably in subsequent months.Smoothing through this volatility, itappears that demand for such equipmenthas emerged from the lull that prevailedduring 1986 and the first half of 1987,when excess computing capacity—aswell as concerns about the usefulness ofavailable software—limited purchases.Outlays for other types of equipment alsohave been strong, on balance, since theturn of the year, largely reflecting thebuoyancy of overall economic activity.In particular, with utilization rates now atelevated levels in many manufacturingindustries, equipment investments havebeen an attractive way of removingbottlenecks and achieving a relativelyrapid improvement in effective capacity.

Although the data for May showed asurprising jump in nonresidential con-struction activity, real outlays in thissector were sluggish overall during thefirst five months of the year. Commercialconstruction, the largest part of thisaggregate, continues to be restrained byan overhang of vacant space. In addition,oil and gas drilling, which was up morethan 20 percent in 1987, has changedlittle since last fall, owing in large part tothe general weakness of petroleum pricesover this period. Industrial construction,in contrast, has risen briskly in recentmonths. Nonetheless, even here, thepicture is cloudy. Although capacityutilization is high in a number of sectors,manufacturers apparently remain cau-tious about making the large, long-rangecommitments involved in building new



plants, and new contracts for industrialconstruction actually have trended downsince the beginning of the year, afterrising in 1987.

The pace of business inventory invest-ment moderated somewhat during thefirst four months of 1988, reducing theconcern about excessive stocks that hadarisen earlier this year. This concern hadfocused on the retail sector, where inven-tories at auto dealers and at certain outletsfor nondurable goods (primarily generalmerchandise and apparel stores) ap-peared high relative to sales at year-end.By cutting production early in the yearand offering a variety of sales incentives,automakers have been able to bring theirinventories into better alignment withsales. In contrast, inventory-to-salesratios for nondurable retail goods con-tinue to hover at levels that are high byhistorical standards. At the manufactur-ing level, inventory positions throughMay appeared fairly lean in general,given the pace of shipments. Much of therecent building of factory stocks has beenin industries where market demand hasbeen robust, such as aircraft, machinery,chemicals, and paper.

Before-tax economic profits of nonfi-nancial corporations continued to bestrong in the first quarter, with manufac-turing firms posting substantial gains.After-tax profits also rose noticeably, asthe maximum tax rate on corporateprofits was reduced from 40 to 34 percent,a change mandated by the Tax ReformAct of 1986. Owing to the strong growthof profits, the internal cash flow ofnonfinancial corporations has increasedconsiderably since mid-1987, reversingthe slide of the previous year.

The Government SectorIn real terms, federal government pur-chases of goods and services—which adddirectly to GNP and account for aboutone-third of total federal expenditures—

fell during the first quarter and appear tohave remained relatively weak in recentmonths. This dropoff reflects the windingdown of some major defense procure-ment programs, restraint on domesticdiscretionary spending, and net reduc-tions in farm inventories held by theCommodity Credit Corporation. How-ever, on a budget basis, total outlays havebeen growing rapidly, owing to contin-ued increases in entitlements, greaterdemands on deposit insurance agencies,and increasing net interest payments.

Meanwhile, growth of federal govern-ment revenue has slowed compared withthe sharp increase in FY1987. Althoughtax receipts have been pushed up by therobust gains in income and by an increasein the payroll tax rate, this upwardimpetus to revenue has been tempered bythe final reductions in income tax ratesfrom the reforms enacted in 1986. Incontrast to its effects this year, tax reformhad provided a substantial boost to reve-nues in FY1987. On balance, it is quitepossible that the budget deficit this yearwill exceed the $150 billion shortfallrecorded last year.

The state and local sector continues tooperate under budgetary pressure, asoperating and capital accounts (whichexclude social insurance funds) have beenin deficit for the past year and a half. Inthe first quarter of 1988, this combineddeficit stood at $9 billion, similar to theshortfall recorded during 1987. Manystates have acted to curb this fiscalerosion, using a combination of taxhikes—primarily sales and excise taxes—and budget cuts. As a result, the growthof real spending slowed considerably inthe first quarter, reflecting a sharp de-crease in construction outlays. This wasthe third such decline in the past fourquarters, and this downtrend in construc-tion activity has occurred despite continu-ing needs to expand and upgrade thebasic infrastructure.



Labor MarketsEarly in the year, incoming data seemedto signal some weakening of labor de-mand. Initial claims for unemploymentinsurance, which had trended up duringthe final months of 1987, rose evenfurther just after the turn of the year.Moreover, the first report on nonfarmpayroll employment for January showedthe smallest monthly increase since mid-1986. Taken together, these indicatorsconveyed a picture of deterioration in thelabor market. However, as subsequentdata were released, it became clear thatthe underlying pattern of labor demandhad, in fact, remained healthy. Claimsfor unemployment insurance droppedback to relatively low levels and theanemic employment gains for Januarywere revised up substantially. Moreover,since January, nonfarm payroll employ-ment has advanced more than 300,000 ata monthly rate, somewhat above theaverage increase in 1987. Although thegains have been concentrated in theservice-producing sector, manufacturinghas posted an average monthly increaseof about 30,000 jobs thus far this year,with the largest advances in the machin-ery and metals industries.

The combination of strong gains inemployment and slower growth of thelabor force over the first half of 1988lowered the civilian jobless rate to 5.3percent in June from 5.8 percent at theend of last year. Jobless rates fell for abroad spectrum of demographic groupsover the first half of the year, and the Junerate of unemployment represents thelowest monthly figure since mid-1974.The June level, however, may be artifi-cially low, owing to the difficulty ofadjusting for seasonal swings in employ-ment at the end of the school year.

As the unemployment rate droppedlast year, compensation increases, whichhad been moderating for several years,leveled out. In the early part of this year,

there were some signs of an accelerationin labor costs. Hourly compensation, asmeasured by the employment cost index,advanced nearly 4 percent between thefirst quarter of 1987 and the first quarterof this year, about 34 percentage pointmore than in the previous 12-monthperiod. Although this pickup was relatedin large part to the strength of labordemand, it was exacerbated by the rise inthe payroll tax rate that took effect onJanuary 1. By sector, the sharpest uptickin compensation rates occurred in manu-facturing, where increases in productionhave led to a firming in labor demand.This pattern stands in contrast to trends inthe early 1980s, when pay gains inmanufacturing lagged far behind those inthe service-producing sector.

Since 1980, output per hour in thenonfarm business sector has risen at anaverage l!/2 percent annual rate. Al-though this rate is somewhat above thesluggish pace of the 1970s, it remains farbelow the advances registered earlier inthe postwar period. In contrast, produc-tivity gains in manufacturing have beenquite rapid in recent years. The first-quarter rise in factory output per hourwas nearly 3 percent at an annual rate, inline with the average increase registeredduring 1986 and 1987; these productivityadvances have continued to hold downunit labor costs, which fell Vi percentover the year ended in the first quarter of1988.

Price DevelopmentsUpward pressures on prices appear tohave grown stronger this year, reflectingthe lagged effects of the earlierdepreciation of the dollar, as well astighter markets for labor, industrialmaterials, and farm output. Energyprices, in contrast, have been restrainedthis year, on balance, and have providedsome offset to these pressures. For themost part, signs of higher inflation have



been confined to price indicators forcommodities and intermediate goods,which have posted sharp increases. Theconsumer price index-a measure ofinflation for finished goods and ser-vices—showed no acceleration duringthe first five months of 1988, rising atthe 4!/2 percent annual rate registered for1987 as a whole.

In the energy sector, spot prices forcrude oil plummeted after OPEC failedlast December to reach a credible agree-ment to limit production. The contractprice for West Texas Intermediate (thebenchmark crude oil in the United States)fell from about $18 per barrel in Decem-ber to about $16 per barrel in March.Reflecting these developments, retailprices for gasoline fell considerably inthe first quarter. During March and April,prices for crude oil drifted up and, inresponse, consumer energy prices re-bounded in April and May. More re-cently, however, crude oil prices havereceded again, as OPEC's June meetingadjourned without an agreement on pro-duction cuts.

In the agricultural sector, tighter cropinventories and stronger grain exportspushed up farm-level prices early in1988. In addition, prices for grains andsoybeans recently have surged incommodity markets, owing to thedrought in major growing regions. Itnow appears likely that retail food priceswill accelerate in coming months andexert some upward pressure on aggre-gate consumer price inflation.

Excluding food and energy, prices atthe consumer level rose at about anannual rate of about 4% percent duringthe first five months of this year.Consumer price inflation has remainedat this relatively high rate partly becauseof continued increases in import pricesspurred by the earlier depreciation of thedollar. Particularly noteworthy has been

a jump in clothing prices, which havebeen affected not only by the dollar'smovement, but by quotas on apparelimports. In the service area, medicalcare costs have continued to rise rapidly.

At earlier stages of processing, infla-tion appears to have picked up for a widerange of items. On commodity markets,prices of crude industrial materials haveremained on an upward course this year,although the price hikes have been lesspervasive than in 1987. Reflecting, inpart, these developments, the producerprice index for intermediate materialsother than food and energy rose at anannual rate of nearly 8 percent over thefirst five months of this year, up from the5 percent pace registered last year. Priceincreases have been especially large formaterials used by producers of metals,chemicals, paper, and plastic, whereoutput has been strong or capacity utili-zation rates high.

The upward movement of intermediategoods prices relative to finished goodsprices at the producer level has been quitesubstantial. Although divergences in thetwo series, such as the one that has arisenover the past year, are not unprecedented,disparities typically have not persistedfor long. Historical evidence indicatesthat higher materials costs, on average,pass through rather quickly into finishedgoods prices. In the recent period, theeffect of the sharp rise in materials pricesmay have been cushioned by restraint onunit labor costs, by the spreading ofoverhead costs over larger sales volumes,and, perhaps, by efforts to save on orsubstitute away from higher cost materi-als. Nonetheless, past experience sug-gests that, even if there may not be asignificant delayed pass-through in com-ing months, the risks of an acceleration infinished goods prices would be consider-able if the pressures on materials pricesdo not ease soon.



Monetary Policy and FinancialDevelopments during the FirstHalf of 1988

The Federal Open Market Committeehas sought monetary and financial condi-tions that promote price stability overtime, support sustainable economicgrowth, and contribute to an improvedpattern of international transactions. Tothis end, the Committee at its Februarymeeting established target ranges, mea-sured as growth rates from the fourthquarter of 1987 to the fourth quarter of1988, of 4 to 8 percent for both M2 andM3. It also set a monitoring range of 7 to11 percent for the growth of domesticnonfinancial debt and chose, once again,not to stipulate a range for Ml growth.The 1988 target ranges for M2 and M3represented reductions from last year'sranges of 5Vi to SV2 percent for bothaggregates and resulted in a lowering ofthe midpoint of the target ranges by 1 fullpercentage point.

In widening the target ranges for M2and M3, the Committee cited the highdegree of variability in the relationshipbetween money and aggregate demandthat had appeared in recent years. As aresult of this development, whichstemmed largely from an increased sen-sitivity of money growth to interest ratechanges, it was believed that a widerrange of monetary growth rates could becompatible with satisfactory outcomesfor the economy. At the time of theFebruary FOMC meeting, broaderranges seemed particularly appropriatein light of the uncertain outlook forspending. More specifically, the eventualeffects on domestic demand of the Octo-ber stock market plunge and the subse-quent drop in interest rates remainedunclear. Ml had become even moreinterest sensitive, and it had varied morewidely relative to GNP than had the

broad aggregates, thus making it evenmore difficult to interpret; consequently,the Committee decided against establish-ing a target range for this aggregate.

In setting a monitoring range fordomestic nonfinancial sector debt, theCommittee anticipated that debt growthwould slow in 1988, owing to lessgovernment borrowing. Nonetheless, therate of expansion of domestic debt wasexpected to exceed that of income. Aswas the case for the monetary aggregates,considerable uncertainty surrounded theprospects for debt growth, leading theCommittee to widen the monitoring rangeby dropping the lower limit 1 percentagepoint from the previous year's rate.

During the first partof 1988, monetarypolicy was conducted against a backdropof data suggesting some weakness in theeconomic expansion. Reflecting concernabout the outlook for economic growth,the Committee moved in January to easeslightly the degree of pressure on reservepositions. On balance, interest rates fellduring January and February, which, inconjunction with rate declines that fol-lowed the stock market drop in Octo-ber, contributed to a pickup in M2 andM3 growth over the first quarter of theyear.

As information suggesting greater eco-nomic strength and an increased potentialfor a buildup of inflationary pressuresbecame available in March and in subse-quent months, and with M2 and M3running near the upper ends of theirgrowth ranges, the Committee moved, inseveral steps, to tighten reserve pres-sures. Owing to the force of creditdemands and the Federal Reserve's lessaccommodative posture, interest ratesrose on balance over those months. Latein the second quarter, growth in theaggregates moderated, leaving both wellwithin their target ranges as the first halfof 1988 ended.



Growth of Money and DebtPercent change at annual rate

Period

Fourth quarter tofourth quarter

1979 .19801981

198219831984198519861987

1987:4 to 1988:2e...

1987:4 to June 1988e

Quarterly average1987: 1

234

1988: 12 e

Ml M2 M3

Debt ofdomestic

non-financialsectors

7.7 8.2 10.4 12.37.5 8.9 9.5 9.65.2 9.3 12.3 10.0

(2.5)»8.7 9.1 9.9 8.9

10.2 12.1 9.8 11.35.3 7.6 10.4 14.2

12.0 8.9 7.7 13.315.6 9.4 9.1 13.36.2 4.0 5.4 9.6

5.0 7.4 7.1 8.5

5.1 7.1 7.0 8.5

13.2 6.5 6.5 10.56.6 2.7 4.6 8.6

.8 2.8 4.5 7.93.9 3.9 5.4 10.13.8 6.7 7.0 8.46.1 7.9 7.1 8.3

1. Ml figure in parentheses is adjusted for shifts toNOW accounts in 1981.

e estimated

Behavior of Money and CreditFrom the fourth quarter of 1987 throughJune 1988, M2 increased at about a 7percent annual rate, a noticeable increaseover its 1987 rate of 4 percent (table 3).The faster growth can be attributedprimarily to the lagged reaction of thepublic's demand for M2 balances todecreases in market interest rates relativeto deposit rates that occurred in late 1987and early 1988. In the second quarter of1988, however, the "opportunity cost" ofholding M2 reversed its downward trend,and growth in M2 moderated toward theend of the period. Also contributing tothe May-June slowdown was the runoffof an unusually large, tax-related buildupof transactions balances that inflated bothMl and M2 in April. On balance, M2velocity is estimated to have declinedslightly over the first half of the year,in contrast to its upward movement in

1987 when market interest rates and theopportunity cost of M2 were generallyincreasing.

A number of the components of M2contributed to its strengthening in thefirst half of the year. After decliningsteadily over the last half of 1987, liquidretail deposits—the sum of other check-able deposits, savings deposits, andmoney market deposit accounts—regis-tered a solid gain over the first half of1988, as reductions in market interestrates during the winter combined withthe slow adjustment of rates on thesedeposits to increase their relative attrac-tiveness. Growth in small time depositsalso was particularly strong, as was thatin M2-type money market mutual fundassets early in the year. Falling marketinterest rates, coupled with slow adjust-ment of returns on fund assets, providedmoney funds with a rate advantage in thefirst quarter, thereby leading to higherasset growth. Rising market rates ofinterest and the apparent use of moneyfunds to pay taxes, however, significantlyslowed their growth in the second quarter.

M3 growth increased in the first half of1988 to a 7 percent rate, following a 5Vipercent increase in 1987. Credit expan-sion at banks and thrift institutions, whichheavily influences the overall behavior ofM3, remained at roughly the same paceas last year, but it was financed to agreater extent over the first half of theyear by liabilities included in M3. In par-ticular, inflows to banks from their for-eign branches and borrowings by savingsand loans from Federal Home LoanBanks, which are not included in M3,dropped off sharply compared with 1987.

Ml grew at a 5 percent rate during thefirst half of the year, which althoughbelow the 6 lA percent rate for all of 1987,was higher than its growth in the secondhalf of last year. The sluggish growth ofMl, especially in comparison to that ofM2 and M3, owed entirely to weakness



in demand deposits, which have beendeclining over the past year and a half. Incontrast, growth in currency and othercheckable deposits was robust.

Domestic nonfinancial debt grew at arate of SV2 percent rate from the fourthquarter of 1987 to June, according toestimates based on partial data. Debtgrowth in the first half represented aslowdown from last year's rate of 9*/2percent and a substantial decline from therate of expansion of 13 lA percent in 1985and 1986. Nonetheless, debt continued togrow faster than nominal GNP. Reflect-ing the effects of smaller federal deficitsduring the calendar year, growth in fed-eral debt slowed from last year's pace andremained at a rate well below that re-corded over most of the 1980s. Nonfed-eral debt also expanded at a somewhatslower rate, as the growth of the debt ofhouseholds and state and local govern-ments declined modestly. In the house-hold sector, a falloff in mortgage borrow-ing associated with weaker housingexpenditures offset a pickup in consumercredit. Business borrowing expanded atroughly the same pace as in 1987, withrising interest rates in the second quartercausing firms to shift more of theirborrowing to short-term instruments.

Implementation of Monetary PolicyIn conducting monetary policy, the Fed-eral Reserve directed its operations dur-ing the first three months of 1988 at eithermaintaining or easing slightly the degreeof reserve pressure that had prevailedsince the October stock market collapse.Thereafter, the System moved in severalsteps to firm reserve positions.

The early months of 1988 were markedby widespread concern that the economicexpansion might be faltering. Data avail-able in January and February pointedtoward a weakening in domestic finaldemand, as evidenced by a substantialbuildup of inventories in the fourth

quarter of 1987 and some softening inlabor market data. At the same time,inflationary pressures and expectationsappeared to have diminished somewhat,and after coming under pressure in lateDecember, the dollar first reboundedand then stabilized against most majorcurrencies.

In these circumstances, the Committeemoved in late January to ease slightly thepressure on bank reserve positions. Theprovision of nonborrowed reservesthrough open market operations wasincreased, the level of discount windowborrowing declined, and the federal fundsrate edged downward. Other marketinterest rates declined as well; in spiteof lower interest rates, the dollar wasrelatively stable against most majorcurrencies.

The downward trend for most marketinterest rates came to an end in lateFebruary and early March, when incom-ing information indicated that the econ-omy was considerably stronger than itwas earlier thought to be, and in light ofemerging pressures on industrial capacityand labor markets, the risks of a pickup ininflation appeared to have risen. In thisenvironment, monetary policy began inlate March to become less accommoda-tive. The restraint in policy was aimed atmoderating potential inflationary pres-sures by damping domestic demand inorder to facilitate a shift of resources tothe external sector. As information point-ing to substantial economic strengthbecame available in April and May, andwith the monetary aggregates growing atrates near the upper end of their targetranges, the Committee moved again toapply slightly greater pressure on reservepositions. Reflecting both the System'sactions and market concerns about infla-tion, market interest rates moved higher.Since late May, however, long-terminterest rates have fallen on balance,despite further increases in short-term



interest rates. The resulting narrowing ofthe spread between long- and short-termrates apparently reflects some lesseningof concerns about inflation, broughtabout in part by the firmer monetarypolicy. Long-term yields also have bene-fited recently from the upward movementof the dollar against most major cur-rencies, as the trade balance has contin-ued to improve. The change in attitudetoward the dollar apparently has encour-aged investments in relatively high yield-ing dollar assets.

In the aftermath of the stock marketcrash last October, the Committee modi-fied the System's procedures by placinggreater emphasis on money market con-ditions and less on bank reserve positionsin carrying out day-to-day open marketoperations. In doing so, it was neither theCommittee's intention to alter its operat-ing procedures permanently nor to ignorebank reserve positions completely.Rather, the thrust of the modification wasto permit greater flexibility in Systemoperations in light of the volatility andfragility characterizing financial marketsat that time. During this period, it wasconsidered important to assure the mar-kets of the System's intention to provideadequate liquidity, and it was feared thatsignificant variation in money marketconditions could add to the unusualuncertainties already in the markets.

As markets exhibited signs of in-creased stability this year, the Committeeresponded by gradually placing greateremphasis on reserve positions in conduct-ing System operations, allowing moneymarkets to respond more sensitively tochanging economic circumstances. Thetransition back to the pre-October ap-proach was completed in the spring.

Other Financial DevelopmentsThe collapse of equity prices last Octoberheightened public concerns about thevolatility of stock prices and the fragility

of financial institutions and markets.These concerns became the subject ofstudies by a presidential commission,governmental agencies, and the securi-ties industry. Recommendations fromthese groups and from a follow-up presi-dential working group focused on waysto avoid excessive stock price volatilityand to strengthen the ability of marketsand related systems to deal with largeprice movements. Progress has beenmade in this regard, with steps havingbeen taken by market participants toaddress some of the problems revealedby the market break in clearing andsettlement systems. Additional steps havebeen taken to coordinate trading haltstriggered by extreme price moves and tostrengthen capital positions of specialistsand other market makers.

In considering the possibility of futureregulatory action in this sphere, it isnoteworthy that the stock market breakhas not been followed by any majoraftershocks. In part, this reflects the basicresilience in this period of the economyand financial markets. In addition, itattests to the general adequacy of thecurrent regulatory framework and mon-etary policy institutions in cushioningfinancial disturbances, so that they do notspread to the economy as a whole. Thus,while the additional steps initiated byprivate entities to strengthen marketmechanisms certainly are desirable, amajor extension of the governmentalregulatory apparatus does not seem nec-essary.

The banking industry also has been thesubject of considerable concern, arisingfrom its well-publicized difficulties withenergy, agricultural, real estate, anddeveloping country loans. These prob-lems have been highlighted by the manybank closings and the rescue by bankregulators of several large banks. As aresult of large banks choosing to makesizable increases in loan-loss reserves,



profits reported by the banking industryas a whole in 1987 were down nearly 80percent from 1986. Despite these diffi-culties, some bright spots emerged lastyear, especially the improved perfor-mance of agricultural banks. It is impor-tant to note, however, that throughoutthis period of stress in the industry, thecommercial banking system has contin-ued to play its crucial role as a provider ofcredit to the economy.

The savings and loan industry contin-ues to be under financial stress. Althoughthe majority of savings and loans arehealthy and reasonably profitable, theindustry as a whole reported enormouslosses in 1987 and in the first quarter of1988. Roughly one-sixth of the institu-tions are insolvent when evaluated inaccordance with generally accepted ac-counting principles, and their aggregatelosses increased in 1987 and in the firstquarter of 1988. The prospects for therecovery of the insolvent institutions arenot bright, implying that the FederalSavings and Loan Insurance Corporation(FSLIC) will be required either to liqui-date them or to assist in their absorptionby stronger institutions.

The deterioration of the savings andloan industry has affected the financialcondition of FSLIC, whose net worthbecame more deeply negative in 1987.Congress approved a plan last yearproviding nearly $11 billion to recapital-ize FSLIC. This action has helped FSLICliquidate several large and especiallytroubled savings and loans, but concernspersist in the market that the total avail-able new capital may fall short of thatneeded for FSLIC to deal fully with theproblem institutions.

The difficulties of many individualdepository institutions have been associ-ated, in most cases, with specific types ofloans or certain regions and countries.However, concerns have been expressedmore generally about the financial health

of households and businesses - especiallyabout the ability of these sectors to servicetheir debts if interest rates were to risesharply or business conditions were toweaken significantly.

With regard to households, the rapidgrowth of their debt during the currenteconomic expansion has outstripped thatof disposable income. The ratio of house-hold sector indebtedness to income is atan all-time high. Recent information alsoshows a rising level of personal bankrupt-cies and a relatively high level of delin-quencies on certain types of consumerloans.

Although these developments suggestthat debt burdens may be difficult forsome households to manage, other evi-dence indicates that most households areable to meet their debt obligations reason-ably well. The trend toward longerrepayment schedules has held down debt-service payments. The increased use ofadjustable-rate mortgages has made thefinancial positions of many householdsmore vulnerable to increases in interestrates; however, at the same time, depositderegulation has meant that householdinterest income is more responsive tochanges in rates. Furthermore, for thesector as a whole, assets have risen morerapidly than debt, implying increases inhousehold net worth. Indeed, surveyinformation indicates that many familieswith consumer debt have substantialamounts of financial assets that could betapped to meet debt-service obligationsin the event that incomes proved to beinadequate.

Like households, businesses haveadded greatly to their indebtedness inrecent years. Many companies havedramatically increased their leveragethrough debt-financed merger, buyout,and share retirement activity. Reflectingheavier debt loads, the bite that interestpayments take out of corporate cash flowis near historically high levels for the



nonfinancial corporate sector as a whole.A downturn in earnings would placeserious debt-servicing strains on manyindividual firms. In addition, heavyreliance on floating-rate loans and short-term debt obligations has rendered manyfirms vulnerable to a significant rise inborrowing costs. In reflection of thissituation, downgradings of corporatedebt have continued to exceed upgradingsby a large margin.

Firms would not have been able toassume these greater financial exposureswere it not for receptive attitudes amonglenders and equity investors. Companiesengaging in restructurings that haveinvolved the addition of massive amountsof debt to their balance sheets have beenrewarded with sizable runups in theirshare prices; this is reflected in theabsence of an uptrend during the 1980s inthe market-value based "debt/equity"measure. Moreover, lenders are exactingrelatively small risk premiums on debtobligations incurred by firms, as re-flected, for example, in the spreadsbetween yields on high-grade corporatebonds and Treasury securities or eventhose for below-investment-grade "junk"bonds. Nonetheless, our financial historyprovides numerous reminders of thefragility of this type of situation: last fall,for example, when confidence was joltedby the stock market break, yield spreadswidened dramatically, and the availabil-ity of new credit to riskier borrowers wassharply curtailed.

Appendix: The Monetary Base

In recent years, the monetary base hasreceived increased attention as the behav-ior of other monetary aggregates-espe-cially Ml -has diverged from historicalpatterns. In part, the appeal of the basehas resulted from the notion that it mayhave a reasonably stable relationship withnominal spending. In addition, it is

perceived as being more directly underthe control of the Federal Reserve thanare the broader aggregates. This appen-dix reviews the historical and analyticalcharacteristics of the monetary base. Itdiscusses its definition, its relation toincome and other economic variables,and its control by the Federal Reserve.

Concepts, Definitions, and MeasurementThe monetary base consists of currencyin the hands of the nonbank public andreserves held by depository institutions—both reserves required to be held againstdeposits and the additional, "excess"reserves that depository institutionschoose to hold. Because reserve require-ments are substantially higher for trans-actions deposits (that is, checkable de-posits) than for nontransactions deposits,the bulk of required reserves—aboutthree-quarters—is related to transactionsdeposits. In turn, transactions depositsconsist primarily of demand deposits andother checkable deposits, which are theprincipal components of the narrowmonetary aggregate Ml . Thus, boththrough its currency component and itsreserves component, the monetary baseis closely related to Ml . The linksbetween the monetary base and broadermeasures of money, such as M2 and M3,are much looser because most savings-type instruments in these measures eitherare not reservable or have a much lowerreserve requirement applied to them.Moreover, currency accounts for an evensmaller share—on the order of 5 per-cent—of these aggregates.

Looking at the base as currency andreserves focuses on the monetary liabili-ties of the Federal Reserve—frequentlyreferred to as the "uses" of the base.2

Alternatively, the base can be measuredfrom its "sources" in the Federal Reserve

2. Technically, the base also encompasses arelatively small amount of U. S. Treasury liabilities.



balance sheet, the assets held by the Sys-tem less its nonmonetary liabilities. Thetwo concepts are identical if all compo-nents are measured contemporaneously.

There are two publicly available mea-sures of the monetary base. One, corre-sponding to the uses concept, is con-structed by the Board and the other, asources concept, is produced by the Fed-eral Reserve Bank of St. Louis. Besidesthe difference in accounting approach,which affects the treatment of vault cashused to meet reserve requirements, thetwo measures differ in the method ofadjustment for changes in reserve require-ments and in the method of seasonaladjustment.

The Board measure constructs the basefrom the currency component of themoney stock (currency held by the non-bank public) (76 percent), total reserves(lagged vault cash, up to required re-serves, plus reserve deposits at the Fed-eral Reserve banks) (23 percent), and athird component that includes currentsurplus vault cash held at depositoryinstitutions plus service-related balances(1 percent).3

The St. Louis measure, consistent withits sources concept, comprises FederalReserve credit—holdings of U. S. govern-ment securities, discounts and advances,Federal Reserve float, and other FederalReserve assets—plus other sources, in-cluding the gold stock, special drawingrights and Treasury currency outstand-ing. It subtracts several categories ofliabilities, namely, Treasury and for-eign deposits at the Federal Reserve,

3. "Vault cash" included in total reserves islagged four weeks, which reflects its use to meetreserve requirements."Surplus vault cash" is bankholdings of currency in excess of required reserves."Service-related balances" comprise other balancesheld by depository institutions at the FederalReserve, including required clearing balances andadjustments to compensate for Federal Reservefloat.

Treasury holdings of coin and cur-rency, and certain miscellaneous items.Implicitly, all vault cash is treatedcontemporaneously.4

The St. Louis and Board measures ofthe monetary base have moved togetherover time, though the St. Louis measuregenerally lies above the Board measure,reflecting differences in techniques foradjustment of breaks caused by changesin reserve requirements. In terms ofgrowth rates, the two series track eachother closely.

Growth of the monetary base has beenmuch smoother on average than that ofthe other monetary aggregates.5 In largemeasure, the smooth growth of the basecan be attributed to its large currencycomponent, which over long periods oftime has expanded in a relatively stablefashion. Between 1959 and 1987, theaverage quarter-to-quarter fluctuation ofgrowth in currency in circulation wasless than one-fifth of the quarterly fluctu-ation in growth of total reserve balances.

While growth in the base has beenrelatively smooth, its longer-run patternhas not differed markedly from that ofother narrow aggregates. Specifically,

4. There are two other differences between theBoard base and the St. Louis base concerningseasonal adjustment and adjustments for changes inreserve requirements. St. Louis seasonally adjuststhe whole base directly after adding a reserveadjustment magnitude (RAM) to account for regu-latory changes in reserve requirements as well aschanges in composition of deposits. For the Boardmeasure, currency, total reserves, and the residualcomponent are seasonally adjusted separately, afterapplying to the reserves and residual componentscertain break adjustment factors, and finally thecomponents are summed. The Board's break adjust-ment method is intended to adjust only for regula-tory changes in reserve requirements.

5. This and subsequent mentions of the monetarybase refer specifically to the Board measure of thebase but, in view of the close relationship betweenthe two measures, should apply nearly as well to theseries produced by the Federal Reserve Bank of St.Louis.



the velocity of the monetary base hasbehaved similarly to Mi's velocity, witha pronounced break in the 1980s from itsearlier behavior. Between 1960 and1980, the velocities of the base, Ml-A(currency plus demand deposits), andMl all rose, in part reflecting the effectson money demand of the generally risingtrend of interest rates. Fluctuations ofbase velocity around its trend during the1960s and 1970s were comparable withthose of the other aggregates. And, in the1980s, velocity of the base and Mldeclined both absolutely and relative tothe earlier trend as deregulation andfalling market interest rates encouraged alarge volume of funds to move intotransaction deposits.

Statistical methods of relating growthin income to past growth rates in the baseproduce results that echo this pattern ofvelocity behavior. When these relation-ships are estimated using data through1980, they make substantial errors inpredicting nominal GNP in subsequentyears, much as do equations involvingother aggregates—especially the narrowaggregates. Techniques that allow for abreak in behavior in the early 1980s makesomewhat smaller but still large errors inthe 1980s and leave unanswered ques-tions about the potential for additionalshifts in the relationships.

An examination of the demand proper-ties of the base can shed light on thedeterminants of the behavior of its veloc-ity and the errors made in predictingGNP. The demand for the base is derivedfrom demands for its components, cur-rency and reserves. The demand forreserves, in turn, depends on demandsfor excess reserves and for reservabledeposits—primarily the transactions de-posits that are included in Ml but alsosome that are not in that aggregate,such as interbank and U.S. governmentdeposits and certain time and savingsdeposits.

Analysis by the Board's staff has foundthat the demand for the base has substan-tial interest sensitivity, mainly reflectingthe interest sensitivity of demand de-posits and other checkable deposits.6 Thisinterest responsiveness, together with thedrop in interest rates during the 1980s,helps to explain the turnaround in basevelocity, much as it explains the move-ments in the velocities of other monetaryaggregates—especially Ml—in recentyears. However, the base probably is lessinterest sensitive than are the other mone-tary aggregates, because of the impor-tance of the currency component, whichdoes not respond very much to changes ininterest rates. This implies that efforts tocontrol the base to predetermined targetranges could involve very wide swings ininterest rates. Whether those fluctuationswould be beneficial to the economydepends in part on the stability of thedemand relationship. If the demand forthe base is relatively stable, the interestrate movements would tend to stabilizeGNP in the face of disturbances tospending. But if base demand tends tomove unpredictably, the interest ratemovements associated with controllingthe base would tend to destabilize GNP.

Over long periods of time, the demandfor the base appears to be fairly predict-able, especially compared with Ml-Aand Ml. Movements in transactions de-posits, especially demand deposits, oftenhave been somewhat erratic, tending toloosen the relationships of Ml-A and Mlwith GNP, but their effects on basedemand are muted by the fractionalnature of reserve requirements. Another

6. An estimated demand equation for the basewas derived from the Board staffs standard modelsof demand for currency and demand for requiredreserves on transactions accounts in Ml only.Demands for other components of reserves werenot explicitly modeled, as the effects of thesecomponents on required reserves are relativelysmall.



factor contributing to the relative stabilityof the demand for the base is thatunpredictable movements in transactiondeposits at times have tended to offsetunexplained changes in currency, per-haps owing to substitution between cur-rency and demand deposits. However,there is considerable variability in therelationship of the base to income andother variables over periods of a year orless—and evidence suggests that at leastover these shorter periods it is no morestable than M2.

In considering the past and prospectivedegree of stability of demand for thebase, attention must be directed to itslargest component, currency. Analystshave noted the extraordinarily largevolume of dollar currency outstandingrelative to measured U.S. economicactivity or the number of households.Although available data are inadequate todetermine even approximate magnitudes,it seems likely that a substantial part ofU.S. currency is being employed insupport of activity that is not reflected inU.S. GNP—in particular, activity outsideour borders. Especially to the extent thisactivity and the currency to support itmove independently of U.S. GNP, thiswould tend to reduce the usefulness of thebase as an indicator or target.

Not only is it difficult to account fullyfor the level of currency outstanding, butgrowth occasionally has been at variancewith expectations, despite the relativelystable long-run relationship with mea-sured income. For example, in the pastyear and a half, growth of currency hasbeen roughly twice as rapid as would beexpected on the basis of historical expe-rience, judging by the Board staffsquarterly econometric model, with noobvious explanation for the strength.

Controllability of the Monetary BaseFor the most part, the Federal Reservehistorically has supplied the monetary

base to accommodate its demand. Thishas been a consistent policy with regardto demands for currency. With respect toreserves, the interactions have been morecomplex. Except in the early 1980s,reactions to deviations of reserves fromexpectations have been quite indirect.Any increases or decreases in the demandfor reserves have been completely accom-modated in the short-run. However, overtime persistent deviations in money (andimplicitly reserves) from objectives haveprompted adjustments in monetary policywhen those deviations were judged likelyto be associated with unwelcome devel-opments in the economy.

Even in the period from late 1979through late 1982, when the FederalReserve used nonborrowed reserves asan operating target to achieve goals formoney growth over time, total reserveswere not closely controlled becauseborrowed reserves adjusted in responseto deviations in money growth fromobjectives.

Because of the remaining two-day lagbetween the ends of the reserve computa-tion and reserve maintenance periods,control of total reserves or the monetarybase would need to be indirect, workingthrough the effects of changes in interestrates on the demand for the componentsof the base in the short run. In thisrespect, control of the base is achieved inthe same way as for the broader aggre-gates. It is likely that the base, or for thatmatter any of the broader aggregates,could be controlled reasonably well overa span of several quarters—a period thatwould be meaningful in terms of theeffects of monetary policy. However, thedegree of interest rate volatility underbase targeting could be quite substantial,especially in the short to intermediaterun. Changes in the quantity of the basedemanded that caused the base to deviatefrom its target would need to be offset inthe short run mainly by changes in



reserves (given the low interest sensitiv-ity of currency demand), which wouldhave multiple effects on the quantity ofmoney. •


Part 2Records, Operations,and Organization


63

Record of Policy Actionsof the Board of Governors

Regulation C(Home Mortgage Disclosure)

August 3, 1988—Revision andAdoption of New Reporting Forms

The Board revised Regulation C to imple-ment recent amendments to the HomeMortgage Disclosure Act and to clarifythe regulatory language.

Votes for this action: Messrs. Greenspanand Johnson, Ms. Seger, and Messrs.Angell, Heller, and Kelley.1

Early this year, the Congress amendedthe Home Mortgage Disclosure Act of1975, expanded its coverage, and made itpermanent. The act requires institutionsthat have more than $10 million in assetsand that operate in a metropolitan statis-tical area to disclose annually certaindetailed information about their homemortgage lending. The recent amend-ments expanded the coverage of the act toinclude savings and loan service corpora-tions and mortgage banking subsidiariesof bank and savings and loan holdingcompanies. Accordingly, the Board re-vised the implementing regulation andthe related reporting forms and instruc-tions and clarified the language of theregulation.

The revisions were effective Septem-ber 19,1988, except that after January 1,1989, the provisions governing the defi-nition of loans for home improvement

1. On this and subsequent pages, footnote 1indicates there was a vacancy on the Board whenthis action was taken.

and home purchase will include loansrelated to mobile and manufacturedhomes.

Regulation D(Reserve Requirementsof Depository Institutions)

November 29, 1988 - Amendments

The Board amended Regulation D toincrease the amount of transactionbalances to which the lower reserverequirement applies and to increase theamount of reservable liabilities subjectto a zero percent reserve requirement.

Votes for these actions: Messrs. Greenspanand Johnson, Ms. Seger, and Messrs.Angell, Heller, Kelley, and LaWare.

Under the Monetary Control Act of1980, depository institutions, Edge andagreement corporations, and U.S.agencies and branches of foreign banksare subject to reserve requirements setby the Board. Initially, the Board setreserve requirements at 3 percent of aninstitution's first $25 million in trans-action balances, and 12 percent onbalances above that level. The act directsthe Board to adjust the amount subject tothe lower reserve requirement annuallyto reflect changes in transaction balancesnationwide. By the beginning of 1988,this amount was $40.5 million. Recentgrowth in such balances warranted anincrease of $1 million. The Board,therefore, amended Regulation D toincrease to $41.5 million the amount oftransaction account balances to whichthe lower reserve requirement applies.


64 Board Policy Actions

The Garn-St Germain DepositoryInstitutions Act of 1982 established azero percent reserve requirement on thefirst $2 million of an institution's reserv-able liabilities. It also provided for annualadjustments to that exemption based ondeposit growth nationwide. Recentgrowth in deposits warranted an increasefrom $3.2 million to $3.4 million in theamount subject to a zero percent reserverequirement, and the Board amendedRegulation D accordingly.

The amendments are effective begin-ning December 20, 1988.

Regulation K (InternationalBanking Operations)

February 3, 1988—Amendment

The Board amended Regulation K, effec-tive February 24, 1988, to liberalize theconditions under which bank holdingcompanies may make debt-for-equityswaps.

Votes for this action: Messrs. Greenspanand Johnson, Ms. Seger, and Messrs.Angell, Heller, and Kelley. (GovernorAngell abstained from voting on the reviewof general consent limits.)l

In August 1987 the Board amendedRegulation K to permit U.S. bankingorganizations to make certain invest-ments abroad using debt-for-equityswaps. (Swaps are useful primarily in acountry that has restricted or prohibitedforeign creditors from expatriating itscurrency.) That amendment allowed aU.S. bank holding company to acquireup to 100 percent of the shares of anonfinancial company in a swap, pro-vided the following conditions were met:(1) the company must be in the process ofbeing transferred from public to privateownership; (2) the company must belocated in a country that is heavilyindebted; (3) the shares acquired through

the swap must be held by the holdingcompany or a subsidiary and not by thebank; and (4) the shares must be divestedwithin five years after the acquisition,unless the Board grants an extension forup to five additional years.

The Board decided to amend the regu-lation further to provide additional flexi-bility in making debt-equity investments.Under the new rules, the investment mustbe made by the holding company or itssubsidiary, and not by the bank. Theother conditions are as follows: (1) AU.S. holding company may acquire up to40 percent of the equity, including votingshares, of a privately owned company. Ifthe organization acquires more than 25percent, there must be another investorholding a larger block of shares. (2) Aholding company that holds more than 20percent of a company's equity may notfinance more than one-half of the com-pany's borrowing needs. (3) The organi-zation may hold the investment for thelesser of 15 years or up to 2 years after thecountry cancels restrictions on the repa-triation of investments. This divestitureperiod also applies to investments madeunder the earlier amendment.

The Board also revised its generalconsent procedures for foreign invest-ments made under debt-equity swaps.Under the regulation's general consentrules, a bank holding company mayinvest up to $15 million in a company, or5 percent of the capital and surplus of thecompany, whichever is smaller, withoutfirst seeking Board approval. For largerinvestments, a bank must notify the Boardof its intentions and may proceed with theacquisition if the Board has not indicatedits disapproval within 45 days. A majorityof Board members believed that a moreliberal general consent provision wasappropriate, and they agreed, GovernorAngell abstaining, to establish the cutofffor making investments under this amend-ment without Board approval at $15


Board Policy Actions 65

million or 1 percent of the investingorganization's equity capital, whicheveris greater.

Regulation T(Credit by Brokers and Dealers)

August 10, 1988—Amendments

The Board amended Regulation T, effec-tive September 15,1988, to make certainforeign debt securities eligible for margincredit.

Votes for this action: Messrs. Greenspanand Johnson, Ms. Seger, and Messrs.Angell, Heller, and Kelley.'l

The Board revised the definition inRegulation T of over-the-counter marginbonds to include long-term nonconvert-ible debt securities issued by foreigngovernments or supranational entities.The amendment allows brokers anddealers to extend margin credit on long-term debt securities issued or guaranteedas a general obligation by a foreignsovereign, its entities, or a supranationalorganization, if there is available for theobligation an explicit or implicit rating,in one of the two highest categories, by anationally recognized statistical ratingservice.

Regulation Y(Bank Holding Companies andChange in Bank Control)

September 6, 1988—Amendments

The Board amended Regulation Y toimplement the Competitive EqualityBanking Act of 1987.

Votes for this action: Messrs. Greenspanand Johnson, Ms. Seger, and Messrs.Angell, Heller, and Kelley. Absent and notvoting: Mr. La Ware.

The Competitive Equality BankingAct, which revised the definition of"bank" in the Bank Holding CompanyAct to include any institution whose de-posits are insured by the Federal DepositInsurance Corporation, precludes theformation of new FDIC-insured nonbankbanks. The act permits a nonbankingcompany that controlled a nonbank bankon March 5, 1987, to retain it, withoutbeing treated as a bank holding company,provided certain conditions are met.Those conditions generally restrict theability of nonbank banks: to commencenew activities or engage in new cross-marketing activities with affiliates afterMarch 5, 1987; to permit overdrafts byor incur overdrafts for affiliates at aReserve Bank; or to expand their assetsby more than 7 percent during any 12-month period after August 10,1988. Theact also prohibits the parent companyfrom acquiring more than 5 percent of anadditional bank after the 1987 cutoff date.

Regulation CC (Availability ofFunds and Collection of Checks)

May 11, 1988-Adoption

The Board adopted Regulation CC, effec-tive September 1, 1988, to carry out therequirements of the Expedited FundsAvailability Act of 1987.

Votes for this action: Messrs. Greenspan,Johnson, Angell, and Kelley. Votes againstthis action: Ms. Seger and Mr. Heller.1

The act and the regulation impose newrequirements for more prompt process-ing of checks. Banks and other depositoryinstitutions now must make funds depos-ited in transaction accounts available on aspecified schedule; disclose their avail-ability schedules to customers; andpromptly pay interest on funds depositedin accounts. In general, banks must make



funds available for withdrawal withinthree business days of deposit, if thecheck is deposited in a local bank. (Adepository bank is determined to be localif it is located in the same Federal Reservecheck processing region as the payingbank.) Proceeds from nonlocal checksmust be made available within sevenbusiness days of deposit. In addition,certain types of checks, such as Treasurychecks, state and local governmentchecks, and cashier's checks, must beavailable for withdrawal the next busi-ness day after deposit. Under certainexceptions specified in the regulation, abank is permitted to place longer holds ona check.

The regulation also includes rules toexpedite the collection and return ofchecks by requiring paying banks toreturn checks promptly, by authorizingdirect returns, and by expanding therequirements governing notices ofnonpayment of checks written foramounts above $2,500. The rulesrequiring the prompt collection ofchecks will help reduce the risk thatbanks might incur when making fundsavailable within the schedules mandatedby the regulation.

In addition to rules regarding theavailability of funds and the return ofchecks, the regulation also includesendorsement standards that allow banksto identify more easily the depositorybanks to which returned checks or noticesof nonpayment should be sent.

Governors Seger and Heller opposedadoption of the regulation because theybelieved it was too burdensome relativeto the benefit that consumers wouldderive from it. Governor Seger wasconcerned about the regulatory burdenon smaller institutions. Governor Hellerbelieved that the burden of the rulemak-ing was excessive relative to the benefitsthat consumers would derive. He thoughtthat the benefits would be small and that

some consumers might even be adverselyaffected by the new rules.

August 10, 1988-Interim rulesOctober 19, 1988-Final rules

The Board adopted interim rules forRegulation CC to implement a recentcourt ruling relating to payable-throughchecks.

Votes for this action: Messrs. Greenspanand Johnson, Ms. Seger, and Messrs.Angell and Kelley. Vote against this action:Mr. Heller.1

The Board amended Regulation CC toadopt the rules in final form.

Votes for this action: Mr. Greenspan, Ms.Seger, and Messrs. Angell, Heller, Kelley,and LaWare. Votes against: None. Absentand not voting: Mr. Johnson.

In May the Board adopted RegulationCC, effective September 1, 1988, toimplement the Expedited Funds Avail-ability Act. One provision of the regula-tion had held that a bank check or creditunion share draft written on an account atone institution but payable through an-other institution would be consideredlocal or nonlocal depending on the loca-tion of the institution through which thecheck would be paid. A court decision inJuly, however, found that that provisionwas inconsistent with the definition oforiginating depository institution in theact. The court ruled that the location ofthe institution on which the check waswritten—and not the bank through whichthe check would be paid-should deter-mine whether an item was local ornonlocal.

Because the regulation would becomeeffective shortly after the court's ruling,the Board adopted interim amendmentsin August to comply with the ruling andat the same time sought public comment



on the amendments. The interim amend-ments revised several definitions, andalso required certain banks and creditunions to amend their disclosure state-ments. Governor Heller dissented fromthis action, for the same reason he haddissented when the Board adopted Regu-lation CC, because he believed the regu-latory burden imposed was excessiverelative to the benefit consumers wouldderive.

In October, the Board amended theregulation to adopt the rules in final form,with certain technical revisions. In addi-tion, based on comments received on theinterim rules, the Board sought commenton further refinements to the regulationthat would ease possible operationaldifficulties and reduce the risks resultingfrom the revised rule.

Policy Statements

April 20, 1988-The Selection ofSecurities Dealers and UnsuitableInvestment Practices

The Board issued a supervisory policystatement, effective immediately, re-garding a bank's selection of securitiesdealers and the investment practicesconsidered inappropriate for its invest-ment portfolio.

Votes for this action: Mr. Greenspan, Ms.Seger, and Messrs. Angell, Heller, andKelley. Absent and not voting: Mr.Johnson.1

The Federal Financial Institutions Ex-amination Council had recommendedthat the member agencies issue a jointpolicy statement to advise depositoryinstitutions of trading practices that areconsidered inappropriate when used forthe purchase and sale of securities held inan institution's investment portfolio. Thestatement advises institutions of consid-

erations in selecting a securities dealerand indicates that management shouldevaluate the condition of securities firmswith which they do business. The state-ment also describes several types ofsecurities with volatile prices and high-risk characteristics that might be unsuit-able for an institution's investment port-folio, especially if those securities areheld in significant amounts.

December 16, 1988-Risk-BasedCapital Standards andImplementation Guidelines for U.S.Banks and Bank Holding Companies

The Board adopted a new framework forthe assessment of capital adequacy andissued guidelines for the application of itsstandards to U.S. banking organizations.

Votes for this action: Messrs. Greenspan,Johnson, Angell, Heller, Kelley, andLa Ware. Votes against this action: None.Absent and not voting: Ms. Seger.

In late 1987, U.S. bank regulatorsbegan working with bank supervisorsabroad to develop a new framework forassessing bank capital. U.S. regulatorsand supervisors in eleven other industri-alized countries were seeking a uniformcapital standard that not only wouldpermit comparisons among banking or-ganizations from different countries butalso would be more sensitive to riskfactors, including off-balance-sheet riskexposures. After many months of delib-erations, the supervisors developed aframework that will permit greater com-parability in the measurement and assess-ment of capital internationally. Also, itwill reduce competitive inequities thatarise from differences in supervisorytreatment among nations.

The new capital framework provides acommon definition of the core capitalelements that constitute tier I capital, as



well as certain other supplementarycapital elements that constitute tier II. Inaddition, the risks associated with partic-ular types of assets and off-balance-sheetitems (which are converted into balancesheet equivalents) are factored into thecapital framework by assigning suchclaims to one of five broad risk categoriesthat have weights ranging from zero to100 percent. The new standards encour-age banking organizations that do busi-ness internationally to strengthen theircapital positions.

Banking organizations having capitalratios below the minimum established bythe new framework are encouraged tostrengthen their capital positions as soonas possible. The three U.S. bank regula-tors expect to begin applying the capitalframework in mid-March 1989. Thetransitional minimum standards for allU.S. banks and bank holding companieswill become effective at the end of 1990,and final standards will take effect at theend of 1992.

Governor Seger, who was absent whenthe standards were adopted, had indicatedher opposition to the framework duringan earlier discussion of risk-based capi-tal. Governor Seger opposed the stan-dards primarily because of the creditallocation aspects of the risk weightsassigned to the various categories ofassets and the capital requirements forcertain activities. Also, because of theexpediency of developing an interna-tional standard, she feared that the conse-quences of assigning those assets toparticular risk categories might not havebeen assessed sufficiently. In addition,she did not think the standards should beapplied to bank holding companies.

1988 Discount RatesThe Board approved one change in thebasic discount rate during 1988, anincrease in August from 6 to 6V2 percent.

During the year the Board also voted atfour meetings to disapprove requests forincreases or decreases submitted byindividual Federal Reserve Banks. InApril, the Board decided not to renew itstemporary, simplified seasonal creditprogram.

The reasons for the Board's decisionsare reviewed below. Those decisionswere made in the context of the policyactions of the Federal Open MarketCommittee and the related economic andfinancial developments that are coveredin more detail elsewhere in this REPORT.

A listing of the Board's actions on thediscount rate during 1988, including thevotes on those actions, follows thisreview.

Actions on the Basic Discount Rate

During the first three months of the year,the Board discussed but took no action ona request, renewed biweekly, from oneFederal Reserve Bank to reduce the basicdiscount rate by Vi percentage point; theproposed reduction was lowered to lApercentage point late in the first quarter.Some easing of reserve conditions hadbeen sought through open market opera-tions in late January and early February,but the Board felt that business andfinancial developments did not warrantan accompanying reduction in the dis-count rate. Later in the quarter indica-tions of a stronger economic expansionthan was anticipated earlier in conjunc-tion with faster growth of the monetaryaggregates reinforced the Board's viewthat the discount rate should not bereduced.

On April 4 the Board turned down thestill pending request to reduce the dis-count rate by lA percentage point. Thisaction followed a decision in late Marchby the Federal Open Market Committeeto increase slightly the degree of pressureon reserve positions because of growing



concerns that the expansion might gatherexcessive and inflationary momentum.During the latter part of April, the Boarddiscussed but took no action on requestsfrom two Federal Reserve Banks callingrespectively for an increase and for adecrease of lA percentage point in thebasic discount rate.

In May and June a growing number ofFederal Reserve Banks submitted re-quests for increases of W or Vi percentagepoint in the basic rate. The proposedincreases were seen by the Banks as adesirable complement to the gradualtightening of monetary policy that hadbeen implemented through open marketoperations since late March. On July 5the Board disapproved pending requestsfrom seven Banks to raise the basic rateby Vi percentage point. In the Board'sjudgment, current economic and finan-cial developments, including upwardpressures on the dollar in foreign ex-change markets, argued on balanceagainst a near-term increase in the dis-count rate. The Board recognized thatprospective developments might call fora higher rate subsequently, but felt thatdenying rather than taking no action onthe pending increases would serve theusefal purpose of communicating theBoard's current thinking to the FederalReserve Banks.

On August 9 the Board approved anincrease of Vi percentage point in thebasic discount rate to a level of 6V2percent. Recent economic statistics, no-tably on the employment situation inJuly, suggested a stronger economy thanpreviously appeared to be evolving. Inthese circumstances the Board concludedthat an increase in the discount rate wouldusefully complement earlier moves totighten monetary policy through openmarket operations in order to reduceinflationary pressures. In reaching itsdecision the Board also took into accountthe substantial rise in short-term interest

rates that had occurred over the course ofrecent months and the resulting increasein the spread between such rates and thediscount rate. An increase in the discountrate was expected to result in firmerconditions in money markets withoutwidening the spread further.

Subsequently, on September 6 andOctober 17, the Board disapproved re-quests from one Federal Reserve Bank toraise the discount rate by a further Vipercentage point. In the Board's view,the increasing degree of monetary re-straint that had been implemented sinceearly spring and some recent indicationsthat the rate of economic growth might beslowing argued against approval of theproposed increase, pending an evaluationof farther economic developments.

Toward the end of the year, incominginformation suggested that the economicexpansion retained considerable momen-tum and that inflationary pressures re-mained substantial. Indeed, the risksappeared to have increased that suchpressures would intensify in the absenceof farther monetary tightening. Againstthis background, the Federal Open Mar-ket Committee adjusted its operationstoward a greater degree of reserve pres-sure in late fall and a growing number ofFederal Reserve Banks, totaling seven bythe second half of December, proposedincreases of Vi percentage point—or inone case a fall percentage point—in thebasic discount rate.

The Board reviewed but took no actionon the proposed increases. In the Board'sview, economic and financial develop-ments might warrant a higher discountrate later, but an immediate increasecould have unintended repercussionsunder prevailing conditions in domesticand international financial markets. Inparticular, it might convey a misleadingimpression of the extent of the System'spolicy tightening intentions and generatean undesired degree of upward pressure



on domestic interest rates and on thevalue of the dollar in foreign exchangemarkets.

Termination of Temporary SeasonalCredit Program

On April 4, 1988, the Board decided todiscontinue its temporary seasonal creditprogram. This program was originallyapproved and implemented in 1985,when financial conditions in the agricul-tural sector were deteriorating substan-tially, and renewed for each of thefollowing two years. Its purpose was tomake funds available at the discountwindow to agricultural banks that wereexperiencing exceptionally strong loandemands in those unusual circumstances.The program was designed to comple-ment the longstanding regular seasonalcredit program and thereby to help ensurethat small- and medium-size banks didnot face liquidity constraints in theirefforts to accommodate their farm bor-rowers over the planting and productioncycle. The Board agreed not to renew theprogram in light of the improved outlookfor the agricultural sector and the rela-tively small use of the program.

Structure of Discount Rates

The basic discount rate is the rate chargedon loans to depository institutions forshort-term adjustment credit. The basicrate also applies to the seasonal creditprogram; under that program, credit maybe provided for periods longer than thosepermitted under adjustment credit toassist smaller institutions in meetingregular needs arising from certain sea-sonal movements in their deposits andloans.

A higher, flexible rate may be chargedon loans made over extended periods forother than seasonal purposes to deposi-tory institutions that are under sustained

liquidity pressure and that are not able tosecure similar credit on reasonable termsfrom other sources. The flexible rate isrelated to market rates and is adjustedperiodically, subject to Board approval.At the discretion of the lending FederalReserve Bank, the first 30 days of bor-rowing on extended credit may be at thebasic rate, but any further borrowingsare charged the higher flexible rate. Thehighest rate applicable to any creditextended to a depository institution willbe charged on exceptionally largeadjustment-credit loans that arise fromcomputer breakdowns or other operatingproblems, unless the operating problemclearly is beyond the reasonable controlof the borrowing institution; under thecurrent rate structure that rate is theflexible rate.

As of December 31, 1988, the struc-ture of discount rates was as follows: abasic rate of 6Vi percent for short-termadjustment credit and for credit under theseasonal program, and a flexible rate of9.55 percent. During 1988 the flexiblerate ranged from a low of 7.10 percentearly in the year to a high of 9.55 percentat year-end.

Board Votes

Under the provisions of the FederalReserve Act, the boards of directors ofFederal Reserve Banks are required toestablish rates on loans to depositoryinstitutions at least every 14 days and tosubmit such rates to the Board of Gover-nors for review and determination. Re-serve Bank actions on the discount rateinclude requests to renew the formula forcalculating the flexible rate on extendedcredit. The Board votes listed below arethose that involved changes in the basicdiscount rate and termination of thetemporary simplified seasonal creditprogram. Votes relating to the reestab-



lishment of existing rates or the updatingof market-related rates under the ex-tended credit program are not shown. Allvotes during 1988 were unanimous.

Votes on the Basic Discount RateApril 4,1988. The Board disapproved

an action taken by the directors of theFederal Reserve Bank of Dallas on March24 to reduce the basic discount rate from6 to 5% percent.

Votes for this action: Messrs. Greenspanand Johnson, Ms. Seger, and Messrs.Angell, Heller, and Kelley.1

July 5, 1988. The Board disapprovedactions taken on the following dates bythe directors of the following FederalReserve Banks to increase the basicdiscount rate from 6 to 6*/2 percent:Philadelphia, Cleveland, Richmond, Chi-cago, and St. Louis on June 23; Atlantaon June 24; and New York on June 30.

Votes for this action: Mr. Greenspan, Ms.Seger, and Messrs. Angell and Heller.Absent and not voting: Messrs. Johnsonand Kelley.1

August 9, 1988. Effective August 9,1988, the Board approved actions takenby the directors of the Federal ReserveBanks of Boston, New York, Philadel-phia, Cleveland, Richmond, Atlanta, St.Louis, Minneapolis, Kansas City, andSan Francisco to increase the basicdiscount rate from 6 to 6^2 percent.

Votes for this action: Messrs. Greenspanand Johnson, Ms. Seger, and Messrs.Angell, Heller, and Kelley.l

The Board subsequently approved sim-ilar actions taken by the directors of theFederal Reserve Bank of Chicago, effec-tive August 10, and by the directors of theFederal Reserve Bank of Dallas, effectiveAugust 11, 1988.

September 6y 1988. The Board disap-proved an action taken by the directors ofthe Federal Reserve Bank of Clevelandon August 25 to increase the basicdiscount rate from 6x/2 to 7 percent.

Votes for this action: Messrs. Greenspanand Johnson, Ms. Seger, and Messrs.Angell, Heller, and Kelley. Absent and notvoting: Mr. La Ware.

October 17, 1988. The Board disap-proved an action taken by the directors ofthe Federal Reserve Bank of Clevelandon October 13 to increase the basicdiscount rate from 6Vi to 7 percent.

Votes for this action: Messrs. Greenspanand Johnson, Ms. Seger, and Messrs.Angell, Heller, Kelley, and LaWare.

Vote on the Temporary SeasonalCredit ProgramOn April 4, 1988, the Board voted toterminate the temporary, simplified sea-sonal credit program for small andmedium-size banks that lend to agricul-tural borrowers.

Votes for this action: Messrs. Greenspanand Johnson, Ms. Seger, and Messrs.Angell, Heller, and Kelley.l


73

Record of Policy Actionsof the Federal Open Market Committee

The record of policy actions of the Fed-eral Open Market Committee is presentedin the ANNUAL REPORT of the Board ofGovernors pursuant to the requirementsof section 10 of the Federal Reserve Act.That section provides that the Board shallkeep a complete record of the actionstaken by the Board and by the FederalOpen Market Committee on all questionsof policy relating to open market opera-tions, that it shall record therein the votestaken in connection with the determina-tion of open market policies and thereasons underlying each such action, andthat it shall include in its ANNUAL REPORTto the Congress a full account of suchactions.

The pages that follow contain entriesrelating to the policy actions at themeetings of the Federal Open MarketCommittee held during the calendar year1988, including the votes on the policydecisions made at those meetings as wellas a resume of the basis for the decisions.The summary descriptions of economicand financial conditions are based on theinformation that was available to theCommittee at the time of the meetings,rather than on data as they may have beenrevised later.

It will be noted from the record ofpolicy actions that in some cases thedecisions were made by unanimous voteand that in other cases dissents wererecorded. The fact that a decision infavor of a general policy was by a largemajority, or even that it was by unani-mous vote, does not necessarily meanthat all members of the Committee wereequally agreed as to the reasons for theparticular decision or as to the precise

operations in the open market that werecalled for to implement the generalpolicy.

During 1988 the policy record for eachmeeting was released a few days after thenext regularly scheduled meeting andwas subsequently published in the Fed-eral Reserve Bulletin.

Policy directives of the Federal OpenMarket Committee are issued to the Fed-eral Reserve Bank of New York as theBank selected by the Committee to exe-cute transactions for the System OpenMarket Account. In the area of domesticopen market activities, the Federal Re-serve Bank of New York operates undertwo separate directives from the OpenMarket Committee: an Authorization forDomestic Open Market Operations and aDomestic Policy Directive. (A new Do-mestic Policy Directive is adopted ateach regularly scheduled meeting.) In theforeign currency area, the Committeeoperates under an Authorization for For-eign Currency Operations and a ForeignCurrency Directive. These four instru-ments are shown below in the form inwhich they were in effect at the beginningof 1988. Changes in the instrumentsduring the year are reported in the recordsfor the individual meetings.

Authorization for DomesticOpen Market Operations

In Effect January 1, 1988

1. The Federal Open Market Committeeauthorizes and directs the Federal ReserveBank of New York, to the extent necessary to


74 FOMC Policy Actions

carry out the most recent domestic policydirective adopted at a meeting of theCommittee:

(a) To buy or sell U.S. Governmentsecurities, including securities of the FederalFinancing Bank, and securities that are directobligations of, or fully guaranteed as toprincipal and interest by, any agency of theUnited States in the open market, from or tosecurities dealers and foreign and interna-tional accounts maintained at the FederalReserve Bank of New York, on a cash,regular, or deferred delivery basis, for theSystem Open Market Account at marketprices, and, for such Account, to exchangematuring U.S. Government and Federalagency securities with the Treasury or theindividual agencies or to allow them to maturewithout replacement; provided that the aggre-gate amount of U. S. Government and Federalagency securities held in such Account (in-cluding forward commitments) at the close ofbusiness on the day of a meeting of theCommittee at which action is taken withrespect to a domestic policy directive shall notbe increased or decreased by more than $6.0billion during the period commencing withthe opening of business on the day followingsuch meeting and ending with the close ofbusiness on the day of the next such meeting;l

(b) When appropriate, to buy or sell inthe open market, from or to acceptancedealers and foreign accounts maintained atthe Federal Reserve Bank of New York, on acash, regular, or deferred delivery basis, forthe account of the Federal Reserve Bank ofNew York at market discount rates, primebankers acceptances with maturities of up tonine months at the time of acceptance that (1)arise out of the current shipment of goodsbetween countries or within the United States,or (2) arise out of the storage within theUnited States of goods under contract of saleor expected to move into the channels of tradewithin a reasonable time and that are securedthroughout their life by a warehouse receiptor similar document conveying title to the

1. Pursuant to an action taken by the Committeeat its meeting on Dec. 15-16, 1987, the limit onchanges between Committee meetings in SystemAccount holdings of U.S. government and federalagency securities was set at $9.0 billion for theperiod through the close of business on Feb. 10,1988, at which time the limit reverted to $6.0billion.

underlying goods; provided that the aggregateamount of bankers acceptances held at anyone time shall not exceed $100 million;

(c) To buy U.S. Government securities,obligations that are direct obligations of, orfully guaranteed as to principal and interestby, any agency of the United States, andprime bankers acceptances of the types autho-rized for purchase under l(b) above, fromdealers for the account of the Federal ReserveBank of New York under agreements forrepurchase of such securities, obligations, oracceptances in 15 calendar days or less, atrates that, unless otherwise expressly autho-rized by the Committee, shall be determinedby competitive bidding, after applying reason-able limitations on the volume of agreementswith individual dealers; provided that in theevent Government securities or agency issuescovered by any such agreement are notrepurchased by the dealer pursuant to theagreement or a renewal thereof, they shall besold in the market or transferred to the SystemOpen Market Account; and provided furtherthat in the event bankers acceptances coveredby any such agreement are not repurchased bythe seller, they shall continue to be held by theFederal Reserve Bank or shall be sold in theopen market.

2. In order to ensure the effective conductof open market operations, the Federal OpenMarket Committee authorizes and directs theFederal Reserve Banks to lend U.S. Govern-ment securities held in the System OpenMarket Account to Government securitiesdealers and to banks participating in Govern-ment securities clearing arrangements con-ducted through a Federal Reserve Bank, undersuch instructions as the Committee mayspecify from time to time.

3. In order to ensure the effective conductof open market operations, while assisting inthe provision of short-term investments forforeign and international accounts maintainedat the Federal Reserve Bank of New York, theFederal Open Market Committee authorizesand directs the Federal Reserve Bank of NewYork (a) for System Open Market Account, tosell U.S. Government securities to such for-eign and international accounts on the basesset forth in paragraph l(a) under agreementsproviding for the resale by such accounts ofthose securities within 15 calendar days onterms comparable to those available on suchtransactions in the market; and (b) for NewYork Bank account, when appropriate, toundertake with dealers, subject to the condi-


FOMC Policy Actions 75

tions imposed on purchases and sales ofsecurities in paragraph l(c), repurchaseagreements in U.S. Government and agencysecurities, and to arrange corresponding saleand repurchase agreements between its ownaccount and foreign and international ac-counts maintained at the Bank. Transactionsundertaken with such accounts under theprovisions of this paragraph may provide fora service fee when appropriate.

Domestic Policy Directive


The economic information reviewed at thismeeting largely reflected the influence ofdevelopments that were under way before thefinancial disturbances of mid-October. Theextent to which those disturbances wouldaffect the economy remained uncertain.Information available for the current quartersuggested that the expansion in economicactivity was moderating from a brisk pace inthe third quarter. Total nonfarm payrollemployment rose strongly further overOctober and November, with the manu-facturing sector recording relatively largegains. The civilian unemployment rate, at5.9 percent in November, remained close toits level since mid-year. Industrialproduction also increased considerablyfurther over October and November,following sizable advances since late spring.Retail sales edged up in November after twomonths of substantial declines. Recentindicators of business capital spendingsuggested modest further growth after asurge in the third quarter. Housing starts rosesomewhat in November, after slowing inOctober, but were little changed from theaverage pace in the second and thirdquarters. The nominal U.S. merchandisetrade deficit in October appeared to havedeteriorated substantially from the averagerate in the third quarter. The rise in broadmeasures of prices and wages in recentmonths generally has been close to thatexperienced earlier in the year.

Financial markets remained somewhatunsettled. Stock and bond prices continued tofluctuate over a relatively wide range during

the period since the previous Committeemeeting on November 3. On balance, shareprices fell somewhat further in this period.Changes in long-term yields were mixed whileshort-term interest rates rose, especially onshort-maturity private market instruments.The trade-weighted foreign exchange valueof the dollar in terms of the other G-10currencies declined considerably further.

The monetary aggregates weakened inNovember after strengthening in October inconjunction with a temporary surge in de-mands for transaction balances and otherliquid assets in the latter part of that month.For 1987 through November, expansion ofM2 fell somewhat further below the lowerend of the range established by the Committeefor the year, while growth of M3 remainedaround the lower end of its range. Growth ofMl was close to that of nominal GNP for theyear to date and expansion in total domesticnonfinancial debt remained well within theCommittee's monitoring range for the year.

The Federal Open Market Committee seeksmonetary and financial conditions that willfoster reasonable price stability over time,promote growth in output on a sustainablebasis, and contribute to an improved patternof international transactions. In furtheranceof these objectives, the Committee agreed atits meeting in July to reaffirm the rangesestablished in February for growth of 5 Vi to8V2 percent for both M2 and M3 measuredfrom the fourth quarter of 1986 to the fourthquarter of 1987. The Committee agreed thatgrowth in these aggregates around the lowerends of their ranges might be appropriate inlight of developments with respect to velocityand signs of the potential for some strengthen-ing in underlying inflationary pressures,provided that economic activity was expand-ing at an acceptable pace. The monitoringrange for growth in total domestic nonfinan-cial debt set in February for the year was leftunchanged at 8 to 11 percent.

For 1988, the Committee agreed in July ontentative ranges of monetary growth, mea-sured from the fourth quarter of 1987 to thefourth quarter of 1988, of 5 to 8 percent forboth M2 and M3. The Committee provision-ally set the associated range for growth in totaldomestic nonfinancial debt at IVi to lO

2. Adopted by the Committee at its meeting onDec. 15-16, 1987.

percent.With respect to Ml , the Committee

recognized that, based on experience, thebehavior of that aggregate must be judgedin the light of other evidence relating to



economic activity and prices; fluctuations inMl have become much more sensitive inrecent years to changes in interest rates,among other factors. Because of thissensitivity, which had been reflected in asharp slowing of the decline in Ml velocityover the first half of the year, the Committeeagain decided at the July meeting not toestablish a specific target for growth in Mlover the remainder of 1987 and no tentativerange was set for 1988. The appropriatenessof changes in Ml this year would continue tobe evaluated in the light of the behavior of itsvelocity, developments in the economy andfinancial markets, and the nature of emergingprice pressures. The Committee welcomedsubstantially slower growth of Ml in 1987than in 1986 in the context of continuingeconomic expansion and some evidence ofgreater inflationary pressures. The Com-mittee indicated in July that in reachingoperational decisions over the balance of theyear it would take account of growth in Mlin the light of circumstances then prevailing.The issues involved with establishing a targetfor Ml will be carefully reappraised at thebeginning of 1988.

In the implementation of policy for theimmediate future, the Committee seeks tomaintain the existing degree of pressure onreserve positions. The Committee recognizesthat still sensitive conditions in financialmarkets and uncertainties in the economicoutlook may continue to call for a specialdegree of flexibility in open marketoperations. Taking account of conditions infinancial markets, somewhat lesser reserverestraint or somewhat greater reserverestraint would be acceptable depending onthe strength of the business expansion,indications of inflationary pressures,developments in foreign exchange markets,as well as the behavior of the monetaryaggregates. The contemplated reserveconditions are expected to be consistent withgrowth in M2 and M3 over the period fromNovember through March at annual rates ofabout 5 percent and 6 percent, respectively.Over the same period, growth in Ml isexpected to remain relatively limited. TheChairman may call for Committee con-sultation if it appears to the Manager forDomestic Operations that reserve conditionsduring the period before the next meeting arelikely to be associated with a federal fundsrate persistently outside a range of 4 to 8percent.

At the conclusion of a telephone meet-ing on January 5, 1988, the Committeevoted to change the operational para-graph of its directive to read as follows:

In the implementation of policy for theimmediate future, the Committee seeks tomaintain the existing degree of pressure onreserve positions. The Committee agrees thatthe passing of time and the year-end shouldpermit further progress toward restoring anormal approach to open market operations,although still sensitive conditions in financialmarkets and uncertainties in the economicoutlook may continue to call for someflexibility in operations. Taking account ofconditions in financial markets, somewhatlesser reserve restraint or somewhat greaterreserve restraint would be acceptabledepending on the strength of the businessexpansion, indications of inflationarypressures, developments in foreign exchangemarkets, as well as the behavior of themonetary aggregates. The contemplatedreserve conditions are expected to beconsistent with growth in M2 and M3 overthe period from November through March atannual rates of about 5 percent and 6 percent,respectively. Over the same period, growthin Ml is expected to remain relativelylimited. The Chairman may call forCommittee consultation if it appears to theManager for Domestic Operations thatreserve conditions during the period beforethe next meeting are likely to be associatedwith a federal funds rate persistently outsidea range of 4 to 8 percent.

Authorization for ForeignCurrency Operations


1. The Federal Open Market Committeeauthorizes and directs the Federal ReserveBank of New York, for System Open MarketAccount, to the extent necessary to carry outthe Committee's foreign currency directiveand express authorizations by the Committeepursuant thereto, and in conformity with suchprocedural instructions as the Committee mayissue from time to time:

A. To purchase and sell the followingforeign currencies in the form of cable



transfers through spot or forward transactionson the open market at home and abroad,including transactions with the U. S. Treasury,with the U.S. Exchange Stabilization Fundestablished by Section 10 of the Gold ReserveAct of 1934, with foreign monetary authori-ties, with the Bank for International Settle-ments, and with other international financialinstitutions:

Austrian schillingsBelgian francsCanadian dollarsDanish kronerPounds sterlingFrench francsGerman marks

Italian lireJapanese yenMexican pesosNetherlands guildersNorwegian kronerSwedish kronorSwiss francs

B. To hold balances of, and to haveoutstanding forward contracts to receive or todeliver, the foreign currencies listed in para-graph A above.

C. To draw foreign currencies and topermit foreign banks to draw dollars underthe reciprocal currency arrangements listedin paragraph 2 below, provided that drawingsby either party to any such arrangement shallbe fully liquidated within 12 months after anyamount outstanding at that time was firstdrawn, unless the Committee, because ofexceptional circumstances, specifically autho-rizes a delay.

D. To maintain an overall open positionin all foreign currencies not exceeding $12.0billion. For this purpose, the overall openposition in all foreign currencies is defined asthe sum (disregarding signs) of net positionsin individual currencies. The net position in asingle foreign currency is defined as holdingsof balances in that currency, plus outstandingcontracts for future receipt, minus outstand-ing contracts for future delivery of that cur-rency, i.e., as the sum of these elements withdue regard to sign.

2. The Federal Open Market Committeedirects the Federal Reserve Bank of NewYork to maintain reciprocal currency arrange-ments ("swap" arrangements) for the SystemOpen Market Account for periods up to amaximum of 12 months with the followingforeign banks, which are among those desig-nated by the Board of Governors of the Fed-eral Reserve System under Section 214.5 ofRegulation N, Relations with Foreign Banksand Bankers, and with the approval of theCommittee to renew such arrangements onmaturity:

AmountForeign bank (millions of

dollars equivalent)

Austrian National Bank 250National Bank of Belgium 1,000Bank of Canada 2,000National Bank of Denmark 250Bank of England 3,000Bank of France 2,000German Federal Bank 6,000Bank of Italy 3,000Bank of Japan 5,000Bank of Mexico 700Netherlands Bank 500Bank of Norway 250Bank of Sweden 300Swiss National Bank 4,000Bank for International Settlements

Dollars against Swiss francs 600Dollars against authorized European

currencies other than Swiss francs 1,250

Any changes in the terms of existing swaparrangements, and the proposed terms of anynew arrangements that may be authorized,shall be referred for review and approval tothe Committee.

3. All transactions in foreign currenciesundertaken under paragraph 1(A) aboveshall, unless otherwise expressly authorizedby the Committee, be at prevailing marketrates. For the purpose of providing an invest-ment return on System holdings of foreigncurrencies, or for the purpose of adjustinginterest rates paid or received in connectionwith swap drawings, transactions with for-eign central banks may be undertaken atnon-market exchange rates.

4. It shall be the normal practice to arrangewith foreign central banks for the coordinationof foreign currency transactions. In makingoperating arrangements with foreign centralbanks on System holdings of foreign cur-rencies, the Federal Reserve Bank of NewYork shall not commit itself to maintain anyspecific balance, unless authorized by theFederal Open Market Committee. Any agree-ments or understandings concerning theadministration of the accounts maintained bythe Federal Reserve Bank of New York withthe foreign banks designated by the Board ofGovernors under Section 214.5 of RegulationN shall be referred for review and approval tothe Committee.

5. Foreign currency holdings shall beinvested insofar as practicable, consideringneeds for minimum working balances. Suchinvestments shall be in liquid form, andgenerally have no more than 12 monthsremaining to maturity. When appropriate in



connection with arrangements to provideinvestment facilities for foreign currencyholdings, U.S. Government securities may bepurchased from foreign central banks underagreements for repurchase of such securitieswithin 30 calendar days.

6. All operations undertaken pursuant tothe preceding paragraphs shall be reportedpromptly to the Foreign Currency Subcom-mittee and the Committee. The Foreign Cur-rency Subcommittee consists of the Chairmanand Vice Chairman of the Committee, theVice Chairman of the Board of Governors,and such other member of the Board as theChairman may designate (or in the absence ofmembers of the Board serving on the Subcom-mittee, other Board Members designated bythe Chairman as alternates, and in the absenceof the Vice Chairman of the Committee, hisalternate). Meetings of the Subcommitteeshall be called at the request of any member,or at the request of the Manager for ForeignOperations, for the purposes of reviewingrecent or contemplated operations and ofconsulting with the Manager on other mattersrelating to his responsibilities. At the requestof any member of the Subcommittee, ques-tions arising from such reviews and consulta-tions shall be referred for determination to theFederal Open Market Committee.

7. The Chairman is authorized:A. With the approval of the Committee,

to enter into any needed agreement or under-standing with the Secretary of the Treasuryabout the division of responsibility for foreigncurrency operations between the System andthe Treasury;

B. To keep the Secretary of the Treasuryfully advised concerning System foreign cur-rency operations, and to consult with theSecretary on policy matters relating to foreigncurrency operations;

C. From time to time, to transmit appro-priate reports and information to the NationalAdvisory Council on International Monetaryand Financial Policies.

8. Staff officers of the Committee areauthorized to transmit pertinent informationon System foreign currency operations toappropriate officials of the Treasury Depart-ment.

9. All Federal Reserve Banks shall partic-ipate in the foreign currency operations forSystem Account in accordance with para-graph 3 G(l) of the Board of Governors'Statement of Procedure with Respect to For-eign Relationships of Federal Reserve Banksdated January 1, 1944.

Foreign Currency Directive


1. System operations in foreign currenciesshall generally be directed at counteringdisorderly market conditions, provided thatmarket exchange rates for the U.S. dollarreflect actions and behavior consistent withthe IMF Article IV, Section 1.

2. To achieve this end the System shall:A. Undertake spot and forward pur-

chases and sales of foreign exchange.B. Maintain reciprocal currency

("swap") arrangements with selected foreigncentral banks and with the Bank for Interna-tional Settlements.

C. Cooperate in other respects withcentral banks of other countries and withinternational monetary institutions.

3. Transactions may also be undertaken:A. To adjust System balances in light of

probable future needs for currencies.B. To provide means for meeting Sys-

tem and Treasury commitments in particularcurrencies, and to facilitate operations of theExchange Stabilization Fund.

C. For such other purposes as may beexpressly authorized by the Committee.

4. System foreign currency operationsshall be conducted:

A. In close and continuous consultationand cooperation with the United States Trea-sury;

B. In cooperation, as appropriate, withforeign monetary authorities; and

C. In a manner consistent with theobligations of the United States in the Interna-tional Monetary Fund regarding exchangearrangements under the IMF Article IV.

Meeting Held onFebruary 9-10,1988


The information reviewed at this meetingindicated that economic activity contin-ued to expand rapidly in the fourthquarter, although gains in output ap-peared to have moderated around year-end. Over the quarter as a whole, manu-facturing output recorded a sizable furtherincrease, supported by continued strongdemands for exports. Domestic final sales



weakened, however, with consumptionoutlays and business fixed investmentdeclining, and much of the rise in produc-tion apparently went into inventories.The rate of inflation was held down late inthe year by declines in energy prices,while wage trends showed little change.

Industrial production rose consider-ably over the fourth quarter, but theincrease slowed in November and mod-erated further in December. Output ofconsumer goods, which changed little inboth months, was held down by reduc-tions in automobile assemblies. Also,output of business equipment edgedlower after substantial growth over thesummer and early autumn. Nonfarmpayroll employment grew at a brisk pacein the fourth quarter, but slowed substan-tially in January. In manufacturing,employment gains moderated in Januaryas sizable increases in a few industrieswere partly offset by layoffs elsewhere.In contrast to the payroll survey, totalemployment as measured by the house-hold survey was up sharply in January,bringing the rise over the past fourmonths into line with the advance inpayroll employment. The growth in thelabor force about matched the rise inhousehold employment in January, andthe civilian unemployment rate was un-changed at 5.8 percent.

Consumer spending remained sluggishin recent months. Excluding motor vehi-cles, real outlays on goods and serviceswere essentially unchanged during thelast three months of 1987. Sales of newautomobiles improved after incentiveswere reintroduced in mid-November, butdealer inventories remained high. Withconsumer spending weak and growth indisposable income stronger in the fourthquarter, the saving rate rose considerablyto 4.9 percent.

Housing starts fell to an annual rate of1.37 million units in December, reflect-ing a sharp drop in the multifamily sector

after a surge in November and somedecline in the single-family area. Sales ofnew and existing homes also decreased inlate 1987. For the fourth quarter as awhole, total starts were down appreciablyfrom their averages in the previous twoquarters.

Business fixed investment fell some-what in the fourth quarter, after anexceptionally large rise in the previousquarter. Spending on information-processing equipment, which earlier hadgrown rapidly, appeared to slow, andbusiness purchases of motor vehiclesdeclined. At the same time, expendituresfor industrial equipment continued toexpand as did spending for nonresidentialconstruction, including sizable increasesin outlays for office structures and othercommercial buildings. New orders fornondefense capital goods, excludingaircraft, were little changed in the fourthquarter, after appreciable gains earlier inthe year, while new building commit-ments continued to increase.

Inventory investment rose strongly inOctober and November. The increasewas concentrated in the trade sector,particularly at automobile dealers andmerchant wholesalers. Stocks at non-auto retailers also continued to expand ata faster rate than sales, especially atgeneral merchandise, apparel, and furni-ture stores. In contrast, manufacturers'inventories remained low relative toshipments.

Increases in consumer prices moder-ated in late 1987, reflecting £ decline inretail energy prices in response to earlierdecreases in crude oil prices. The con-sumer price index was up only slightly inDecember, when prices of consumergoods also were held down by extensivemarkdowns on holiday merchandise andby the latest round of incentives forautomobile sales. At the producer level,prices of finished goods fell somewhat inlate 1987. Hourly compensation in the



private nonfarm sector increased at amoderate pace over recent months, littlechanged from earlier trends.

The nominal deficit in U.S. merchan-dise trade was estimated to have increasedslightly over October and Novemberfrom the average rate in the third quarter,but in real terms the trade deficit asmeasured in the GNP accounts appearedto have narrowed further. Nonagricul-tural exports rose somewhat over the firsttwo months of the quarter, but agricul-tural exports fell slightly. Non-oil im-ports rose considerably in the October-November period from the third-quarterpace, with the increases widespread. Oilimports, however, fell somewhat as bothprice and volume declined. The increasesin prices of exports and of non-oil importsaccelerated in the fourth quarter to ratesexperienced in the first two quarters of1987, reversing the slower increases inthe third quarter. Recent indicators ofeconomic performance in major foreignindustrial nations were mixed, afterstrong growth of real GNP in most ofthose countries in the third quarter of1987. Data continued to suggest rela-tively vigorous growth in Japan, theUnited Kingdom, and Canada. In con-trast, expansion appeared to have slowedduring the fourth quarter in Germany,France, and Italy.

The weighted-average foreign ex-change value of the dollar in terms of theother G-10 currencies increased about 3percent over the period since the Decem-ber meeting. The dollar rose about IV2percent in terms of the yen and about 4percent in terms of the mark during theintermeeting period. Early in the period,the dollar fell sharply owing to height-ened concerns about prospects for adjust-ment of U.S. external imbalances andreports that G-7 authorities no longersupported the Louvre accord. The G-7authorities released a statement in lateDecember reaffirming the objectives and

economic policy commitments of theLouvre accord, and the dollar retraced itsdecline in early January when heavyintervention by central banks associatedwith the G-7 statement became particu-larly visible. The dollar strengthenedfurther in mid-January following therelease of better-than-expected data forthe U.S. trade balance in November.

At its meeting on December 15-16,1987, and its meeting via telephoneconference on January 5, 1988, theCommittee adopted directives that calledfor maintaining the existing degree ofpressure on reserve positions. In Decem-ber, the Committee recognized that stillsensitive conditions in financial marketsand uncertainties in the economic outlookmight continue to require a special degreeof flexibility in the conduct of openmarket operations. In early January, theCommittee agreed that the passing oftime and of year-end pressures in themoney market should permit furtherprogress toward restoring a normal ap-proach to open market operations. At thesame time the members recognized thatsome flexibility might continue to beneeded in the conduct of operations. Atboth meetings, the Committee decidedthat, taking account of conditions infinancial markets, somewhat lesser orsomewhat greater reserve restraint wouldbe acceptable depending on the strengthof the business expansion, indications ofinflationary pressures, developments inthe foreign exchange markets, as well asthe behavior of the monetary aggregates.The intermeeting range for the federalfunds rate was left unchanged at 4 to 8percent.

Over the course of the intermeetingperiod and especially after early January,the conduct of open market operationsinvolved placing more emphasis on re-serve positions and correspondingly lesson influencing money market condi-tions on a day-to-day basis. Even so,



adjustments in the provision of reserveswere made on a number of occasionsduring the intermeeting period in light ofunusual developments affecting reserveand money market conditions. Thosedevelopments included heavy borrowingover the four-day New Year's weekendand sizable borrowing subsequentlystemming from a data processing prob-lem at a large bank. In the ensuing reservemaintenance period, demands for dis-count credit were very limited. In lateJanuary and early February, with incom-ing data suggesting some weakening inthe economic expansion and in the con-text of a more stable dollar in foreignexchange markets, some easing wassought in the degree of pressure onreserve positions. Thus far in the currentmaintenance period, borrowing had re-mained relatively low. Total reservescontracted in December, reflecting con-tinued weakness in transactions deposits,but rebounded strongly in January asmost categories of reservable depositsgrew rapidly and excess reserves alsoincreased.

The federal funds rate averaged 6.82percent over the three complete reservemaintenance periods since the Decembermeeting; in recent days, the rate moveddown toward 6!/2 percent. Year-endpressures in the money market weremuch milder than most market partici-pants had expected, partly because of agreatly reduced need for ftinds comparedwith that a year earlier, more planning inadvance by banks and others, and arelatively generous provision of reserves.With the easing of concerns about year-end pressures, rates on private moneymarket instruments fell sharply in lateDecember. Yields on Treasury securitiesof all maturities and on longer-term debtof private borrowers changed little onbalance over the first several weeks of theintermeeting period. More recently, suchrates declined as the dollar tended to

stabilize and economic data were viewedas pointing to a softer economy, moresubdued inflation, and easier monetarypolicy. Early in February, banks low-ered their prime rate. Broad indexes ofstock prices increased somewhat onbalance since mid-December, thoughprice fluctuations were relatively largeon occasion.

Preliminary data showed that moneygrowth rebounded strongly in Januaryafter the marked weakening in Novemberand December. For 1987 as a whole, M2expanded at a rate well below the 5Vipercent lower boundary of the targetrange that the Committee had establishedfor the year. M3 growth was at the lowerend of its range. Ml grew sharply inJanuary, after declining in late 1987.Demand deposits were particularly weakin late 1987, possibly reflecting in partincentives to adjust compensating bal-ances downward before year-end, butother checkable deposits also fell inNovember and December without acorresponding increase in other M2 de-posits. The strengthening of moneygrowth in January was spread widelyover various components of the monetaryaggregates and appeared to be related inpart to the general decline in interest ratessince mid-October.l

1. These growth rates and all subsequent data onthe monetary aggregates reflect annual benchmarksand seasonal factors as published on February 11,1988.

The monetary aggregates are defined as follows:Ml comprises demand deposits at commercialbanks and thrift institutions, currency in circulation,travelers checks of nonbank issuers, negotiableorder of withdrawal (NOW) and automatic transferservice (ATS) accounts at banks and thrift institu-tions, and credit union share draft accounts. M2contains Ml and savings and small-denominationtime deposits (including money market depositaccounts (MMDAs) at all depository institutions,overnight repurchase agreements (RPs) at commer-cial banks, overnight Eurodollars held at foreignbranches of U. S. banks by U. S. residents other than



The staff projection for economicactivity continued to suggest relativelysluggish growth in output in the first halfof 1988 and a pickup later in the year.This pattern primarily reflected varia-tions in the growth of inventories. Asharp slowing in the pace of investmentin nonfarm inventories, notably automo-bile inventories, was expected early inthe year following the buildup in thefourth quarter. Final domestic demandwas projected to expand sluggishly in1988, given an erosion in the growth ofreal income associated in part with higherimport prices and a moderately restrain-ing fiscal policy. Over 1988 as a whole,the primary impetus to growth wasanticipated to come from further strongdemand for U.S. exports. Prices wereprojected to rise at a moderate rate duringthe year. Prices of nonpetroleum importswere believed likely to increase substan-tially, but the price of imported petroleumwas assumed to rise only slowly. Nominalgains in compensation were expected topick up, as wage demands responded toincreases in consumer prices. With un-employment rates remaining nearcurrent levels, however, labor marketconditions were not expected to putmuch additional pressure on wage rates,especially in light of uncertainties aboutthe economic outlook and continuingefforts by businesses to improvecompetitiveness.

In the Committee's discussion, mem-bers emphasized that the economic out-look was subject to a great deal ofuncertainty under prevailing circum-stances. They noted that it was especially

than those restricted to institutions). M3 is M2 pluslarge-denomination time deposits at all depositoryinstitutions, large-denomination term RPs at com-mercial banks and savings and loan associations,institution-only money market mutual funds, andterm Eurodollars held by U.S. residents in Canadaand the United Kingdom and at foreign branches ofU.S. banks elsewhere.

difficult to evaluate the outlook for aneconomy that appeared to be in transitionfrom a consumer-driven to an export-driven expansion. Another area of uncer-tainty related to the decline in equityprices. The latter did not appear to havehad a substantial impact on consumer orbusiness spending to date, judging fromcurrently available data, but more reper-cussions might be felt later. In addition,financial markets, including the foreignexchanges, were still relatively sensitive,and many financial institutions had beenweakened by serious debt repaymentdifficulties among their domestic and for-eign borrowers. Several members com-mented that the staff projection remaineda reasonable expectation but that the risksof a different outcome were substantial.Others saw somewhat greater or some-what lesser economic growth as morelikely for the year ahead. The membersgenerally agreed, however, that the majorrisks to the economy over the longer runappeared to be in the direction of moreinflation.

In conformance with the usual practiceat meetings when the Committee consid-ers its long-run objectives for monetarygrowth, the members of the Committeeand the Federal Reserve Bank presidentsnot currently serving as members hadprepared specific projections of eco-nomic activity, the rate of unemploy-ment, and the overall level of prices. Forthe period from the fourth quarter of1987 to the fourth quarter of 1988, theforecasts for growth of real GNP had acentral tendency of 2 to 2 Vi percent and afull range of Vi to 3 percent. Forecasts ofnominal GNP centered on growth ratesof 5 VA to 6 percent and ranged from 4 to6 Vi percent. Estimates of the civilian rateof unemployment in the fourth quarter of1988 were concentrated in a range of 5 %to 6 percent with a full range of 5 xh to 6 3Apercent. With regard to the rate ofinflation, as indexed by the GNP



deflator, the projections centered on ratesof 3 V4 to 3 3/4 percent and had an overallrange of 2x/i to 4 percent for the year. Inmaking these forecasts, the memberstook account of the Committee's objec-tives for monetary growth in 1988. Theyalso assumed that future fluctuations inthe foreign exchange value of the dollarwould not be of sufficient magnitude tohave any significant effect on theprojections.

In their assessment of specific develop-ments bearing on the economic outlook,members gave considerable attention tothe recent buildup of inventories and therelated possibility of some correctionthat would tend to depress overall growthin business activity during the first half ofthe year. Several believed that the adjust-ment in inventories might be relativelylimited and economic growth in the firsthalf somewhat stronger than projected bythe staff, especially in light of the strengthof orders for capital goods on the booksof manufacturing firms. Others antici-pated a sharper inventory correction butone that would probably be over by mid-year. The outlook for the second half wasparticularly uncertain, and views differedregarding the likelihood and potentialstrength of a rebound. Conditions infinancial markets would have an impor-tant influence on business conditions andany major new disturbances in thosemarkets could have a negative effect onboth consumer and business spending.Some members could see few signs in thedomestic economy that pointed to aresurgence in business activity later inthe year. Other members viewed theprospects as more promising, and somedid not rule out the possibility that theexpansion might in fact tend to be morevigorous than was desirable in a periodwhen increasing domestic productionneeded to be diverted to export markets.All of the members agreed that the rate ofeconomic expansion over the next several

quarters would depend to a substantialextent on the rate of improvement in thenation's balance of trade.

In the discussion of the outlook fortrade, a number of members observedthat sizable further gains in exports werea reasonable expectation, but the rate ofincrease would probably diminish fromthe very rapid pace in recent quarters.Among the factors tending to inhibitexport growth, they cited the possibilitythat expansion in major industrial na-tions, as a group, might be relativelylimited. On balance, while the extent ofthe improvement in trade was uncertainand might well prove to be relativelyslow and uneven, most members sawfavorable prospects for continuing gainsof appreciable magnitude over the yearahead.

Turning to the outlook for inflation,the members generally agreed that therisks over time were in the direction ofgreater inflation. They emphasized thatrelatively rapid growth in overall de-mands, including that for exports, couldtrigger inflationary pressures in a periodwhen the utilization of productive re-sources was already relatively high andcomparatively little leeway appeared toexist for growth in excess of the moderatepace projected by most members. Therecent behavior of broad price indexesdid not suggest any acceleration in theoverall rate of inflation, but severalmembers saw evidence in local econo-mies that price pressures might be inten-sifying. Business contacts were reportingthat some firms were successful in selec-tive efforts to pass through rising costs byraising product prices. And, in one view,the behavior of key commodity pricesraised concern about more inflation.Some members also indicated that risingimport prices were tending to put upwardpressure on competing products that weremanufactured domestically. In general,increases in wages remained moderate,



but members expressed concern that,given the reduced level of unemploy-ment, rising prices would tend to betranslated into higher wages at somepoint. It was noted that the key toavoiding both more inflation or a reces-sion in a period of major adjustments inthe trade balance would be the difficulttask of maintaining restrained growth indomestic demands over an extendedperiod.

Against that background the Commit-tee at this meeting completed the review,begun at the meeting in December, of theranges for growth in the monetary anddebt aggregates in 1988; those rangeshad been established on a tentative basisin July 1987 in keeping with the require-ments of the Full Employment and Bal-anced Growth Act of 1978 (theHumphrey-Hawkins Act). The tentativeranges included growth of 5 to 8 percentfor both M2 and M3 for the period fromthe fourth quarter of 1987 to the fourthquarter of 1988. A monitoring range of 8to 11 percent had been set on a provisionalbasis for growth of total domestic non-financial debt in 1988. With regard toMl, the Committee had decided in Julynot to set a tentative range for 1988 but toreappraise at this meeting the issuesrelating to the establishment and use ofsuch a target.

All of the members favored somereduction in the ranges for growth of M2and M3 in 1988. Such a reduction wouldhelp to focus attention on the need forrelatively restrained expansion in domes-tic demand to accommodate the adjust-ment in the nation's external accounts andwould underscore the Committee's com-mitment to achieving reasonable pricestability over time. However, given theirdiffering assessments of the risks to thebusiness expansion and of the prospectiverelationship of monetary growth to satis-factory economic performance, membersexpressed some divergence of views with

regard to how much the ranges should bereduced. Several indicated a preferencefor confirming the ranges for 1988 thatthe Committee had established on atentative basis in July. Those rangesinvolved reductions of Vi percentagepoint from 1987. Others favored lowerranges with midpoints that were reducedby a full percentage point. The latterincluded a proposal, which receivedconsiderable support, for wider ranges of4 to 8 percent for both M2 and M3. Themembers noted that monetary expansionin 1988 at rates around the midpoints ofthe ranges under consideration, whichthey generally viewed as a reasonableexpectation, would represent some accel-eration from the relatively modest expan-sion in 1987, especially in the case ofM2.

Further discussion focused on thedesirability of widening the ranges forgrowth of the broader aggregates to 4 to 8percent. Such a range was deemed to bewarranted by the experience of recentyears when more marked variability hademerged in the relationship betweenmonetary expansion and ultimate policyobjectives such as prices and output.That variability stemmed from a numberof sources, but prominent among themwas the course of interest rates; a level ofrates consistent with satisfactory eco-nomic performance would depend on theunderlying strength of demands in theeconomy and on emerging price pres-sures. In that context, an uncertainoutlook for the economy and inflationsuggested to several members the needfor somewhat wider ranges than had beenused in the past. A range of 4 percentagepoints would provide more room forappropriate policy responses to unantici-pated economic and financial develop-ments and would encompass more fullythe possible outcomes for monetarygrowth that might prove consistent withacceptable economic performance in



1988. Some members expressed reserva-tions about the desirability of widerranges. They acknowledged that rangesof 4 percentage points might reflect moreadequately the various uncertainties thatwere involved, but they were concernedthat widening the ranges could be viewedas a further retreat from effective mone-tary targeting. Moreover, the narrowerranges imposed a desirable discipline byrequiring a more prompt reappraisal ofpolicy as their limits were approached orexceeded.

The members also considered propos-als for using a different base than theactual fourth quarter level of the aggre-gates as the starting point for the 1988ranges. In support of this view, somemembers argued that the depressed levelsof the aggregates in late 1987, which mayhave reflected in part some special fac-tors, together with the reduced rangesunder consideration implied a quite sub-stantial lowering of the Committee'sobjectives for monetary growth. Severalmembers were opposed to a change in theCommittee's procedures, especially onan ad hoc basis. A number expressedtheir willingness to consider at a latertime proposals for a regularized proce-dure that would take account of over-shoots or of shortfalls in the previousyear. Others believed that it would bepreferable to adjust the new rangesthemselves each year, rather than thebase, if the Committee concluded that itwas desirable to compensate for exces-sive or inadequate monetary growth inthe previous year.

No member supported the reestablish-mentof a target range for Ml in 1988, buta few favored the use of a monitoringrange for this aggregate. The behavior ofMl had become highly sensitive tochanges in interest rates, among otherfactors, in recent years, as reflected insharp swings in its velocity. It remainedparticularly difficult to interpret the

relationship between growth in Ml andthe performance of the economy. In lightof its unpredictable behavior, a narrowrange for Ml could easily trigger aninappropriate response of monetary pol-icy to unexpected developments in theeconomy. On the other hand, a rangewide enough to reasonably encompasspossible acceptable growth in Ml overthe year would be of little use in guidingthe conduct of monetary policy or incommunicating the Committee's policyintentions to the public.

The members anticipated some furtherslowing in the growth of nonfinancialdebt in 1988, following a marked slow-down in 1987, but the rate of growth thisyear appeared likely to remain well abovethat of nominal GNP. A key factorbearing on the outlook for debt expansionwas the expectation of some reduction ingovernment borrowing. However, as inthe case of the monetary aggregates,considerable uncertainty surrounded theprospects for debt growth in 1988 andCommittee members endorsed a proposalto widen the monitoring range for totaldomestic nonfinancial debt to 7 to 11percent, a reduction of 1 percentage pointfrom the lower limit of the 1987 range.

At the conclusion of the Committee'sconsideration of the ranges for 1988, allof the members indicated that they couldsupport ranges of 4 to 8 percent forgrowth in both M2 and M3 for the year.No range was established for Ml for theyear, while the monitoring range forgrowth in total domestic nonfinancialdebt was set at 7 to 11 percent. In keepingwith the Committee's usual proceduresunder the Humphrey-Hawkins Act, theranges would be reviewed at midyear, orsooner if deemed necessary. It wasunderstood that in carrying out policy theCommittee would continue to judge thebehavior of the monetary aggregatesagainst the background of developmentsin the economy and financial markets,



including attention to the sources andextent of price pressures in the economy,the performance of the dollar in foreignexchange markets, and other indicatorsof the impact of monetary policy.

The following paragraphs relating tothe 1988 ranges were approved for thedomestic policy directive:

The Federal Open Market Committee seeksmonetary and financial conditions that willfoster reasonable price stability over time,promote growth in output on a sustainablebasis, and contribute to an improved patternof international transactions. In furtheranceof these objectives, the Committee at thismeeting established growth ranges of 4 to 8percent for both M2 and M3, measured fromthe fourth quarter of 1987 to the fourth quarterof 1988. The monitoring range for growth intotal domestic nonfinancial debt was set at 7 to11 percent for the year.

With respect to Ml, the Committee againdecided not to establish a specific target for1988. The behavior of this aggregate inrelation to economic activity and prices hasbecome very sensitive to changes in interestrates, among other factors, as evidenced bysharp swings in its velocity in recent years.Consequentiy, the appropriateness of changesin Ml this year will continue to be evaluatedin the light of the behavior of its velocity,developments in the economy and financialmarkets, and the nature of emerging pricepressures.

Votes for this action: Messrs. Greenspan,Corrigan, Angell, Boehne, Boykin, Heller,Johnson, Keehn, and Kelley, Ms. Seger,and Mr. Stern. Votes against this action:None.

In the Committee's discussion of policyimplementation for the period immedi-ately ahead, all of the members indicatedthat they favored or could accept adirective that called for maintaining theslightly reduced degree of pressure onreserve positions that had been soughtrecently. While some members ex-pressed reservations about that easing, afew indicated a preference for easingmarginally further. Members commentedduring the discussion that policy imple-

mentation faced the special challenge ofbalancing the risks of a potentially softereconomy over the nearer term while alsoremaining positioned to achieve theCommittee's anti-inflationary objectivesover the longer run. Accordingly, despiteshadings of opinion, the members werein broad agreement that any substantialchange in policy, in either direction, wasnot warranted under prevailing eco-nomic and financial conditions. A tight-ening move would not be appropriate at atime when the expansion was showingsome signs of slackening, and againstthis background such a policy coursemight well have a disruptive impact onfinancial markets, which remained some-what fragile. On the other side, policyshould not overreact to recent indicationsof a more sluggish business expansionbecause any policy easing now wouldtend to have its major impact later in theyear when, in the view of many members,a stronger economic expansion was likelyto emerge. Moreover, while the dollarhad tended to stabilize recently in theforeign exchange markets, memberswere concerned that appreciable furthereasing, especially if it was seen as leadingto a lower discount rate, could havehighly adverse repercussions on thedollar. It might also have unsettlingeffects on financial markets more gener-ally if it was not viewed by marketparticipants as warranted by substantialnew evidence of a weaker economy. Theslight easing that had already been under-taken did not appear to put significantdownward pressure on the dollar and itprovided greater assurance that the ex-pected strengthening of the businessexpansion would in fact materialize laterin the year.

In the course of the Committee's dis-cussion, members referred to the reboundin the growth of M2 and M3 in January,but they noted that the stronger growthneeded to be viewed in relation to the



weakness in late 1987. According to astaff analysis prepared for this meeting,expansion in M2 and M3 could beexpected to strengthen a little over thebalance of the first quarter from theaverage pace in December and January,assuming unchanged conditions of re-serve availability. More generally, some-what faster growth was projected in thecurrent quarter than had occurred in thesecond half of 1987, as increased de-mands for money balances in response tothe decline in interest rates since mid-October more than offset the expectedeffects of slower income growth. Thegrowth in Ml might also strengthen overthe first quarter, but the near-term behav-ior of this aggregate remained subject to ahigh degree of uncertainty.

During this meeting further consider-ation was given to the Committee'soperating procedures. In keeping withthe Committee's decision in early Janu-ary, continuing progress had been madetoward restoring the Committee's previ-ous focus on reserve positions in theday-to-day implementation of policy. Atthis meeting the members expresseddiffering views about whether that pro-cess should now be completed. Severalfelt that the approach originally adoptedat a time of crisis in financial markets wasno longer warranted, even in attenuatedform, and that the previous approach toreserve management provided a betterbasis for guiding the conduct of monetarypolicy because it allowed greater scopefor changes in supply and demand forcesto be reflected in the money market. Onthe other hand, a majority of the memberspreferred to retain for now a directivethat called for some flexibility in theapproach to open market operations.These members emphasized that finan-cial market conditions still exhibitedsome degree of fragility and, against thebackground of substantial uncertainty inthe economic outlook, unanticipated

developments might well continue towarrant occasional departures from thefocus on reserve objectives for the pur-pose of moderating temporary fluctua-tions in money market conditions. Anumber of these members also com-mented on the need for flexibility becausea relatively normal or predictable rela-tionship between the provision of re-serves and money market conditions hadnot yet emerged.

The members expressed some shad-ings of opinion with regard to possibleadjustments in policy during the inter-meeting period. A majority felt that thereshould be no presumptions about thelikely direction of any such adjustments,especially in light of the consensus at thismeeting for maintaining reserve condi-tions that were consistent with the slighteasing that had been sought since lateJanuary. Some members believed, how-ever, that policy implementation shouldbe especially alert to developments thatmight point to somewhat easier reserveconditions, particularly because of therisks that they saw of a weaker economythan was currently projected. In the viewof some members, further easing mightalso be appropriate if monetary growthfell appreciably short of current expecta-tions. Several members cautioned thatany decision to ease should take carefulaccount of the potential impact on thedollar in foreign exchange markets.While the dollar had tended to stabilizerecently, it could be vulnerable to afurther decline.

At the conclusion of the Committee'sdiscussion, all of the members indicatedtheir acceptance of a directive that calledfor maintaining the slightly easier degreeof reserve pressure that had been soughtrecently. With regard to the Committee'soperating procedures, a majority en-dorsed the view that some flexibilitymight continue to be needed in theconduct of open market operations in



light of the still somewhat unsettledconditions in financial markets, the un-certainties in the relationship betweenreserve and money market conditions,and the substantial risks of unanticipatedeconomic and financial developments.Taking account of conditions in financialmarkets, the members indicated thatsomewhat less or somewhat more reserverestraint would be acceptable, dependingon the strength of the business expansion,indications of inflation, the performanceof the dollar in foreign exchange markets,with consideration also given to thebehavior of the monetary aggregates.The reserve conditions contemplated bythe Committee were expected to beconsistent with growth in both M2 andM3 over the four-month period fromNovember through March at annual ratesof about 6 to 7 percent. Because of theunusual uncertainty relating to the behav-ior of M1 and in keeping with the decisionnot to set a longer-run target for thisaggregate, the Committee decided not toindicate any expectation regarding itsgrowth over the months ahead. Themembers agreed that the intermeetingrange for the federal funds rate, whichprovides one mechanism for initiatingconsultation of the Committee when itsboundaries are persistently exceeded,should be left unchanged at 4 to 8 percent.

At the conclusion of the meeting thefollowing domestic policy directive wasissued to the Federal Reserve Bank ofNew York:

The information reviewed at this meetingindicated that economic activity continued toexpand rapidly in the fourth quarter but thatthe advance reflected a build-up in inventoriesas domestic final demands weakened. Thegrowth in output appeared to have slowedaround year-end. Total nonfarm payrollemployment rose much less in January thanon average over the previous three months;the manufacturing sector also recorded re-duced employment growth in January. Thecivilian unemployment rate, at 5.8 percent in

January, was unchanged from December.Growth in industrial production moderatedfurther in December. Retail sales picked up inDecember, buoyed by improved auto sales,but remained below levels reached during thesummer. Indicators of business capital spend-ing were mixed late in the year. Housingstarts fell markedly in December, and weredown somewhat on balance in the fourthquarter from the average pace in the secondand third quarters. The nominal U.S. mer-chandise trade deficit declined substantially inNovember. For October and November com-bined, the deficit rose slightly from theaverage rate in the third quarter, but in realterms the deficit was estimated to havenarrowed further. The rise in consumer pricesslowed and producer prices fell in late 1987,reflecting declines in energy prices; wagetrends have shown little change in recentmonths.

Most interest rates were down substantiallyon balance since the Committee's meeting inmid-December. In the Treasury securitiesmarket, long-term yields fell considerablymore than short-term rates. Broad indexes ofstock prices rose somewhat on balance overthe intermeeting period in still relativelyvolatile trading. The trade-weighted foreignexchange value of the dollar in terms of theother G-10 currencies declined further in thesecond half of December but recovered afterthe turn of the year and has increased moder-ately on balance since the December meeting.

Growth of M2 and M3 strengthened sub-stantially in January after slowing over No-vember and December. For 1987 as a whole,expansion of M2 fell considerably below thelower end of the range established by theCommittee for the year, while growth of M3was at the lower end of its range. Growth ofMl surged in January following two monthsof declines. For the year 1987, Ml growthwas marginally below that of nominal GNP,and expansion in total domestic nonfinancialdebt was at the midpoint of the Committee'smonitoring range for the year.

The Federal Open Market Committee seeksmonetary and financial conditions that willfoster reasonable price stability over time,promote growth in output on a sustainablebasis, and contribute to an improved patternof international transactions. In furtheranceof these objectives, the Committee at thismeeting established growth ranges of 4 to 8percent for both M2 and M3, measured fromthe fourth quarter of 1987 to the fourth quarter



of 1988. The monitoring range for growth intotal domestic nonfinancial debt was set at 7 to11 percent for the year.

With respect to Ml, the Committee againdecided not to establish a specific target for1988. The behavior of this aggregate inrelation to economic activity and prices hasbecome very sensitive to changes in interestrates, among other factors, as evidenced bysharp swings in its velocity in recent years.Consequently, the appropriateness of changesin Ml this year will continue to be evaluatedin the light of the behavior of its velocity,developments in the economy and financialmarkets, and the nature of emerging pricepressures.

In the implementation of policy for theimmediate future, the Committee seeks tomaintain the slightly reduced degree of pres-sure on reserve positions sought in recentdays. The Committee agrees that the currentmore normal approach to open market opera-tions remains appropriate; still sensitiveconditions in financial markets and uncertain-ties in the economic outlook may continue tocall for some flexibility in operations. Takingaccount of conditions in financial markets,somewhat lesser reserve restraint or some-what greater reserve restraint would beacceptable depending on the strength of thebusiness expansion, indications of inflation-ary pressures, developments in foreign ex-change markets, as well as the behavior of themonetary aggregates. The contemplated re-serve conditions are expected to be consistentwith growth in both M2 and M3 over theperiod from November through March atannual rates of about 6 to 7 percent. TheChairman may call for Committee consulta-tion if it appears to the Manager for DomesticOperations that reserve conditions during theperiod before the next meeting are likely to beassociated with a federal funds rate persis-tently outside a range of 4 to 8 percent.

Votes for this action: Messrs. Greenspan,Corrigan, Angell, Boehne, Boykin, Heller,Johnson, Keehn, and Kelley, Ms. Seger,and Mr. Stern. Votes against this action:None.

Meeting Held onMarch 29,1988

1. Domestic Policy Directive

The information reviewed at this meetingsuggested that economic activity was

continuing to expand in the currentquarter, although the rate of growth wasdown somewhat from the rapid pace inthe fourth quarter. The moderationreflected a considerable slowing in thepace of inventory investment. However,domestic final sales seemed to havepicked up sharply in the first quarter;business capital expenditures apparentlyincreased substantially and consumerspending also strengthened, buoyed byhigher sales of motor vehicles. The rateof inflation had remained relativelyrestrained over the course of recentmonths and wage trends had shown littlechange.

Growth in industrial production mod-erated in January and February from arapid pace in late 1987. After a surge inthe second half of 1987, the output ofmaterials edged down. Also, auto assem-blies and the production of consumerhome goods dropped below their late1987 levels, apparently reflecting in partan effort to trim or to moderate the growthin inventories. In contrast, the productionof business equipment remained quitestrong, with gains in nearly all cate-gories. Capacity utilization rates were atrelatively high levels in a number ofindustries. Gains in total nonfarm payrollemployment continued strong over theJanuary-February period, led by theservice and retail trade sectors. In manu-facturing, employment gains weresmaller in January and February thanduring the second half of 1987. Theunemployment rate edged down to 5.7percent in February, its lowest level sincemid-1979.

Increased demand for motor vehiclesproduced a rebound in consumer spend-ing early in the year. That demandappeared to be bolstered by sales incen-tives programs, strong income growth,and rising consumer confidence. Exclud-ing motor vehicles, nominal retail saleswere essentially flat since November,



and the saving rate was well above itsaverage for the year preceding the breakin the stock market.

Housing activity picked up in Februarybut still was slightly below its fourth-quarter pace. While sales of new andexisting homes continued to decline inJanuary, housing starts rose to an annualrate of 1.49 million units in February,with growth stronger in the single-familysector than in the multifamily area.

Available information suggested thatbusiness fixed investment was increasingrapidly since late last year, led by largegains in equipment spending. Data onshipments indicated a surge in spendingon information-processing equipment.Increases in other equipment categorieswere smaller but were widespread.Spending on nonresidential structureswas relatively weak in early 1988. Inven-tory investment apparently slowed in thefirst quarter, reflecting the strength insales of motor vehicles combined withcutbacks in their production.

The nominal U.S. merchandise tradedeficit in January was significantly belowthe fourth-quarter average, althoughessentially unchanged from December.Non-oil imports and nonagriculturalexports both fell noticeably from theirDecember levels. The current accountdeficit had narrowed in the fourth quarter,but the improvement was more thanaccounted for by a sharp increase incapital gains stemming from the depreci-ation of the dollar and the related revalua-tion in the book value of direct U.S.investments abroad denominated in for-eign currencies. On average, economicgrowth in major foreign industrial coun-tries continued strong in the fourth quar-ter and early this year, though it slowedsomewhat from the rapid third-quarterpace. Growth was particularly robust inCanada and Japan.

Increases in consumer prices remainedrelatively moderate in early 1988, reflect-

ing the impact of declining energy pricesand a relatively small rise in food prices.At the producer level, prices of finishedgoods fell slightly in February afterfluctuating irregularly in other recentmonths, largely because of swings infood prices. Commodity prices regis-tered mixed changes during the firstquarter. The index of hourly earningswas unchanged in February after increas-ing in January, and on balance it roseroughly in line with the pace in 1987.

At its meeting on February 9-10,1988, the Committee had adopted adirective that called for maintaining theslightly reduced degree of pressure onreserve positions that had been soughtsince late January. These reserve condi-tions were expected to be consistent withgrowth in both M2 and M3 at annual ratesof about 6 to 7 percent over the periodfrom November through March. Withregard to operating procedures, the Com-mittee had agreed that the more normalapproach to operations implementedespecially since the year-end, which em-phasized the provision of reserves ratherthan money market conditions, remainedgenerally appropriate. Nonetheless, itwas understood that some flexibilitymight continue to be needed in the con-duct of operations in light of the stillsomewhat unsettled conditions in finan-cial markets, the uncertainties in therelationship between reserve and moneymarket conditions, and the substantialrisks of unanticipated economic andfinancial developments. Taking accountof conditions in financial markets, themembers had decided that somewhatless or somewhat more reserve re-straint would be acceptable, dependingon the strength of the business expan-sion, indications of inflationary pres-sures, developments in foreign ex-change markets, and the behavior of themonetary aggregates. The intermeetingrange for the federal funds rate had



been left unchanged at 4 to 8 percent.As contemplated at the February meet-

ing, primary emphasis was placed onachieving reserve objectives during theintermeeting period, although slightlygreater than normal attention continuedto be given to developments in the moneymarket. In the three reserve maintenanceperiods ending March 23, adjustmentplus seasonal borrowing averaged $238million. Growth in M2 and M3 remainedrelatively robust in February and appar-ently also in March following a reboundin January. Since November both aggre-gates had expanded at an annual rate ofabout 7 percent. Growth in Ml slowedconsiderably over the intermeeting pe-riod from a very rapid pace in January.With transaction deposits expanding at arelatively sluggish pace on balance andexcess reserves declining, total reservesadvanced at a modest rate during theintermeeting period.

The federal funds rate averaged 6.59percent for the three full reserve mainte-nance periods since the February meet-ing, close to the rate prevailing aroundthe time of that meeting but below theaverage in January. Most other interestrates rose somewhat on balance duringthe intermeeting period. The largestincreases were in bond markets and theyappeared to have been prompted byevidence of more strength in the econ-omy than had been anticipated. Broadindexes of stock prices rose somewhatover the period, but price swings re-mained sizable on occasion.

Through most of the period since theFebruary meeting the dollar fluctuated ina relatively narrow range. However, itcame under downward pressure late inthe period following reports suggestingstronger than anticipated growth in U.S.domestic demand that raised questionsabout the pace of adjustment in the U.S.trade balance. Over the intermeetingperiod the dollar declined 2 lA percent on

a weighted-average basis in relation tothe other G-10 currencies. The net de-cline was largely accounted for by a 4percent depreciation in terms of thepound and 2 percent in terms of theCanadian dollar and the yen, while themark and other EMS currencies remainedlittle changed in relation to the dollar.

The staff projection prepared for to-day's meeting suggested more strength inbusiness activity this year than had beenforecast earlier. The faster growth wasexpected to be associated with littlechange in the unemployment rate fromcurrent levels. And while the projectionfor 1989 now indicated a somewhatreduced rate of growth, higher levels ofcapacity utilization over the projectionperiod as a whole were associated withmarginally higher rates of inflation bylate 1988 and for the year 1989. A keyadjustment in the forecast was strongerinvestment spending. The staff continuedto anticipate that the external sectorwould make a substantial positive contri-bution to business activity in 1988 and1989.

In the Committee's discussion of theeconomic situation and outlook, themembers generally agreed that the infor-mation available since the Februarymeeting pointed to a stronger expansionin business activity than they had antici-pated earlier. Unfortunately, recent de-velopments in the view of several mem-bers also increased the risks of morepressures on productive resources andmore inflation. A number of membersnoted that the revised staff forecast was inline with their own projections, and somealso indicated that any deviations werelikely to be in the direction of somewhatfaster expansion and even higher rates ofinflation. A number of other membersdid not disagree that the risks had shiftedand that concerns about a recession hadreceded, but they also referred to areas ofweakness in the economy that implied the



potential for relatively moderate growthwithout adding to price pressures.

In the course of the Committee's dis-cussion, members referred to high orimproving levels of business activity inmany parts of the country, albeit fromdepressed levels in some areas or sectorsof the economy. Manufacturing wasexhibiting particular strength across thenation. Despite some increasing pres-sures on manufacturing capacity, busi-ness executives generally appeared toremain cautious in their plans for newproduction facilities, apparently reflect-ing their uncertainties about the outlookfor sales growth in both domestic andexport markets. However, some busi-nesses were reported to be in the processof reappraising their capacity needs, andwith demands for business equipmentrelatively strong, a number of membersconcluded that appreciable further growthwas likely in overall business-fixed invest-ment. The members differed to someextent in their views on the outlook forconsumer spending and business inven-tory accumulation, but they generallyexpected at least moderate growth in totaldomestic final demands.

In the view of some members anystrengthening in domestic demand couldwell give rise to pressures on resourcesas net exports continued to expand. Theoutlook for trade remained subject toconsiderable uncertainty, but furtherimprovement in the trade balance wasnonetheless a reasonable prospect. Thatprospect was supported by reports frombusinesses of their increased ability tocompete internationally. A number ofmembers again commented that long-runadjustment in the trade balance wouldrequire a period of relatively moderategrowth in domestic purchases as moreproduction was directed to export mar-kets.

Turning to the outlook for inflation,some members reported that an increas-

ing number of business contacts wereexpressing concern about the prospectsfor prices and wages. On the positiveside, while some deterioration seemed tohave occurred recently, inflationary ex-pectations appeared to have diminishedon balance since the stock market crashin October. Moreover, aggregate mea-sures of prices and wages had not yetshown any sustained tendency to acceler-ate. This could indicate that some leewayremained in the economy before a moreserious inflation problem emerged. Infla-tion developments did not depend solelyon rates of capacity use but on the overallinflationary and financial climate and onexpectations about policy responses toinflation. In particular, responses torising capacity constraints might bereduced or delayed in light of the down-trend in inflation since the early 1980s.Nonetheless, most members agreed thatthe risks of more inflation stemming fromincreased pressures on capacity hadincreased and represented a key chal-lenge for policymakers. In a still limitednumber of manufacturing industries,relatively high capacity utilization rateswere being reflected in sizable priceincreases for some metals and otherbusiness products, increasing lead timesin filling certain orders, and some pre-cautionary ordering in anticipation offuture needs. While there was littleevidence thus far that the added pricepressures extended to finished productsor that overall business buying andinventory patterns were being signifi-cantly affected, the economy might wellbe near the point where faster growth inbusiness activity would induce a higherrate of inflation, and in the view of severalmembers, there was a potential for asharp escalation in prices. Members wereparticularly concerned that any tendencyfor greater price pressures to becomeimbedded in more rapid wage increaseswould make achievement of the ultimate



objective of price stability considerablymore difficult.

In further comments some membersnoted that an assessment of the economicoutlook was complicated by the continu-ing risks associated with the troubledstatus of a number of financial institutionsand the still somewhat unsettled condi-tions in financial markets, as evidencedin part by occasionally sharp movementsin stock prices. Some members believedthat speculative attitudes had intensifiedrecently as reflected for example inincreases in corporate merger, acquisi-tion, and commercial construction activ-ities that typically involved heavy use ofdebt financing. Such a development wassurprising so soon after the October 1987disturbances in financial markets, andstill growing debt burdens served toincrease the vulnerability of the economyto adverse developments. Some membersalso expressed considerable concernabout the outlook for the dollar, whichhad been under downward pressure in theforeign exchange markets. A sizablefurther decline in the dollar, while itmight have favorable implications for theU.S. trade balance, would tend to raisedomestic prices and could adverselyaffect the nation's ability to continue tofinance a massive trade deficit, withdisruptive effects on domestic financialmarkets and the domestic economy.

At its meeting in February the Commit-tee had agreed on policy objectives thatcalled for monetary growth ranges of 4 to8 percent for both M2 and M3 for theperiod from the fourth quarter of 1987 tothe fourth quarter of 1988. The associatedrange for growth in total domestic nonfi-nancial debt was set at 7 to 11 percent.The Committee decided not to establish anumerical target for Ml growth; instead,the appropriateness of changes in Mlwould be evaluated during the year in thelight of the behavior of Ml velocity,developments in the economy and finan-

cial markets, and the nature of emergingprice pressures.

In the Committee's discussion of policyimplementation for the intermeetingperiod ahead, nearly all the membersfavored some increase in the degree ofpressure on reserve positions. Mostindicated a preference for only a slightmove toward restraint, at least at thistime, but a few urged somewhat greatertightening. Several commented that astronger economic outlook in the contextof already high capacity utilization ratesin a number of industries required timelyaction to help prevent the business expan-sion from gathering excessive and un-sustainable momentum that would lead tohigher inflation. A policy response underemerging circumstances would also serveto confirm the System's commitment toachieving price stability over time andmight help to avert an aggravation ofinflationary expectations. Moreover, ac-tion at this time might preclude the needfor more substantial tightening later.

While they favored a slight increase inreserve pressures, a number of membersstressed that monetary policy should notoverreact to recent developments. Thefirming should proceed with caution inlight of the prevailing uncertainties in theeconomic outlook and the current ab-sence of evidence in broad measures ofprices and wages that rates of inflationwere already rising. Other factors citedin favor of a cautious approach includedthe persisting problems or incompleterecovery in some sectors of the economyand areas of the country, the still sensitiveconditions in financial markets, and thetroubled status of many financial institu-tions. In the view of one member, under-lying demands in the economy were notlikely to be sufficiently robust to pose athreat of greater inflation, and so prospec-tive economic and financial conditionsdid not warrant any tightening of reserveconditions.



In the course of the Committee's dis-cussion, somemembers noted that growthof the broader monetary aggregates hadremained fairly rapid in February andMarch. According to a staff analysis, thereserve conditions favored by most mem-bers were likely to be associated withsome slowing in the expansion of thoseaggregates, assuming a typically sluggishadjustment of offering rates on retail de-posits to changes in short-term marketrates. Even so, the analysis suggestedthat for the year through June growth ofboth M2 and M3 would still be apprecia-bly above the midpoints of the Commit-tee's ranges for 1988. Some membersobserved that the near-term outlook formonetary growth was subject to moreuncertainty than usual because the impactof new tax laws on mid-April tax pay-ments and related deposit balances couldnot be fully anticipated. Some concernwas expressed regarding the inflationarypotential of the recent rates of growth inthe broader monetary aggregates, andone member commented that underprevailing circumstances significantlystronger than expected expansion in thoseaggregates should be resisted, especiallyexpansion that brought the cumulativegrowth of M2 and M3 to levels above theCommittee's ranges by midyear.

During this meeting the Committeereviewed its operating procedures atsome length, including the relative meritsof focusing primarily on money marketconditions or on a specified degree ofreserve pressure in the day-to-day con-duct of monetary policy. The consider-able emphasis on stabilizing money mar-ket conditions in the period after theOctober collapse of the stock market hadgiven way increasingly to the earlierconcentration on achieving reserve posi-tion objectives, especially since the year-end. Nonetheless, in keeping with theCommittee's instructions as reaffirmed atthe February meeting, open market oper-

ations had continued to be conductedwith some degree of flexibility thatinvolved occasional departures from anormal focus on targeting reserve posi-tions and slightly greater than usualattention to money market conditions. Intoday's discussion a few members indi-cated that they favored paying greaterattention to money market conditions inthe normal course of conducting openmarket operations. It was noted in sup-port of this view that money marketinterest rates were a key variable fortransmitting monetary policy to financialmarkets and the economy, and that thevariability in those rates that sometimesaccompanied the pursuit of a givendegree of pressure on reserve positionsinjected an unneeded element of uncer-tainty in the decisions of market partici-pants. However, most members were infavor of either retaining the existingemphasis on reserve pressures or com-pleting the process of reinstating theprevious approach to reserve manage-ment. Short-run variability in moneymarket interest rates was not seen asdetracting from the functioning of themarket or the implementation of policysince market participants were well awareof the System's procedures, and suchfluctuations could reflect important shiftsin market expectations or underlyingconditions of supply and demand forreserves and credit. The shifts would bemasked if the Federal Reserve were tofocus more closely on money marketconditions in its day-to-day conduct ofopen market operations. Even so, amajority of the members felt that theuncertain economic outlook and stillsensitive conditions in financial marketswarranted some continuing flexibility inthe conduct of open market operations.

In the Committee's consideration ofpossible adjustments in policy implemen-tation during the intermeeting period,some members felt that the risks of more



inflation argued for giving particularattention to developments that might callfor somewhat tighter reserve conditions.A majority of the members believed,however, that there should be no pre-sumption about the likely direction ofintermeeting adjustments, if any, in theimplementation of policy. While thesemembers generally agreed that the eco-nomic risks were in the direction of moreinflation, they preferred not to weight thedirective toward possible further tighten-ing in light of the firming that was alreadycontemplated at this meeting and theconsiderable uncertainties that they sawin the economic and financial outlook.One member proposed placing moreemphasis on the behavior of the monetaryaggregates as a factor that might triggersome firming during the intermeetingperiod, but other members preferred thecurrent emphasis, partly because anysurge in money growth over the weeksahead might reflect temporary develop-ments related to mid-April tax payments.Some consideration was given during thediscussion to an upward adjustment in theintermeeting range for the federal fundsrate, especially since federal funds couldtrade well into the upper half of theCommittee's range following the decisionmade at today's meeting. However, themembers concluded that increasing therange under current circumstances couldbe misread as implying a greater movetoward restraint than the Committeeintended.

At the conclusion of the Committee'sdiscussion, all but one of the membersindicated their acceptance of a directivethat called for a slight increase in thedegree of pressure on reserve positions.With regard to the Committee's operatingprocedures, a majority continued toendorse the view that some flexibilitymight be desirable in the day-to-dayconduct of open market operations inlight of the still somewhat unsettled

conditions in financial markets and theuncertainties surrounding the economicoutlook. Taking account of conditions infinancial markets, the members indicatedthat somewhat greater or somewhat lesserreserve restraint would be acceptabledepending on the strength of the businessexpansion, indications of inflation, theperformance of the dollar in foreignexchange markets, and the behavior ofthe monetary aggregates. The reserveconditions contemplated by the Commit-tee were expected to be consistent withgrowth in both M2 and M3 over theperiod from March through June atannual rates of about 6 to 7 percent. As atprevious meetings, the Committee de-cided not to indicate any expectationregarding the growth of Ml over themonths ahead. The members agreed thatthe intermeeting range for the federalfunds rate, which provides one mecha-nism for initiating consultation of theCommittee when its boundaries are per-sistently exceeded, should be left un-changed at 4 to 8 percent.


The information reviewed at this meetingsuggests some moderation in the expansion ofeconomic activity in the current quarter fromthe rapid pace in the fourth quarter; thecontinuing expansion has been supported by asharp pickup in domestic final sales while theaccumulation of inventories appears to haveslowed. Total nonfarm payroll employmentrose substantially over the first two months ofthe year, although employment growth slowedsomewhat in the manufacturing sector. Thecivilian unemployment rate fell slightly to 5.7percent in February. Growth in industrialproduction moderated in early 1988 from abrisk pace during the second half of 1987.Consumer spending strengthened in Januaryand February, buoyed by higher sales ofmotor vehicles. Indicators of business capitalspending pointed to substantial gains in thefirst quarter. Housing starts rebounded in



February but were still somewhat below thereduced fourth-quarter average. The nominalU.S. merchandise trade deficit changed littlein January and was significantly below thefourth-quarter average. In recent months therise in consumer and producer prices has beenrelatively modest on balance, reflecting devel-opments in food and energy prices, and wagetrends have shown little change.

Most interest rates were up somewhat onbalance since the Committee's meeting inFebruary, with the largest increases concen-trated in bond markets. The trade-weightedforeign exchange value of the dollar in termsof the other G-10 currencies fluctuated in arelatively narrow range over most of theintermeeting period, but declined somewhatin recent days.

After strengthening in January, growth ofM2 and M3 remained relatively robust inFebruary and in the first part of March. Thusfar this year expansion of these two aggregatesappears to have been in the upper portion ofthe ranges established by the Committee for1988. Ml has grown moderately on balancesince the fourth quarter. Expansion in totaldomestic nonfinancial debt appears to becontinuing at a pace close to that in 1987.

The Federal Open Market Committee seeksmonetary and financial conditions that willfoster price stability over time, promotegrowth in output on a sustainable basis, andcontribute to an improved pattern of interna-tional transactions. In furtherance of theseobjectives, the Committee at its meeting inFebruary established growth ranges of 4 to 8percent for both M2 and M3, measured fromthe fourth quarter of 1987 to the fourth quarterof 1988. The monitoring range for growth intotal domestic nonfinancial debt was set at 7 to11 percent for the year.

With respect to M1, the Committee decidedin February not to establish a specific targetfor 1988. The behavior of this aggregate inrelation to economic activity and prices hasbecome very sensitive to changes in interestrates, among other factors, as evidenced bysharp swings in its velocity in recent years.Consequently, the appropriateness of changesin Ml this year will continue to be evaluatedin the light of the behavior of its velocity,developments in the economy and financialmarkets, and the nature of emerging pricepressures.

In the implementation of policy for theimmediate future, the Committee seeks toincrease slightly the degree of pressure on

reserve positions. The Committee agrees thatthe current more normal approach to openmarket operations remains appropriate; stillsensitive conditions in financial markets anduncertainties in the economic outlook maycontinue to call for some flexibility in opera-tions. Taking account of conditions in finan-cial markets, somewhat greater reserve re-straint or somewhat lesser reserve restraintwould be acceptable depending on the strengthof the business expansion, indications ofinflationary pressures, developments in for-eign exchange markets, as well as the behaviorof the monetary aggregates. The contem-plated reserve conditions are expected to beconsistent with growth in M2 and M3 over theperiod from March through June at annualrates of about 6 to 7 percent. The Chairmanmay call for Committee consultation if itappears to the Manager for Domestic Opera-tions that reserve conditions during the periodbefore the next meeting are likely to beassociated with a federal funds rate persis-tently outside a range of 4 to 8 percent.

Votes for this action: Messrs. Greenspan,Corrigan, Angell, Black, Forrestal, Heller,Hoskins, Johnson, Kelley, and Parry. Voteagainst this action: Ms. Seger.

Ms. Seger dissented because she did notbelieve that economic and financial devel-opments warranted any tightening ofreserve conditions. She did not see asignificant risk of more inflationary pres-sures on productive resources stemmingfrom prospective demands in domesticand export markets. She remained con-cerned about the downside risks in theeconomy, the fragility in financial mar-kets, especially the stock market, and theweakened condition of many depositoryinstitutions.

2. Authorization for DomesticOpen Market Operations

The Committee approved a temporaryincrease of $4 billion, to a level of $10billion, in the limit between Committeemeetings on changes in System Accountholdings of U. S. government and federal



agency securities specified in paragraphl(a) of the Authorization for DomesticOpen Market Operations. The increasewas effective for the intermeeting periodstarting March 30,1988, and ending withthe close of business on May 17,1988.

Votes for this action: Messrs. Greenspan,Corrigan, Angell, Black, Forrestal, Heller,Hoskins, Johnson, Kelley, and Parry andMs. Seger. Votes against this action: None.

This action was taken on the recommen-dation of the Manager for DomesticOperations. The Manager advised thatthe normal leeway of $6 billion probablywould not be sufficient to accommodatedesirable increases in System Accountholdings of securities during the inter-meeting period. Those increases wouldsupply reserves to help offset very largereserve drains stemming mainly form ashort-term rise in Treasury balances atthe Federal Reserve Banks associatedwith mid-April tax payments.

Meeting Held onMay 17,1988


The information reviewed at this meetingsuggested continuing strength in the eco-nomic expansion, supported by strongsales in both domestic and export mar-kets, and relatively high utilization levelsof labor and capital resources. In thissetting, consumer and producer priceshave risen more rapidly recently. Inaddition, labor costs increased substan-tially in the first quarter.

Nonfarm payroll employment contin-ued to increase in April, though at a moremoderate pace than in other recentmonths. The rise included sizable growthin the manufacturing sector and wasaccompanied by a sharp increase in theaverage workweek. Employment as mea-

sured by the household survey was upvery sharply in April, and the civilianunemployment rate declined 0.2 percent-age point to a level of 5.4 percent; thatlevel was down appreciably since thestart of the year and was the lowest since1974.

Growth in industrial production pickedup considerably in April from a reducedpace earlier in the year. Auto assembliesposted large gains, and the output ofbusiness equipment remained exception-ally strong. Capacity utilization rates inmanufacturing and mining and in theproduction of industrial materials in-creased appreciably in April and onbalance have risen substantially over thepast several quarters to relatively highlevels.

Consumer spending for durables andservices was strong in the first quarter.Retail sales, as revised, showed substan-tial gains in February and March but fellin April. Auto sales declined somewhatin April, apparently reflecting reducedsales incentives, but household spendingon other durables and on services re-mained strong. Outlays on nondurablegoods continued sluggish.

A surge in business fixed investmentduring the first quarter reflected largegains in spending on information-processing and other equipment. Neworders for nondefense capital goodssoftened recently, but order backlogswere still high and suggested that outputwould remain at an advanced level in thecurrent quarter. Spending on structuresdeclined in the first quarter, and forwardcommitments for nonresidential buildingwere essentially flat in nominal terms.While inventories of motor vehiclesdeclined during the first quarter, non-auto inventory investment remained closeto the high rate of the fourth quarter.Sales of new and existing homes in-creased late in the first quarter. Aftershowing weakness early in the year,



housing starts picked up to a 1.55 millionannual rate in March, a level margin-ally above that in the fourth quarter butstill appreciably below that in earlierquarters.

The U.S. merchandise trade deficitdeclined substantially in both nominaland real terms in the first quarter. Exportsreached a record level; oil imports fell,but non-oil imports continued to expand.Indicators of economic activity in themajor foreign industrial countries duringthe first months of 1988 showed contin-ued strength in Japan and, on balance, inEurope as well.

The consumer price index increasedsubstantially in March, despite a limitedrise in retail food prices and flat retailenergy prices. At the producer level,prices of finished goods rose rapidly inMarch and April, largely reflecting in-creases in the food and energy sectors.Prices of intermediate goods advancedconsiderably further in both months,continuing their uptrend of the past yearand a half that has coincided with in-creased capacity utilization rates. Com-modity prices strengthened recently afterregistering mixed changes in the firstquarter. Broad measures of labor costsindicated a substantial advance in the firstquarter, in part because of a rise in payrolltaxes.

Dollar exchange rates moved within anarrow range during most of the inter-meeting period, with uncertainties re-garding U.S. trade and price perfor-mance apparently offset by indications ofU.S. monetary tightening; also, weak-ness at the time of the release of theFebruary trade data was met by concertedcentral bank intervention. On a weighted-average basis, the dollar appreciatedslightly on balance in relation to the otherG-10 currencies until late in the period; itstrengthened with respect to the markand weakened slightly with respect to thepound and the yen. The dollar then

appreciated about 1 percent on the morn-ing of the May 17 meeting in response tonews of the improved U.S. trade deficitin March.

At its meeting in February the Commit-tee agreed on policy objectives that calledfor monetary growth ranges of 4 to 8percent for both M2 and M3 for theperiod from the fourth quarter of 1987 tothe fourth quarter of 1988. The associatedrange for growth in total domestic nonfi-nancial debt was set at 7 to 11 percent.The Committee decided not to establish anumerical target for Ml growth; instead,the appropriateness of changes in Mlwould be evaluated during the year in thelight of the behavior of Ml velocity,developments in the economy and finan-cial markets, and the nature of emergingprice pressures.

At its previous meeting on March 29,the Committee adopted a directive callingfor a slight increase in the degree ofpressure on reserve positions. Thesereserve conditions were expected to beconsistent with growth in both M2 andM3 at annual rates of about 6 to 7 percentover the period from March throughJune. Taking account of conditions infinancial markets, the members agreedthat somewhat greater or somewhat lesserreserve restraint would be acceptable,depending on the strength of the businessexpansion, indications of inflationarypressures, developments in foreign ex-change markets, and the behavior of themonetary aggregates. The intermeetingrange for the federal funds rate was leftunchanged at 4 to 8 percent.

Some slight firming of reserve condi-tions was implemented immediately afterthe March meeting. In the two reservemaintenance periods ending April 20,adjustment plus seasonal borrowing roseto an average of about $330 million; inthe subsequent period ending May 4,borrowing averaged about $440 million,reflecting the impact of a tax-related



bulge in Treasury deposits at the FederalReserve Banks that affected reservemarket conditions and complicated themanagement of reserves. More recently,open market operations were adjustedtoward the implementation of furtherslight firming in reserve conditions inrelation to what had been sought earlierin the period. This action was taken inlight of information that indicated consid-erable strength in the economy and arelated increase in concerns about thepotential for greater inflation. Growth ofM2 and M3 for the year to date was atrates in the upper portions of the Commit-tee's ranges for 1988. Monetary growthwas boosted in April by a temporarybuildup in transaction balances associ-ated with very large tax payments byindividuals. Although preliminary datafor early May indicated substantial weak-ness of money growth, the cumulativeexpansion of the broad aggregates re-mained relatively high in their annualranges. Total and nonborrowed reservesrose at rapid rates in April in conjunctionwith the increase in required reservesagainst transaction deposits.

The firming of reserve conditions wasreflected in a rise in the federal funds ratefrom around 6 Vi percent at the time of theMarch meeting to around 7 percent mostrecently. Other short-term rates also roseabout Vi percentage point over the inter-meeting period, while yields on Treasuryand corporate bonds increased somewhatless. Banks raised their prime lendingrate from 8 xh to 9 percent during the firsthalf of May. Broad indexes of stockprices changed little on balance over theperiod.

The staff projection reviewed at thismeeting suggested that the economy hadconsiderable underlying strength, reflect-ing both an improving trade balance andcontinuing momentum in domestic de-mands. With unemployment already alittle lower, and capacity utilization a

little higher, than had been anticipated,the risks of higher rates of price and wageinflation had increased. The actual courseof the economy would depend in part onhow these developments affected finan-cial markets. Pressures in those marketscould restrain domestic final demands.Relatively sluggish growth in such de-mands, along with indications of over-stocking in the retail sector, wouldencourage a reduced rate of inventoryinvestment. Growth in business fixedinvestment was projected to slow substan-tially, and federal purchases, in constantdollar terms, were expected to be weak.Under such circumstances, while pricesand wages might rise somewhat morerapidly in the quarters ahead, reflectingthe effects of the lower dollar on marketprices and reduced margins of unutilizedproduction resources, the extent andduration of any pickup of inflation mightbe limited.

In the Committee's discussion of theoutlook for economic activity andprices, the members focused on thestrong performance of the economy inrecent months, and, in the context ofdiminishing margins of unused laborand other production resources, theyexpressed considerable concern aboutthe potential for higher rates of inflationin the year ahead. Members referred towidespread evidence of strength in themanufacturing sector and to indicationsthat many firms were producing at veryhigh levels of capacity use. Man-ufacturing was continuing to benefitfrom the nation's improved ability tocompete internationally as a result of thedepreciated dollar, and strength inmanufacturing was feeding through toother related sectors of the economy. Onthe negative side, members referred toindications that inventories were higherthan desired in some industries, notablyat the retail level, and some saw arelatively weak outlook for construe-



tion, both residential and nonresidential.Weaknesses in the financial sectors ofthe economy and relatively heavy debtburdens also increased the downsiderisks in the economy. But, on balance,while some slowing from the currentrate of expansion was a reasonableexpectation, the risks were on the side offaster-than-desired growth and moreinflationary pressures. Some membersobserved that in these circumstancesfiscal restraint, especially if supple-mented by measures to reduce theinflationary consequences of manygovernment programs, could greatlyfacilitate the effort to control inflationwhile encouraging sustained economicexpansion.

Turning to the outlook for inflation,members reported rising costs of materi-als and other manufacturing inputs. Withprofit margins under more pressure,numerous firms were looking for oppor-tunities to pass on rising costs, and therewere reports of some increase in success-ful efforts by businesses to raise prices,especially on crude and intermediateproducer goods. However, while manyspecific instances of sizable price in-creases could be cited, broad measures ofprices, including commodity prices as agroup, did not indicate at this point that asignificant worsening had occurred in theoverall rate of inflation. Likewise, whilereports of shortages of qualified laborwere multiplying and business resistanceto higher wages seemed to be diminishingin some areas, the members did notcurrently detect any appreciable acceler-ation in wage rate increases. Nonethe-less, several expressed concern that,unless the expansion in overall demandswere to slow markedly from the recentpace, which exceeded the trend growthof potential output, a substantially higherrate of price and wage inflation could notbe avoided in the relatively near future.Others were less ready to conclude that

an inflationary surge might be imminent,but they believed that the situation neededcareful watching.

In the Committee's discussion of policyfor the intermeeting period ahead, themembers generally agreed that somefurther tightening of reserve conditionswas needed to counter the risks of risinginflationary pressures in the economy. Afailure to act in timely fashion not onlywould be inconsistent with the Commit-tee's commitment to achieving pricestability over time but would in factcompound the difficulties of accomplish-ing that objective. Views differed, how-ever, regarding the desirable extent ofsuch firming and the appropriate timingfor its implementation. A majority fa-vored only a slight move toward morerestraint, at least pending an evaluationof further developments, and most ofthese members preferred to delay thetightening action for a short period. Othermembers felt that current and potentialpressures on prices and wages arguedmore urgently for a prompt move tosomewhat greater restraint.

The members who favored only slightfurther firming, whether immediately orafter a short delay, saw a considerablerisk that an appreciable further tighteningwould be unexpected so soon after themost recent firming and might well havean exaggerated impact on financial mar-kets. Among other effects, it might giverise to anticipations of an increase in thediscount rate, and foster unwarrantedexpectations about the System's inten-tions. Some members also stressed theadverse impact that any marked weaken-ing of financial markets could have ontroubled depository institutions. In thesecircumstances, marginal further tighten-ing in the near term would provide anappropriate balance between the need tocurb the emergence of excessive demandpressures in the economy and the risks offurther restraint for financial markets and



depository institutions. A few membersalso expressed the view that the twofirming actions since late March, takentogether, already represented a signifi-cant move to greater restraint and moretime was needed to appraise their impacton the economy before any substantialfurther tightening was implemented.

Members who favored movingpromptly to a somewhat greater degreeof restraint gave more emphasis to therisks of more inflation as demand pres-sures encountered labor and capacityconstraints in many industries. In thisview the System's recent firming actionswere helpful, but they did not go farenough toward restraining the growth intotal demands to a noninflationary pace.These members recognized that apprecia-ble further firming could have someadverse impact on financial markets inthe short run and on the condition ofmany already weakened depository insti-tutions. However, a prompt and some-what stronger response to inflationarydevelopments at this point would have afavorable effect on inflationary expecta-tions, and over time also on long-termdebt markets, and would reduce the needfor greater and more disruptive tighten-ing actions later. Some of these membersindicated that a relatively modest movenow, or in the very near future, and areadiness to tighten further later duringthe intermeeting period would constitutean acceptable compromise, given con-cerns about the risks of unwarrantedreactions in the financial markets.

During the discussion members re-ferred to a staff analysis prepared for thismeeting that concluded that expansion ofthe monetary aggregates, especially Mland M2, was likely to moderate substan-tially from the pace in April. The pro-jected slowing reflected in part a reversalof the tax-related buildup in transactionaccounts during April, which was alreadyoccurring, and the impact of increased

opportunity costs of holding money bal-ances in response to the rise in marketinterest rates. While M2 and M3 cur-rently appeared to be growing at ratesthat were consistent with the Committee'sexpectations for the second quarter, theircumulative growth thus far this year wasat rates in the upper part of the Commit-tee's ranges. One member stressed thatany tendency for monetary growth toexceed the ranges should be firmly re-sisted under prevailing circumstances.Another commented that reduced growth,which brought the expansion for the yearto around the middle of the Committee'sranges, would be a desirable outcome.

With regard to adjustments in thedegree of reserve pressure during theintermeeting period, the slight firmingafter a short interval following today'smeeting that was favored by a majority ofthe members would be implementedunless economic and financial conditionsin the period ahead were to differ mark-edly from current expectations. Shouldunanticipated developments of that sortoccur, the Chairman would call for aspecial consultation of the Committee.On the question of any subsequent adjust-ment in policy, a majority believed thatpolicy implementation should remainespecially alert to incoming informationthat might call for further firming. Giventhe recent tightening of reserve condi-tions and the presumption that at leastmarginally firmer reserve conditionswould be implemented in the intermeet-ing period, the members decided to raisethe intermeeting range for the federalfunds rate by 1 percentage point to 5 to 9percent. With such an increase the aver-age trading level expected for the federalfunds rate in the period ahead would bealigned somewhat more symmetricallyaround the middle of the range.

In further discussion most of the mem-bers indicated that they now favoreddropping from the directive the special



reference to sensitive conditions in finan-cial markets and the related reference tothe need for flexibility in the conduct ofopen market operations. Members notedthat these references, while helpful indescribing the Committee's approach tooperations for an extended period follow-ing the October disturbances in financialmarkets, no longer served a clarifyingpurpose in communicating the Commit-tee's intentions. While still somewhatvolatile, market conditions were nowcloser to those prevailing prior to theOctober break in the stock market, andthe Committee anticipated that the earlierapproach to open market operationsgenerally would be followed. A fewmembers felt, however, that still quitesensitive conditions in financial marketscontinued to warrant more than the usualamount of flexibility in the conduct ofopen market operations.

In advance of the discussion of long-term monetary growth ranges at its nextmeeting, the Committee considered therole that the monetary base might play inmonetary policy. One proposal was to setfairly wide limits on quarterly fluctua-tions in the monetary base, but to adjustpolicy promptly if the limits werebreached. The Committee also discussedwhether a range for the base comparableto the existing ranges for M2 and M3 andnonfinancial debt might usefully supple-ment the current ranges. Most membersexpressed reservations about the relia-bility of the base as a guide to or restrainton policy, given their questions about thebehavior of currency and reserves rela-tive to income. However, there was senti-ment for a continuing review of possiblemonetary indicators of future pricetrends.

At the conclusion of the Committee'sdiscussion, all but two of the membersindicated that they favored or couldaccept a directive that called initially formaintaining the current degree of pres-sure on reserve positions. Some slight

firming would be implemented after ashort interval following today's meeting,assuming that economic and financialconditions remained reasonably consis-tent with current expectations. In partic-ular, and in keeping with the Committee'susual approach to policy, the conduct ofopen market operations would take ac-count of conditions in financial markets,the strength of the business expansion,indications of inflation, the performanceof the dollar in foreign exchange markets,and the behavior of the monetary aggre-gates. Later in the intermeeting period,some added reserve restraint would beacceptable, or some slight lessening ofreserve pressure might be acceptable,depending on ongoing economic andfinancial developments. The contem-plated reserve conditions were likely tobe associated with slower monetarygrowth, but given their relatively rapidexpansion in April, M2 and M3 were stillexpected to grow at the rates of 6 to 7percent established in late March for theperiod from March to June. The membersagreed that the intermeeting range for thefederal funds rate, which provides onemechanism for initiating consultation ofthe Committee when its boundaries arepersistently exceeded, should be raisedby 1 percentage point to 5 to 9 percent.


The information reviewed at this meetingsuggests continuing strong expansion in eco-nomic activity and rising levels of resourceutilization. In April, total nonfarm payrollemployment rose further; the increase in-cluded sizable growth in the manufacturingsector. The civilian unemployment rate fell to5.4 percent, down appreciably from its levelat the start of the year. Growth in industrialproduction picked up considerably in Aprilfrom a reduced pace earlier in the year. Retailsales fell appreciably last month but estimatesof sales in February and March were revised



substantially higher. Indicators of businesscapital spending point to substantial gainsthus far this year, notably for equipment. Thenominal U.S. merchandise trade deficit in thefirst quarter was substantially smaller thanthat for the fourth quarter. Consumer andproducer prices have risen more rapidlyrecently following a period of relativelymodest increases. Broad measures of laborcosts indicate a substantial advance in the firstquarter, in part because of a rise in payrolltaxes.

Interest rates have risen somewhat sincethe Committee's meeting on March 29. Thetrade-weighted foreign exchange value of thedollar in terms of other G-10 currencies hadincreased slightly on balance over the inter-meeting period prior to May 17 and jumpedfollowing release of the March trade data.

M1 and M2 grew rapidly in April, owing inpart to a buildup in transaction balancesassociated with tax payments, while M3expanded at a slower pace than in previousmonths. Through April, expansion of M2 andM3 was in the upper portion of the rangesestablished by the Committee for 1988.Expansion in total domestic nonflnancial debtappears to be continuing at a pace close to thatin 1987.

The Federal Open Market Committee seeksmonetary and financial conditions that willfoster price stability over time, promotegrowth in output on a sustainable basis, andcontribute to an improved pattern of interna-tional transactions. In furtherance of theseobjectives, the Committee at its meeting inFebruary established growth ranges of 4 to 8percent for both M2 and M3, measured fromthe fourth quarter of 1987 to the fourth quarterof 1988. The monitoring range for growth intotal domestic nonflnancial debt was set at 7 to11 percent for the year.

With respect to M1, the Committee decidedin February not to establish a specific targetfor 1988. The behavior of this aggregate inrelation to economic activity and prices hasbecome very sensitive to changes in interestrates, among other factors, as evidenced bysharp swings in its velocity in recent years.Consequently, the appropriateness of changesin Ml this year will continue to be evaluatedin the light of the behavior of its velocity,developments in the economy and financialmarkets, and the nature of emerging pricepressures.

In the initial implementation of policy, theCommittee seeks to maintain the existing

degree of pressure on reserve positions.Taking account of conditions in financialmarkets, the strength of the business expan-sion, indications of inflationary pressures,developments in foreign exchange markets,and the behavior of the monetary aggregates,the Committee expects that a slight increase inthe degree of pressure on reserve positionswould be appropriate in the weeks ahead.Depending on further developments in thesefactors, somewhat greater reserve restraintwould, or slightly lesser reserve restraintmight, also be acceptable later in the intermeet-ing period. The contemplated reserve condi-tions are expected to be consistent with growthin M2 and M3 over the period from Marchthrough June at annual rates of about 6 to 7percent. The Chairman may call for Commit-tee consultation if it appears to the Managerfor Domestic Operations that reserve condi-tions during the period before the next meetingare likely to be associated with a federal fundsrate persistently outside a range of 5 to 9percent.

Votes for this action: Messrs. Greenspan,Corrigan, Angell, Black, Forrestal, Heller,Johnson, and Kelley and Ms. Seger. Votesagainst this action: Messrs. Hoskins andParry.

Messrs. Hoskins and Parry dissentedbecause they favored a prompt move to agreater degree of reserve restraint. Intheir view the risks were considerablethat price and wage inflation wouldaccelerate from rates that were alreadytoo high. A more substantial firming wasneeded to moderate underlying pressuresand to foster reasonable progress towardprice stability. In the absence of such amove at this time, even greater tighteningmight well be required later, with atten-dant costs to financial markets and theeconomy. Mr. Hoskins noted that the M2and M3 aggregates were near the upperbound of their target ranges. He alsoreferred to the strengthening of businessactivity abroad, which had implications,potentially, for more widespread pricepressures, and to the desirability ofincreasing the credibility, and thus the



effectiveness, of monetary policy throughtimely, anti-inflationary measures. Heemphasized that monetary policy shouldbe directed toward a steady reduction ofinflation and not toward meeting shorter-term business cycle goals. Mr. Parrynoted that the two tightening actions inrecent weeks were of insufficient magni-tude to have much effect on the economyin the context of strengthened prospectsfor growth and already tight labormarkets.

Meeting Held onJune 29-30,1988


The information reviewed at this meetingsuggested that economic activity wascontinuing to expand at a relativelyvigorous pace, though apparently notquite as rapidly as earlier this year.Growth in output was being sustained byconsiderable strength in manufacturing;the latter appeared to reflect in part acontinuing improvement in the nation'strade balance as well as ongoing expan-sion in domestic demands. Various mea-sures of prices and wages suggested someintensification of inflation in recentmonths.

Growth in nonfarm payroll employ-ment moderated somewhat in April andMay, particularly in construction, trade,and services. However, manufacturingemployment and the average workweekshowed continued strength. In May,household employment fell sharply andreversed a large gain in April. Thecivilian unemployment rate rose from5.4 percent in April to 5.6 percent inMay, but it remained slightly below thefirst-quarter average.

Industrial production increased consid-erably in April and May. Assemblies ofmotor vehicles and the production ofcapital goods rose substantially in both

months. The output of materials alsostrengthened over the two months, butthat of non-auto consumer goods edgeddown. There were widespread increasesin capacity utilization rates in April andMay. Those rates have risen to highlevels in primary processing industries.

After increasing appreciably in thefirst quarter, retail sales were littlechanged on balance over April and May.Sales of durable goods edged down fromrecent advanced levels, while spendingon nondurable goods extended the slug-gish pattern in evidence over the previoustwo quarters. Housing starts fell to anannual rate of 1.38 million units in May,down from a rate of approximately 1 Vimillion units over the preceding threemonths. Despite the decline, data onbuilding permits and home sales sug-gested that the pace of housing activitywas little changed.

Business fixed investment also ap-peared to have leveled off at a high raterecently. Outlays for structures increasedin April, particularly in the industrialsector, but new commitments for nonres-idential construction were trending down.While new orders for nondefense capitalgoods showed little change in April andMay, the latest survey data impliedfurther gains in capital spending over thesecond half of 1988. Nonfarm inventoryinvestment in April remained close to itsfirst-quarter pace. The buildup in stockscontinued to be sizable in manufacturingand wholesale trade and was concentratedin industries experiencing strong domes-tic and foreign demand. At the retaillevel, non-auto inventory investmentslowed sharply in April, while invento-ries of automotive products rose some-what after declining substantially in thefirst quarter.

The U.S. merchandise trade deficitnarrowed in April on a seasonally ad-justed basis, essentially reflecting a de-cline in imports across a wide range of



commodity categories. Exports fellslightly in April after a large increase inMarch. Real economic activity expandedstrongly during the first quarter in mostof the major foreign industrial countries,but available indicators pointed to someslowing in the second quarter, whileinflation remained subdued.

Over April and May, the consumerprice index rose at about the average paceof the first quarter, despite a sizableadvance in retail food and energy prices.At the producer level, prices of finishedgoods continued to increase in May at thequickened pace of the previous twomonths. Prices of a broad range ofcommodities, particularly agriculturalgoods, increased sharply in the past fewweeks, in part because of the effects ofthe drought. The rise in average hourlyearnings of private nonfarm workerspicked up significantly in April and May.

The dollar firmed considerably in for-eign exchange markets from late Maythrough mid-June, and it subsequentlyappreciated further in the days leading upto the Committee meeting. In relation toother G-10 currencies, the dollar finishedthe period on average about 6 percentabove its level at the time of the previousCommittee meeting on May 17. Continu-ing improvement in the U.S. trade bal-ance and perceptions that inflationarypressures would be resisted with tightermonetary policy helped to strengthen thedollar.

At its previous meeting in May, theCommittee adopted a directive that calledinitially for maintaining the existingdegree of pressure on reserve positions.The Committee agreed that some slightfirming would be implemented after ashort interval following this meeting,assuming that economic and financialconditions did not diverge significantlyfrom the members' expectations. In par-ticular, the conduct of open marketoperations would take account of condi-

tions in financial markets, the strength ofthe business expansion, indications ofinflation, the performance of the dollar inforeign exchange markets, and the behav-ior of the monetary aggregates. Later inthe intermeeting period, some addedreserve restraint would be acceptable, orsome slight lessening of reserve pressuremight be acceptable, depending on ongo-ing economic and financial develop-ments. The contemplated reserve condi-tions were expected to be associated withgrowth in M2 and M3 at annual rates of 6to 7 percent over the period from Marchto June. The members agreed that theintermeeting range for the federal fundsrate should be raised by 1 percentagepoint to a range of 5 to 9 percent.

In accordance with the Committee'sinstructions, open market operationswere directed toward a slight increase inthe degree of reserve pressure starting inthe latter part of May. In the two reservemaintenance periods ending June 15,adjustment plus seasonal borrowing roseto an average of $530 million. Thataverage included a bulge over the Memo-rial Day holiday in late May. The imple-mentation of firmer reserve conditions,interacting with market expectations of atighter monetary policy and some sea-sonal pressures in the money market,contributed to an increase in the federalfunds rate from about 7 percent at thetime of the May meeting to around 73/s toIVi percent by mid-June. Subsequently,a marginal further increase was sought inthe degree of reserve restraint. Thisfurther adjustment in open market oper-ations was made in the context of a flowof economic information that suggested acontinuing risk of greater inflation and adirective that called for evaluating neweconomic data with a greater readiness totighten than to ease. Adjustment plusseasonal borrowing averaged about $520million in the reserve maintenance periodending June 29. Federal funds traded



mostly around IVi percent during thisperiod but rose to around 8 percent late inthe month with the approach of thequarterly statement date.

Most other short-term interest ratesrose by 14 to % percentage point duringthe intermeeting period. In contrast, bondyields declined by about the same amountover the interval. Demands for long-termdebt instruments appeared to be buoyedby improved prospects for the dollar andby signs that the economic expansionmight be moderating toward a moresustainable pace in the context of percep-tions that monetary policy was beingtightened in a timely manner. Broadindexes of stock prices increased appre-ciably on balance over the period sincemid-May.

Growth of M2 and M3 slowed substan-tially in May, and Ml was about un-changed. This weaker performance re-flected mainly a runoff of tax-relatedbalances. Based on partial data throughmidmonth, growth of the monetary ag-gregates appeared to have rebounded inJune, though it remained below thatregistered earlier in the year as increasesin market interest rates in recent monthsapparently began to damp demands formoney. Expansion in total domesticnonfinancial debt thus far this year wasestimated to have moderated somewhatfrom the pace in 1987.

The staff projection prepared for thismeeting suggested that the economywould expand at a more moderate pace inthe quarters immediately ahead. Growthin output would be held down by theeffects of the drought on agriculturaloutput, a decline in automobile produc-tion, and a more restrained pace ofnonfarm inventory accumulation thanwas thought to have occurred in recentmonths. Over the longer run, the courseof the economy would depend to animportant extent on developments infinancial markets. To the degree that

demands were strong, in a context of ananti-inflation monetary policy, this wouldshow through in pressures in those mar-kets tending to restrain domestic spend-ing. The staff projection continued toanticipate a sluggish pace of consumerspending, substantially slower growth inbusiness fixed investment, and subduedhousing activity; it also assumed a mildlyrestrictive fiscal policy. As in earlierprojections, improvement in the tradebalance was expected to contribute sub-stantially to continuing growth in overalleconomic activity. Prices and wages wereexpected to rise somewhat more rapidlyin the quarters ahead because of thecontinuing effects of the dollar's depreci-ation on prices of non-oil imports and ofreduced margins of unutilized productionresources. Increases in food prices as aconsequence of drought conditions werealso expected to contribute to inflationarypressures over the quarters immediatelyahead.

In the Committee's discussion of theeconomic situation and outlook, themembers generally agreed that somemoderation in the rate of economicexpansion was a reasonable expectationfor the next several quarters. Indeed,although the specific rate of economicgrowth that would foster achievement ofthe Committee's price stability goal couldnot be anticipated with any degree ofprecision, the members generally agreedthat a considerably slower rate of expan-sion than appeared to have occurred inthe first half of 1988 would probably beneeded, given already high utilizationrates of labor and capital resources.Views differed, however, with regard tothe likely extent of the slowing thatmight already be under way. Manymembers expressed concern that, in theabsence of tighter fiscal and monetarypolicies, the momentum of the economypointed to faster growth than would beconsistent with the Committee's objective



of containing inflationary pressures overtime. Some other members gave moreemphasis to recent data that seemed topoint to more moderate economic growth.They noted that the higher interest andexchange rates and the slower monetarygrowth that had accompanied the tighten-ing of monetary policy over the springwould be restraining demands over com-ing quarters, and they saw a lesser risk ofa significant pickup in inflation. In theview of these members, inflation re-mained a major concern, but additionalinformation was needed to assess whetherthe economy was on a course that wouldlead to an intensification of pricepressures.

In keeping with the usual practice atmeetings when the Committee considersits long-run objectives for monetarygrowth, the members of the Committeeand the Federal Reserve Bank presidentsnot currently serving as members pre-pared specific projections of growth inreal and nominal GNP, the rate of unem-ployment, and changes in the overallprice level. With regard to rates ofexpansion in real GNP, the projectionshad a central tendency of 2 3A to 3 percentfor 1988 as a whole, implying a consid-erable slowing over the second half of theyear; for the year 1989 the centraltendency of the projections was 2 to 2*/2percent or close to that implied for thesecond half of this year. Projections ofgrowth in nominal GNP centered on ratesof 53A to 6% percent for 1988 and 5 to 7percent for 1989. The projected rates ofcivilian unemployment had a centraltendency of 5lA to 5% percent for thefourth quarter of 1988 and 5V4 to 6percent for the fourth quarter of 1989.With respect to the rate of inflation, asindexed by the GNP deflator, the projec-tions centered on rates of 3 to 3 % percentfor 1988 and 3 to 4Vi percent for 1989.The somewhat higher midpoint of thecentral tendency for 1989 overstated

the anticipated pickup in inflation fortechnical reasons, including a shift in thecomposition of output that had producedan unusually low increase in the deflatorfor the first quarter of 1988. In makingthese projections the members took ac-count of the Committee's objectives formonetary growth established at thismeeting and assumed that the fiscal policyunderstandings reached by the Congressand the administration in late 1987 wouldbe fully implemented. The members alsoassumed that fluctuations in the exchangevalue of the dollar would not be ofsufficient magnitude to affect economicgrowth and inflation materially in theperiod through the end of 1989.

In their review of developments bear-ing on the prospects for the economy, themembers generally agreed that the out-look for consumer and business spendingpointed to slower growth in domesticfinal demands over the next severalquarters, but they continued to anticipatethat further improvement in the nation'strade balance would provide a majorimpetus to sustained moderate expansionin overall economic activity. There wasuncertainty about strength of demands inthe economy from both domestic andforeign sources. Some recent data onconsumption and investment seemed tosuggest that demands were moderating abit in the second quarter; moreover, therise in interest rates would be dampingdomestic demands over coming quarters,and the higher dollar, if it persisted,could restrain the pace of external adjust-ment. In addition, money stock growth,taking 1987 and the first half of 1988together, had been much less rapid thanin previous years, and this suggestedsome restraint in the economy. On theother hand, the economy seemed to havea good deal of momentum and it was farfrom clear whether the slowing, if any,would be sufficient to relieve growingpressures on resources. Consumption



seemed sluggish, but restrained con-sumer spending was needed to allowproduction resources to be shifted tosectors that competed in internationalmarkets. Reports from the Federal Re-serve Districts suggested that the im-proved international competitiveness ofdomestic producers continued to boostmanufacturing activity and that capitalspending to expand and modernize indus-try would likely continue fairly robust, ifbelow the extraordinary pace of the firstquarter. Economic activity abroad hadbeen somewhat stronger than expected,and if that pattern continued it would tendto boost demands on U.S. exporters.

An important uncertainty in the eco-nomic outlook, at least in the view ofsome members, was the prospectiveperformance of inventories. A somewhatreduced rate of inventory accumulationwas desirable to prevent an excess buildupin relation to sales, but a surge ininventory investment could not be ruledout. Such a development would contrib-ute to demand pressures and wouldthreaten the sustainability of the expan-sion . Members also noted that the droughtwas having an adverse impact on agricul-ture in several parts of the country, but itsultimate effects on the economy weredifficult to predict. A timely improve-ment in moisture conditions might yetlimit that impact for many producers.In areas unaffected by the drought,agricultural producers were benefitingfrom higher prices of agriculturalcommodities.

During the Committee's discussion,the members focused a great deal ofattention on the outlook for prices andwages. Specific developments, such asrising import prices and the impact of thedrought on agricultural prices, werecontributing to inflationary pressures.However, of more fundamental concernto members was the possibility thataggregate demand pressures in the econ-

omy might prove excessive in relation toavailable labor and capital resources,especially given the high levels of re-source utilization already prevailing. Bysome measures, prices had risen some-what more rapidly in recent months,although any associated worsening ofinflationary expectations, at least asreflected in certain key financial markets,appeared to have been muted, perhaps byfavorable reactions to the System's tight-ening moves. With regard to wages,some members commented that recentwage data, on the whole, had an upwardtilt. Reports from different parts of thecountry suggested that labor marketconditions were relatively taut in many,but not all, areas, but there were fewreports of substantial acceleration in ratesof wage increases. Many business exec-utives were expressing concern, how-ever, about their continuing ability torestrain demands for higher wages. Forthe moment, priority in labor negotia-tions continued to be placed on jobsecurity issues, and many business exec-utives, facing domestic and foreign com-petition, continued to emphasize mea-sures to increase productivity and holddown unit labor costs.

Against the background of the Com-mittee's views regarding the economicoutlook and in keeping with the require-ments of the Full Employment and Bal-anced Growth Act of 1978 (the Humph-rey-Hawkins Act), the Committee at thismeeting reviewed the ranges for growthin the monetary and debt aggregates thatit had established in February for 1988and decided on tentative ranges forgrowth in those measures in 1989. The1988 ranges included growth of 4 to 8percent for both M2 and M3 for theperiod from the fourth quarter of 1987 tothe fourth quarter of 1988. A monitoringrange of 7 to 11 percent had been set forgrowth in total domestic nonfinancialdebt in 1988. For the year to date,



cumulative expansion of M2 and M3 hadbeen in the upper portion of the rangesestablished by the Committee, whileexpansion in nonfinancial debt had beenaround the middle of its range. Withregard to M1, the Committee had decidedin February not to set a numerical targetfor 1988 but to appraise the behavior ofthis monetary measure in terms of itsvelocity and against the background ofdevelopments in the economy and finan-cial markets and the nature of emergingprice pressures.

In the Committee's review of theranges that had been set for 1988, all ofthe members found acceptable a proposalto retain the current ranges. The Commit-tee took account of a staff analysis thatindicated that a moderation in the growthof M2 over the second half of 1988,bringing M2 expansion to around themiddle of the Committee's range for theyear, was consistent with the slowergrowth of income that was both expectedand desirable. The slower M2 growthalso would reflect the impact of the rise inmarket interest rates in recent months inassociation with an expectation thatdepository institutions characteristicallywould not adjust offering rates fully ontheir interest-bearing deposits or woulddo so only after a considerable delay.Growth of M3 was projected to exceedthat of M2 during the remainder of 1988,reflecting needs to finance fairly robustcredit growth at depository institutions.Nonetheless, the growth of M3 wasprojected to remain well within theCommittee's range for the year. Growthin total domestic nonfinancial debt wasexpected to remain near the middle of itsrange and thus still appreciably above theprojected expansion in nominal GNP, inpart because of a widened corporatefinancing gap.

With regard to the ranges in 1989, themembers generally agreed that achieve-ment of sustained economic expansion

and concurrent progress toward pricestability would require that the rangescontinue to be ratcheted down over time.However, views differed as to how much,if any, of this reduction should be sched-uled at this time for 1989—especially inlight of the uncertainty at mid-1988 as towhat economic and financial conditionswould prevail in 1989. With deposit ratederegulation, the aggregates had becomemore interest sensitive, and it had becomeincreasingly difficult to anticipate veryfar in advance what rates of monetarygrowth would be appropriate. Manymembers favored a reduction of a fullpercentage point in the M2 range. Theyviewed such a reduction as necessary toconstrain income growth in a period whenunderlying inflation pressures could re-main strong and velocity could be increas-ing. Most other members favored asmaller reduction, or no reduction, in themoney growth ranges. Some anticipatedthat the expansion in business activity as1989 began might well be slower thanmost members currently anticipated.Interest rates might also be lower, therebytending to damp velocity. Because ofuncertainty about the outlook, there wasa risk that a part, or all, of any currentreductions might have to be reversedwhen the ranges were reexamined inFebruary, with adverse effects in termsof the public's perception of the System'santi-inflation resolve. In the view of thesemembers, the ranges could be adjusteddownward in February, when the outlookfor 1989 would be in clearer focus. Onthe other hand, one member felt that areduction of more than 1 percentage pointin the M2 range probably would beneeded if progress was to be made inlowering the rate of inflation in 1989.Despite their differing preferences and inrecognition of the possibility of revisionsnext February in these tentative ranges,all but one member indicated they couldaccept a reduction of a full percentage



point in the M2 range. This wouldcommunicate the System's intention torestrain any tendency for inflation toaccelerate next year and, indeed, to moveover time toward price stability. In lightof the uncertainties, the Committee de-cided to retain the 4-point width for allthe aggregates in 1989. Considerationwould be given to narrowing the rangesto 3 percentage points when they werereviewed in February.

The tentative range for M3 was re-duced by Vi percentage point and leftsomewhat higher than that for M2.Growth in M3 had shown a tendency toexceed M2 growth over time and thatpattern was expected to continue. Therange for M3 had been set above that forM2 in a number of earlier years. Themonitoring range for expansion in totaldomestic nonfinancial debt also waslowered on a tentative basis by Vi per-centage point from the range for 1988. Inthe economic environment projected for1989, growth in nonfinancial debt wasbelieved likely to slow a bit from thealready reduced pace now expected forall of 1988. Even so, with business loandemands expected to remain relativelystrong, growth in nonfinancial debt wouldprobably continue to exceed that ofnominal GNP by a considerable margin.

The Committee again decided not toset a specific range for Ml for 1988 or1989. The velocity of Ml had exhibitedsharp swings in recent years. The latterwere in part the result of the increasedsensitivity of M1 to fluctuations in marketinterest rates since the deregulation ofdeposit rate ceilings. The Committeeconcluded that the prospective relation-ships between Ml and aggregate mea-sures of economic performance remainedtoo uncertain to justify reliance on thismonetary aggregate as a guide for mone-tary policy, at least insofar as could bejudged at this point for next year. Simi-larly, after Committee consideration

most members preferred not to make useof another narrow monetary measure,the monetary base, in guiding monetarypolicy. In recent years, the base hadvaried less in relation to economic activ-ity and prices than had Ml, but itsvelocity had nonetheless fluctuated sub-stantially, and sometimes unpredictably,from year to year.

At the conclusion of this discussion,the Committee approved for inclusion inthe domestic policy directive the follow-ing paragraphs relating to its objectivesfor the broader aggregates and nonfinan-cial debt in 1988 and the role of Ml:

The Federal Open Market Committee seeksmonetary and financial conditions that willfoster price stability over time, promotegrowth in output on a sustainable basis, andcontribute to an improved pattern of interna-tional transactions. In furtherance of theseobjectives, the Committee reaffirmed at thismeeting the ranges it had established inFebruary for growth of 4 to 8 percent for bothM2 and M3, measured from the fourth quarterof 1987 to the fourth quarter of 1988. Themonitoring range for growth in total domesticnonfinancial debt was also maintained at 7 to11 percent for the year.

With respect to Ml, the Committee re-affirmed its decision in February not toestablish a specific target for 1988 and alsodecided not to set a tentative range for 1989.The behavior of this aggregate will continueto be evaluated in the light of movements in itsvelocity, developments in the economy andfinancial markets, and the nature of emergingprice pressures.

Votes for this action: Messrs. Greenspan,Corrigan, Angell, Black, Forrestal, Heller,Hoskins, Johnson, Kelley, and Parry andMs. Seger. Votes against this action: None.

The following paragraph relating tothe ranges for 1989 was approved forinclusion in the domestic policy directive:

For 1989, the Committee agreed on tenta-tive ranges for monetary growth, measuredfrom the fourth quarter of 1988 to the fourthquarter of 1989, of 3 to 7 percent for M2 and



3 Vi to 7 Vi percent for M3. The Committee setthe associated monitoring range for growth intotal domestic nonfinancial debt at 6 Vi to 101/2percent. It was understood that all these rangeswere provisional and that they would bereviewed in early 1989 in the light of interven-ing developments.

Votes for this action: Messrs. Greenspan,Corrigan, Angell, Black, Forrestal, Heller,Hoskins, Johnson, Kelley, and Parry. Voteagainst this action: Ms. Seger.

Ms. Seger dissented because she pre-ferred to retain—at least for now—thisyear's ranges of 4 to 8 percent for growthin both M2 and M3 for 1989. The eco-nomic outlook for next year remainedhighly uncertain at this point, and shewas concerned about reducing the rangesso far in advance and incurring the risk ofhaving to reverse that decision nextFebruary. Such a reversal would createunnecessary uncertainty about the con-duct of monetary policy. She recognizedthat further reductions in the M2 and M3ranges might well be needed over time tobring inflation under control, and shewould be prepared to lower those rangesearly next year if economic conditionsand prospects appeared to warrant suchan action at that time.

In the course of the Committee's dis-cussion of policy implementation for theperiod immediately ahead, considerableemphasis was given by some members tothe desirability of avoiding any impres-sion of a reversal in what was widelyperceived as the thrust of policy in recentmonths toward a gradual increase in thedegree of restraint. Several observed thatthe tightening actions of recent monthshad had a salutary effect on financialmarkets, and, as evidenced in part by theperformance of the bond markets, oninflation expectations. The Committeedid not contemplate any easing of policyin the current economic environment,and some members were concerned thatmaintaining the degree of reserve pres-

sure sought recently might well be inter-preted as a move to an easier policy oncethe effects of seasonal pressures onmoney market interest rates subsided. Inpresent circumstances such a develop-ment could have an exaggerated effect oninflationary attitudes and thus on theeffectiveness of monetary policy. A slightincrease in reserve pressure would helpto maintain the general thrust of policyand its perception by the markets; somefurther tightening could be assessed asnew data, especially pertaining to infla-tion pressures, became available. Othermembers preferred a somewhat greaterdegree of firming immediately. Theywere concerned that there were substan-tial risks that the tightening actions todate might not be sufficient to limit theexpansion to a noninflationary pace, andsome felt that an increase in the discountrate might helpfully complement openmarket operations at this juncture.

Some members favored steady reserveconditions. They gave more emphasis tothe anticipated lagged effects of earlierpolicy tightening actions, and most ofthese members also interpreted recentinformation as indicative of some slowingin the business expansion. They alsowere concerned that any firming, how-ever slight, would add to existing upwardpressures on the dollar. The rise in thedollar already suggested monetary re-straint in the United States, and furtherupward movements might work againstneeded adjustment of external imbal-ances . Some firming might well be neededat some point and should be reflected in adirective that indicated a greater willing-ness to tighten than to ease in response tonew data. However, economic and mon-etary indicators in this view did not pointto the need for any tightening at this time.

According to a staff analysis preparedfor this meeting, the implementation ofunchanged or slightly firmer reserveconditions was likely to be associated



with some slowing in the growth of Mland M2 during the months ahead, largelyreflecting the impact on deposit growthof more attractive yields on short-termmarket instruments stemming from therecent rise in market rates. Growth in M3might be better maintained as banks andthrift institutions continued to financestill sizable expansion in credit demandsthrough issuance of managed liabilities.In these circumstances, cumulativegrowth in both M2 and M3 throughSeptember would be expected to remainin the upper halves of the Committee's1988 ranges, albeit with M2 decliningtoward the midpoint of its range.

With regard to possible changes in thedegree of reserve pressure during theintermeeting period, all of the membersagreed that operations should be adjustedmore readily toward further tighteningthan toward some easing. However,those who preferred no change in thedegree of reserve restraint, at least fornow, also thought that the directiveshould incorporate such a presumptiononly if there were no immediate tighten-ing. The relatively long span betweenmeetings and the importance of theforthcoming data to an assessment of theevolving economic and price outlook,might well require consideration of inter-meeting adjustments in the stance of openmarket operations in coming weeks. Inaddition, developments in financial mar-kets, especially the foreign exchangemarket, could have an important effecton the timing of policy actions in the nearterm, and such developments would needto be reviewed carefully. The membersgenerally endorsed a suggestion to giveparticular weight to incoming informa-tion bearing on the outlook for inflationduring the intermeeting period, thoughthe usual attention should also continueto be given to the strength of the eco-nomic expansion, conditions in domes-tic and foreign exchange markets, and

the growth of the monetary aggregates.At the conclusion of the Committee's

discussion, a majority of the membersindicated that they preferred or couldaccept a directive that called for a slightincrease in the degree of pressure onreserve positions. The members indi-cated that somewhat greater reserverestraint would be acceptable, or slightlylesser reserve restraint might be accept-able, depending on indications of infla-tionary pressures, the strength of thebusiness expansion, developments in for-eign exchange and domestic financialmarkets, and the behavior of the mone-tary aggregates. The reserve conditionscontemplated by the Committee wereexpected to be consistent with growth inM2 and M3 at annual rates of about 5Viand 7 percent respectively over the three-month period from June through Septem-ber. In keeping with its decision on thelonger-run ranges, the Committee de-cided not to indicate any expectationsregarding the growth of Ml over themonths immediately ahead. The mem-bers agreed that the intermeeting rangefor the federal funds rate, which providesone mechanism for initiating consultationof the Committee when its boundaries arepersistently exceeded, should be leftunchanged at 5 to 9 percent.


The information reviewed at this meetingsuggests that economic activity has continuedto expand at a fairly vigorous pace. Growth intotal nonfarm payroll employment moderatedsomewhat in April and May. The civilianunemployment rate rose to 5.6 percent inMay, a level just below its average in the firstquarter. Industrial production advanced con-siderably in April and May. Retail sales werelittle changed on balance over the two monthsafter rising appreciably in the first quarter.Available data indicate that business capitalspending has remained at the high level



reached in the first quarter. Housing starts fellsharply in May, but other indicators suggestedlittle change in the pace of recent housingactivity. The nominal U.S. merchandise tradedeficit declined substantially in April, asimports dropped sharply and exports wereessentially unchanged. Most measures indi-cate that prices and wages have risen some-what more rapidly in recent months. Prices ofa broad range of commodities, particularlyagricultural goods, have increased sharply inthe past few weeks.

Short-term interest rates have risen sincethe Committee's meeting on May 17, whilebond yields have moved lower. The trade-weighted foreign exchange value of the dollarin terms of the other G-10 currencies appre-ciated considerably over the intermeetingperiod.

Expansion of M2 and M3 slowed consider-ably in May and Ml was about unchanged,but data available for June suggested somepickup in monetary growth. From a fourth-quarter base, M2 and M3 have grown at ratesin the upper portion of the ranges establishedby the Committee for 1988. Expansion intotal domestic nonfinancial debt for the yearthus far appears to be at a pace somewhatbelow that in 1987.

The Federal Open Market Committee seeksmonetary and financial conditions that willfoster price stability over time, promotegrowth in output on a sustainable basis, andcontribute to an improved pattern of interna-tional transactions. In furtherance of theseobjectives, the Committee reaffirmed at thismeeting the ranges it had established inFebruary for growth of 4 to 8 percent for bothM2 and M3, measured from the fourth quarterof 1987 to the fourth quarter of 1988. Themonitoring range for growth in total domesticnonfinancial debt was also maintained at 7 to11 percent for the year.

For 1989, the Committee agreed on tenta-tive ranges for monetary growth, measuredfrom the fourth quarter of 1988 to the fourthquarter of 1989, of 3 to 7 percent for M2 and3 Vi to 7 Vi percent for M3. The Committee setthe associated monitoring range for growth intotal domestic nonfinancial £ebt at 6Vi to lOVipercent. It was understood that all these rangeswere provisional and that they would bereviewed in early 1989 in the light of interven-ing developments.

With respect to Ml, the Committee re-affirmed its decision in February not toestablish a specific target for 1988 and also

decided not to set a tentative range for 1989.The behavior of this aggregate will continueto be evaluated in the light of movements in itsvelocity, developments in the economy andfinancial markets, and the nature of emergingprice pressures.

In the implementation of policy for theimmediate future, the Committee seeks toincrease slightly the existing degree ofpressure on reserve positions. Takingaccount of indications of inflationarypressures, the strength of the businessexpansion, developments in foreign ex-change and domestic financial markets, andthe behavior of the monetary aggregates,somewhat greater reserve restraint would, orslightly lesser reserve restraint might, beacceptable in the intermeeting period. Thecontemplated reserve conditions areexpected to be consistent with growth in M2and M3 over the period from June throughSeptember at annual rates of about 5 V2 and 7percent, respectively. The Chairman maycall for Committee consultation if it appearsto the Manager for Domestic Operations thatreserve conditions during the period beforethe next meeting are likely to be associatedwith a federal funds rate persistently outsidea range of 5 to 9 percent.

Votes for the paragraph on short-termpolicy implementa t ion : Mess r s .Greenspan, Corrigan, Black, Forrestal,Heller, Hoskins, Johnson, and Parry.Votes against: Messrs. Angell and Kelleyand Ms. Seger.

Messrs. Angell and Kelley and Ms. Segerdissented because they preferred to directpolicy toward maintaining unchangedconditions of reserve availability. Theydid not rule out the possible need forsome firming later during the intermeet-ing period, subject to a review of devel-opments by the Committee.

Mr. Angell indicated that hesupported a continued slowing in thegrowth of the monetary aggregates thatwas directed toward price level stabilityover time. In his view, while longer-run developments in prices remainedsomewhat uncertain, recent information



from exchange rate and commoditymarkets, as well as the monetaryaggregates, called for a pause in theprocess of continuous tightening in orderto gain additional insight regarding theeffects of previous actions. In addition,the dollar had been under substantialupward pressure, which had promptedcentral bank intervention. He felt thatthe exchange rate objectives implied indollar sales would be frustrated by thedouble sterilization of reserves impliedby monetary tightening. He wanted tocall attention to the cross purposes ofthese actions.

Mr. Kelley noted that he hadsupported firming actions over the pastseveral months, but he could not concurwith a decision to increase reservepressure further at this time. The econ-omy, for the most part, was behavingsatisfactorily, with evidence that the rateof growth in real activity might bedecelerating. He recognized and sharedthe concern that inflation had thepotential to accelerate. However, therewas insufficient evidence at this time tojustify further tightening that mightfoster undue slowing in economicgrowth. He would be prepared tosupport appropriate firming action latershould adequate evidence of increasedinflationary pressures emerge, takinginto account overall economic activity.

Ms. Seger emphasized that somecurrent business indicators alreadypointed to a slower economic expansion.Moreover, the full impact of the firmingof policy in recent months had not yetmaterialized. In the circumstances andalso taking into account the strength ofthe dollar and the absence of broadindications of significant acceleration inthe rate of inflation, she believed that afurther increase in the degree of reserverestraint represented an unwarrantedrisk at this time to satisfactory economicperformance.

Meeting Held onAugust 16,1988


The information reviewed at this meetingsuggested that the economy was continu-ing to expand at a vigorous pace, withmanufacturing activity exhibiting partic-ular strength. Some measures of priceinflation pointed to a pickup from recenttrends, and data on wages and totalcompensation indicated that labor costswere rising more rapidly.

Total nonfarm payroll employmentincreased sharply further in June andJuly. The rise included continuing rapidexpansion in the manufacturing sector,and it was accompanied by an appreciableincrease in the workweek of productionworkers. After declining considerably inJune, the civilian unemployment rateedged up to 5.4 percent in July butremained slightly below its average levelfor the second quarter.

Industrial production rose strongly inJuly after a sizable advance during thesecond quarter. Production gains werewidespread but were especially pro-nounced for business equipment. Capitalutilization rates in manufacturing rosefurther in June and July and were atrelatively high levels in primary process-ing industries.

Retail sales increased moderately fur-ther in July, and revised data indicatedsomewhat higher retail sales in the secondquarter than had been estimated earlier.Overall consumer spending in constantdollar terms increased at about the samemoderate pace in the second quarter as ithad on average in the previous threequarters; outlays for services and durablegoods posted strong gains in the quarter,while spending for nondurable goodsdeclined.

Business fixed investment was nowindicated to have increased substantially



further in the second quarter. Spendingfor business equipment registered an-other sharp rise, paced by continued largegains in outlays for computing equipmentAn upturn in expenditures for nonresiden-tial construction offset about half of thedrop in the previous quarter. With outlaysfor consumer durables and businessequipment relatively robust, the accumu-lation of nonfarm business inventoriesslowed markedly in the second quarter.Housing starts were unchanged in thequarter from their pace in the first quarter.

The U.S. merchandise trade deficitdeclined considerably in the secondquarter to its lowest level in three years.Exports of both agricultural and nonagri-cultural goods rose substantially whilenon-oil imports fell after increasingsteadily since early 1985. Economicactivity appeared to have slowed in mostof the major foreign industrial countriesin the second quarter. The rate of inflationhad increased in some of those countriesin recent months, but it was still relativelylow.

Producer prices of finished goods,which had increased at an acceleratedpace in the second quarter, rose apprecia-bly further in July. The advance in Julyincluded a substantial rise in prices ofconsumer goods excluding food andenergy. The consumer price index, avail-able for June, continued to suggest littlechange in the rate of consumer priceinflation as declines in energy pricestended to offset some acceleration in foodand other prices. The prices of somebasic commodities had softened recently,in part because of the appreciation of thedollar in foreign exchange markets.Increases in most measures of labor costshad picked up over the past severalmonths, with the acceleration occurringin most broad industry and occupationalgroupings.

In the foreign exchange markets, thedollar rose somewhat further over the

period since the Committee meeting onJune 29-30. In relation to other G-10currencies, the dollar was up about 2Vipercent on average over the intermeetingperiod. Indications of continuing im-provement in the U.S. trade balance andof some tightening in U.S. monetaryconditions contributed to the strength ofthe dollar, but the rise in its exchangevalue may have been tempered by percep-tions that it would be resisted by officialactions.

At its meeting in late June, theCommittee adopted a directive callingfor a slight increase in the degree ofpressure on reserve positions. Thesereserve conditions were expected to beconsistent with growth of M2 and M3 atannual rates of about 5Vi percent and 7percent respectively over the periodfrom June to September. The membersagreed that somewhat greater reserverestraint would, or slightly lesserreserve restraint might, be acceptabledepending on indications of inflationarypressures, the strength of the businessexpansion, developments in foreignexchange and domestic financial mar-kets, and the behavior of the monetaryaggregates. The intermeeting range forthe federal funds rate was left unchangedat 5 to 9 percent.

Some slight firming of reserve condi-tions was implemented immediately afterthe June meeting. In the reserve mainte-nance period ending in mid-July, adjust-ment plus seasonal borrowings jumped toan average of $1.3 billion, reflecting asurge in borrowings over the extendedJuly 4 weekend and another bulge associ-ated with an unanticipated large upwardrevision in required reserves late in thatmaintenance period. In the two reservemaintenance periods that followed, bor-rowings averaged close to $600 million,somewhat above the level prior to theJune meeting. Over much of the inter-meeting period, federal funds traded



primarily in a range of 7 3A percent to 7 %percent. In addition to the firming ofreserve conditions, market expectationsof further near-term monetary restraintin response to the strength of incomingeconomic data seemed to contribute tothe rise in the federal funds rate from itsaverage level in June. On August 9, thediscount rate was increased from 6 per-cent to 6 Vi percent and at the time of thismeeting federal funds were tradingaround 8V& percent.

Against the background of continuingstrength in the economy, related concernsabout inflation, and the firming of mone-tary policy, most other interest rates roseVz to % percentage point over the inter-meeting period; however, increases inyields on corporate and municipal bondswere more limited, reflecting reducedsupplies of new issues. Mortgage ratesrose marginally during the period. Banksraised their prime lending rate from 9 to9 Vi percent in mid-July and subsequentlyto 10 percent in the first part of August.Broad indexes of stock prices were downaround 5 percent over the intermeetingperiod.

Growth of the broader monetary aggre-gates, especially M2, slowed in July torates somewhat below the Committee'sexpectations for the third quarter as awhole. The weakness in M2 was concen-trated in its volatile overnight RP andEurodollar components. Growth of retaildeposits in M2 remained considerablyless than in the first few months of theyear and apparently was damped by therise since early spring of market interestrates and related opportunity costs ofholding such deposits. Ml continued toexpand rapidly in July, with strengthespecially evident in other checkable de-posits. Reflecting a surge in total re-serves, the growth of the monetary baseaccelerated in July.

In the light of recent economic devel-opments, the staff projection prepared

for this meeting was revised to incorpo-rate notably faster real growth in thecurrent quarter than had been anticipatedearlier. Nevertheless, the rate of expan-sion was still projected to moderateconsiderably on balance over the nextseveral quarters. The effects of thedrought were expected to depress mea-sured GNP growth in the second half ofthe year, but those effects would bereversed in the first part of 1989. Growthof final demand was projected to moder-ate somewhat over the year ahead. To theextent that the current momentum in finaldemand tended to be sustained but wasnot accommodated by monetary policy,pressures would be generated in financialmarkets that would restrain domesticspending. The staff projection continuedto anticipate relatively sluggish growthof consumer spending, much slowerexpansion of business fixed investment,and subdued housing activity. Thestrengthening of the dollar since latespring might inhibit the improvement inthe nation's trade balance to some extentin 1989, but continuing progress inreducing the trade deficit was still ex-pected to provide a key impetus tosustained economic expansion. The rateof inflation was projected by the staff toincrease somewhat over the next severalquarters, to an important extent becauseof the effects of reduced margins ofunutilized labor and other productionresources.

In the Committee's discussion of theeconomic situation and outlook, a num-ber of members gave considerable em-phasis to indications of ongoing strengthin the economic expansion and to theimplications of such growth for inflationin the context of relatively full utilizationof labor and capital resources. Somecommented that the surprises in theincoming economic information over thecourse of recent weeks—indeed for theyear 1988 to date—had tended to be on



the side of greater than projected strength.Other members gave more weight to thepossibility that monetary tightening overprevious months—reflected in reducedgrowth of the monetary aggregates,higher interest and exchange rates, andflat commodity prices—might alreadyhave fostered a significant slowing of theexpansion and restraint on inflation. Themembers generally anticipated at leastsome moderation in the expansion fromthe recent pace and viewed slower growthas a desirable development in terms ofaccommodating long-run anti-inflationobjectives, but they differed as to whatdegree of policy restraint might be neededto achieve a sustainable and noninflation-ary rate of economic expansion.

In their assessment of prospectivedevelopments in key sectors of the econ-omy, a number of members focused onbusiness fixed investment and businessinventory accumulation as areas of par-ticular uncertainty. Growth in businesscapital spending was expected to slowsubstantially from its rapid pace earlierthis year, but a number of membersbelieved that the risks of a differentoutcome were in the direction of unantic-ipated strength, particularly in light ofexceptionally high rates of capacity utili-zation in many industries. Tending tosupport that view were a growing numberof reports from business contacts of plansto expand or modernize production facil-ities. Business inventories currently ap-peared to be at generally acceptablelevels, as evidenced by inventory-to-sales ratios, lead times on deliveries, andreports from many business firms aroundthe country. Nonetheless, a surge ininventory accumulation could not beruled out at this stage of the cyclicalexpansion. Under prevailing economicconditions, such a development mightwell add to inflationary demand pressuresand could threaten the sustainability ofthe business expansion itself.

Views with respect to the outlook forconsumer spending differed to someextent, but the members generally antic-ipated relatively limited growth over thenext several quarters. One factor citedwas the impact of higher interest rates,whose restraining effects on consumerspending might be reflected more quicklythan earlier because of the increased useof variable rates on consumer and mort-gage loans. Some members commentedthat relatively slow growth of consumerexpenditures would be desirable not onlyto curb potentially inflationary expansionof overall final demand but to facilitatethe allocation of more production re-sources to export markets. The rise inmortgage interest rates was expected todamp housing activity, and one memberemphasized that this effect might be quitesubstantial.

With regard to the prospects for for-eign trade, the members still expected netexports to continue to improve, but theextent of that improvement might be lessthan previously anticipated, given theappreciation of the dollar in recentmonths. Indeed, some business contactscompeting in international markets orpreparing to enter such markets werealready expressing concern about thepotentially negative impact that the risein the dollar would have on their sales.

Turning to the outlook for inflation,members noted with particular concernthat labor compensation costs were risingat a faster rate this year. Several com-mented on increasing shortages of work-ers in their local and regional marketsand on more numerous reports of higherwages to attract or retain workers. How-ever, wage inflation did not appear to beworsening in many areas, including somewhere available workers were reportedto be in increasingly short supply. Withregard to price developments, recentstatistical indicators presented a mixedpicture. Producer prices of finished goods



were rising more rapidly, and there werereports from some parts of the countrythat business firms were succeeding to agreater extent than earlier in their effortsto pass on rising costs or to raise profitmargins. On the other hand, sensitivecommodity prices, particularly for indus-trial materials, had been fairly steady anda firmer dollar should relieve some of thepressure on import prices. On balance,however, most of the members thoughtthat the risks were on the side of greaterinflation over the quarters ahead.

At its meeting in late June, the Com-mittee reviewed the basic policy objec-tives that it had set for growth of themonetary and debt aggregates in 1988and established tentative objectives forexpansion of those aggregates in 1989.For the period from the fourth quarter of1987 to the fourth quarter of 1988, theCommittee reaffirmed the ranges of 4 to 8percent established in February forgrowth of both M2 and M3. The monitor-ing range for expansion of total domesticnonfinancial debt was left unchanged at 7to 11 percent for 1988. On a cumulativebasis through July, M2 and M3 grew atannual rates a little above the midpointsof their annual ranges. Expansion of totaldomestic nonfinancial debt appeared tohave moderated to a pace marginallybelow the midpoint of its range. For 1989the Committee agreed on tentative reduc-tions to ranges of 3 to 7 percent for M2and 3x/2 to IVi percent for M3. Themonitoring range for growth of totaldomestic nonfinancial debt was reducedto 6V2 to 10% percent for 1989. It wasunderstood that all the ranges for nextyear were provisional and that they wouldbe reviewed in February 1989 in the lightof intervening developments. With re-spect to M1, the Committee reaffirmed inJune its earlier decision not to set aspecific target for growth in 1988 andalso decided not to establish a tentativerange for 1989.

During the Committee's discussion ofpolicy for the intermeeting period ahead,nearly all the members indicated thatthey preferred or could support a direc-tive to maintain unchanged conditions ofreserve availability. In assessing thedesirability of such a policy, membersnoted that the discount rate had beenraised only recently and, to date, financialmarkets did not appear to have adjustedfully to the increase. In the circum-stances, several members expressed con-cern that further tightening at this timethrough open market operations mighthave unintended and unsettling effects onfinancial markets. Moreover, under pre-vailing circumstances, further firmingmight well foster some added strengthen-ing of the dollar in foreign exchangemarkets with undesirable repercussionsover time on progress in improving thenation's foreign trade position. One mem-ber also noted that further tightening sosoon after the increase in the discountrate would add to pressures for firmermonetary policies abroad and therebyheighten the risks of an upward ratchetingof interest rates in financial marketsaround the world.

While the members generally agreedon the desirability of a steady policy forthe near term, many thought that somefurther firming was likely to be needed,perhaps relatively soon. These memberssaw substantial risks that inflationarypressures would intensify in the absenceof further fiscal and monetary restraint.The economy had considerable momen-tum, and there already were indicationsthat cost pressures and some prices wereincreasing more rapidly. In light of theirconcerns, these members favored a direc-tive that would permit operations duringthe intermeeting period to be adjustedmore readily toward further tightening ifincoming information tended to confirmthe potential that they saw for increasinginflationary pressures. While most of



these members did not rule out thepossibility of some easing, one proposeda directive that did not envisage anymove in that direction during the inter-meeting period.

Other members, while they couldaccept a directive that indicated a greaterwillingness to tighten than to ease reserveconditions, were less certain of thepotential need for further monetary re-straint, especially in the near term. Thesemembers emphasized that, when takentogether, the tightening actions over thepast several months represented, in theirjudgment, a major policy move whoserestraining impact was not yet fullyreflected in the economy. In this view,time was needed to observe the effects ofthe earlier policy actions and thus toreduce the risk that monetary policyinadvertently might become too restric-tive. Also, a cautious approach to furthertightening might be appropriate in lightof the fragilities that had developed in theeconomy, including the vulnerability ofmany financial intermediaries and theexposure of many business and house-hold borrowers and of some foreigndebtor countries to rising interest rates.Other members, while not disagreeingthat debtor problems were a matter ofserious concern, nevertheless felt thatprimary emphasis needed to be placed oncurbing any tendency for inflation togather momentum; such a development,if allowed to proceed, would lead to evenhigher interest rates and more severedamage to exposed, interest-sensitiveborrowers, both in the United States andabroad.

In the discussion of factors that mighttrigger future monetary policy actions, anumber of members felt that the behaviorof the monetary aggregates should begiven more weight, although only a fewfavored giving primary emphasis to thesemeasures. According to a staff analysisprepared for this meeting, growth of both

M2 and M3 was likely to be appreciablyslower in the current quarter than hadbeen anticipated at the time of the previ-ous meeting, given the rise in interestrates that had occurred over the intermeet-ing period. Assuming no further increasein interest rates, the cumulative expan-sion of M2 through September might bearound the midpoint of the Committee'srange for the year while that of M3 mightbe only marginally above the midpoint ofits range. Growth of Ml also was ex-pected to slow substantially from itsrelatively rapid rates of expansion inJune and July. Members who wanted togive the monetary aggregates greaterattention expressed satisfaction that mon-etary growth appeared to have slowed toa pace deemed more consistent withprogress in reducing inflationary pres-sures and a sustainable expansion in eco-nomic activity over time. They alsoobserved that the behavior of M2 hadresumed a more predictable pattern overthe past several quarters in relation toaggregate measures of economic perfor-mance. However, several members ex-pressed the reservation that more timewas needed to assess the ongoing relia-bility of M2 as a guide for the conduct ofmonetary policy. A number commentedthat the major focus in policy implemen-tation should continue to be on incomingindications of inflationary pressures inthe economy.

In light of the increase that had oc-curred in the federal funds rate, includingthe recent rise following the advance inthe discount rate, the members accepteda proposal to raise the intermeeting rangefor the federal funds rate by 1 percentagepoint to a range of 6 to 10 percent. Theupward adjustment in the range wasintended to align its midpoint moreclosely with the current average level ofthe federal funds rate. The range for thefederal funds rate provides one mecha-nism for initiating consultation of the



Committee when its boundaries are per-sistently exceeded.

At the conclusion of the Committee'sdiscussion, all but one member indicatedthat they favored or could accept adirective that called for maintaining thecurrent degree of pressure on reservepositions. The members decided thatsomewhat greater reserve restraint wouldbe acceptable, or slightly lesser reserverestraint might be acceptable, over theintermeeting period depending on indica-tions of inflationary pressures, thestrength of the business expansion, thebehavior of the monetary aggregates,and developments in foreign exchangeand domestic financial markets. Thereserve conditions contemplated by theCommittee were expected to be consis-tent with growth of M2 and M3 at annualrates of around V/i percent and 5Vipercent respectively over the three-month period from June to September.The intermeeting range for the federalfunds rate was raised by 1 percentagepoint to a range of 6 to 10 percent.

At the conclusion of the meeting, thefollowing domestic policy directive wasissued to the Federal Reserve Bank ofNew York:

The information reviewed at this meetingsuggests that economic activity has continuedto expand at a vigorous pace. Total nonfarmpayroll employment grew sharply further inJune and July. The civilian unemploymentrate in July, at 5.4 percent, was slightly belowits average level in the second quarter.Industrial production advanced considerablyfurther in July. Growth in retail sales remainedmoderate last month. Business capital spend-ing has continued to grow rapidly. Somemeasures of prices indicate a pickup fromrecent trends and labor costs have risen morerapidly in recent months..

Most interest rates have increased apprecia-bly since the Committee's meeting on June29-30. On August 9 the Federal ReserveBoard approved an increase in the discountrate from 6 to 6V2 percent.

The nominal U.S. merchandise trade deficitfell in the second quarter as exports continued

to rise and non-oil imports declined. Over theintermeeting period, the trade-weighted for-eign exchange value of the dollar appreciatedsomewhat further in terms of the other G-10currencies.

Expansion of M2 and to a lesser extent M3slowed in July but growth of Ml remainedrelatively strong. From a fourth-quarter basethrough July, M2 and M3 have grown at ratessomewhat above the midpoints of the rangesestablished by the Committee for 1988.Expansion in total domestic nonfinancial debtfor the year thus far appears to be at a pacesomewhat below that in 1987.

The Federal Open Market Committeeseeks monetary and financial conditions thatwill foster price stability over time, promotegrowth in output on a sustainable basis, andcontribute to an improved pattern ofinternational transactions. In furtherance ofthese objectives, the Committee at itsmeeting in late June reaffirmed the ranges ithad established in February for growth of 4to 8 percent for both M2 and M3, measuredfrom the fourth quarter of 1987 to the fourthquarter of 1988. The monitoring range forgrowth in total domestic nonfinancial debtwas also maintained at 7 to 11 percent for theyear.

For 1989, the Committee agreed on tenta-tive ranges for monetary growth, measuredfrom the fourth quarter of 1988 to the fourthquarter of 1989, of 3 to 7 percent for M2 and3 Vi to 7 Vi percent for M3. The Committee setthe associated monitoring range for growth intotal domestic nonfinancial debt at 6 Vi to 10 Vipercent. It was understood that all these rangeswere provisional and that they would bereviewed in early 1989 in the light of interven-ing developments.

With respect to Ml, the Committee reaf-firmed its decision in February not to establisha specific target for 1988 and also decided notto set a tentative range for 1989. The behaviorof this aggregate will continue to be evaluatedin the light of movements in its velocity,developments in the economy and financialmarkets, and the nature of emerging pricepressures.

In the implementation of policy for theimmediate future, the Committee seeks tomaintain the existing degree of pressure onreserve positions. Taking account of indica-tions of inflationary pressures, the strength ofthe business expansion, the behavior of themonetary aggregates, and developments inforeign exchange and domestic financial



markets, somewhat greater reserve restraintwould, or slightly lesser reserve restraintmight, be acceptable in the intermeetingperiod. The contemplated reserve conditionsare expected to be consistent with growth inM2 and M3 over the period from June throughSeptember at annual rates of about Vh and5!/2 percent, respectively. The Chairman maycall for Committee consultation if it appearsto the Manager for Domestic Operations thatreserve conditions during the period beforethe next meeting are likely to be associatedwith a federal funds rate persistently outside arange of 6 to 10 percent.

Votes for this action: Messrs. Greenspan,Corrigan, Angell, Black, Forrestal, Heller,Johnson, La Ware, and Parry and Ms.Seger. Vote against this action: Mr. Hos-kins. Absent and not voting: Mr. Kelley.

President Hoskins dissented becausehe preferred a policy that would give lessemphasis to near-term business condi-tions and exchange rate considerationsand greater emphasis to the longer-termobjective of price stability. He viewedthe current rate of inflation as too highrelative to that objective and believed thatthe strength of final demand and associ-ated pressures on costs in the economysuggested that inflation may be headinghigher. In the circumstances, he thoughtfurther monetary restraint would be moreconsistent with the Committee's long-runprice stability objective and would in-crease market confidence in the eventualachievement of that objective.

Meeting Held onSeptember 20,1988


The information reviewed at this meetingsuggested that the expansion of economicactivity might be moderating from thevigorous pace experienced earlier in theyear. Information on output and spendingin the third quarter was still fragmentary,

but recent statistics, including data onlabor market activity, pointed on balanceto some slowing in the rate of economicgrowth. Measures of price and wageinflation showed little change from recenttrends, apart from the continuing upwardimpetus to food prices stemming fromthe drought.

Total nonfarm payroll employmentrose more slowly in July and August, butgains in overall employment remainedsizable. After four months of strongincreases, manufacturing employmentfell slightly although some industries withstrong domestic and export sales re-corded further increases. The civilianunemployment rate edged up in July androse somewhat further to 5.6 percent inAugust, returning to its average level ofthe first half of the year.

Industrial production advanced some-what further in August after a sharpincrease in July. Production gains wererecorded for most categories althoughthey generally were smaller than those inJuly. Total industrial capacity utilizationwas little changed in August. Utilizationrates remained at relatively high levels inprimary processing industries but slippedin manufacturing as a whole after fourmonths of increases.

Total retail sales were little changed onbalance in July and August. Outlays fordurable goods declined in both months,partly because of some slowing in unitsales of new automobiles. Sales of non-durable goods increased at a sluggishpace.

Recent information on business capitalspending suggested some moderationfrom the very rapid growth in earliermonths of the year. Real outlays forequipment continued to expand in Julybut at a pace well below that of the firsthalf of the year as shipments of office andcomputing equipment fell. Nonresiden-tial construction activity apparently edgedhigher in July despite farther contraction



in oil drilling and in spending on indus-trial and commercial structures other thanoffice buildings. Inventory investment inthe manufacturing and wholesale sectorsin July evidently remained at about themoderate second-quarter pace. Housingstarts rose in July, as multifamily con-struction rebounded from a reduced Junelevel, but single-family starts remainedclose to the average pace of the first halfof the year. Sales of new and existinghomes retreated from their June pace,which had been the highest in more than ayear.

The nominal U.S. merchandise tradedeficit fell appreciably further in Julyfrom a considerably reduced second-quarter rate and was the lowest monthlydeficit since March 1985. Virtually all ofthe improvement in July was due to areduction in imports. The total value ofexports was little changed from the Junelevel as a sharp reduction in exports ofautomotive products about offset smallincreases in most other major categories.Economic activity in major foreign indus-trial countries slackened in the secondquarter, but expansion appeared to haveresumed in the current quarter.

Producer prices of finished goods,propelled by farther substantial increasesin refinery prices for gasoline, registeredanother large advance in August. At thelevel of crude materials, producer foodprices were up sharply for the fourthstraight month, reflecting the continuingeffects of the drought. Consumer prices,available for July, advanced at about thesecond-quarter pace. Consumer foodprices surged again; and energy pricesrose further, mainly because of highergasoline prices. Excluding food andenergy items, consumer prices increasedat about the average pace of the preceding12 months.

In the foreign exchange markets, thetrade-weighted value of the dollarchanged little on balance over the period

since the Committee meeting on August16. Following that meeting, the dollarremained under upward pressure untillate in the month when increases inEuropean official lending rates arrestedits climb. Following the softer U.S.employment report for August, the dollarmoved lower in early September, but itsubsequently firmed in response to thepublication of the July merchandise tradefigures.

At its meeting in mid-August, theCommittee adopted a directive callingfor no change in the degree of pressure onreserve positions. These reserve condi-tions were expected to be consistent withgrowth of M2 and M3 at annual rates ofabout 3V4 and 5V6 percent respectivelyover the period from June through Sep-tember. The members agreed that some-what greater reserve restraint would, orslightly lesser reserve restraint might, beacceptable, depending on indications ofinflationary pressures, the strength of thebusiness expansion, the behavior of themonetary aggregates, and developmentsin foreign exchange and domestic finan-cial markets.

Reserve conditions remained essen-tially unchanged over the period since theAugust meeting. Adjustment plus sea-sonal borrowing averaged just below$600 million for the two reserve mainte-nance periods completed since the meet-ing, and federal funds primarily tradednear the SVs percent level prevailing atthe time of the meeting. In light of someindications of more moderate economicexpansion, most other market interestrates declined lA to 3/s percentage pointover the intermeeting period. Broadindexes of stock prices were up 1 to 3percent.

Growth of the broader monetary aggre-gates slowed again in August. The slowerexpansion of M2 was concentrated in itsliquid deposit components and probablycontinued to reflect the rise since early



spring of market interest rates and relatedopportunity costs of holding such de-posits. Growth of Ml fell sharply inAugust, as total transaction depositsdeclined slightly. Reflecting a contractionin total reserves, growth of the monetarybase slowed markedly in August.

The staff projection prepared for thismeeting incorporated somewhat slowergrowth of economic activity in the currentquarter than had been projected earlier,largely reflecting the recent softening inthe data on employment. The rate ofexpansion through the end of 1989 wasexpected to remain on balance below thepace in recent quarters, with the droughtlikely to contribute to an uneven quarterlypattern of growth. To the extent thatmonetary policy did not accommodateany tendency for growth in final demandto be sustained at a pace that threatenedmore inflation, pressures would be gen-erated in financial markets that wouldrestrain domestic spending. The staffcontinued to project relatively limitedgrowth of consumer spending, consider-ably reduced expansion of business fixedinvestment, and sluggish housing activ-ity. The foreign sector was still expectedto make a major contribution to domesticeconomic growth, even though progressin reducing the trade deficit was thoughtlikely to be slower than in recent quarters.The staff also anticipated some continu-ing cost pressures over the next severalquarters, reflecting the effects of risingimport prices and especially of reducedmargins of unutilized labor and otherproduction resources.

In the Committee's discussion of theeconomic situation and outlook, mem-bers noted that the recent indications ofsome moderation in the rate of economicgrowth tended to reinforce their expecta-tions of a reduced rate of economicexpansion through next year. The mem-bers welcomed the signs of somewhatslower economic growth, given the risks

of higher inflation. A number wereconcerned that the apparent slowingmight prove to be only a temporary pausein a generally strong expansion or to beinadequate to avert an intensification ofinflationary pressures without furthermonetary restraint. Others, while notingthe still tentative nature of the incomingdata, interpreted recent developments infinancial markets as well as the real econ-omy as suggesting a greater likelihoodthat policy had tightened sufficiently toput the economy on a desirable coursetoward moderate growth that wouldprove compatible over time with theachievement of the Committee's anti-inflationary objectives.

In the Committee's discussion of fac-tors bearing on the economic outlook, anumber of members emphasized that, onthe whole, indicators of economic activ-ity continued to suggest appreciablemomentum in the expansion. Recentgrowth of payroll employment, whilebelow the average pace of the first half ofthe year, was still substantial. Capitalspending exhibited few signs of weaken-ing following a period of rapid expansion,and sizable profits augured for continuinggrowth. Likewise, new orders, notablyfor exports, were holding up well, andsome greater inventory investment wasseen as a reasonable prospect, givencurrent low inventory-to-sales ratios. Anumber of members also referred tocontinuing evidence of a high level ofbusiness activity in many parts of thecountry. Indeed, in some areas andindustries, growth was being constrainedby a limited availability of labor andother production resources. At the sametime, members noted that economicperformance remained uneven across thecountry, depending on the mix of localindustries, and a few signs of moderationcould be observed even in areas that werecharacterized by strong local economies.Retail sales were lackluster in a number



of areas, and the drought was having amixed impact on agriculture. Thedrought's adverse effects in some parts ofthe country contrasted with income gainsin other areas where producers experienc-ing more normal crop yields were bene-fitting from higher prices. On balance,local conditions appeared consistent withexpectations of somewhat slower growthin domestic demand.

Members continued to anticipate fur-ther improvement in the nation's tradebalance over the next several quarters.That view was bolstered by local reportsof strength in export demands for a widevariety of products and indications ofgains in domestic market shares by firmsin the United States. The prospectiveimprovement in net exports was not likelyto be as strong as in recent quarters,however, reflecting the lagged effects ofthe rise in the exchange value of thedollar over the course of recent months.

With regard to the outlook for infla-tion, members generally emphasized thatthe risks remained on the side of anintensification of inflationary demandpressures. Some favorable developmentsthat had tended to dampen inflation, suchas declining oil prices and a rising dollar,might well be reversed. More fundamen-tally, given current utilization rates oflabor and other production resources, theeconomy was probably near the pointwhere expansion at a rate somewhatabove the economy's trend growth poten-tial could result in greater pressures onwages and prices. Other members sawless risk of more inflation, particularly inthe context of what they viewed as themoderating growth of the economy andthe appreciable tightening of monetarypolicy over the past several months.Consistent with this view, some notedthat inflationary expectations appeared tohave eased as evidenced, for example, bythe performance of long-term debt mar-kets and the behavior of the dollar in

foreign exchange markets. Moreover,industrial commodity prices had beenrelatively stable for an extended period.Reports from contacts around the nationdid not suggest much change recently inlocal price and wage developments.Capacity constraints and labor shortagesin some industries and areas continued tobe a source of inflationary pressures, butthere were few reports of outsized in-creases in prices or wages. Indeed, somemembers noted that prices had tended tolevel out or to rise more slowly in anumber of industries and indications offaster increases in wages were limited.

At its meeting in late June the Commit-tee reviewed the basic policy objectivesthat it had set for growth of the monetaryand debt aggregates in 1988, and itestablished tentative objectives for expan-sion of those aggregates in 1989. For theperiod from the fourth quarter of 1987 tothe fourth quarterof 1988, the Committeereaffirmed the ranges of 4 to 8 percent setin February for growth of both M2 andM3. The monitoring range for expansionof total domestic nonfinancial debt in1988 was left unchanged from its Febru-ary specification of 7 to 11 percent. On acumulative basis through August, M2had grown at an annual rate slightlyabove, and M3 at a rate more noticeablyabove, the midpoints of their annualranges. Expansion of total domesticnonfinancial debt appeared to have mod-erated to a pace marginally below themidpoint of its range. For 1989 theCommittee agreed on tentative reduc-tions to ranges of 3 to 7 percent for M2and 3V4 to IVi percent for M3. Themonitoring range for growth of totaldomestic nonfinancial debt was loweredto 6Vi to \0Vi percent for 1989. It wasunderstood that all the ranges for nextyear were provisional and that they wouldbe reviewed in February 1989 in the lightof intervening developments. With re-spect to M1, the Committee reaffirmed in



June its earlier decision not to set aspecific target for growth in 1988 and italso decided not to establish a tentativerange for 1989.

In the Committee's discussion of policyimplementation for the weeks immedi-ately ahead, all of the members agreed ona proposal calling for an unchangedpolicy stance pending an evaluation offurther economic developments. Thosewho perceived the risks in the economicoutlook as still decidedly on the side ofcontinued strong demand and greaterinflationary pressures saw enough uncer-tainties in the current economic situationto warrant a pause in the policy firmingprocess. Others were less persuaded thatinflationary pressures would intensify,especially given the degree of policyrestraint that already had been imple-mented over the past several months. Itwas noted that additional firming at thistime could have undesirable repercus-sions on the dollar in foreign exchangemarkets and on the financial condition ofmany already troubled depository institu-tions. Some members expressed concernthat a marked weakening in the economy,which would become a greater risk ifpolicy were tightened further, woulddisrupt the urgent task of reducing thefederal budget deficit.

In their consideration of a desirablepolicy for the near term, the memberstook account of a staff analysis, whichsuggested that monetary expansion waslikely to remain relatively damped incoming months. This outlook assumed acontinuing lagged adjustment of offeringrates on retail deposits to earlier increasesin market interest rates.

With regard to possible adjustments inthe degree of reserve pressure during theintermeeting period, all of the membersindicated that the balance of risks in theeconomy was such that they favored orcould accept a directive that would morereadily accommodate a move toward

firming than an adjustment toward easingin the weeks ahead. Some commentedthat near-term developments were notlikely to call for a policy change in thisperiod, while others saw a greater likeli-hood that intermeeting developmentswould point to the desirability of somefirming. The potential need for someeasing was viewed as remote.

At the conclusion of the Committee'sdiscussion, all of the members approveda directive that called for maintaining thecurrent degree of pressure on reservepositions. The members decided thatsomewhat greater reserve restraint wouldbe acceptable, or slightly lesser reserverestraint might be acceptable, over theintermeeting period, depending on indi-cations of inflationary pressures, thestrength of the business expansion, thebehavior of the monetary aggregates,and developments in foreign exchangeand domestic financial markets. Thereserve conditions contemplated by theCommittee were expected to be consis-tent with growth of M2 and M3 at annualrates of about 3 percent and 5 percentrespectively over the four-month periodfrom August to December. The membersagreed that the intermeeting range for thefederal funds rate, which provides onemechanism for initiating consultation ofthe Committee when its boundaries arepersistently exceeded, should be leftunchanged at 6 to 10 percent.


The information reviewed at this meetingsuggests that the expansion in economicactivity may be moderating from the vigorouspace earlier in the year. Total nonfarm payrollemployment grew more slowly in July andAugust, though the increases in the twomonths were still sizable. The civilian unem-ployment rate rose to 5.6 percent in August.Industrial production advanced slightly fur-



ther in August after a sharp increase in July.Retail sales were flat in July and August.Recent indicators of business capital spendingsuggest some moderation ftom the especiallyrapid growth in earlier months of the year.Preliminary data for the nominal U.S. mer-chandise trade deficit in July showed somefurther reduction from the improved second-quarter rate. The latest information on pricessuggests little if any change from recenttrends.

Most interest rates have declined somewhatsince the Committee meeting on August 16.Over the intermeeting period, the trade-weighted foreign exchange value of the dollarin terms of the other G-10 currencies wasabout unchanged on balance.

Expansion of M2 and M3 moderated fur-ther in August. For the year through August,M2 has grown at a rate slightly above, and M3at a rate more noticeably above, the midpointsof the ranges established by the Committeefor 1988. Ml was unchanged in August afterregistering relatively strong growth in Juneand July. Expansion of total domestic nonfi-nancial debt for the year thus far appears to beat a pace somewhat below that in 1987.

The Federal Open Market Committee seeksmonetary and financial conditions that willfoster price stability over time, promotegrowth in output on a sustainable basis, andcontribute to an improved pattern of interna-tional transactions. In furtherance of theseobjectives, the Committee at its meeting inlate June reaffirmed the ranges it had estab-lished in February for growth of 4 to 8 percentfor both M2 and M3, measured from thefourth quarter of 1987 to the fourth quarter of1988. The monitoring range for growth oftotal domestic nonfinancial debt was alsomaintained at 7 to 11 percent for the year.

For 1989, the Committee agreed on tenta-tive ranges for monetary growth, measuredfrom the fourth quarter of 1988 to the fourthquarter of 1989, of 3 to 7 percent for M2 and3 Vi to 7 Vi percent for M3. The Committee setthe associated monitoring range for growth oftotal domestic nonfinancial debt at 6 Vi to 10 Vipercent. It was understood that all these rangeswere provisional and that they would bereviewed in early 1989 in the light of interven-ing developments.

With respect to Ml, the Committee reaf-firmed its decision in February not to establisha specific target for 1988 and also decided notto set a tentative range for 1989. The behaviorof this aggregate will continue to be evaluated

in the light of movements in its velocity,developments in the economy and financialmarkets, and the nature of emerging pricepressures.

In the implementation of policy for theimmediate future, the Committee seeks tomaintain the existing degree of pressure onreserve positions. Taking account of indica-tions of inflationary pressures, the strength ofthe business expansion, the behavior of themonetary aggregates, and developments inforeign exchange and domestic financialmarkets, somewhat greater reserve restraintwould, or slightly lesser reserve restraintmight, be acceptable in the intermeetingperiod. The contemplated reserve conditionsare expected to be consistent with growth ofM2 and M3 over the period from Augustthrough December at annual rates of about 3and 5 percent, respectively. The Chairmanmay call for Committee consultation if itappears to the Manager for Domestic Opera-tions that reserve conditions during the periodbefore the next meeting are likely to beassociated with a federal funds rate persis-tently outside a range of 6 to 10 percent.

Votes for this action: Messrs. Greenspan,Corrigan, Angell, Black, Forrestal, Heller,Hoskins, Johnson, Kelley, LaWare, andParry and Ms. Seger. Votes against thisaction: None.

Meeting Held onNovember 1,1988

1. Domestic Policy Directive

The information reviewed at this meetingindicated that the expansion in economicactivity had moderated from the vigorouspace evident earlier in the year. Privatedomestic final demand grew at an appre-ciably slower pace in the third quarterthan in the first half of the year; and otherrecent statistics, including data on labormarket activity, also suggested someslowing in the rate of economic expan-sion. Information on wage and pricedevelopments gave no clear evidence onbalance of any change in underlyinginflation trends.



Total nonfarm payroll employmentincreased considerably in the third quar-ter, but the gains were less than thoseregistered in the first half. In August andSeptember, hiring in all major sectorsexcept government moderated, and em-ployment in manufacturing declined.Despite this broad-based slowing in thegrowth of private payrolls, the civilianunemployment rate fell to 5.4 percent inSeptember and has remained in a narrowrange around 5Vi percent since earlyspring.

Industrial production increased onlyslightly on balance in August and Septem-ber after a strong surge earlier in thesummer. Output of business equipmentcontinued to advance fairly rapidly whileproduction of consumer goods was slug-gish. Total industrial capacity utilizationdeclined slightly in September but wasstill more than xh percent above therelatively high second-quarter level.

Overall consumer spending in constantdollar terms increased substantially onaverage in the third quarter, as outlaysfor services and nondurable goodsstrengthened while purchases of durableswere little changed. However, retail salesweakened in August and September,owing partly to reduced sales of motorvehicles.

Indicators of business capital spendingin the third quarter suggested a consider-ably reduced rate of expansion comparedwith the first half of the year. Growth ofreal outlays for business equipmentslowed sharply, as investment ininformation-processing equipment decel-erated. Nonresidential construction activ-ity was weak in the first two months of thequarter, with oil drilling and expenditureson commercial and industrial structuresother than office buildings contractingfurther. Inventory investment in themanufacturing and wholesale sectorspicked up in July and August, but stocksaccumulated about in line with the growth

of sales. Retail inventories, reflectinglittle further change in stocks at autodealers after a sharp rise in the secondquarter, increased much less rapidly.Housing construction had been flat inrecent months; the third-quarter pace ofstarts of single-family homes was un-changed from that of the previous quarterwhile multifamily starts edged down.

Preliminary data for the nominal U.S.merchandise trade deficit in Augustshowed a larger deficit than in July. How-ever, the average for July and August wasslightly lower than the second-quarterrate as exports increased more thanimports. Most of the rise in exports wasin nonagricultural goods, particularlycapital goods and consumer durables;increased imports of consumer goodsand food outweighed a slight reduction inthe value of purchases of imported oil.Economic activity in the major foreignindustrial economies appeared to haverebounded somewhat in the third quarter,following a pronounced slackening in thesecond quarter.

Reflecting a decline in gasoline pricesat the refinery level, producer prices offinished goods registered a smaller ad-vance in September than in August; how-ever, for the third quarter as a whole,these prices rose more rapidly than duringthe first half of the year. At the crudematerials level, producer food pricescontinued to rise sharply. Consumerprices increased at a somewhat slowerrate in September as declines in energyprices outweighed the passthrough to theretail level of higher wholesale foodprices. Excluding food and energy items,consumer prices on a year-over-yearbasis continued to rise at about the AVipercent annual rate evident since late1987. Most measures of labor costsindicated some slowing in the rate ofincrease over the summer months, after asharp upward movement in the secondhalf of 1987 and early 1988.



In the foreign exchange markets, thetrade-weighted value of the dollar interms of the other G-10 currencies haddeclined from its high level of lastsummer by the time of the previousCommittee meeting on September 20.Following the meeting, the dollar initiallyfluctuated in a narrow range but laterdeclined appreciably in response to indi-cations of more moderate U.S. economicgrowth and to information suggesting aslower U.S. external adjustment than themarkets had anticipated earlier.

At its meeting on September 20, theCommittee adopted a directive callingfor no change in the degree of pressure onreserve positions. These reserve condi-tions were expected to be consistent withgrowth of M2 and M3 at annual rates ofabout 3 and 5 percent respectively overthe period from August to December.The members agreed that somewhatgreater reserve restraint would, orslightly lesser reserve restraint might, beacceptable depending on indications ofinflationary pressures, the strength of thebusiness expansion, the behavior of themonetary aggregates, and developmentsin foreign exchange and domestic finan-cial markets.

Adjustment plus seasonal borrowingfluctuated over a sizable range during theintermeeting period, averaging about$630 million in the two complete reservemaintenance periods since the Septembermeeting. The federal funds rate rosesomewhat, with funds trading around 8 lApercent and sometimes higher over mostof the intermeeting period. Most othershort-term interest rates edged higher,perhaps reflecting the firmer federalfunds rate as well as increased supplies ofTreasury bills and CDs. Interest rates inlong-term debt markets declined a littlefurther as indications of more moderateeconomic expansion and weak energyprices apparently reduced concerns aboutinflation and buoyed expectations that

money market conditions would not betightened substantially further. Lowerbond yields apparently contributed tohigher equity prices; some broad indexesof stock prices had risen about 3 percentsince the September meeting.

Expansion of M2 slowed further inSeptember, and preliminary data sug-gested that growth remained quite weakin October as earlier increases in marketinterest rates and opportunity costs con-tinued to damp demands for liquid de-posit components. By contrast, after slowgrowth in August and September, M3appeared to have strengthened somewhatin October, in association with a resump-tion in growth of bank credit. Afterregistering relatively strong expansion inJune and July, Ml had increased onlyslightly on balance in recent months,with total transactions deposits fallingmarginally.

The staff projection prepared for thismeeting suggested that growth of thenonfarm sector of the economy in thecurrent quarter might be near the reducedpace of the third quarter and that expan-sion in 1989 was likely to remain, onbalance, well below the pace of the firsthalf of 1988. The effects of the droughtwould continue to be reflected in anuneven quarterly pattern of growth ofGNP, notably through the first half ofnext year. To the extent that expansion offinal demand at a pace that could fosterhigher inflation was not accommodatedby monetary policy, pressures would begenerated in financial markets that wouldrestrain domestic spending. The staffprojection, which assumed a slightlyrestrictive fiscal policy, continued toindicate relatively sluggish growth ofconsumer spending, sharply reducedexpansion of business fixed investmentfrom the pace in the first half of 1988, andrestrained housing activity. As in earlierprojections, the external sector wasexpected to contribute importantly to



domestic economic growth. The staffnow anticipated some marginal easing inaggregate price increases in 1989, inlarge part because recent declines incrude oil prices portended lower energyprices more generally. However, anydecline in inflation would be limited,largely because of continuing pressuresstemming from still strong demandspressing against reduced margins ofunutilized labor and other productionresources.

In the Committee's discussion of theeconomic situation and outlook, mem-bers welcomed the apparent moderationin the expansion of economic activitytoward a pace that might prove to bemore sustainable and consistent withprogress over time toward price stability.Continuing expansion, but at a moremoderate pace than that experienced inthe first half of 1988, was viewed as areasonable expectation, partly in light ofthe monetary policy tightening that al-ready had been implemented this year.There was no evidence of emergingimbalances in key sectors of the economythat might bring the expansion to an end,although the outlook remained cloudedby the nation's outsized trade and federalbudget deficits and the financial problemsor debt exposure of a number of deposi-tory institutions and business firms. Inthe view of many of the members, therisks of deviations from current expecta-tions continued to be in the direction ofgreater inflationary pressures. Othermembers, while concerned about thepotential for inflation, felt that the econ-omy already appeared to be on a trackconsistent with no pickup in inflation andperhaps some improvement next year.

In the course of the Committee's dis-cussion, members noted that despite signsof some slowing in recent months, theexpansion in business activity retainedappreciable momentum as evidenced, forexample, by order backlogs, ongoing

strength in business capital spending,and noteworthy improvement in theagricultural sector. Further improvementin the nation's trade balance also appearedlikely, and while the gains might be morelimited than in recent quarters, theywould help to sustain domestic manufac-turing activity. Consumer spending mightbe supported to some extent by gains inreal incomes stemming from reducedenergy prices. By most measures, busi-ness inventories appeared to be relativelylean and, assuming continued moderategrowth in overall final demand, furtherinventory accumulation might provide amodest fillip to the expansion over theyear ahead. On the other hand, membersalso took note of the relatively sluggishperformance of retail sales recently,notably of durable goods, and the continu-ing weakness of construction activity,including housing. A review of localbusiness conditions continued to indicatean uneven pattern of regional activity,but on balance local developments tendedto confirm broader indications of further,though reduced, growth in overall busi-ness activity.

With regard to the outlook for infla-tion, a critical issue in the view of manymembers was whether overall demandconditions in the economy would beconsistent with containing or reducinginflation. A number of members ex-pressed concern that underlying pres-sures on resources remained strong andthat the possibility of greater inflationconstituted the major current threat tosustained economic expansion. One ob-served that the uncertainties in the out-look for inflation were compounded bythe prospect that, with production re-sources at or close to full capacity, evensmall differences in demand pressurescould have a disproportionate effect onthe actual rate of inflation next year.However, some members commentedthat, on the whole, price and wage



developments were more favorable thanmight have been anticipated at currentrates of capacity utilization. Recentreports from around the nation suggestedthat inflation was not worsening in re-gional markets, including parts of thecountry where business activity remainedrelatively robust. Indeed, there wereindications that prices of some businessproducts previously in short supply nowwere showing some tendency to level off,and there was little or no evidence offaster increases in wages. Moreover,recent developments in financial marketssuggested some lessening of inflationaryexpectations, although the latter re-mained volatile.

At its meeting in late June, the Com-mittee reviewed the basic policy objec-tives that it had set for growth of themonetary and debt aggregates in 1988,and it established tentative objectives forexpansion of those aggregates in 1989.For the period from the fourth quarter of1987 to the fourth quarter of 1988, theCommittee reaffirmed the ranges of 4 to 8percent set in February for growth ofboth M2 and M3. The monitoring rangefor expansion of total domestic nonfinan-cial debt in 1988 was left unchanged fromits February specification of 7 to 11percent. For the year to date, M2 hadgrown at an annual rate somewhat below,and M3 at a rate somewhat above, themidpoints of their annual ranges. Expan-sion of total domestic nonfinancial debtappeared to have moderated to a pacemarginally below the midpoint of itsrange. For 1989 the Committee agreedon tentative reductions to ranges of 3 to 7percent for M2 and 3 Vi to 7 Vi percent forM3. The monitoring range for growth oftotal domestic nonfinancial debt waslowered to 6Vi to lOVi percent for 1989.It was understood that all the ranges fornext year were provisional and that theywould be reviewed in February 1989 inthe light of intervening developments.

With respect to Ml, the Committeereaffirmed in June its earlier decision notto set a specific target for growth in 1988and it also decided not to establish atentative range for 1989.

In the Committee's discussion of policyimplementation for the period immedi-ately ahead, the members generallyagreed that the current relatively bal-anced performance of the economy andthe uncertainties surrounding the outlookargued for an unchanged policy at thispoint. Some commented that the apparentstrength of underlying inflationary pres-sures might require further monetaryrestraint later, but for now they favoredor could accept a steady policy course.Other members were more persuadedthat, in the context of the recent evidenceof slower economic growth, monetarypolicy already appeared to be on a coursethat would promote progress in reducinginflation. From the perspective of thegrowth of the monetary aggregates andreserve as well as interest rate develop-ments, monetary policy had been fairlyrestrictive for some months and furtherrestraint needed to be approached withsome caution. At the same time, mem-bers stressed the continuing need tosustain the System's commitment to itslong-run objective of controlling infla-tion, including the desirability of makingclear that the current rate of inflation wasunacceptable.

In the course of the Committee's dis-cussion, the members took account of astaff analysis that concluded that themaintenance of unchanged reserve con-ditions was likely to be associated withrelatively slow monetary growth over thebalance of the year. Some pickup in thegrowth of M2 and M3 was anticipatedfrom the very sluggish performance ofSeptember and October, but furtheradjustments of asset portfolios to previ-ous increases in interest rates and oppor-tunity costs were likely to limit the rise.



In addition, reductions in compensatingbalances in response to earlier increasesin market interest rates were expected tobe more pronounced late in the year,though such adjustments would have theirmajor impact on Ml growth. Concur-rently, expansion of M3 and, to a lesserdegree, M2 might be buttressed to someextent as banks undertook to secure fundsto underwrite a perhaps substantial por-tion of the initial cash needed to financethe recent surge in merger and buyoutactivities. Although members observedthat any easing of reserve conditions tostimulate monetary growth would not bedesirable at this point, some indicatedthat they would become increasinglyconcerned if very weak monetary growthwere to persist in the context of sluggishexpansion in economic activity.

With regard to possible adjustments inthe degree of reserve pressure in theintermeeting period, a majority of themembers believed that operations shouldbe adjusted more readily toward furthertightening than toward any easing. Someindicated that they viewed the incor-poration of such an understanding as akey element of an acceptable directive,given their assessment of the inflationaryrisks in the economic outlook. Most ofthe other members indicated that theycould accept such a directive, althoughthey were less inclined than they hadbeen previously to bias it toward furtherrestraint; in this view, the direction ofany potential adjustment in policy im-plementation was less certain than earlier,given the recent performance of theeconomy and behavior of the monetaryaggregates. One member felt that therisks of some further weakness in theeconomy were sufficiently strong that acontinued bias toward possible tighteningduring the intermeeting period was notacceptable.

At the conclusion of the Committee'sdiscussion, all but one member indicated

that they favored or could accept adirective that called for maintaining thecurrent degree of pressure on reserveconditions and that provided for remain-ing especially alert to potential develop-ments that might require some firmingduring the intermeeting period. Accord-ingly, somewhat greater reserve restraintwould be acceptable, or slightly lesserreserve restraint might be acceptable,over the intermeeting period dependingon indications of inflationary pressures,the strength of the business expansion,the behavior of the monetary aggregates,and developments in foreign exchangeand domestic financial markets. Thereserve conditions contemplated by theCommittee were expected to be consis-tent with growth of M2 and M3 at annualrates of around 2 Vi percent and 6 percentrespectively over the three-month periodfrom September to December. The inter-meeting range for the federal funds rate,which provides one mechanism for initi-ating consultation of the Committee whenits boundaries are persistently exceeded,was left unchanged at 6 to 10 percent.


The information reviewed at this meetingindicates that the expansion in economicactivity has moderated from the vigorouspace earlier in the year. Total nonfarm payrollemployment grew considerably in the thirdquarter but the gains were less than thoseregistered in the first half of the year andemployment in manufacturing declined inAugust and September. The civilian unem-ployment rate fell to 5.4 percent in September,remaining in the narrow range that hasprevailed since early spring. Industrial pro-duction advanced only slightly on balance inAugust and September after a sharp increasein July, while housing construction has beenflat in recent months. Consumer spendingincreased substantially on average in the thirdquarter but apparently slowed in recentmonths. Indicators of business capital spend-



ing suggest considerably slower expansion inthe third quarter, following very rapid growthin the first half of the year. Preliminary datafor the nominal U.S. merchandise trade deficitin August showed a greater deficit than inJuly, but the average for July-August wasslightly less than the second-quarter rate. Thelatest information on prices and wages sug-gests little if any change from recent trends.

Interest rates in long-term debt marketshave declined a little further since the Com-mittee meeting on September 20, while ratesin short-term markets have edged higher. Thetrade-weighted foreign exchange value of thedollar in terms of the other G-10 currenciesdeclined appreciably over the intermeetingperiod from the high level of last summer.

Expansion of M2 has slowed considerablyin recent months; growth of M3 moderated inAugust and September but appears to havestrengthened somewhat in October. Thus farthis year, M2 has grown at a rate somewhatbelow, and M3 at a rate somewhat above, themidpoint of the ranges established by theCommittee for 1988. Ml has increased onlyslightly on balance in recent months afterregistering relatively strong growth in Juneand July. Expansion of total domestic nonfi-nancial debt for the year thus far appears to beat a pace somewhat below that in 1987.



With respect to Ml, the Committee re-affirmed its decision in February not to

establish a specific target for 1988 and alsodecided not to set a tentative range for 1989.The behavior of this aggregate will continueto be evaluated in the light of movements in itsvelocity, developments in the economy andfinancial markets, and the nature of emergingprice pressures.

In the implementation of policy for theimmediate future, the Committee seeks tomaintain the existing degree of pressure onreserve positions. Taking account of indica-tions of inflationary pressures, the strength ofthe business expansion, the behavior of themonetary aggregates, and developments inforeign exchange and domestic financialmarkets, somewhat greater reserve restraintwould, or slightly lesser reserve restraintmight, be acceptable in the intermeetingperiod. The contemplated reserve conditionsare expected to be consistent with growth ofM2 and M3 over the period from Septemberthrough December at annual rates of about2Vi and 6 percent, respectively. The Chair-man may call for Committee consultation if itappears to the Manager for Domestic Opera-tions that reserve conditions during the periodbefore the next meeting are likely to beassociated with a federal funds rate persis-tently outside a range of 6 to 10 percent.

Votes for this action: Messrs. Greenspan,Corrigan, Angell, Black, Forrestal, Heller,Hoskins, Johnson, Kelley, LaWare, andParry. Vote against this action: Ms. Seger.

Ms. Seger indicated that while anunchanged policy was acceptable to herat this point, she did not want to bias thedirective toward potential tightening. Inher view current indications of slowereconomic growth and the lagged effectsof earlier policy tightening actions pointedto relatively slow expansion and reducedinflationary pressures over the yearahead. In these circumstances, she wouldnot want to react more promptly orvigorously to indications of greaterstrength or price pressures in the econ-omy, which might well prove to betemporary, than to evidence of a weaken-ing economy.

In the period following the Committeemeeting on November 1, it became



increasingly evident in the implementa-tion of policy that depository institutionshad reduced their demands on the dis-count window; in this period, a signifi-cantly lower level of adjustment plusseasonal borrowing was being associatedwith a slightly higher federal funds ratethan had been anticipated at the time ofthe meeting. To take account of thischange in behavior, but also in light ofrecent information suggesting that theeconomic expansion retained consider-able strength, the Manager for DomesticOperations adjusted the reserve paths toincorporate a lower level of borrowing,with the expectation that federal fundswould continue to trade in the slightlyhigher range that had prevailed recently.This adjustment in open market opera-tions was discussed with the Committeeon November 22, 1988. The membersagreed that the factors relating to theapparent change in the relationship be-tween borrowing and the federal fundsrate, and the broader implications for theconduct of open market operations, wouldbe reviewed further at the Decembermeeting.

2. Authorization for DomesticOpen Market Operations

Effective November 2, 1988, the Com-mittee approved a temporary increase of$4 billion, to $10 billion, in the limitbetween Committee meetings on changesin System Account holdings of U.S.government and federal agency securitiesthat is specified in paragraph l(a) of theAuthorization for Domestic Open MarketOperations. The increase was effectivefor the intermeeting period ending withthe close of business on December 14,1988.

Votes for this action: Messrs. Greenspan,Corrigan, Angell, Black, Forrestal, Heller,

Hoskins, Johnson, Kelley, LaWare, andParry and Ms. Seger. Votes against thisaction: None.

This action was taken on the recom-mendation of the Manager for DomesticOperations. The Manager had advisedthat the usual leeway of $6 billion forchanges in System Account holdingswould probably not be sufficient over theintermeeting period because of seasonalincreases in currency in circulation andin required reserves.

3. Change in Terms of CertainMembers to Calendar-Year Basis

The Committee amended its "Rules ofOrganization" to advance from March 1to January 1 of each year the start of theterms of office of the Federal ReserveBank presidents who serve one-yearterms as Committee members or alternatemembers. The change will be effectivestarting with the calendar year 1990.Because the Committee's objectives formonetary growth are established on acalendar-year basis, the Committee be-lieved that it would be appropriate tohave all the members responsible forcarrying out those objectives during theyear participate in the vote to establishthem at the start of the year. The Commit-tee emphasized that this change wasessentially procedural in nature, giventhe continuity of its decisionmakingprocess. The Full Employment and Bal-anced Growth Act of 1978 requires thatthe Committee's monetary growth objec-tives for the calendar year be transmittedto the Congress by February 20 of eachyear.

Votes for this action: Messrs. Greenspan,Corrigan, Angell, Black, Forrestal, Heller,Hoskins, Johnson, Kelley, LaWare, andParry and Ms. Seger. Votes against thisaction: None.



Meeting Held onDecember 13-14,1988


Information on employment and produc-tion reviewed at this meeting suggestedthat, apart from the direct effects of thedrought, economic activity had continuedto expand at a vigorous pace althoughsome measures of demand, available on aless current basis, still indicated moremoderate growth. Recent price datashowed a fairly stable inflation rate,partly because of the favorable effects ofearlier oil price declines, while labor costmeasures continued to indicate someacceleration from a year earlier.

Total nonfarm payroll employmentrose sharply in October and November.Following declines in late summer, gainsin manufacturing employment were largein both months, with particularly sizableincreases recorded in the machinery,electrical equipment, and lumber indus-tries. Employment in service industriespicked up significantly in November fromthe reduced pace of expansion in previousmonths. The civilian unemployment rateedged up to 5.4 percent in November butremained in the lower part of the narrowrange that had prevailed since earlyspring.

Industrial production advanced consid-erably further in October and Novemberafter a strong third quarter. Output ofconsumer goods continued to increase,on balance, at a fairly vigorous pace, andproduction of materials posted anothersolid gain in November. Output of busi-ness equipment also increased in Novem-ber, but revised data indicated that suchgrowth had moderated appreciably inrecent months. Total industrial capacityutilization edged up further in Novem-ber, and the operating rate in manufac-turing reached its highest level since July1979.

Growth of overall consumer spendinghad moderated somewhat in recentmonths. Spending for nondurables hadbeen sluggish in September and October,while outlays for durable goods haddeclined, mainly because of reducedpurchases of cars. On the other hand,preliminary data for total retail sales inNovember indicated a strong advancefollowing a large, upward-revised in-crease in October.

Indicators of business capital spendingsuggested a substantially slower rate ofexpansion in October than earlier in theyear. Shipments of nondefense capitalgoods were little changed, reflecting afairly broad-based deceleration. Nonres-idential construction edged down a littlefurther, as petroleum drilling fell againand expenditures on commercial struc-tures other than office buildings declined.Inventory investment in the manufactur-ing and wholesale sectors in the thirdquarter remained about in line with thegrowth of sales. In the retail sector, abuildup in inventories in the third quarterlargely reflected additions to stocks byauto dealers; the expansion of nonautostocks remained broadly in line withsales. Housing starts strengthened inOctober after changing little on balanceover the previous several months.

Excluding food and energy, producerprices of finished goods were unchangedin October after a sizable increase inSeptember. At the consumer level, retailfood prices eased in October and energyprices were little changed, but prices ofother goods and services increased fasteron balance than in preceding months.On a year-over-year basis, consumerprices continued to rise at about the 4x/2percent annual rate evident since late1987. The limited data available forlabor costs in the fourth quartersuggested that increases in these costscontinued to exceed those of a yearearlier.



Preliminary data for the nominal U.S.merchandise trade deficit in Octobershowed a slightly smaller deficit than inSeptember. The value of total importsfell, with declines recorded in capitalgoods, consumer goods, and oil. Exportsalso declined in October owing to loweragricultural sales abroad. Boosted byhigher aircraft shipments, nonagricul-tural exports were unchanged from theirSeptember level. Economic activity ac-celerated or remained strong in most ofthe major foreign industrial countries inthe third quarter but appeared to haveslowed somewhat in the fourth quarter.

In the foreign exchange markets, thetrade-weighted value of the dollar interms of the other G-10 currencies haddeclined about 2lh percent on balanceover the period since the Committeemeeting on November 1, bringing it to alevel 8 percent below its peak of lastAugust. Following a brief respite in theweek before the U. S. elections, the dollarwas under downward pressure over mostof the intermeeting period. However, thedollar firmed somewhat near the end ofthe period, as prospects were seen to beincreasing for further reductions in thefederal deficit and a tightening of mone-tary policy.

At its meeting on November 1, theCommittee adopted a directive callingfor no immediate change in the degree ofpressure on reserve positions. Thesereserve conditions were expected to beconsistent with growth of M2 and M3 atannual rates of about 2Vi and 6 percentrespectively over the period from Septem-ber to December. The members agreedthat somewhat greater reserve restraintwould, or slightly lesser reserve restraintmight, be acceptable depending on indi-cations of inflationary pressures, thestrength of the business expansion, thebehavior of the monetary aggregates,and developments in foreign exchangeand domestic financial markets.

In the course of implementing policyfollowing the November meeting, itbecame increasingly evident that aslightly higher federal funds rate thanthat anticipated at the time of the meetingwas associated with a substantially lowervolume of adjustment plus seasonal bor-rowing; for reasons that remained un-clear, depository institutions exhibited areduced willingness to come to the dis-count window. To take account of thischange in borrowing behavior, andagainst a backdrop of recent informationsuggesting that the economic expansionretained considerable vigor and potentialfor price pressures, the Manager forDomestic Operations adjusted the reservepaths on November 22 to incorporate alower level of borrowings, with theexpectation that federal funds wouldcontinue trading in the slightly higherrange that had prevailed recently. Overthe intermeeting period, the federal fundsrate rose nearly lA percentage point toaround 8J/2 percent. Other short-termmarket interest rates generally advancedby more than the federal funds rate overthe intermeeting period, as expectationsof a tighter monetary policy were stimu-lated by higher world oil prices, renewedweakness of the dollar, and the release ofstrong domestic economic data. Theprime rate was increased 50 basis points.Rates in long-term debt markets also roseon balance, although by appreciably lessthan short-term rates. Stock prices fellover the first half of the intermeetingperiod, but most indexes reboundedsubsequently to nearly their values at thetime of the November 1 meeting.

Growth of the broader monetary aggre-gates strengthened in November from therelatively sluggish rates of expansionrecorded in previous months, especiallyfor M2. The acceleration in M2 reflectedstrong expansion in its liquid retailcomponents. M3 growth picked up some-what less, as bank credit growth and



associated funding needs remained mod-erate . On average in October and Novem-ber, growth of M2 had been somewhatfaster, and that of M3 slightly faster, thanthe Committee expected at the time of theprevious meeting. With demand depositsrunning off again, Ml, which had in-creased only slightly on balance sincemidsummer, was virtually unchanged inNovember.

The staff projection prepared for thismeeting suggested that, after adjustmentfor the effects of the drought, economicgrowth in the current quarter might benear the vigorous pace of the third quarterbut that expansion in 1989 was likely tomoderate on balance. However, to theextent that expansion of final demand at apace that could foster higher inflationwas not accommodated by monetarypolicy, pressures would be generated infinancial markets that would tend torestrain domestic spending. The staffcontinued to project some slowing in thegrowth of consumer spending, sharplyreduced expansion of business fixedinvestment, and sluggish housing activ-ity. Foreign trade was expected to makean important contribution to growth indomestic output, despite some dampingeffects from the dollar appreciation thathad occurred earlier in 1988 and some-what slower growth abroad. The staffalso anticipated some continuing costpressures over the next several quarters,especially owing to reduced margins ofunutilized labor and other productionresources.

In the Committee's discussion- of theeconomic situation and outlook, themembers focused on indications of con-tinuing strength in the economic expan-sion. While some signs of prospectiveslowing in the expansion remained inevidence, recent data on employmentand production suggested that the econ-omy retained considerable momentum.A number of members commented that

business activity had remained morerobust than had seemed likely earlier,and many expressed concern that contin-ued expansion at a relatively rapid paceraised the risk that inflation would inten-sify, given already high rates of capacityutilization in many industries and tightlabor markets in many parts of thecountry. On balance, while somewhatmore moderate growth continued to beviewed as a reasonable expectation for1989, most members interpreted recentdevelopments as suggesting that, in theabsence of some added policy restraint,any moderation in the expansion mightwell prove to be insufficient to forestall apickup in inflation, much less to permitprogress to be made in reducing inflationover time. At the same time, somemembers cautioned that the risk of arecession stemming from a substantialtightening of policy should not be over-looked; in addition to job and outputlosses, a recession could impede progressin bringing the federal budget into bal-ance and could have severe repercussionson the viability of highly leveraged bor-rowers and many depository institutions.

In their review of developments bear-ing on the economic outlook, memberstook account of indications that overalldomestic demands were being well main-tained, including some recent strength inretail sales, and that exports remained ona clear uptrend. High levels of activitycontinued to characterize business condi-tions in many areas. Manufacturing wasbenefiting from growing export marketsand the substitution of domestic productsfor higher-priced imports; moreover,many domestic producers had not yetexploited potential markets abroad. Therewere indications of some softening inbusiness fixed investment, including amoderation of growth in outlays forequipment and reduced constructionactivity in a number of areas, notablythose most affected by weak energy



markets and previous overbuilding.Nonetheless, business contacts suggestedthat overall investment spending wouldcontinue to benefit from ongoing effortsin many industries to modernize orexpand production facilities. With regardto housing construction, members re-ported somewhat depressed conditions ina number of areas, but the latest statisticsfor the nation as a whole were on the firmside of recent trends.

In the course of the Committee's dis-cussion, members gave a good deal ofattention to the outlook for inflation. Onthe positive side, inflationary expecta-tions did not appear to be worsening, asevidenced for example by the stability oflong-term bond markets, and strongcompetitive pressures were encouragingbusiness firms to persist in their efforts tohold down costs. Such competition con-tinued to make it difficult for manybusinesses to pass on increasing coststhrough higher prices and tended toharden business resistance to demandsfor higher wages. With regard to laborcosts, reports from local areas suggestedthat non wage components were rising ata faster rate than wages but that largeincreases in the latter still were infrequentdespite some shortages of labor.

While the members saw no clearevidence in current aggregate measuresof prices that the overall rate of inflationwas worsening, key indicators of laborcompensation suggested some uptrendand many members commented that therisks were in the direction of greaterinflation, given the apparent growth ofthe economy at a pace above its long-runpotential together with the relatively fullemployment of production resources.These risks would be heightened if thedollar were to decline significantly fromcurrent levels. Commodity prices ap-peared to have leveled off, but theyshowed little sign of reversing earlierincreases, which themselves might not

yet have been passed through fully toconsumer prices. Of particular concernwas the prospect that, in the absence of atimely move to restraint, greater inflationwould become embedded in the econ-omy, especially in the labor-cost struc-ture. A new wage-price spiral would thenbe very difficult to avoid and the criticaltask of bringing inflation under controlwould be prolonged and much moredisruptive. A worsening of inflationarypressures and inflation expectations, ifunchecked, eventually would fosterhigher interest rates and would lead togrowing imbalances and distortions inthe economy and almost certainly to adownturn at some point in overall eco-nomic activity.

At its meeting in late June, the Com-mittee reviewed its basic policy objec-tives for growth of the monetary and debtaggregates in 1988 and established tenta-tive objectives for expansion of thoseaggregates in 1989. For the period fromthe fourth quarter of 1987 to the fourthquarter of 1988, the Committee reaf-firmed the ranges of 4 to 8 percent that ithad set in February for growth of bothM2 and M3. The monitoring range forexpansion of total domestic nonfinancialdebt in 1988 was left unchanged from itsFebruary specification of 7 to 11 percent.For the year through November, M2grew at an annual rate a little below, andM3 at a rate a little above, the midpoint oftheir annual ranges. Expansion of totaldomestic nonfinancial debt appeared tohave moderated to a pace somewhatbelow the midpoint of its range. For 1989the Committee agreed in June on tentativereductions to ranges of 3 to 7 percent forM2 and 3% to IVi percent for M3. Themonitoring range for growth of totaldomestic nonfinancial debt was loweredto 6V2 to 10V4 percent for 1989. It wasunderstood that all the ranges for nextyear were provisional and that they wouldbe reviewed in February 1989 in the light



of intervening developments. With re-spect to Ml, the Committee reaffirmed inJune its earlier decision not to set aspecific target for growth in 1988, and italso decided not to establish a tentativerange for 1989.

In the Committee's discussion of policyfor the near term, nearly all the memberssupported a proposal mat called for animmediate increase in the degree ofreserve pressure to be followed by somefurther tightening at the start of 1989unless incoming evidence on the behaviorof prices, the performance of the econ-omy, or conditions in financial marketsdiffered greatly from current expecta-tions. The appropriate degree of reserverestraint also would be reevaluated in theevent of an increase in the discount rate.While the members recognized that thedegree of monetary restraint could beoverdone, they generally felt that therisks of a downturn stemming from thelimited tightening under considerationwere extremely small and needed to beaccepted in light of what they perceivedas the much greater threat of a recessionif inflation were allowed to intensify.Expressing a differing view, one membercommented that further restraint wasundesirable in light of that member'sexpectation that economic growth overthe next several quarters was likely to beat a pace consistent with progress againstinflation.

While all but one member agreed onthe need for some further monetaryrestraint, views differed to some extentwith regard to the appropriate degree andtiming of such restraint. A number ofmembers indicated a preference for astronger immediate move to greaterrestraint, given their perception of theurgency of countering inflation expecta-tions and inflationary pressures in theeconomy. Other members did not dis-agree that inflation was a serious prob-lem, but they preferred a more gradual

approach to further restraint in order tominimize potential market disturbances,especially around the year-end, and tofacilitate adjustments to rising interestrates. It also was suggested that moremarked tightening at this time could havethe unintended effect of fostering anescalation of interest rates in worldmarkets, with especially undesirableeffects on many less developed debtornations.

In the discussion of adjustments in theprovision of reserves through open mar-ket operations, many members com-mented on how a possible increase in thediscount rate might interact with suchoperations. Several favored the imple-mentation of a tighter policy through thediscount rate in order to signal moreclearly than through a gradual tighteningof reserve conditions the System's ongo-ing commitment to an anti-inflationarypolicy. Other members expressed con-cern that, under immediately prevailingcircumstances, an increase in the dis-count rate might have exaggerated reper-cussions on domestic and internationalfinancial markets. The Committee con-cluded that in the event of an increase inthe discount rate during the intermeetingperiod the members would need to con-sult regarding the implications for theconduct of open market operations.

In the course of the Committee's dis-cussion, the members took account of astaff analysis, which suggested that mon-etary growth was likely to remain rela-tively restrained in the months immedi-ately ahead, especially if reserveconditions were tightened. An increasein the degree of reserve restraint in linewith that contemplated by the Committeewould reduce growth of M2 somewhatfrom its recent pace, assuming a typicallydelayed adjustment in deposit rates torising short-term market interest rates,while growth of M3 would continue at asomewhat higher rate than that of M2.



Several members observed that re-strained monetary growth would con-tinue to be desirable, and some expressedconcern that in the absence of sometightening of reserve conditions suchgrowth might accelerate, with inflation-ary implications under foreseeable eco-nomic conditions. On the other hand, inlight of the limited growth in the monetarybase and reserves in the past severalmonths, some other members cautionedthat sharp additional restraint on reserveprovision could have an undesirablyrestraining effect on monetary growthand the economy.

With regard to the proposed movetoward further monetary restraint shortlyafter the year-end, it was understood thatsuch firming would be implementedunless emerging economic and financialconditions were to differ markedly fromcurrent expectations. Should unantici-pated developments of that kind occur orshould the Board of Governors approvean increase in the discount rate during theintermeeting period, the Chairman wouldcall for a special consultation of theCommittee. On the question of anyadditional adjustment in policy, the mem-bers generally agreed that policy imple-mentation should remain especially alertto incoming information that might callfor further firming beyond that alreadycontemplated. In light of the tighteningof reserve conditions after today's meet-ing and the presumption that some furthermonetary restraint would be imple-mented later during the intermeetingperiod, the members decided to raise theintermeeting range for the federal fundsrate by 1 percentage point to 7 to 11percent. With such an increase, federalfunds would be expected to trade at ratesaveraging closer to the middle of therange. That range provides one mecha-nism for initiating consultation of theCommittee when its boundaries are per-sistently exceeded.

At the conclusion of the Committee'sdiscussion, all but one of the membersindicated that they favored or couldaccept a directive that called for someimmediate firming of reserve conditions,with some further tightening to be imple-mented at the start of 1989, assuming thateconomic and financial conditions re-mained reasonably consistent with cur-rent expectations. In keeping with theCommittee's usual approach to policy,the conduct of open market operationswould be subject to further adjustmentduring the intermeeting period based onindications of inflationary pressures, thestrength of the business expansion, thebehavior of the monetary aggregates,and developments in foreign exchangeand domestic financial markets. Depend-ing on such developments, some addedreserve restraint would be acceptable, orsome slight lessening of reserve pressuremight be acceptable. The reserve condi-tions contemplated at this meeting wereexpected to be consistent with growth ofM2 and M3 at annual rates of around 3percent and 6 Vi percent respectively overthe four-month period from November1988 to March 1989.


The information reviewed at this meetingsuggests that, apart from the direct effects ofthe drought, economic activity has continuedto expand at a vigorous pace. Total nonfarmpayroll employment rose sharply in Octoberand November, with sizable increases indi-cated in manufacturing after declines in latesummer. The civilian unemployment rate, at5.4 percent in November, remained in thelower part of the range that has prevailedsince early spring. Industrial productionadvanced considerably in October and No-vember. Housing starts turned up in Octoberafter changing little on balance over theprevious several months. Growth in consumerspending has been somewhat more moderate



in recent months, and indicators of businesscapital spending suggest a substantially slowerrate of expansion than earlier in the year. Thenominal U.S. merchandise trade deficit nar-rowed further in the third quarter. Preliminarydata for October indicate a small decline fromthe revised deficit for September. The latestinformation on prices and wages suggestslittle if any change from recent trends.

Interest rates have risen since the Commit-tee meeting on November 1, with appreciableincreases occurring in short-term markets. Inforeign exchange markets, the trade-weightedvalue of the dollar in terms of the other G-10currencies declined significantly further onbalance over the intermeeting period.

Expansion of M2 and M3 strengthened inNovember from relatively slow rates ofgrowth in previous months, especially in thecase of M2. Thus far this year, M2 has grownat a rate a little below, and M3 at a rate a littleabove, the midpoint of the ranges establishedby the Committee for 1988. Ml has increasedonly slightly on balance over the past severalmonths, bringing growth so far this year to 4percent. Expansion of total domestic nonfi-nancial debt for the year thus far appears to beat a pace somewhat below that in 1987 andaround the midpoint of the Committee'smonitoring range for 1988.



With respect to Ml, the Committee re-affirmed its decision in February not to

establish a specific target for 1988 and alsodecided not to set a tentative range for 1989.The behavior of this aggregate will continueto be evaluated in the light of movements in itsvelocity, developments in the economy andfinancial markets, and the nature of emergingprice pressures.

In the implementation of policy for theimmediate future, the Committee seeks toincrease somewhat the existing degree ofpressure on reserve positions. Taking accountof indications of inflationary pressures, thestrength of the business expansion, the behav-ior of the monetary aggregates, and develop-ments in foreign exchange and domesticfinancial markets, somewhat greater reserverestraint would, or slightly lesser reserverestraint might, be acceptable in the intermeet-ing period. The contemplated reserve condi-tions are expected to be consistent with growthof M2 and M3 over the period from Novemberthrough March at annual rates of about 3 and6lh percent, respectively. The Chairman maycall for Committee consultation if it appearsto the Manager for Domestic Operations thatreserve conditions during the period beforethe next meeting are likely to be associatedwith a federal funds rate persistently outside arange of 7 to 11 percent.

Votes for this action: Messrs. Greenspan,Corrigan, Angell, Black, Forrestal,Heller, Hoskins, Johnson, Kelley,LaWare, and Parry. Vote against thisaction: Ms. Seger.

Ms. Seger dissented because sheviewed current business indicators asalready pointing on balance to slowereconomic expansion, and in the circum-stances she did not feel that any addedmonetary restraint was needed to fostereconomic conditions consistent withprogress in reducing inflationary pres-sures. In the context of already restrainedmonetary growth, she was concernedthat a further increase in the degree ofreserve pressure would pose unnecessaryrisks to interest-sensitive sectors of theeconomy and ultimately to the sustaina-bility of the expansion itself. She ex-pressed particular concern that the higherinterest rates implied by greater monetary



restraint would aggravate the conditionof financially troubled thrift institutions.

At this meeting the Committee re-viewed its current procedure for imple-menting open market operations againstthe background of a marked change overrecent months in the relationship betweenthe level of adjustment plus seasonalborrowing and the federal funds rate.The current procedure of focusing on thedegree of reserve restraint, as indexed byborrowed reserves, had been imple-mented with some flexibility in recentweeks in light of the substantial shortfallof borrowing in relation to expectations.The policy results had been satisfactory,but some members proposed that consid-eration be given to focusing more directlyon the federal funds rate in carrying outopen market operations, particularly ifuncertainty about the borrowing-federalfunds relationship were to persist. Othersfelt that despite its drawbacks, the currentprocedure had a number of advantages,including that of allowing greater scopefor market forces to determine short-term interest rates. The Committee con-cluded that no changes in the currentprocedure were needed at this time, butthat flexibility would remain important inaccomplishing Committee objectives un-der changing circumstances. •


143

Consumer and Community Affairs

In 1988 the Federal Reserve Board usedits rulewriting and enforcement authorityto maintain statutory protections forconsumers while easing regulatory bur-dens. This chapter examines the activitiesof the Federal Reserve System in supportof those goals.

Regulatory MattersThe Board issued Regulation CC to carryout the Expedited Funds Availability Actand revised Regulation C to implementstatutory amendments that expanded thecoverage of the Home Mortgage Disclo-sure Act and made the law permanent.The Board also proposed amendments toRegulation Z to implement the FairCredit and Charge Card Disclosure Actof 1988, which provides that credit andcharge card issuers must give consumersinformation about their plans earlier thancurrently required. In addition, the Boardprepared regulations concerning homeequity lines of credit to implement theHome Equity Loan Consumer ProtectionAct of 1988. In other matters, the Boardreviewed the paperwork burden associ-ated with several regulations in keepingwith the Paperwork Reduction Act andissued four new publications for consum-ers: one to explain the provisions of theExpedited Funds Availability Act and aset of three pamphlets to clarify themortgage-application process.

Regulation CC(Expedited Funds Availability)

In May the Board issued Regulation CC,effective September 1, 1988, to imple-ment the Expedited Funds AvailabilityAct. The act and regulation address

delayed access to deposits and require,among other things, that depositoryinstitutions make funds deposited intoaccounts available within specified timeperiods. Banks and other depositoryinstitutions must give next-day availabil-ity, subject to certain conditions, forelectronic payments, Treasury checks,postal money orders, state and localgovernment checks, and checks writtenon the same institution where the check isbeing deposited. For next-day availabil-ity, deposits may have to be made inperson to a teller or the depositor mayhave to use a special deposit slip madeavailable by the institution.

The period within which institutionsmust make other check deposits availablefor withdrawal depends on whether acheck is considered local or nonlocal inrelation to the institution where it wasdeposited. A local check is one depositedin an institution located in the same Fed-eral Reserve check processing region asthe institution on which the check waswritten. In the case of a nonlocal check,the two institutions are located in differ-ent processing regions.

Funds must be made available by thethird business day after deposit for localchecks and by the seventh day after de-posit for nonlocal checks. After Septem-ber 1,1990, these deposits must be madeavailable sooner: by the second businessday for local checks and by the fifthbusiness day for nonlocal checks.

Institutions may invoke exceptions tothe time periods in the law when handlingnew accounts, redeposited checks, emer-gency conditions, deposits exceeding$5,000 in any one day, accounts that havebeen repeatedly overdrawn, and checksthat the institution has reasonable cause


144 Consumer and Community Affairs

to believe will not be paid. In such casesthe institution must notify the customerof the longer delay and indicate when thefunds will be available.

Regulation CC requires depositoryinstitutions to disclose their specificpolicies on funds availability and to notifycustomers of a change in policy. Aninstitution must give disclosures to newcustomers before opening an account andto anyone who asks for the information.A brief notice is required at all locationswhere an institution's employees acceptdeposits, at automated teller machines,and on all deposit slips printed with thecustomer's name and account number.Regulation CC includes model forms andclauses to help institutions make therequired disclosures. To facilitate com-pliance, the Board in June released aSpecial Notice summarizing the require-ments of the regulation.

In September the Board issued a pam-phlet for consumers that explains theprovisions of the act, "Making Deposits:When Will Your Money Be Available?"It outlines the availability schedule bytype of deposit, lists the circumstancesunder which an institution may delaycustomers' funds beyond the normallimits, states the disclosure requirements,demonstrates endorsement procedures,and provides information on how toresolve errors.

Regulation AA(Credit Practices Rule)

In July the Board granted a request fromthe State of California for an exemptionfrom the cosigner provisions of Regula-tion AA (Credit Practices Rule) for state-chartered institutions. That rule prohibitsbanks from using certain remedies toenforce consumer credit obligations andfrom "pyramiding" late charges; it alsoaffords special protections to cosigners.

To qualify for an exemption, the statemust have a law that protects consumersat least as well as the correspondingfederal provision. In the case of Califor-nia, the Board granted the exemptionafter determining that the law with re-spect to a special notice given to cosignersis substantially equivalent to the federallaw and that the state administers andenforces its laws effectively.

Regulation C(Home Mortgage Disclosure)

In August the Board revised RegulationC to incorporate amendments to theHome Mortgage Disclosure Act. The actapplies to institutions with more than $10million in assets and offices in metropol-itan areas; it requires disclosure, and ageographic listing, of originations andpurchases of home mortgage and homeimprovement loans.

The amendments, enacted by the Con-gress in February 1988, expand thecoverage of the act to mortgage-bankingsubsidiaries of bank and thrift-institutionholding companies and to savings andloan service corporations that originateor purchase mortgage loans. The actpreviously applied only to depositoryinstitutions and their majority-ownedsubsidiaries. The newly covered institu-tions will report data for loan originationsand purchases made after August 19,1988, in keeping with an amendmentadopted by the Congress in November1988. Without that amendment, institu-tions would have been required to reportdata for the entire calendar year.

Following an in-depth review throughthe Board's Regulatory Review Section,the Board revised the text of RegulationC to improve its clarity and expandedthe instructions for the reporting form.These changes should make it easier forfinancial institutions to comply with theregulation.


Consumer and Community Affairs 145

The Board also amended the regulationto require that institutions disclose loandata related to the purchase or improve-ment of mobile and manufactured homes.Until now, such loans were reported onlyif these dwellings were treated as realestate under state law. This changebecame effective January 1, 1989.

Regulation B(Equal Credit Opportunity)

In November the Board determined thatthe Equal Credit Opportunity Act(ECOA) and Regulation B preempt aportion of New York law because of thelatter's inconsistency with the federallaw. ECOA and Regulation B prohibitdiscrimination in any credit transactionon the basis of race, color, nationalorigin, and other specified characteristicsof the applicant. But to allow creditors totarget a segment of the population thatfinds it difficult to obtain credit, such asan ethnic minority, the act and regulationallow creditors to offer special-purposecredit and to consider one or morecharacteristics of applicants for suchcredit (such as race or national origin).Because creditors under New York lawcould in no circumstance take any of thespecified characteristics into account,they were in effect barred from offeringspecial-purpose credit programs. As ofNovember 11, 1988, the state of NewYork may not prohibit special-purposecredit programs or related inquiries thatare permissible under federal law.

The Women's Business Ownership Actof 1988, signed into law in October,amends ECOA requirements applicableto business credit transactions. Althoughbusiness credit has always been coveredby ECOA and Regulation B, the regula-tory requirements for retaining recordsand for notice of adverse action havediffered from those applicable to con-sumer credit. The amendments will re-

quire creditors to keep records of abusiness application for at least one yearand to notify business credit applicants,in writing, that they are entitled to astatement of reasons when they are turneddown for credit. The Board will issueproposed amendments to Regulation B inearly 1989. The changed requirementswill take effect when the revisions toRegulation B are published in final form.

Regulation Z(Truth in Lending):Adjustable-Rate Mortgages

A revision to Regulation Z regardingdisclosures for adjustable-rate mort-gages (ARMs) became effective inOctober. The amendment, adopted inDecember 1987, requires creditors togive consumers more detailed infor-mation about the variable-rate feature ofclosed-end mortgages with maturitieslonger than one year. The amendment,which applies to mortgages secured bythe consumer's principal dwelling,requires creditors to give a descriptionof the terms of the mortgage. Theamendment also requires creditors togive borrowers historical data onchanges in the index to show thepotential effect on monthly payments.ARM disclosures must be given whenthe consumer gets an application formor before the consumer pays a non-refundable fee, whichever is earlier.An educational booklet describingthe characteristics and risks relatedto ARMs must accompany thesedisclosures.

To provide guidance to creditors aboutthe required ARM disclosures, the Boardin September published a special updateto the staff commentary. This officialcommentary applies to, and interprets,the requirements of Regulaption Z and isa substitute for individual interpretations.



Regulation Z:Credit Card Disclosures

In December the Board proposed toamend Regulation Z to require thatconsumers be given earlier disclosuresabout credit and charge card plans.Under the proposed amendments, whichimplement the Fair Credit and ChargeCard Disclosure Act, issuers that offercards to consumers by direct-mailsolicitation must disclose the annualpercentage rate, annual fees, transactioncharges, grace periods, and the methodused to calculate the balance on whichthe finance charge is computed.Previously, these disclosures could bemade later, when the card was issued.Special rules will apply to disclosures intelephone solicitations and to applicationforms placed in retail establishments andin magazines.

Card issuers that charge fees for renew-ing an account must notify the consumerat least 30 days before the renewalpayment is due. The notice must includethe date when the card will expire if notrenewed by the consumer; the cost (in-cluding membership fees) for continueduse of the card; and information on howthe consumer may close the account andavoid paying any fees.

The proposed changes also addresscredit insurance. A card issuer thatchanges insurance providers must givecardholders advance notice and the op-portunity to cancel the insurance. Thecard issuer also must inform consumersof any increase in rate or substantialdecrease in coverage that may result fromthe change.

Regulation Z:Home Equity Lines of Credit

The Home Equity Loan Consumer Pro-tection Act of 1988, signed into law inNovember, adds extensive requirements

for disclosures to be given at the timeconsumers receive an application formfor home equity lines of credit and revisesthe rules for advertising such credit. Thelaw further mandates certain consumerprotections applicable to these programs.For example, it limits a creditor's abilityto terminate the line of credit and accel-erate any outstanding balance or tochange the terms once a plan has beenopened. The Board will issue proposedamendments to the regulation in early1989.

The Board is also preparing a pamphletfor consumers that describes the featuresof home equity lines of credit, how theywork, and how they compare with othertypes of credit programs. This pamphlet,or one substantially similar, must begiven to consumers along with creditors'disclosures.

Regulation Z:Determination of Preemption

In February the Board determined thatfederal law preempts a provision ofan Indiana statute that is inconsistentwith the disclosure requirements ofRegulation Z. Indiana law requires loanbrokers to give disclosures to potentialborrowers and mandates that their feesand charges be included in calculat-ing the finance charge and annualpercentage rate. Under Regulation Z,charges for services provided by thirdparties, such as loan brokers, are notfinance charges if the creditor does notrequire the services or does not retainthe fees. The Board preempted theIndiana provision because it uses thesame wording as that used in the federallaw to refer to the disclosure of anamount that is different from the amountto be disclosed under federal law. Thepreemption took effect on October 1,1988.



Interpretations

In 1988 the Board continued to offer legalinterpretations and guidance throughupdates to the official staff commentarieson Regulation B (Equal Credit Opportu-nity), Regulation E (Electronic FundTransfers), and Regulation Z (Truth inLending). These commentaries, pub-lished by April 1 each year, help financialinstitutions and others apply the regula-tions to specific situations.

The Board published an update, effec-tive August 1, to its staff guidelines on theCredit Practices Rule. The guidelinesanswer questions from banks about therule and are updated periodically.

Mortgage Brochures

In response to a congressional request,the Federal Reserve Board and the Fed-eral Home Loan Bank Board in Junepublished three brochures to improveconsumer understanding of the mortgageapplication process. These brochures—on refinancings, lock-ins, and closingcosts—were prepared in consultationwith trade and consumer groups and withother government agencies.

Reduction of Paperwork Burden

In May the Board reviewed the paper-work burden associated with five regula-tions —Regulation BB (Community Rein-vestment), Regulation Z (Truth inLending), Regulation E (Electronic FundTransfers), Regulation B (Equal CreditOpportunity), and Regulation M (Con-sumer Leasing)—and one statute, theRight to Financial Privacy Act. As re-quired by the Office of Management andBudget under the Paperwork ReductionAct, the Board conducts these reviewsperiodically for the possible reduction ofregulatory requirements.

The bulk of the disclosures imposed bythe Board's regulations are mandated by,or are needed to carry out the intent of,the underlying legislation. The require-ments were already reduced significantlyin recent years through the Board's ownregulatory review program and throughprevious reviews for paperwork reduc-tion. Following the latest review, theBoard concluded that few opportunitiesexist for further reducing the paperworkburden in the absence of congressionalaction.

Community Affairs

The Community Affairs Program of theFederal Reserve System took a majorstep in 1988 when the presidents of the 12Reserve Banks formally established aCommunity Affairs subcommittee withintheir Conference of Presidents. Thesubcommittee will keep the presidentsinformed of current issues relating tocommunity development and the Com-munity Reinvestment Act.

A major focus of the CommunityAffairs Program, described by the Boardat hearings in March before the SenateCommittee on Banking, Housing andUrban Affairs, is to develop expertise insafe, sound, and thoughtful communitydevelopment lending and then to sharethat expertise with member banks andothers. During the year, staff members ofthe Community Affairs Program keptthemselves up to date on the lateststrategies and programs (such as taxcredits for low-income housing and theuse of new secondary market entities andtechniques) by attending more than 125seminars and workshops. The Commu-nity Affairs Officers from the ReserveBanks and staff members from the Boardalso took part in week-long trainingsessions on methods that can help lendersand community members form produc-tive partnerships.



The Reserve Banks conducted 78educational programs, many of them inconjunction with the Federal Home LoanBanks, the Department of Housing andUrban Development, and the Small Busi-ness Administration. Partnerships be-tween banks and their communities, ofthe types explored at these conferences,are needed to address adequately thecountry's economic development. Manybanks—from small and rural communi-ties as well as from more metropolitanareas—have responded in a positive wayto the information provided by the Re-serve Banks' Community Affairs Officers.

Participation by financial institutionsin community development takes a vari-ety of forms. A number of Californiabanks formed a consortium to addresslow-income housing needs. To coordi-nate their involvement in communitydevelopment, lenders formed councils inCamden, New Jersey; in Harrisburg,Pennsylvania; and in Wilmington, Dela-ware. In Boston, financial institutionsbegan an assessment of housing needs. Incooperation with Board staff members,the Economic Development Administra-tion is encouraging banks and bankholding companies throughout the coun-try to form community developmentcorporations.

In 1988 the Reserve Banks also usedcommunity profiles, educational pam-phlets, and newsletters to help banks,holding companies, and others addressthe economic development of their com-munities. The Federal Reserve Bank ofChicago inaugurated a community affairsnewsletter, bringing to five the numbernow published by the System. Thesepublications highlight emerging issues incommunity development and presentcase studies of successful programs thatinvolve cooperation between banks andtheir communities.

In 1988, staff members of the FederalReserve made 135 speeches at the request

of conference sponsors as diverse as theNational League of Cities, the AmericanBankers Association, and National Peo-ple's Action. Through these speeches aswell as through seminars, conferences,and other meetings, Community Affairsstaff members reached an estimated13,000 people on the subject of commu-nity development.

Examination Procedures

Amendments to Regulation Z that tookeffect in October 1988 require creditorsto give consumers more detailed informa-tion about closed-end mortgages withvariable rates. To ensure compliance bystate member banks, the Board developedobjectives, procedures, and a checklistfor the compliance examination dealingwith such mortgages. The other federalagencies that supervise financial institu-tions expect to adopt similar procedures.

Member agencies of the Federal Finan-cial Institutions Examination Council(FFIEC)-the Board, the Federal De-posit Insurance Corporation, the FederalHome Loan Bank Board, the Office of theComptroller of the Currency, and theNational Credit Union Administration—developed interagency examination pro-cedures for Regulation CC (ExpeditedFunds Availability). The FFIEC alsoconducted and videotaped a trainingsession for examiners, providing anoverview that focuses on the schedulesfor availability of funds, disclosure re-quirements, and examination proce-dures. The videotape and a written"Course for Financial Institution Exam-iners" is available to compliance examin-ers of the five financial regulators.

The Federal Reserve continues toconduct separate examinations to monitorcompliance with consumer protectionlaws and regulations and to monitorperformance under the Community Rein-vestment Act. State member banks are



examined at intervals determined by theirown performance records. The longestinterval between examinations, for bankswith the best records of performance, is24 months. Banks with poor performancerecords are examined as frequently asevery 6 months.

The Federal Deposit Insurance Corpo-ration reports that it changed the fre-quency of its compliance examinations inJuly 1988. The agency will examinebanks with a poor record of performanceevery 12 months and banks with betterrecords every 24 months. It has increasedits staff of examiners, and as a resultexpects the number of compliance exam-inations completed in 1989 to increase by30 percent. During 1988 the agencyreorganized its compliance function inWashington, centralizing the responsibil-ity for consumer compliance in the Officeof Consumer Affairs.

The Federal Home Loan Bank Boardhas created a Division of CompliancePrograms within the Office of Reg-ulatory Activities to be responsible forconsumer compliance examinations.The board adopted a Compliance PolicyStatement in June 1988, urging savingsand loan associations that are systemmembers to develop sound internalcompliance programs; the agency alsodistributed a manual, "Compliance: ASelf-Assessment Guide," to all memberinstitutions.

Compliance with ConsumerRegulations

Data from the five federal agencies thatsupervise financial institutions and fromother federal supervisory agencies indi-cate that compliance with the Truth inLending Act and the Equal Credit Oppor-tunity Act declined somewhat from 1987levels, while compliance with the Elec-tronic Fund Transfer Act remained sub-stantially the same. This section summa-

rizes data gathered from the agencies forthe reporting period July 1,1987, to June30,1988. i

Truth in Lending Act(Regulation Z)

Taken together, the five financial regula-tory agencies report that 46 percent of allexamined institutions were in full compli-ance with Regulation Z, down from 54percent in 1987. Of the five agencies, theOffice of the Comptroller of the Cur-rency (OCC), the Federal Deposit Insur-ance Corporation (FDIC), and the Boardnoted declines in compliance, while theFederal Home Loan Bank Board(FHLBB) and the National Credit UnionAdministration (NCUA) reported levelsof compliance similar to those for the1987 reporting period. Data from theBoard, the OCC, and the NCUA (theagencies that provide frequency ranges)indicate that among the institutions not infull compliance, 78 percent had no morethan five violations, an improvement overthe 51 percent reported in that range for1987.

The most frequent violations involvedthe failure to give accurate disclosures ofthe annual percentage rate; the number,amounts, and timing of payments sched-uled to repay the obligation; the financecharge; the itemization of the amountfinanced; and the amount financed.

The FDIC issued one cease-and-desistorder and the Board entered into oneformal written agreement involving vio-lations of Regulation Z. Under the Inter-agency Enforcement Policy on Regula-tion Z, a total of 279 institutionssupervised by the Board, the FDIC, the

1. The federal agencies that regulate financialinstitutions do not use the same method to compileinformation on compliance; however, the datasupport the general conclusions presented here.



FHLBB, and the OCC reimbursed ap-proximately $2 million to 23,419 ac-counts, compared with $1.2 millionreimbursed to 10,507 accounts duringthe 1987 reporting period.

The Federal Trade Commission (FTC)continued its compliance program toenforce the credit-advertising require-ments of Regulation Z, with an emphasison advertisers of credit for the purchaseof real estate and automobiles. Most com-panies contacted by the FTC promptlybrought their advertising programs intocompliance.

In conjunction with the National Asso-ciation of Attorneys General, the FTChas also continued its enforcement pro-gram against fraud in telemarketing andother fraud involving charges to creditcards. Two actions were brought in fed-eral district court, alleging violations ofthe Truth in Lending requirements forprompt notification of returns and credit-ing of refunds on credit card accounts.

The FTC issued a new pamphlet,"Home Equity Credit Lines." A checklistassists consumers in comparing differenthome equity loan programs. The FTCalso published "Choosing and UsingCredit Cards," which offers guidance onhow to shop for a credit card and explainsthe consumer protections provided underfederal law.

The Department of Transportationreported a satisfactory level of compli-ance with the Truth in Lending Act byforeign and domestic carriers under itsjurisdiction. As the result of consumerinquiries investigated by its ConsumerAffairs Division, the department enteredinto a consent order with an air carrierthat included provisions relating to theact.

The other agencies that enforce theact—the Packers and Stockyards Admin-istration of the Department of Agricul-ture and the Farm Credit Administra-tion-reported satisfactory levels of

compliance among the entities theysupervise.

Equal Credit Opportunity Act(Regulation B)

Among the institutions they examine, thefive financial regulatory agencies re-ported a decline in the overall level ofcompliance with Regulation B. The num-ber of institutions that had no violationsdeclined from 74 percent in 1987 to 67percent for the 1988 reporting period.The Board, the OCC, and the NCUA (thethree agencies that collect data on thefrequency of violations) report that 78percent of the institutions not in fullcompliance had fewer than five viola-tions. The most frequent violations in-volved the failure to meet the followingrequirements:

• Notify the applicant of the actiontaken within 30 days after the creditorreceives a complete application.

• Provide a written notice of adverseaction that contains the information re-quired by the regulation.

• Request information for monitoringpurposes about race or national originand sex on applications involving thepurchase or refinancing of a primaryresidence.

• Note the race or national origin andsex, based on the lender's visual observa-tion, if an applicant chooses not toprovide that information.

• Provide the specific reasons forcredit denials and other adverse action.

The FTC continued an investigativeprogram in which testers pose as creditapplicants to monitor compliance withECO A. Four finance companies werefound to have practices that violateECOA, leading FTC staff to recommendenforcement actions.

The other agencies that enforce theact—the Department of Transportation,the Farm Credit Administration, the



Interstate Commerce Commission, theSmall Business Administration, the Secu-rities and Exchange Commission, andthe Packers and Stockyards Administra-tion—report substantial complianceamong the entities they supervise.

Electronic Funds Transfer Act(Regulation E)

The five financial regulatory agenciesreport that 88 percent of examined insti-tutions were in full compliance withRegulation E, a decline from last year's90 percent. The four most frequentviolations involved the failure to give thefollowing disclosures:

• A periodic notice of the proceduresfor resolving alleged errors.

• A written statement outlining theterms and conditions of the EFT service.

• A periodic statement for eachmonthly cycle in which an EFT occurred.

• A summary of the consumer's liabil-ity for unauthorized transfers.

The fifth most frequent violation in-volved the failure promptly to investigateerrors alleged by consumers and toinform them of the results of the investi-gation in a timely manner.

The other agencies that enforce theact—the Federal Trade Commission andthe Securities and Exchange Commis-sion—report a satisfactory level of com-pliance among the entities they supervise.

Economic Effect of the ElectronicFunds Transfer Act

In accordance with statutory require-ments, the Board monitors the effects ofthe Electronic Funds Transfer Act on thecosts and benefits of EFT services tofinancial institutions and consumers.During 1988, the economic effect of theact broadened as more financial institu-tions offered EFT services and as moreconsumers used them. About two-thirds

of the depository institutions in the UnitedStates provide EFT services that arecovered by the requirements of the actand Regulation E.

Demand for EFT services has contin-ued to grow. Consumers gained greateraccess to EFT services through theexpansion of shared ATM systems. Morethan 86 percent of ATMs in the UnitedStates now participate in shared systems.Excluding balance inquiries, about 5billion transactions were conducted at the82,000 installed machines in the country.

The number of point-of-sale (POS)systems has also grown rapidly, thoughthese machines still handle a relativelysmall share of total EFT transactions.The number of merchant terminals capa-ble of supporting direct-debit POS trans-actions grew about 12 percent in 1988,from 38,800 to 43,400 terminals. POSterminals handled about 55 million trans-actions during 1988.

Each year, more consumers are elect-ing to receive pay or government trans-fers by electronic direct deposit, andmore corporations are offering direct de-posit. In the public sector, about half ofsocial security recipients receive monthlybenefits electronically; and the numberof military personnel who receive payrolland other benefits by automated directdeposit continues to grow. The InternalRevenue Service offers electronic de-posit of income tax refunds to individualswho file their returns electronically.

The benefits to consumers from theElectronic Fund Transfer Act are diffi-cult to measure because they cannot beisolated from protections that would havebeen provided in the absence of regula-tion. Statistics from examination reportsdo not suggest widespread violation ofthe consumer rights established by theact.

Data from the Board's Consumer Com-plaint Control System show no seriousconsumers problems with electronic



transactions. In 1988, 51 of the 2,196complaints processed involved electronictransactions; of the 51, the FederalReserve System forwarded the 23 com-plaints that did not pertain to state mem-ber banks to other agencies for resolution.None of the remaining 28 involved aviolation of the regulation.

Because the costs of industry practicesthat would have evolved in the absence ofstatutory requirements are unknown, theincremental costs associated with the act,like the benefits, are difficult to quantify.But the compliance cost of an electronictransaction is probably not high enoughto compromise its cost advantage over acheck-based transaction.

As EFT systems mature, as transactionvolume builds, and as start-up costs forcompliance are amortized, compliancecosts imposed by the act, per transfer andper dollar of transferred funds, will likelydecline.

Complaints againstState Member Banks

In 1988 the Federal Reserve received2,196 complaints: 1,832 by mail, 356 bytelephone, and 8 in person. The Federal

Reserve investigated and resolved the796 that were against state member banks(see accompanying table). The Boardalso received 184 written inquiries con-cerning consumer credit laws and bank-ing practices. In responding to thesecomplaints and inquiries, staff membersof the Board and the Reserve Banks gavespecific explanations of laws, regula-tions , and banking practices and providedprinted materials on the general issues.

To evaluate compliance with Systempolicies, the Board's Division of Con-sumer and Community Affairs regularlyreviews a sample of the complaintshandled by the Reserve Banks. The Boarduses follow-up questionnaires to gauge,through the perceptions of complainants,how well the System handles cases.Consumers returned 44 percent of thesequestionnaires. Approximately 80 per-cent of the respondents found the expla-nations clear and understandable; 75percent were satisfied with the prompt-ness of handling; 95 percent said theywere treated courteously by FederalReserve staff; 90 percent reported thatthey would contact the Federal Reserveagain if they had other problems withbanks; and 75 percent found the resolu-

Consumer Complaints Received by the Federal Reserve System, by Subject, 1988

Subject State memberbanks

8628

341

15701

1210

102

4550

Otherlenders1

5223

347

3161

308324

331

706108

lotai

13851

688

4731

319534433

1,161108

Regulation B (Equal Credit Opportunity)Regulation E (Electronic Fund Transfers)Regulation M (Consumer Leasing)Regulation Q (Interest on Deposits)Regulation Z (Truth in Lending)Regulation BB (Community Reinvestment)Regulation CC (Expedited Funds Availability).Fair Credit Reporting ActFair Debt Collection Practices ActFair Housing ActMunicipal Securities Dealer RegulationTransfer agentsUnregulated bank practicesOther2

Total. 796 1,400 2,196

1. Referred by the Federal Reserve to the appropriateagencies.

2. Primarily miscellaneous complaints against businessentities.



tion of their complaint acceptable. Manycomplaints involved practices that, al-though of concern to consumers, arepermissible practices. Thus, a greaterpercentage of the respondents were satis-fied with the System's handling of theircomplaint than with its resolution.

A second table summarizes the natureand resolution of the 796 complaintsagainst state member banks. About 52percent involved loan functions: 11 per-cent alleged discrimination on a prohib-ited basis, and 41 percent concernedcredit denial on nonprohibited bases

(such as length of residency) and otherunregulated lending practices (such asrelease or use of credit information).About 26 percent involved disputes con-cerning interest on deposits and generalpractices concerning deposit accounts.

Unregulated Practices

In 1988 the Board continued to monitor,under section 18(f) of the Federal TradeCommission Act, complaints about bank-ing practices that are not subject toexisting regulations to focus on those that

Consumer Complaints Received by the Federal Reserve System,by Function and Resolution, 1988

Type of resolution

Complaints about statemember banks

NumberPercent

Complaints about statemember banks, by type

Insufficient informationl

Information furnished tocomplainant2

Bank legally correctNo accommodationAccommodation made3

Clerical error, correctedFactual dispute4

Bank violation, resolved5

Possible bank violation,unresolved6

Customer errorPending, December 31

Complaints referredto other agencies7

Total, all complaints

Total

Type of complaint

Loan function

Discrimi-nation Other

Depositfunction

Electronicfund

transfers

Trustservices Other

796 87 329 205 28 9 138100 11 41 26 4 1 17

27 3 6 7 1 1 9

89 9 46 21 0 0 13

277 43 107 73 14 4 3666 10 31 12 0 0 13

153 5 70 47 5 0 2641 2 15 12 2 1 918 4 10 2 2 0 0

2 0 1 0 0 0 121 1 3 7 0 0 10

102 10 40 24 4 3 21

1,400 56 644 294 23 16 367

2,196 143 973 499 51 25 505

1. The staff has been unable, after follow-up correspon-dence with the consumer, to obtain sufficient informationto process the complaint.

2. When it appears that the complainant does notunderstand the law and that there has been no violation onthe part of the bank, the Federal Reserve System explainsthe law in question and provides the complainant with otherpertinent information.

3. In these cases the bank appears to be legally correctbut has chosen to make an accommodation.

4. These cases involve factual disputes not resolvableby the Federal Reserve System and contractual disputes

that can be resolved only by the courts. Consumers wishingto pursue the matter may be advised to seek legal counsel orlegal aid or to use small claims court.

5. In these cases a bank appears to have violated a law orregulation and has taken corrective measures voluntarilyor as indicated by the Federal Reserve System.

6. When a bank appears to have violated a law orregulation, customers are advised to seek civil remedythrough the courts. Cases that appear to involve criminalirregularity are referred to the appropriate law enforcementagency.

7. Complaints about nonmember institutions.



may be unfair or deceptive. Three cate-gories each accounted for 5 percent of the1,161 complaints: improper crediting ofdeposits to accounts (59), credit denialbased on credit history (58), and miscel-laneous other practices (57). Complaintsabout improper crediting of depositsusually involved cases in which a cus-tomer held more than one account and theteller inadvertently credited funds to thewrong account. Many of the complaintsabout credit denials based on credithistory indicated that the applicant under-estimated the importance lenders give toa poor credit history or a lack of borrow-ing experience when considering theapplicant's creditworthiness. The thirdcategory covered a wide range of prac-tices, such as merchants' minimum-charge requirements on credit cards, thenumber of points charged on a mortgageloan, or a lender's failure to close on amortgage loan by the agreed settlementdate.

Community Reinvestment Act

The Community Reinvestment Act(CRA) requires the Board to encourageinstitutions under its jurisdiction to helpmeet the credit needs of their communi-ties, including the needs of low- andmoderate-income neighborhoods, in amanner consistent with safe and soundpractices. The Board assesses the CRArecord of state member banks duringregular examinations, and takes CRAperformance into account when acting onapplications filed by state member banksand bank holding companies. The Boardmay withhold approval of certain appli-cations if the CRA record of the institu-tion is not satisfactory.

The CRA program of the FederalReserve consists of a compliance exami-nation program, a community affairsprogram, and a program for analysis ofCRA performance in connection with

applications of banks and bank holdingcompanies.

Examiners trained in consumer regu-lation and CRA issues carry out thecompliance program; they conduct ex-aminations and produce reports dealingexclusively with these issues. During the1988 reporting period (July 1, 1987,through June 30,1988), Federal Reservepersonnel examined 569 state memberbanks for compliance with the CRA.During these examinations, banks arecounseled on ways to improve CRAperformance, including techniques formore active involvement in communityeconomic development.

The number of CRA protests and theincreased complexity of protests involv-ing interstate acquisitions have resultedin a greater emphasis on the applicationsprocess in recent years. To achieve a fairand equitable settlement of CRA issuesarising during the application process,the Board carefully considers all relevantfacts from the parties involved. TheBoard scrutinizes the CRA records,which may reflect problems for anapplicant, whether or not a protest hasbeen filed. In this process the Board oftenhas obtained commitments for futureimprovement. When CRA issues arise,the Federal Reserve also provides aforum for protestants and applicants thatwish to discuss their concerns privatelyand narrow differences caused bymisunderstandings.

The number of applications of statemember banks or bank holding com-panies protested because of CRA perfor-mance declined from the record high of1987. In calendar year 1988, 31 applica-tions were protested, compared with 36in 1987. But the Board also handled 20other applications in which adverse CRAratings were at issue, compared with 15such cases during 1987. In the protestedcases, 6 protests were withdrawn follow-ing resolution of differences between



applicants and protestants. In 9 otherinstances, applications were approvedafter the applicant made commitments tothe Board to improve its CRA perfor-mance. By year-end the Board hadapproved 27 of the 31 applications; theother 4 applications were still pending.

Consumer Advisory Council

The Consumer Advisory Council (C AC)met in March, July, and October to advisethe Board on its responsibilities under theconsumer credit protection laws anddiscuss other issues relating to financialservices to consumers. The CAC has 30members from consumer groups, finan-cial institutions, academia, and govern-ment. Its meetings are open to the public.

At the March meeting, the CAC con-sidered proposed legislation for im-proved disclosures to consumers and forrestrictions on credit features of homeequity lines of credit. The CAC revieweda December 1987 Board proposal thatwould have required earlier and addi-tional Truth in Lending disclosures forthese plans. The council urged the Boardto move expeditiously in developing afinal rule, though CAC members alsorecognized the need for protections forconsumers (such as rate indexes that canbe verified by the consumer through anoutside source) that could be providedonly by legislative action. The CACrecommended amending Regulation Z toprovide a 90-day notice period (insteadof the current 15 days) for a change interms affecting an outstanding balance ina home equity line.

In March the CAC considered theBoard's proposed rules implementing theExpedited Funds Availability Act. Sev-eral bankers expressed concern about aprovision that mandates next-day avail-ability without exception for governmentand cashier's checks, citing the risk offraud on large-dollar items. The act

removes from mandated schedules cer-tain items such as large-dollar deposits orchecks the institution has reason tobelieve will not be paid; a majority ofcouncil members wanted the Board toseek statutory authority to extend theexceptions to all checks, including gov-ernment and cashier's checks. Consumerand community representatives, notingthat many low-income individuals desper-ately need next-day availability, opposedapplying the exceptions to governmentchecks.

Also in March the CAC recommendedthat the Board support legislation allow-ing banks, thrift institutions, and creditunions to sell insurance if they metcertain conditions designed to protectconsumers. These conditions would in-clude legal protections against linkinginsurance sales to credit extensions,clear and understandable product disclo-sures, access to insurance and bankingproducts that are affordable to low- andmoderate-income persons, "at-cost"government-check-cashing services fornoncustomers, and public disclosure ofthe CRA rating of an institution thatapplies for insurance powers. Six CACmembers, representing both industry andconsumer perspectives, opposed therecommendation.

At the July meeting the CAC consid-ered the potential effects of a legislativeproposal requiring banks to cash govern-ment checks for nondepositors for a smallfee. Members were agreed that recipientsof public-assistance and social-securitychecks should be able to cash thosechecks at a reasonable cost, but themembers differed over the best way toaccomplish this objective. Industry rep-resentatives, concerned about the poten-tial for fraud and about the new direct andindirect costs for institutions under theproposed legislation, thought reliance onelectronic fund transfer systems wouldbe a better solution: direct deposit of



funds would minimize the potential forfraud, and the use of automated tellermachines would provide convenience forrecipients. Consumer representativespointed out that only a small percentageof families with incomes under $10,000currently use automated teller machines.

In July the CAC considered alterna-tives to accommodate communities de-prived of local banking services when abank branch shuts down. The alternativesincluded community development creditunions (chartered around a geographicbond) and community development banks(designed to provide financial servicesand economic development in low- andmoderate-income communities). TheCAC also reviewed programs undertakenby banks and by the banking trade groupsto develop alternative banking services.The CAC supported the concept thatbanks should give advance notice to thecommunity when they decide to close abranch and urged the Board to publicizealternatives for communities lackingregular banking services.

In October the CAC considered disclo-sure rules on traditional second-mortgagetransactions in the context of the newrules for early disclosure of terms onhome equity lines of credit. Memberssuggested earlier disclosure of the creditcosts, repayment terms, and risks associ-ated in the more traditional closed-endtransactions that involve second mort-gages; the disclosures for these transac-tions are now given at settlement. Legal-aid attorneys and state governmentofficials believe that with earlier disclo-sures, consumers would be more likelyto avoid the less advantageous programs.Members from small banks were againstthe idea of having to provide additionaldisclosures because their institutions arenot part of the problem being described.

Also in October, the CAC consideredwhether the information given on savingsaccounts enables depositors to check that

the interest received matches the rateadvertised. The CAC generally endorsedthe concept that depositors should havethe information necessary to verify inter-est, though some members expressedconcern about costs if institutions had togive a great deal of complicated data toconsumers.

In 1988 the CAC also considered thefollowing issues:

• Legislative proposals to amend theCRA.

• The Federal Reserve's implementa-tion of CRA recommendations that weremade by the CAC in 1983.

• Newspaper articles describing widedisparities in the practices of bankswith respect to lending in predomi-nantly white and predominantly minorityneighborhoods.

• Regulatory issues that affect smallfinancial institutions.

• The trend toward restructuringwithin the financial services industry.

• The exportation, by national banks,of interest rates and other charges acrossstate lines.

Testimony and LegislativeRecommendations

In 1988 the Board testified before theCongress and made recommendationsconcerning the Community Reinvest-ment Act, government check cashingand basic banking, and expedited fundsavailability.

Community Reinvestment Act

The Board testified twice before theSenate Committee on Banking, Housing,and Urban Development concerning theCommunity Reinvestment Act. At over-sight hearings in March the Board re-ported on the Federal Reserve's CRAprogram, which integrates complianceexaminations, a strong community affairs



program, and a program for analysis ofbanks' CRA performance in decidingapplications by banks and bank holdingcompanies (see the section above on theCRA).

The Board's testimony in Septemberprovided comment on proposed amend-ments to the CRA in a comprehensivebanking bill. While the Board recognizesthat improvements in the implementationof the CRA can be made, it believes thecurrent CRA requirements are fundamen-tally sound and workable, and it opposedmajor revisions. Any modification mustbe tailored carefully to preserve thebalance between the needs of local com-munities and the safe and sound operationof banks and should not raise administra-tive obstacles that may tend to erase gainsalready achieved by the CRA. The Boardbelieves that changes to the CRA shouldfocus on two major criticisms: the lack ofopportunity for individuals and commu-nity groups to contribute to the evaluationof the CRA performance of institutions,and that high CRA ratings may be giventoo readily.

The Board suggested some ways thatwould enable the public to participate inCRA assessments. Institutions couldprovide, in their annual public statementon the CRA, a discussion of the effortsthey have made to meet their CRAresponsibilities. Members of the publiccould then comment to the institution andto regulators on the institution's perfor-mance. In addition, federal regulatorscould publish every two years or so anevaluation of the CRA record of eachfinancial institution. This evaluationwould give the basis for the regulatoryagency's analysis of an institution's CRAperformance. The public could be invitedto comment on this evaluation as well;and the agency would take these com-ments into account in reviewing applica-tions by the institution. This approachwould facilitate regular, meaningful, and

effective communication among banks,communities, and regulators about thecommunity's needs and an institution'srecord of accomplishment in meeting itsCRA responsibilities.

Government Check Cashing andBasic Banking

The Board's testimony in Septemberbefore the Senate banking committee alsocovered legislative proposals to imposenew requirements for government-checkcashing and basic banking services. TheBoard opposes the requirement that finan-cial institutions cash government checksfor nondepositors at a specified price.Electronic alternatives present a betterlong-term solution to problems in thisarea than focusing exclusively on checkcashing; the processing cost would bemuch lower and the fee charged anindividual to make cash available wouldprobably be smaller than for cashing acheck. Federal, state, and local agenciescould arrange to transfer benefit pay-ments electronically to depository insti-tutions that agree to participate in avoluntary program, for example.

The Board does not support requiringthat institutions offer basic transactionaccounts at a regulated price. Any man-datory arrangement would be inflexible,the Board believes, and fee requirementswould be extremely difficult to implementin regulations. In light of these problems,and the fact that as many as 50 percent ofall financial institutions already offerbasic banking services, the Board favorsencouraging voluntary efforts by finan-cial institutions to offer basic low-costaccounts—without mandating a specificprogram of services and fees.

Expedited Funds Availability

The Expedited Funds Availability Actgenerally authorizes financial institutions



to impose holds for longer than thenormal times under specific, limitedcircumstances. But these exceptions arenot authorized for some checks on whichthe act requires next-day availability—Treasury and cashier's checks, for exam-ple. The Board supports amending theact to make the special exceptions appli-cable to all checks to reduce the risk offraud.

The Board opposes the legislativecodification of a recent court decisionrequiring that credit union share draftspayable through a bank be treated as localor nonlocal based on the location of thecredit union (rather than the location ofthe bank). The Board believes this ap-proach increases the risk associated withaccepting these drafts for deposit andalso makes it difficult for consumers tounderstand when the proceeds of creditunion drafts are available for withdrawal.The Board recommended that the Con-gress amend the act to treat a draft aslocal or nonlocal based on the location ofthe payable-through bank.

and statistically sound." The FDIC re-ports that the largest volume of ECOA-related complaints involve credit cardapplications where "age" or "age group"has been cited as a reason for denial ofcredit. To eliminate the confusion inher-ent in the act's provisions, the FDICrecommends that the reference to "age"be replaced by the term "elderly age,"and suggests defining elderly to mean 62years or older, as in Regulation B. •

Recommendations of OtherAgencies

Each year the Board asks those agenciesthat have enforcement responsibilitiesunder Regulations B, E, and Z forrecommended changes to the regulationsor the underlying statutes.

The FDIC has recommended amend-ing ECOA to prohibit discrimination onthe basis of handicap, a change that wouldbring it into conformity with recentamendments to the Fair Housing Act.The FDIC also recommends amendingECOA to clarify congressional intentwith respect to age discrimination. ECOAbars creditors from discriminating on thebasis of age regardless of whether anapplicant is young or old. But it allowscreditors to take age into account in creditscoring systems that are "demonstrably


Litigation

159

During 1988 the Board of Governors wasnamed in 44 pending lawsuits, comparedwith 47 in 1987. Of the 13 new lawsuitsfiled in 1988,6 raised questions under theBank Holding Company Act, comparedwith 12 in 1987. As of December 31,1988,23 cases were pending, 15 of whichinvolved questions under the Bank Hold-ing Company Act.

Bank Holding Companies—Antitrust Action

In 1988 no bank holding company acqui-sitions or mergers that had been approvedby the Board were challenged by theDepartment of Justice under antitrustlaws, and no such cases were pendingfrom previous years.

Bank Holding Company Act—Review of Board ActionsIn Independent Community Bankers As-sociation of South Dakota v. Board ofGovernors, No. 85-1496 (D.C. Circuit,filed August 7, 1985), petitioners soughtreview of a Board order dated July 12,1985, which approved the application ofFirst City Bancorporation of Texas toacquire a nationally chartered credit cardbank in South Dakota (Federal ReserveBulletin, vol. 71, September 1985, p.716). In an opinion dated June 5, 1987,the Court of Appeals affirmed the Board'sorder (820 F.2d 428). On January 11,1988, the Supreme Court denied a peti-tion for certiorari (108 S. Ct. 695).

In CBC, Inc. v. Board of Governors,No 86-1001 (10th Circuit, filed January2, 1986) petitioner seeks review of theBoard's amendment to Regulation Yrequiring certified financial statements in

annual reports for bank holding com-panies with assets of $150 million ormore (50 Fed. Reg. 50,950, December13, 1985. The Board's order was upheldby the Court of Appeals (855 F.2d 688).A petition for certiorari in the SupremeCourt is pending (No. 88-1109).

In Independent Community BankersAssociation of South Dakota v. Board ofGovernors, No. 86-5373 (8th Circuit,filed October 3, 1986), the Court ofAppeals (838 F.2d 969) overturned theBoard order dated September 15, 1986,approving the application of MichiganNational Corporation to acquire a nation-ally chartered credit card bank in SouthDakota (Federal Reserve Bulletin, vol.72, November 1986, p. 792). On Febru-ary 17, 1988, however, the provisions inthe South Dakota statute that were chal-lenged in this case were repealed.

In Lewis v. Board of Governors, Nos.87-3455 and 87-3545 (1 lth Circuit, filedJune 25, 1987), petitioner seeks reviewof Board orders dated May 29,1987, andJuly 1, 1987, approving applications ofChemical New York Corporation and ofManufacturers National Corporation toexpand activities of trust company sub-sidiaries in Florida (Federal ReserveBulletin, vol. 73, July 1987, p. 609, andSeptember, p. 735). The cases have beenstayed pending the resolution of proceed-ings in a related case in the same judicialcircuit.

In Chase Manhattan Corporation v.Board of Governors, No. 87-1333 (D.C.Circuit, filed July 20, 1987), petitionerseeks review of a Board order dated July17, 1987, conditionally approving theapplication of Chase Manhattan Corpo-ration to underwrite and deal in mortgage-related securities to a limited extent (Fed-


160 Litigation

eral Reserve Bulletin, vol. 73, September1987, p. 729). The case is pending.

In National Association of Casualtyand Surety Agents et al. v. Board ofGovernors, Nos. 87-1354 and 87-1355(D.C. Circuit, filed July 29, 1987) theCourt of Appeals (856 F.2d 282) upheldBoard orders dated June 29, 1987, andJuly 2,1987, permitting Sovran FinancialCorporation and MNC Financial, Inc.,to retain insurance agency activities (Fed-eral Reserve Bulletin, vol. 73, September1987, p. 744 and p. 740, respectively).On December 2, 1988, a petition forrehearing and rehearing en bane wasdenied. Several other cases involvedpetitions for review of similar Boardorders. The petitions for review in thesecases were denied by court orders datedJanuary 19, 1989. These cases are asfollows: National Association of Casu-alty and Surety Agents et al. v. Board ofGovernors, No. 88-1001 (D.C. Circuit,filed January 4, 1988), No. 88-1270(D.C. Circuit, filed April 7, 1988), No.87-1644 (D.C. Circuit, filed November14, 1987), No. 87-1801 (D.C. Circuitfiled December 21, 1987), No. 88-1206(D.C. Circuit, filed March 18,1988) andNo. 88-1245 (D.C. Circuit, filed March30, 1988); and Independent InsuranceAgents of America, Inc., et al. v. Boardof Governors, No. 87-1686 (D.C. Cir-cuit, filed November 19,1987).

In Board of Trade of Chicago et al. v.Board of Governors, No. 87-2389 (7thCircuit, filed September 1,1987) petition-ers sought review of a Board order datedAugust 5, 1987, approving the applica-tion of Security Pacific Corporation toengage in brokerage clearing and otherservices through wholly owned sub-sidiaries (Federal Reserve Bulletin, vol.73, October 1987, p. 815). On January20,1988, the case was dismissed as mootby joint stipulation.

In Citicorp v. Board of Governors,No. 87-1475 (D.C. Circuit, filedSeptem-

ber 9, 1987), petitioner sought review ofa Board order dated August 10, 1987,denying petitioner relief from certainconditions on prior approvals of acquisi-tions of thrift institutions. The case wasdismissed on January 29, 1988.

In Independent Insurance Agents ofAmerica, Inc. v. Board of Governors,No. 87-4118 (2nd Circuit, filed Septem-ber 17, 1987), petitioner sought reviewof a Board order dated September 10,1987, granted at the request of MerchantsNational Corporation, determining thatnonbanking prohibitions of the BankHolding Company Act do not apply toactivities of banks (Federal ReserveBulletin, vol. 73, November 1987, p.876). The Board order was vacated onJanuary 26, 1988, on the basis of acongressional moratorium (838 F.2d627), and thus, no further judicial pro-ceedings have been taken.

In Irving Bank Corporation v. Boardof Governors, No. 88-1176 (D.C. Cir-cuit, filed March 1, 1988), the Court ofAppeals (845 F.2d 1035) upheld a Boardorder approving the application of theBank of New York Company, Inc., toacquire Irving Bank Corporation (Fed-eral Reserve Bulletin, vol. 74, April1988, p. 257).

In American Land Title Association v.Board of Governors, No. 88-1872 (D.C.Circuit, filed December 16, 1988) peti-tioner seeks review of a Board orderdated November 17,1988, approving theapplication by First Wisconsin Corpo-ration to acquire a company engaged intitle insurance agency activities (FederalReserve Bulletin, vol. 75, January 1989,p. 31). The case is pending.

Other Litigation InvolvingChallenges to Board Proceduresand Regulations

In 1988, 15 actions were taken, werepending, or were dismissed under the


Litigation 161

Financial Institutions Supervisory Actand the Glass-Steagall Act.

1988) plaintiff seeks to enjoin an enforce-ment proceeding. The case is pending.

Financial InstitutionsSupervisory Act

In Adams et al. v. Board of Governors,No. 87-5311MN (8th Circuit, filed July13, 1987), the Court of Appeals (855F.2d 1336) on August 31,1988, affirmedthe decision of a district court (659F.Supp. 948) holding that the Board didnot violate the Right To Financial PrivacyAct when it reviewed and copied plain-tiffs' records at a national bank.

In Northeast Bancorp, Inc. v. Board ofGovernors, No. 87-1365 (D.C. Circuit,filedJuly31,1987), the Court of Appeals(849 F.2d 1499) denied a petition forreview of the Board determination thatan officer and director who consents to beremoved from a national bank is alsobarred from serving in a holdingcompany.

In Anonymous Bank v. Board ofGovernors, No. 87-1661 (S.D. Fla.,filed September 4, 1987), a case placedunder seal by court order, plaintiffssought to set aside a Board order suspend-ing a bank director and officer from astate member bank. A motion to dismissthe case as moot is pending.

In Stoddard v. Board of Governors,No. 88-1148 (D.C. Circuit, filed Febru-ary 25,1988) petitioner seeks review of aBoard order removing petitioner fromthe positions of director and officer of theMichigan National Bank of Detroit. Thecase is pending.

In Bonilla v. Board of Governors, No.88-1464 (7th Circuit, filed March 11,1988) petitioner seeks review of a Boardorder prohibiting petitioner from partici-pation in the conduct of the affairs of anyinsured bank or bank holding company.The case is pending.

In MCorp v. Board of Governors, No.88-2693 (N.D. Texas, filed October 28,

Glass-Steagall Act

In Securities Industry Association v.Board of Governors, No. 86-1412 (D.C.Circuit, filed July 14, 1986) petitionersought review of a Board order datedJune 13,1986, approving National West-minster Bank's acquisition of a companyoffering investment advice and securitiesbrokerage (FederalReserve Bulletin, vol.72, August 1986, p. 584). On July 7,1987, the Court of Appeals upheld theBoard'sorder (821 F.2d810). OnJanuary11, 1988, the Supreme Court denied apetition for certiorari (108 S. Ct. 697).

In Securities Industry Association v.Board of Governors, No. 87-1169 (D.C.Circuit, filed April 17, 1987), the Courtof Appeals (847 F.2d 890) upheld a Boardorder dated March 18, 1987, approvingthe application by Chase ManhattanCorporation to underwrite and deal incommercial paper to a limited extent(Federal Reserve Bulletin, vol. 73, May1987, p. 367).

In Securities Industry Association v.Board of Governors etal, No. 87-4041,(2nd Circuit, filed May 1, 1987), peti-tioner sought review of Board ordersdated April 30 and May 18, 1987,authorizing various bank holding com-panies to underwrite and deal in certainsecurities to a limited extent through asecurities subsidiary (Federal ReserveBulletin, vol. 73, June 1987, p. 473, andJuly 1987, p. 607). On February 8,1988,the Court of Appeals upheld the Board'sorder in substantial part (839 F.2d 47). Apetition for certiorari was denied by theSupreme Court on June 13,1988 (108 S.Ct. 2830). Several other cases that in-volve similar petitions for review werewithdrawn after final disposition of thiscase by the Supreme Court. These casesare as follows: Securities Industry Asso-


162 Litigation

elation v. Board of Governors, Nos.87-4091 and 87-4093 (2nd Circuit, filedJuly 1,1987), No. 87-4095 (2nd Circuit,filed July 15, 1987), No. 87-4115 (2ndCircuit, filed September 9, 1987), No.87-4135 (2nd Circuit, filed October 8,1987), and No. 87-4161 (2nd Circuit,filed December 24, 1987).

Other Actions

In Melcher v. Federal Open MarketCommittee, No. 84-1335 (D. D.C., filedApril 30, 1984), plaintiff challenged theconstitutionality of the methods used toselect certain members of the FederalOpen Market Committee. On December18, 1987, the Court of Appeals held thecomplaint should be dismissed on groundsof equitable discretion (836 F.2d 561). Apetition for certiorari in the SupremeCourt was denied on June 6,1988 (108 S.Ct. 2034).

In Jenkins etal. v. Board of Governors,No. 87-1336 (D.C. Circuit, filed July18,1986) the Court of Appeals dismissedthe petition for review of the Board ordergranting application for membership inthe Federal Reserve System on June 2,1988.

In Brown v. United States Congress etal., No. 87-5586 (9th Circuit, filedMarch 2, 1987), plaintiff appealed thedismissal of his complaint seeking dam-ages for alleged discrimination in homefinancing and mandatory injunction re-garding the Board's monetary policy. Theappeal was dismissed on March 8,1988.

In Barrett v. Greenspan, No. 87-2280(D. D .C, filed August 17, 1987), anaction to enjoin an alleged discriminatorypractice, was dismissed on July 8, 1988.

In Teichgraeber v. Board of Gov-ernors, 87-2505-0 (D. Kans., filed Oc-tober 16,1987), plaintiff seeks to requiredisclosure of certain documents underthe Freedom of Information Act. Thecase is pending.

In Cohen v. Board of Governors, No.88-1061 (D. New Jersey, filed March 7,1988) plaintiff seeks to require disclosureof documents under the Freedom ofInformation Act.

In Fidata Trust Company New York v.Board of Governors, No. 88-4846 (D.New Jersey, filed November 9, 1988)plaintiff seeks to enjoin the Board fromdisclosing certain documents involved inthe Cohen case. Both actions are pending.

In Credit Union National Association,Inc., etal. v. Board of Governors, No.88-1295 (D. D .C , filed May 13,1988)adistrict court invalidated certain chal-lenged provisions of the Board's Regula-tion CC relating to the treatment of creditunion share drafts under the ExpeditedFunds Availability Act (53 Fed. Reg.19,372, May 27, 1988) by order datedJuly 28, 1988.

In White v. Board of Governors, No.88-623 (D. Nevada, filed July 29, 1988)plaintiff alleges discriminatory practicesunder the Age Discrimination In Employ-ment Act. The case is pending. •


Legislation Enacted

163

In 1988 the Congress passed the follow-ing legislation directly affecting theFederal Reserve or the institutions itregulates.

Omnibus Trade andCompetitiveness Act of 1988

Public Law 100-418, the Omnibus Tradeand Competitiveness Act of 1988, wasenacted on August 23, 1988. Title III ofthe act addresses international financialpolicy and is summarized here.

Subtitle A of title III, the ExchangeRate and International Economic PolicyCoordination Act of 1988, states policygoals for negotiations by the Presidentand imposes new reporting requirementson the Secretary of the Treasury concern-ing the international coordination of eco-nomic and exchange rate policies. Sub-title A also amends the Federal ReserveAct to require that the Board include ananalysis of the impact of the dollarexchange rate on the economy in theBoard's yearly report to the Congress oneconomic development.

Subtitle B of title III, the InternationalDebt Management Act of 1988, containscongressional findings and provisionsconcerning the debt of developing coun-tries. It also expesses the sense of theCongress that federal regulators givebanks wide latitude in negotiating reduc-tions of principal and interest with sover-eign debtors. Subtitle B also declares thatit is the intent of the Congress (1) thatfederal agencies regulating depositoryinstitutions allow maximum flexibility inapplying generally accepted accountingprinciples in determining the asset valueand effects of restructured loans to heavilyindebted sovereign borrowers; (2) that

these federal agencies require depositoryinstitutions with substantial loans toheavily indebted sovereign borrowers torecapitalize as appropriate to maintainadequate ratios of capital to assets; and(3) that the federal agencies ensure thatdepository institutions establish appro-priate levels of reserves against loanlosses.

Subtitle B further requires the federalbanking agencies to submit data to theCongress annually concerning loan-lossexposure, reduction of risks associatedwith such exposure, the relationshipbetween bank lending activity in heavilyindebted foreign countries and U.S.exports to these countries and ways toencourage such lending, responses ofregulatory authorities in other countriesto international debt problems, and stepstaken by heavily indebted countries toalleviate debt-servicing problems. TheBoard, together with the Comptroller ofthe Currency and the Federal DepositInsurance Corporation are also requiredto submit a report analyzing regulatoryand accounting obstacles to various formsof debt restructuring.

Subtitle E of title III, the ExportTrading Company Act Amendments of1988, amends the Bank Holding Com-pany Act of 1956. The amendmentsestablish standards for determiningwhether a company may be considered tobe operated principally for the purposesof exporting goods and services producedin the United States. The amendmentsalso prohibit the Board from proscribinga proposed investment in an exporttrading company solely on the basis ofthe leverage ratios of the company unlessthe asset-to-equity ratio is projected to begreater than 20 to 1. The amendments


164 Legislation Enacted

limit the circumstances under which theBoard may limit the maximum dollarvalue of the inventory of an export tradingcompany.

Subtitle F of title III, the PrimaryDealers Act of 1988, provides thatneither the Board nor the FederalReserve Bank of New York maydesignate or continue a prior designationof a foreign person as a primary dealerin government debt securities unless thatperson's country affords U.S. companiesthe same opportunities in the under-writing and distribution of governmentdebt securities as are afforded domesticcompanies in that country. Designationsmade before July 31, 1987, areexcepted; also excepted are previouslydesignated primary dealers acquired bya foreign person prior to that date if theFederal Reserve Bank was notifiedbefore the acquisition. Exceptions arealso made for citizens of countries thatwere negotiating or had in force as ofJanuary 1, 1987, a bilateral free tradeagreement with the United States.

Subtitle G of title III, the FinancialReports Act of 1988, requires theTreasury, in conjunction with the Boardand a number of other federal agencies,to report to the Congress on the homecountries of foreign financial-serviceinstitutions doing business in the UnitedStates and on the types of financial ser-vices offered by persons from thesecountries. The report must also includeinformation concerning the extent towhich such countries deny nationaltreatment to U.S. financial-serviceinstitutions, on efforts to eliminatediscrimination, and on discussionsauthorized by subtitle G to reducebarriers to trade in financial services.The subtitle also requires the Board toreport on issues concerning thetreatment of loan loss reserves as part ofbanks' primary capital for regulatorypurposes.

Management Interlocks RevisionAct of 1988

P.L. 100-650, the Management Inter-locks Revision Act of 1988, enacted onNovember 10,1988, amends the Depos-itory Institution Management InterlocksAct. The 1988 act amends the definitionof "affiliate" to allow companies to beconsidered affiliates if 25 percent or moreof the voting stock in each company isbeneficially owned by common share-holders. Previously, at least 50 percentof the voting stock had to be commonlyowned for companies to be consideredaffiliates. Because affiliated companiesare allowed to have management inter-locks, the amendment will allow com-panies that are more loosely related tohave directors and managers in common.

The new law makes the followingadditional provisions:

• Creates an exception for failed orfailing depository institutions acquiredby another depository institution or bythe holding company of a depositoryinstitution.

• Creates a limited exception fordirectors in diversified savings and loanholding companies.

• Excludes advisory or honorary di-rectors in depository institutions withassets of less than $100 million fromcoverage by the act.

• Extends for an additional five years,to November 10, 1993, the grandfather-ing clause for interlocks that existed in1978.

Anti-Drug Abuse Act of 1988

P.L. 100-690, the Anti-Drug Abuse Actof 1988, enacted on November 18,1988,includes amendments to the Right toFinancial Privacy Act of 1978. Amongother provisions, the amendments ex-empt agencies or departments of theUnited States from the procedures estab-


Legislation Enacted 165

lished for the transfer of financial recordsunder the Right to Financial Privacy Act,enabling such organizations to moreeasily transfer financial records to theattorney general.

To be transferred, records must havebeen obtained in the exercise of supervi-sory or regulatory functions and bebelieved to be relevant to a violation offederal criminal law. A similar exemp-tion will allow financial institutions orsupervisory agencies to provide lawenforcement officials more easily withthe records of directors, officers, employ-ees, controlling shareholders, and certainborrowers when the records are relevantto suspected crimes against financialinstitutions by such insiders.

Fair Credit and Charge CardDisclosure Act of 1988

P.L. 100-583, the FairCreditand ChargeCard Disclosure Act of 1988, enacted onNovember 3, 1988, amends the Truth inLending Act to require that applicationsor solicitations for credit or charge cardsdisclose annual percentage rates, feesand charges, grace periods for payments,and methods used to calculate balances,as well as additional disclosures whenrenewal fees are due and when the creditinsurer is changed.

The amendments require the Board toadopt implementing regulations, to col-lect information on the price and avail-ability of credit cards, and to report tothe Congress within one year on theprofitability of credit card operations andon the effect of the amendments onprofitability.

Home Equity Loan ConsumerProtection Act of 1988

The Congress enacted P.L. 100-709, theHome Equity Loan Consumer ProtectionAct of 1988, on November 23,1988. The

act amends the Truth in Lending Act toestablish additional requirements fordisclosures, advertising, and other as-pects aspects of home equity lines ofcredit. The amendments require thatapplications for such credit disclosecertain information including paymentterms, the annual percentage rate ofinterest charged, the calculation of vari-able interest rates, maximum interestrates, and the timing of changes in rates.

The amendments address the timingand form of the disclosures with regard tosolicitations or applications and requirethe information to be provided again atthe time the home equity account isopened. The amendments also requirecertain disclosures in any advertisementsrelated to home equity lines of credit andprohibits the use of misleading terms insuch advertising.

Under the new provisions, the creditormust not be able to control the index towhich a variable interest rate is linked.The act prohibits creditors from unilater-ally terminating a credit line and requir-ing immediate payment except in theevent of fraud, default by the debtor, orother action by the debtor that adverselyaffects the creditor's security interest.

The amendments also limit the cir-cumstances under which the creditormay unilaterally change the terms of thecredit agreement. Impositions of nonre-fundable fees are also limited, and theamendments provide that consumers mayobtain a refund of fees under certaincircumstances.

The amendments require the Board todevelop educational materials for con-sumers of home equity lines of credit andto report to the Congress on whether theuse of terms such as "annual percentagerate" for different types of credit linesmislead consumers attempting to com-pare credit plans. The act requires theBoard to develop regulations to imple-ment the amendments.


166 Legislation Enacted

Women's Business OwnershipAct of 1988P.L. 100-533, the Women's BusinessOwnership Act of 1988, enacted onOctober 25,1988, establishes a NationalWomen's Business Council and amendsthe Small Business Act to provide fordemonstration projects to provide ser-vices and assistance to small businessesowned by women.

The act also amends the Equal CreditOpportunity Act to require the Board toprescribe regulations to improve accessto capital for small businesses owned bywomen. The amendments require credi-tors to maintain records of business loanapplications by women and to give suchapplicants notice of their right to informa-tion concerning credit denials.

Housing and CommunityDevelopment Act of 1987P.L. 100-242, the Housing and Commu-nity Development Act of 1987, enactedFebruary 5,1988, makes the Home Mort-gage Disclosure Act of 1975 permanentand extends its coverage to the mortgage-banking subsidiaries of holding com-panies of depository institutions and tocertain savings and loan service corpora-tions. The new law also amends severalexisting statutes in order to improve theavailability of low- and moderate-incomehousing in the United States. •


167

Banking Supervision and Regulation

During 1988 the international supervi-sion of banking organizations reached animportant milestone. Under the auspicesof the Basle Committee on BankingRegulations and Supervisory Practices,the Federal Reserve and the other U.S.bank regulators reached an agreementwith the central banks and banking super-visors of 11 industrialized nations oninternational guidelines for risk-basedcapital standards.1 The agreement aimsfor more consistent capital standardsthroughout the world, thereby reducing asource of competitive inequity amonginternational banking organizations. Theagreement, which the Board adopted inDecember 1988, will be phased in overthe next four years.2 The risk-basedframework will introduce more sensitiv-ity to risk factors, including off-balance-sheet exposures, than the current lever-age ratios provide. The standards shouldalso encourage banking organizations,particularly those engaged in interna-tional activities, to strengthen their capi-tal positions.

The guidelines constitute a major stepin fulfilling the capital mandate set forthby the Congress in the InternationalLending Supervisory Act of 1983. Whenfully in place throughout the world, therisk-based capital standard promisessupport of a more stable internationalbanking environment.

The Board also considered numerousproposals for expansions of banks and

1. The other U.S. regulators in the agreementare the Federal Deposit Insurance Corporation andthe Office of the Comptroller of the Currency.

2. For a discussion of the Board's action, see thesection on policy statements in the chapter of thisREPORT on "Record of Policy Actions of the Boardof Governors."

nonbanks, the effects of which willcontinue the restructuring of the geo-graphic and product environment thathas evolved in recent years. The propos-als included large interstate combinationsas well as reorganizations and acquisi-tions for certain Texas-based institutionsin financial difficulty. Under provisionsgranted by the Congress to cover emer-gencies, the Board expedited its process-ing of applications involving failingbanks and distressed thrift institutions.

In addition, Division staff membersprovided technical assistance to otheragencies in selecting an appropriateowner for failing institutions. Throughthis process, the agencies attempt toselect a bidder that will provide optimumfinancial and managerial resources to thesuccessor institution at the lowest possi-ble cost.

The Board also took significant stepson the issue of securities underwritingand dealing by banking organizations.By way of background, the Board in 1987approved proposals by banking organiza-tions to underwrite and deal on a limitedbasis in investment-quality commercialpaper, certain municipal revenue bonds,conventional residential mortgage-re-lated securities, and securitized con-sumer loans in a manner consistent withthe Glass-Steagall Act and the BankHolding Company Act. The Board lim-ited revenues from these approved activ-ities to no more than 5 percent of totalrevenues for each organization. TheBoard also required that the organizationsundertake these activities in separatesecurities subsidiaries under limitationsthat would insulate bank subsidiaries withfederally insured deposits from relatedrisks and to avoid possible conflicts of


168 Banking Supervision and Regulation

interests, unfair competition, and otherpotential adverse effects.

In accordance with the provisions ofthe Competitive Equality Banking Act of1987, the Congress placed a moratorium,until March 1, 1988, on bank holdingcompanies engaging in these securitiesactivities. Court rulings upheld theBoard's action in large part. Subsequentto the expiration of the moratorium,several bank holding companies appliedto the Board to underwrite and deal in abroad range of corporate debt and equitysecurities under the terms set by theBoard in 1987. After extensive delibera-tions, the Board approved the applica-tions in January 1989 subject to additionalconditions. In particular, approval ofactivity in equities carries a one-yearwaiting period, after which the Boardwill determine whether the applicantshave the managerial and operationalstructure required by the Board to com-mence the new activity.

Risk-Based Capital

On March 1, 1988, the Federal Reserveissued for public comment its proposedguidelines for risk-based capital based onthe December 1987 Basle Accord. Theseproposed guidelines superseded the pro-posal on risk-based capital issued forpublic comment in February 1987.

The Basle Accord was developed bythe Basle Committee on Banking Regula-tions and Supervisory Practices, whichconsists of representatives of the centralbanks and supervisory authorities from12 industrial countries.3 The accordaimed to develop a broad-based capitalframework applicable to internationalbanking organizations from the major

3. The 11 "Group of 10" countries (Belgium,Canada, France, Germany, Italy, Japan, the Neth-erlands, Sweden, Switzerland, the United King-dom, and the United States) plus Luxembourg.

industrial countries. The principle objec-tives of the framework were greaterconvergence in the measurement andassessment of capital adequacy interna-tionally and strengthened capital posi-tions of major international bankingorganizations.

After reviewing and incorporatingpublic comments, the Board of Gover-nors approved the final risk-based capitalguidelines on December 14, 1988, forstate member banks and bank holdingcompanies. The Federal Deposit Insur-ance Corporation and the Office of theComptroller of the Currency issuedsimilar guidelines early in 1989.

The domestic guidelines adopted bythe Board establish a systematic analyti-cal framework that (1) makes regulatorycapital requirements more sensitive todifferences in risk profiles among bank-ing organizations, (2) takes off-balance-sheet exposures into explicit account inassessing capital adequacy, and (3) mini-mizes disincentives to holding liquid,low-risk assets.

These guidelines consist of a definitionof capital, a system for assigning assetsand off-balance-sheet items to risk cate-gories, a schedule for achieving a mini-mum risk-based capital ratio, and aphase-in period that provides for transi-tional arrangements. The minimum su-pervisory ratios reflected in the frame-work's transitional provisions will notbecome effective until December 31,1990. The supervisory ratios in theirfinal form will take effect December 31,1992.

Supervision for Safetyand Soundness

The Federal Reserve conducts the follow-ing activities to ensure the safety andsoundness of financial institutions: on-site examinations and inspections, sur-


Banking Supervision and Regulation 169

veillance and monitoring, and enforce-ment and other supervisory actions.

Examinations and Inspections

The on-site review of operations is anintegral part of ensuring the safety andsoundness of financial institutions. Exam-inations of state member banks and Edgecorporations and inspections of bankholding companies and their subsidiariesentail (1) an appraisal of the quality of theinstitution's assets; (2) an evaluation ofmanagement, including internal policies,operations, and procedures; (3) an assess-ment of the key financial factors ofcapital, earnings, asset and liabilitymanagement, and liquidity; and (4) areview for compliance with applicablelaws and regulations.4

State Member BanksThe Federal Reserve is the primary fed-eral supervisor and regulator of state-chartered commercial banks that aremembers of the Federal Reserve System,of which there were 1,063 at the end of1988. These banks accounted for about 8percent of all insured commercial banksand about 18 percent of the assets of allsuch banks.

The Federal Reserve in 1986 increasedthe frequency of scheduled examinationsand inspections of state member banks

4. The Board's Division of Consumer andCommunity Affairs is responsible for reviewingcompliance with consumer and civil rights laws.This responsibility is accomplished mainly throughexaminations by specially trained Reserve Bankexaminers. These regulatory responsibilities aredescribed in the section of this REPORT coveringconsumer and community affairs. Compliance withother statutes and regulations, which is treated inthis section, is the responsibility of the Board'sDivision of Banking Supervision and Regulationand the Reserve Banks, whose examiners check forsafety and soundness.

and bank holding companies. The guide-lines call for state member banks to beexamined at least annually. Except forlarge or troubled banks, examination byeither a Reserve Bank or state bankingagency will meet that requirement. In1988, either the Federal Reserve or astate banking agency examined 1,083state member banks at least once. Alto-gether, the state agencies conducted 344examinations of state member banks, andthe Federal Reserve conducted 875 exam-inations, some of them jointly with thestate agencies. Under policy guidelines,Reserve Bank officials also held 348meetings with directors of the largeststate member banks in each state and withdirectors of those banks that displayedsignificant weaknesses.

Bank Holding CompaniesIn 1988 the number of bank holdingcompanies increased by 31, to 6,474.These organizations control 9,025 com-mercial banks, which hold approximately91 percent of the assets of all insuredcommercial banks in the United States.

Most large bank holding companiesand smaller companies with significantnonbank assets are inspected annuallyunder the 1986 guidelines. Others areinspected at least every three years or, inthe case of the smallest companies with-out any nonbank assets, on a samplebasis. The inspection focuses on theoperations of the parent and the nonbank-ing companies. The subsidiary banks areexamined by the appropriate bankingregulators. In 1988, System examinersmade 2,726 on-site inspections and 97off-site inspections. State examiners made49 inspections of bank holding com-panies. During 1988, Reserve Bankofficials held 591 meetings with directorsof the largest bank holding companiesand with those of companies displayingsignificant weakness.



Enforcement Actionsand Civil Money Penalties

Under the Financial Institutions Supervi-sory Act of 1966, the Board of Governorshas the authority to enter into writtenagreements with, or issue cease and desistorders against, state member banks andbank holding companies, and personsassociated with such organizations, thatengage in unsafe or unsound practices orthat violate applicable laws or regula-tions. The Board may also assess civilmoney penalties for violations of a cease-and-desist order, of the Bank HoldingCompany Act, or of certain provisions ofthe Federal Reserve Act.

In 1988 the Reserve Banks recom-mended, and the Board's staff initiatedand worked on, 144 enforcement casesthat involved 287 separate actions such ascease and desist orders, removals, andcivil money penalties, most dealing withunsafe or unsound banking practices; ofthese, 54 cases involving 93 actions,were completed by year-end. The Boardcompleted 6 civil money penalty actionsand assessed a total of $55,000. Byyear-end 1988, the Board collected$40,000, with the remainder of theassessments to be paid in accordancewith agreed-upon schedules. A descrip-tion of all formal supervisory actionsduring the year and the reasons for themare available to the public in the Board'stwice-yearly "Report on Formal En-forcement Actions."

to provide all segments of the U.S. econ-omy with a means of financing interna-tional trade, especially exports. Anagree-ment corporation is a company that entersinto an agreement with the Board not toexercise any power that is impermissiblefor an Edge corporation. In 1988 theFederal Reserve examined 112 Edge andagreement corporations.

Foreign-Office Operationsof U.S. Banking OrganizationsThe Federal Reserve examines the inter-national operations of state memberbanks, Edge corporations, and bankholding companies principally at the U. S.head offices of these organizations, wherethe ultimate responsibility for their for-eign offices lies. In addition, the FederalReserve conducts on-site reviews ofimportant foreign offices at least everythree years to supplement the results ofthe head-office examinations. In 1988 theFederal Reserve examined 12 foreignbranches of state member banks and 34foreign subsidiaries of Edge corporationsand bank holding companies. In 1988 theFederal Reserve, in coordination withthe Office of the Comptroller of the Cur-rency, conducted extensive on-site exam-inations of merchant banking activities ofU.S. banking organizations in the UnitedKingdom and Spain. All the examinationsabroad were conducted with the cooper-ation of the supervisory authorities of thecountries in which the examinations tookplace.

International Activities

The Federal Reserve is responsible forsupervising several international ac-tivities.

Edge and Agreement CorporationsEdge corporations are international bank-ing organizations chartered by the Board

U.S. Activities of Foreign BanksForeign banks continue to be significantparticipants in the U.S. banking system.As of year-end 1988, 264 foreign banksoperated 457 state-licensed branches andagencies, of which 31 are insured by theFederal Deposit Insurance Corporation.At year-end these foreign banks alsooperated 81 branches and agencies li-



censed by the Office of the Comptrollerof the Currency, of which 4 have FDICinsurance. Foreign banks also directlyowned 18 Edge corporations and 9 com-mercial lending companies. In addition,foreign banks held a 25 percent or greaterinterest in 88 U.S. commercial banks.Together, these foreign banks at year-end controlled approximately 20 percentof U.S. banking assets.

The Federal Reserve has broad author-ity to supervise and regulate foreignbanks that engage in banking in theUnited States through branches, agencies,commercial lending companies, Edgecorporations, or banks. In exercising thisauthority, the Federal Reserve relies onexaminations conducted by the appropri-ate federal or state regulatory agency.Although states have primary authorityfor examining state-licensed uninsuredbranches and agencies, the Federal Re-serve participated in the examination of125 such offices during the past year.

Specialized Examinations

The Federal Reserve conducts special-ized examinations in the following areasof bank activity: data processing, trustactivities, dealing and brokering govern-ment securities, dealing and clearingmunicipal securities, and transferringsecurities.

Electronic Data ProcessingUnder the Interagency EDP ExaminationProgram, the Federal Reserve examinesthe electronic data processing (EDP)activities of state member banks, Edgeand agreement corporations, and inde-pendent centers that provide EDP ser-vices to these institutions. In 1988,System examiners conducted 296 on-siteEDP reviews. In addition, the FederalReserve reviews reports of EDP exami-nations issued by other bank regulatory

agencies on organizations that providedata-processing services to state memberbanks.

Trust ActivitiesDuring 1988 the Federal Reserve con-ducted 215 examinations of the trustfunctions of state member banks, trustcompanies that are members of the Fed-eral Reserve System, and certain foreignand domestic trust companies that aresubsidiaries of bank holding companies.At the end of 1988, 432 of these institu-tions exercised trust powers, approxi-mately 10 percent of the total number ofinstitutions in the industry. These 432institutions held about 50 percent of thetotal assets administered by all suchbanks, trust companies and subsidiaries.

Government Securities Dealersand BrokersUnder the Government Securities Act of1986, the Board is responsible for exam-ining government securities dealer andbrokerage activities of state memberbanks and of some foreign banks forcompliance with the act and with theregulations of the Treasury Department.Forty-three state member banks, onebranch of a foreign bank, and oneagency of a foreign bank currently haveon file with the Board notices that theyare government securities dealers orbrokers not otherwise exempt byTreasury Department regulations.Specialized examination proceduresrelating to government securitiesactivities were revised by the FederalReserve in September 1988 in light ofregulatory amendments adopted by theTreasury Department.

Municipal Securities Dealersand Clearing AgentsThe Securities Act Amendments of 1975made the Board responsible for supervis-



ing state member banks and bank holdingcompanies that act as municipal securitiesdealers or as clearing agencies. In 1988the Board examined 26 state memberbanks that deal in municipal securities.Currently 50 such banks are registeredwith the Board. A clearing agency acts asa custodian of securities involved intransactions settled by bookkeeping en-tries. The four agencies registered withthe Board were examined in 1988.

Transfer AgentsSystem examiners conducted separatereviews of state member banks and bankholding companies that act as transferagents. Transfer agents countersign andmonitor the issuance of securities, regis-ter the transfer of securities, and ex-change or convert securities. During1988, System examiners conducted ex-aminations of 79 of the 165 banks andbank holding companies registered astransfer agents with the Board.

Surveillance and Monitoring

The Federal Reserve monitors the finan-cial condition of state member banks andbank holding companies. The surveil-lance program supplements the FederalReserve's on-site examination programwith automated screening systems thatidentify organizations with poor or dete-riorating financial profiles. These auto-mated systems use quarterly financialstatements submitted by the bankingorganizations and compute numerousfinancial ratios, which are then analyzedby the staff members of the Division andof the Reserve Banks in order to deter-mine whether banking organizations arepotential emergency problems. The sur-veillance program also aids in the alloca-tion of the System's examination re-sources by focusing early attention onthose banking institutions that appear to

have recently encountered financial prob-lems. These organizations may then besubject to accelerated examinations ormay warrant closer supervision or othersupervisory actions.

Supervisory Policy

In addition to its enactment of risk-basedcapital guidelines, the Board in 1988initiated or modified several other super-visory guidelines. The following sectionssummarize the principal aspects of theseadditional initiatives or changes andreview other activities carried out duringthe year to enhance the supervisoryprogram.

Problem Loans in Agriculture

In 1987 the Congress passed the Compet-itive Equality Banking Act, which in partrequired the three federal bank regulatoryagencies to issue regulations permittingagricultural banks with assets of less than$100 million to amortize losses on agri-cultural loans and related real or personalproperty over a period not to exceedseven years. Banks seeking to amortizelosses on qualified agricultural loans arerequired to apply to their Federal ReserveBank for acceptance into the program,must have capital in need of restoration,and must haye reasonable procedures forrestoring capital to acceptable levels. Atyear-end 1988, eight state member bankswere amortizing their loan losses underthe program.

In a related action, effective December31, 1987, the Federal Financial Institu-tions Examination Council (FFIEC)amended the regulatory reports for thebanks amortizing their losses. Theserevised reports permit losses eligible fordeferral to be reinstated as new items inthe asset and equity sections of thebalance sheet. The resulting increases inthe capital account are treated as primary



capital for determining the adequacy ofthe bank's capital.

In 1988 the FFIEC revised the instruc-tions for Call Reports so that transfers ofsecuritized agricultural mortgages, underthe Farmer Mac Program, could bereported as sales. Otherwise these assetswould be reported as borrowings underthe general rule governing the sale ofassets with recourse.

Relations with the States

The Board has provided a total of$300,000 to the Education Foundation ofState Bank Supervisors over the pastthree years. Established by the Confer-ence of State Bank Supervisors, theFoundation offers technical courses tostate bank examiners. The Board alsoauthorized the Federal Reserve Banks toprovide scholarships to examiners em-ployed by state banking agencies to helpthem cover expenses in attending trainingcourses offered by the Federal Reserveand by the FFIEC.

Accounting Standardsand Regulatory Reporting

The Board and its staff are continuing towork on eliminating, to the extent possi-ble, differences between regulatory re-porting requirements and generally ac-cepted accounting principles (GAAP). In1988 the Board incorporated GAAP in itsregulatory requirements for reportingnonrefundable loan fees. Under the aus-pices of the FFIEC, the Board in Novem-ber 1988 issued for public comment aproposal to require that the income frominterest rate swaps be recognized overthe life of the transaction for Call Reportpurposes, in a manner analogous to thatunder GAAP. This proposal would alsorequire that changes in the market value

of interest rate swaps occurring afterinception be recognized in the currentperiod.

Progress was made toward the adop-tion of regulatory reporting standards forpush down accounting and futures thatare consistent with GAAP. The Boardalso adopted Financial Accounting Stan-dards Board (FASB) Statement 95, whichreplaced the statement of changes infinancial position in the FR Y-6 annualreports filed by bank holding companieswith a statement of cash flows.

Board staff members have served onvarious advisory committees of FASBand advisors to that group's project onfinancial instruments. Staff members alsoprovide commentary on proposals issuedby FASB and by the American Instituteof Certified Public Accountants thataffect banking organizations.

Staff Training

System staff training emphasizes analyti-cal and supervisory themes common tothe four areas of supervision and regula-tion—examinations, inspections, applica-tions, and surveillance—and stresses theinterdependence among these areas.

During 1988 the Federal Reserveconducted fifty sessions of variouscourses. The core banking programcomprised four sessions of an introduc-tory course, eight sessions of an interme-diate course, and five sessions of anadvanced course; each course lasted threeweeks. A new course presented this year,Senior Forum for Current RegulatoryIssues, is a continuing-education seminarfor senior examiners. The other offeringscovered sixteen sessions of a course oneffective writing for banking supervisionstaff, five sessions of a credit analysiscourse, two sessions of a bank holdingcompany applications course, six ses-sions on bank holding company inspec-tions, one session on cash flow and



liquidity analysis, and two courses of onesession each on consumer compliance.

Also, System staff attended two coursesconducted jointly by a financial institu-tions regulator and the Federal Bureau ofInvestigation on white-collar crime andbank failures.

In 1988 the System participated in111 sessions of courses offered by theFFIEC in specialized areas of income-property lending, trust department activ-ities, off-balance-sheet risk, internationalbanking, electronic data processing,activities of municipal securities dealers,payments system risks, white-collarcrime, management training, conductingmeetings with management, and instruc-tor training.

During 1988 the Federal Reservecosponsored with the World Bank twotraining sessions for senior supervisorsfrom developing nations. Sixty-eightrepresentatives from twenty-nine coun-tries attended these programs.

In 1988 the Federal Reserve trained1,194 System employees in Systemschools and 866 System employees inschools conducted by the FFIEC andother agencies, for a total of 2,060, inaddition to 269 students from state agen-cies and 117 from foreign central banks.

Federal Financial InstitutionsExamination Council

During 1988 the Federal Reserve adoptedseveral policies recommended by theFFIEC.5 The Board joined the otherconstituent agencies of the FFIEC inapproving a policy statement concerning

5. The FFIEC consists of representatives fromthe Board of Governors of the Federal ReserveSystem, the Federal Deposit Insurance Corpora-tion, the Federal Home Loan Bank Board, theNational Credit Union Administration, and theOffice of the Comptroller of the Currency.

selection of securities dealers and unsuit-able investment practices. The FederalReserve also endorsed a FFIEC proposalto inform financial institutions of therisks associated with large-scale inte-grated systems of financial software.

In March 1988 the Federal Reserveand other FFIEC agencies implementeda program for the electronic transfer ofreports of condition and income bybanks. CompuServe, Inc., has beendesignated collection agent for theagencies.

The FFIEC and other agencies alsorevised reporting requirements to accom-modate special lending programs and todisclose certain off-balance-sheet ac-tivities. In addition, provision has beenmade to collect information on the typeof audits performed on financial institu-tions by independent certified publicaccountants.

Regulation ofthe U.S. Banking Structure

The Board administers the Bank HoldingCompany Act, the Bank Merger Act, andthe Change in Bank Control Act for bankholding companies and state memberbanks. In doing so, the Federal Reserveacts on a variety of proposals that directlyor indirectly affect the structure of U.S.banking at the local, regional, and na-tional levels. The Board also has primaryresponsibility for regulating the interna-tional operations of domestic bankingorganizations and the overall U.S. bank-ing operations of foreign banks, whetherconducted directly through a branch oragency or indirectly through a subsidiarycommercial lending company. In addi-tion, the Board has established regula-tions for the interstate banking activitiesof these foreign banks and for foreignbanks that control a U.S. subsidiarycommercial bank.



Public Notice of Board Decisions Bank Holding Company Act

Each decision by the Board that involvesa bank holding company, bank merger,change in control, or international bank-ing proposal is effected by an order orannouncement. Orders state the decisionalong with the essential facts of theapplication and the basis for the decision;announcements state only the decision.All orders and announcements are re-leased immediately to the public; they arealso reported in the Board's weekly H.2statistical release and in the monthly Fed-eral Reserve Bulletin. Announcement ofapplications and notices received by theSystem but not yet acted on is made in theH.2 release.

Timely Processing of Applications

The Federal Reserve maintains targetdates and procedures for the processingof applications. These target dates pro-mote efficiency at the Board and theReserve Banks and reduce the burden onapplicants. The time allowed for a deci-sion is 60 days; during 1988, about 91percent of the decisions met this standard.

Delegation of Applications

The Board has delegated certain regula-tory functions—including the authorityto approve, but not to deny, certain typesof applications—to the Reserve Banks, tothe Staff Director of the Board's Divisionof Banking Supervision and Regulation,and to the Secretary of the Board.

The delegation of responsibility forapplications permits staff members towork more efficiently at both the Boardand the Reserve Banks by removingroutine cases from the Board's agenda.During 1988, 89 percent of the applica-tions were acted on under delegatedauthority.

By law, a company must obtain theBoard's approval if it is to form a bankholding company by acquiring control ofone or more banks. Moreover, onceformed, a bank holding company mustreceive the Board's approval beforeacquiring additional banks or nonbankingcompanies.

In reviewing an application filed by abank holding company, the Boardconsiders factors relating to theconvenience and needs of the com-munity to be served, the applicant'sfinancial and managerial resources, theprospects of both the applicant and thefirm to be acquired, and die competitiveeffects of the proposal.

In 1988 the Federal Reserve acted on1,337 bank holding company and relatedapplications. The Federal Reserve Sys-tem approved 400 new bank holdingcompanies plus 372 bank acquisitions byexisting bank holding companies and 489requests by existing companies to acquirenonbank firms engaged in activitiesclosely related to banking. Data on theseand related bank holding company deci-sions are shown in the accompanyingtable.

Bank Merger Act

The Bank Merger Act requires that allproposed bank mergers be acted uponby the appropriate federal bankregulatory agency. If the bank surviv-ing the merger is a state member bank,the Federal Reserve has primary juris-diction. Before acting on a proposedbank merger, the Federal Reserveconsiders factors relating to the com-munity's convenience and needs, thefinancial and managerial resources andprospects of the existing and proposedinstitutions, and the competitive effectsof the proposal. The Board must also



Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1988

Proposal

Formation of hold-ing company

Merger of holdingcompany

Retention ofbank

AcquisitionBankNonbankBank service

corporationOther

Total

Direct actionby the

Board of Governors

Approved Denied

Action under authority delegatedby the Board of Governors

Staff Director ofDivision of Banking

Supervision andRegulation

Approvedl Denied

Officeof the

Secretary

Approved

FederalReserve Banks

Approved Permitted

Total

30 0 1 0 2 367 0 400

5 0 0 0 1 55 0 61

0 0 0 0 0 1 0 1

38 0 1 0 22 311 0 372142 0 0 0 25 149 173 489

0 0 0 0 0 1 1 20 0 12 0 0 0 0 12

215 0 14 0 50 884 174 1,337

1. Two of the fourteen cases—the formation of a holding delegated by the Board for joint action by the office showncompany and the acquisition of a bank—were specifically and the General Counsel of the Board.

consider the views of certain otheragencies on the competitive factorsinvolved in the transaction.

During 1988 the Federal Reserveapproved 75 merger applications: theSecretary of the Board approved 4 underauthority delegated by the Board, and theReserve Banks approved 71. As requiredby law, each merger is described in thisREPORT (in table 16 of the StatisticalTables section).

When the Office of the Comptroller ofthe Currency or the Federal DepositInsurance Corporation has jurisdictionover a merger, the Board is asked tocomment on the competitive factors toassure comparable enforcement of theantitrust provisions of the act. The Boardand those agencies have adopted standardterminology for assessing competitivefactors in bank merger cases to assureconsistency in administering the act. Onbehalf of the Board, the Reserve Bankssubmitted 698 reports on competitivefactors to the OCC and the FDIC in1988.

Change in Bank Control Act

The Change in Bank Control Act requirespersons seeking control of a bank or bankholding company to obtain approval fromthe appropriate federal banking agencybefore the transaction occurs. Under theact, the Board is responsible for review-ing changes in the control of state memberbanks and of bank holding companies. Inso doing, it must review the financialcondition, competence, experience, andintegrity of the acquiring person; it mustconsider the effect on the financial condi-tion of the bank or bank holding companyto be acquired; and it must determine theeffect on competition in any relevantmarket.

The federal banking agencies are re-quired to publish notice of each proposedchange in control and to invite publiccomment, particularly from persons lo-cated in the markets served by the institu-tion to be acquired. The federal bankingagencies are also required to assess thequalifications of each person seeking



control; the Board routinely makes sucha determination and verifies informationcontained in the proposal. In 1988 theFederal Reserve System acted on 198proposed changes in control of statemember banks and bank holding com-panies. The Reserve Banks consented to192 proposals, the Secretary of the Boardconsented to 5 under authority delegatedby the Board, and the Board consentedt o l .

writing and dealing in securities; (4)providing management consulting ser-vices to failed savings and loan associa-tions under the Management Consign-ment Program of the Federal Home LoanBank Board, and assisting in the disposi-tion of assets of such failed institutions;and (5) issuing and selling drafts and wiretransfers that are payable in foreign cur-rencies without limitation as to their faceamount, but subject to certain limitations.

Board Policy Decisionsand Developmentsin Bank-Related Activities

In 1988 the Board approved several newnonbanking activities for individual bankholding companies. It also had underconsideration other nonbanking propos-als, including one to engage in modifiedleasing activities. A proposed rulemak-ing procedure would require Board ap-proval for state bank affiliates of bankholding companies to establish or acquireoperations subsidiaries. (In early 1989the Board approved pending applicationsto engage in expanded securities under-writing and dealing activities.)

Approval of PermissibleNonbank ActivitiesIn 1988 the Board for the first timeapproved the following activities forindividual bank holding companies: (1)providing investment advisory and re-search services to retail customers incombination with securities brokerageactivities; (2) providing financial adviceto the Canadian federal and provincialgovernments, such as with respect to theissuance of their securities in the UnitedStates; (3) engaging in private placementof ineligible securities (for underwritingand dealing by banks) to a limited extentas an incidental activity related to under-

Proposals to Engagein New Nonbanking ActivitiesAt year-end 1988 the Board was consid-ering a proposal for bank holding com-panies to engage in leasing transactionsin a manner consistent with expandednational bank leasing powers authorizedby the Competitive Equality Banking Actof 1987. At year-end the Board also wasconsidering a proposal for a bank holdingcompany to ftmction as a foreign cur-rency options specialist on a securitiesexchange.

Also pending was a proposal to rescindan existing rule that permits bank holdingcompanies, through their state-charteredbank subsidiaries, to establish or acquirenonbank operations subsidiaries engagedin activities that may be conducted by theparent bank. If adopted, this proposalwould require bank holding companies toobtain approval to acquire or retaincontrol of such nonbank operations sub-sidiaries. The Board also requested com-ment on a proposal to permit retention ofall or most existing operations sub-sidiaries without further approval.

Other rulemaking proposals wereunder continuing review at year-end.These proposals, if adopted, would per-mit bank holding companies to acquirehealthy thrift institutions and to engagein real estate investment and devel-opment activities subject to appropriatelimitations.



Applicationsby State Member Banks

State member banks must obtain thepermission of the Board to open newdomestic branches, to make investmentsin bank premises that exceed 100 percentof capital stock, and to add to the capitalbase from sales of subordinated debt.State member banks must also give sixmonths' notice of their intention to with-draw from membership in the FederalReserve, although the Board may shortenor eliminate the notice period in specificcases. These matters are normally han-dled by the Federal Reserve Banks underdelegated authority or, in the case ofcertain investments in bank premises orproposed sales of subordinated debt, bythe Staff Director of the Board's Divisionof Banking Supervision and Regulation.

Stock Repurchasesby Bank Holding Companies

A bank holding company sometimespurchases its own shares from its share-holders. When the company borrows themoney to buy the shares, the transactionincreases the debt of the bank holdingcompany and simultaneously decreasesits equity. Relatively large repurchasesmay undermine the financial condition ofa bank holding company and its banksubsidiaries. The Board's regulationsrequire holding companies to give ad-vance notice of repurchases that retire 10percent or more of their consolidatedequity capital. The Board may object tostock repurchases by holding companiesthat fail to meet certain standards, includ-ing the Board's capital guidelines. During1988 the Federal Reserve reviewed 110proposed stock repurchases by bankholding companies, 107 of which wereacted on by the Reserve Banks on behalfof the Board.

International Activitiesof U.S. Banking OrganizationsThe Board has several statutory respon-sibilities in supervising the internationaloperations of U.S. banking organiza-tions . The Board must provide authoriza-tion and regulation of foreign branches ofmember banks; of overseas investmentsby member banks, Edge corporations,and bank holding companies; and ofinvestments by bank holding companiesin export trading companies. In additionthe Board is required to charter andregulate Edge corporations and theirinvestments.

Foreign Branches of Member Banks

Under provisions of the Federal ReserveAct and of Regulation K, member banksin most cases must seek Board approvalto establish branches in foreign countries.In reviewing proposed foreign branches,the Board considers the requirements ofthe law, the condition of the bank, and thebank's experience in international busi-ness. In 1988 the Board approved theopening of seven foreign branches.

By the end of 1988,147 member bankswere operating 854 branches in foreigncountries and overseas areas of the UnitedStates; 113 national banks were operating715 of these branches, and 34 statemember banks were operating the remain-ing 139 branches.

International Banking Facilities

The Board amended its Regulations Dand Q to permit the establishment ofinternational banking facilities (IBFs) inthe United States as of December 3,1981. An IBF is essentially a set of assetand liability accounts that is segregatedfrom the accounts of the office establish-ing the IBF. Deposits from, and creditextended to, foreign residents or other



IBFs generally can be booked at thesefacilities free from domestic reserverequirements and interest rate limita-tions. Subject to conditions specified bythe Board, IBFs may be established byU.S. depository institutions, by Edgeand agreement corporations, and by U. S.branches and agencies of foreign banks.By the end of 1988, 532 IBFs had beenestablished.

Edge and Agreement Corporations

Under sections 25 and 25(a) of the Fed-eral Reserve Act, Edge and agreementcorporations may engage in internationalbanking and foreign financial transac-tions. These corporations, which areusually subsidiaries of member banks,provide their owner organizations withthe following powers: (1) they mayconduct a deposit and loan business instates other than that of the parent,provided that the business is strictlyrelated to international transactions; and(2) their powers to make foreign invest-ments are broader than those of memberbanks because they can invest in foreignfinancial organizations, such as financecompanies and leasing companies, aswell as in foreign banks. By the end of1988, there were 112 Edge corporations,which had 49 branches. The Boardrequires each Edge corporation that isengaged in banking to maintain a ratio ofequity to risk-assets of at least 7 percent.

Foreign Investments

Under authority of the Federal ReserveAct and the Bank Holding Company Act,U.S. banking organizations may engagein activities overseas with the autho-rization of the Board. To a significantextent, the Board's Regulation K permitssuch investments without prior Boardreview. In 1988 the Board reviewed andpermitted 71 foreign investments bv

member banks, Edge and agreementcorporations, and bank holding com-panies. In most cases, the applicantrequested permission to increase anexisting investment. The Board alsoamended Regulation K to facilitate theability of bank holding companies toengage in debt-for-equity swap transac-tions in certain developing countries.

Export Trading Companies

In 1982 the Bank Export Services Actamended Section 4 of the Bank HoldingCompany Act to permit bank holdingcompanies, their subsidiary Edge oragreement corporations, and bankers'banks to invest in export trading com-panies, subject to certain limitations andafter Board review. The purpose was toallow effective participation by bankholding companies in the financing anddevelopment of export trading com-panies. The Export Trading CompanyAct Amendments of 1988 provide addi-tional flexibility for bank holding com-panies engaging in export trading com-pany activities. Since 1982 the Board hasacted affirmatively on notifications by 45bank holding companies to establishexport trading companies.

Enforcement of otherLaws and Regulations

This section describes the Board's respon-sibilities for the enforcement of laws,rules, and regulations other than thosespecifically related to bank safety andsoundness and the integrity of the bankingstructure.

Bank Secrecy Act

Through the examination process, theFederal Reserve determines whether theinstitutions it supervises are complyingwith the recordkeeoine and reoortine



requirements of the Currency and For-eign Transactions Reporting Act (theBank Secrecy Act). Among the stipula-tions in the act designed to combatunlawful currency transactions is therequirement that financial institutions(and selected other businesses) report tothe Internal Revenue Service certain cashtransactions of more than $10,000.

During 1988 the Federal Reserve,working in concert with the other federalbanking agencies and the federal lawenforcement community, focused itscompliance efforts toward criminal oper-ations that conduct cash transactionsunder the $10,000 threshold and also usethe banking system's wire transfer oper-ations to launder money. The FederalReserve has encouraged the institutions itsupervises to report such suspiciousactivities to the federal enforcementauthorities.

The Federal Reserve also supportedthe Omnibus Drug Initiative Act of 1988which, among other provisions, intensi-fied the recordkeeping requirements ofbanks that sell monetary instruments tonondeposit customers and provided theSecretary of the Treasury with the author-ity to conduct regional investigations ofmoney laundering.

Securities Regulation

Under the Securities Exchange Act of1934, the Board is responsible for regu-lating credit in certain transactions involv-ing the purchase or carrying of securities.In fulfilling its responsibility under theact, the Board limits the amount of creditthat may be provided by securities bro-kers and dealers (Regulation T), by banks(Regulation U), and by other lenders(Regulation G). Regulation X extendsthese credit limitations, or margin re-quirements, to certain borrowers and tocertain credit extensions, such as credit

obtained from foreign lenders by U.S.citizens.

Brokers and dealers are examined forcompliance with Regulation T by theSecurities and Exchange Commission,the National Association of SecuritiesDealers, and the national securities ex-changes. The three federal bank supervi-sory agencies examine banks under theirrespective jurisdictions for compliancewith Regulation U.

Other lenders are examined forcompliance with Regulation G by theBoard, the National Credit UnionAdministration, the Farm CreditAdministration, or the Federal HomeLoan Bank Board according to thejurisdiction involved. At the end of 1988there were 560 "G-lenders," of which310 were subject to the Board'ssupervision. Of these 310, 171 weresubject to regular inspection by the Fed-eral Reserve System. During the year,Federal Reserve examiners inspected 53G-lenders for compliance with the Fed-eral Reserve's margin requirements(these lenders are inspected on either abiennial or triennial basis, according tothe type of credit extended).

Regulations G and U in general imposecredit limits on loans whose purpose isthe purchasing or carrying of publiclyheld equity securities and that are securedby such securities.

Regulation T limits the amount ofcredit that brokers and dealers mayextend when securities serve as collat-eral for credit that is used to purchase orcarry securities. This collateral mustconsist of stocks and bonds traded onnational securities exchanges, of certainover-the-counter stocks that the Boarddesignates as having characteristicssimilar to those of stocks listed onnational exchanges, or of bonds meetingcertain requirements.

The Division of Banking Supervisionand Regulation monitors the market



activity of all over-the-counter (OTC)stocks to determine what stocks aresubject to the Board's margin require-ments. In 1988 the Board published theresulting "List of Marginable OTCStocks" in February, May, August, andNovember. The November list consistedof 3,111 stocks.

In August 1988 the Board amendedRegulation T, revising the definition of"OTC margin bond" to include certainforeign sovereign debt securities. Theamendment permits broker-dealers toextend good faith loan value on long-term debt securities issued or guaranteedas a general obligation by a foreignsovereign, its provinces, states, or cities,or a supranational entity if there isavailable an explicit or implicit rating ofthe entity in one of the two highest ratingcategories by a nationally recognizedstatistical rating organization.

Under Section 8 of the SecuritiesExchange Act, a nonmember domesticor foreign bank may lend to brokers ordealers posting registered securities ascollateral only if the bank has filed anagreement with the Board that it willcomply with all the statutes, rules, andregulations applicable to member banksregarding credit of securities. During theyear, the Board processed three suchagreements.

In 1988 the Securities RegulationSection of the Division of Banking Super-vision and Regulation issued 65 inter-pretations of the margin regulations.Those that presented sufficiently impor-

tant or novel issues were published in the"Securities Credit Transactions Hand-book," which is part of the FederalReserve Regulatory Service. These inter-pretations serve as a guide to the marginregulations.

Financial Disclosureby State Member Banks

State member banks must disclose certaininformation of interest to investors,including financial reports and proxystatements, if they issue securities regis-tered under the Securities Exchange Actof 1934. The Board's financial disclosurerules are required by statute to be substan-tially similar to those issued by theSecurities and Exchange Commission.

In 1988 the Board implemented acomprehensive revision of its reportingrequirements that rescinded RegulationF in its entirety and added a new disclo-sure rule as part of Regulation H. To easecompliance, the new rule requires bankssubject to Regulation H to use the formsprescribed by the Securities and Ex-change Commission and receive annualaudits of their financial statements. Smallbanks have the option of filing simplifiedquarterly reports.

At the end of 1988, 37 state memberbanks, most of which are of small ormedium size, were registered with theBoard under the Securities ExchangeAct. Members of the Board's staff reviewthe bank disclosures for compliance withthe regulation.

Loans by State Member Banks to their Executive Officers, 1987-88

Period

October 1-December 31, 1987January 1-March 31,1988April 1-June 30,1988July 1-September 30, 1988

Number Amount (dollars)Range of interest

rates charged(percent)

1,132 21,817,715 6.0-20.51,039 19,447,137 6.0-20.01,078 20,166,780 6.5-21.01,019 21,199,836 6.6-21.0



Loans to Executive Officers

Under section 22(g) of the Federal Re-serve Act, each state member bank mustinclude with each quarterly report ofcondition a report of all extensions ofcredit made by the bank to its executiveofficers since the date of the bank'sprevious report of condition. The accom-panying table summarizes these data forthe last quarter of 1987 and the first threequarters of 1988.

Federal Reserve Membership

At the end of 1988, 5,450 banks weremembers of the Federal Reserve System,a decrease of 299 from the previous year.Member banks operated 30,391 brancheson December 31,1988, a net increase of1,131 for the year.

Member banks accounted for 41 per-cent of all commercial banks in the UnitedStates and for 65 percent of all commer-cial banking offices. •


183

Regulatory Simplification

In 1978 the Board of Governors estab-lished the Regulatory ImprovementProject, in the Office of the Secretary, tominimize the burdens imposed by regu-lation, to ensure that consideration isgiven to minimizing the economic impactof regulation on small business, to affordinterested parties the opportunity toparticipate in designing regulations andto comment on them, and to ensure thatregulations are written in simple andclear language. Under the program,Board staff members periodically reviewall existing regulations for adherence tothese objectives. In 1986 the Boardreaffirmed its commitment to regulatoryimprovement, renaming the project theRegulatory Review Section and creat-ing a subcommittee of the Board calledthe Regulatory Policy and PlanningCommittee.

Availability of Information

In the spring of 1987 the Board adopted arevised version of its "Rules RegardingAvailability of Information." These rulescover three broad areas: requests underthe Freedom of Information Act, handledby the Secretary of the Board; subpoenas,inquiries regarding law enforcement, andsimilar matters, handled by the Board'sGeneral Counsel; and the routine disclo-sure of supervisory activities, tradition-ally handled by the Staff Director of theBoard's Division of Banking Supervisionand Regulation and staff members at theFederal Reserve Banks. This revision,the first since the Board promulgated therules in 1967, incorporates many proce-dures developed by the staff or suggestedby the courts in the intervening years.

Home Mortgage Disclosure

The Board revised its Regulation C toincorporate the 1988 amendments to theHome Mortgage Disclosure Act of 1975,which permanently extended the act andexpanded its coverage to include mort-gage banking subsidiaries of holdingcompanies of depository institutions andsavings and loan service corporationsthat originate or purchase mortgageloans. In adopting the final regulation,the Board made some changes in itsproposed definitions to ensure that insti-tutions already reporting under the actwould not be subject to additional report-ing burdens.

In the process of this revision, obsoleteprovisions were deleted, footnotes wereeither incorporated or eliminated, andthe instructions to the report forms weresignificantly reworked to make themeasier to follow.

Debt-Equity Swaps

In August 1987 the Board liberalizedprovisions to Regulation K to permitcertain investments abroad by U. S. bank-ing organizations through swaps of debtfor equity. In February 1988 the Boardfurther liberalized the regulation as itapplies to debt-for-equity investments inheavily indebted developing countries.

The new provisions permit investorsto acquire up to 40 percent of the equityof foreign companies engaged in nonfi-nancial activities in the context of ex-changing sovereign debt obligations forownership interests in the companies.The revisions extend to 15 years the timeperiod that companies acquired throughthe debt-for-equity conversions could be


184 Regulatory Simplification

held; the revisions also increased theamount that organizations may investwithout giving prior notice to the Board,to the greater of $15 million or 1 percentof the tangible equity of the bank holdingcompany.

Issuance of Foreign CurrencyDeposits

In light of the globalization of financialmarket transactions and the continuationof financial innovations, the Board de-cided that the Federal Reserve would nolonger discourage the issuance of foreigncurrency deposits in the United States.The decision will become effective onJanuary 1, 1990, to permit time forfinancial institutions to develop the pro-cedures for handling the reporting ofsuch accounts. The Board does not antic-ipate a significant demand for foreigncurrency deposits, in part because of theavailability of competing instruments andalso because foreign currency depositswill be subject to reserve requirements.

OTC Margin BondThe Board amended the definition of"OTC margin bond" in Regulation T(Credit by Brokers and Dealers) to makecertain foreign sovereign debt securitiesmarginable. The amendment permitsbrokers and dealers to extend "good faith"loan value on long-term debt securitiesissued as a general obligation by a for-eign sovereign or supernational entity ifthese securities are given one of the twohighest rating categories by a nationallyrecognized statistical rating organiza-tion. The amendment gives parity to U.S.broker-dealers with regard to banks andforeign dealers, who already could ex-tend such credit.

Efforts to Assist RegulatoryCompliance

The Board created a special form ofinformation release called a SpecialNotice to assist depository institutions incomplying with the Expedited FundsAvailability Act and the rule, RegulationCC, that implements it. The Board tookthis unusual step because the law andregulation is extremely lengthy, the timefor compliance was short, and manyfinancial institutions thought they wereexempt because they provided next-dayavailability of funds.

One Special Notice, entitled "You AreAffected by the Expedited Funds Avail-ability Law" and issued in June 1988,provided a one-page checklist of policiesand notices that institutions had to have inplace by September 1, the implementa-tion date of the regulation. The noticealso gave step-by-step instructions oncompliance and provided sample formsthat institutions could use in complyingwith the requirements for informing cus-tomers. The other Special Notice, issuedin August, addressed the new endorse-ment standards to be used on the back ofchecks.

The Federal Reserve Banks sent theSpecial Notices to all depository institu-tions in the United States, and the Boardprovided ready-to-print copy to relevanttrade associations to facilitate their distri-bution of the information. •


Federal Reserve Banks

185

The Expedited Funds Availability Act,which requires the Federal Reserve toensure the prompt availability of depos-ited funds according to mandatedschedules and to expedite the return ofchecks, was a major focus of the Sys-tem's activities in 1988. The legislation,title VI of Public Law 100-86, theCompetitive Equality Banking Act of1987, was enacted in August 1987 andbecame effective on September 1, 1988(see also "Record of Policy Actions of theBoard of Governors" in this REPORT).

Regulation CC

In December 1987 the Board proposedfor public comment Regulation CC,which implements the Expedited FundsAvailability Act. To better prepare thepublic to comment on the Board's propos-als, the Reserve Banks during January1988 conducted more than 220 seminarsattended by about 17,000 participantsfrom nearly 9,000 depository institutionsto explain the provisions of the act andthe proposed regulation. The Boardreceived more than 1,000 comments onthe proposals. After the Board approvedthe final Regulation CC in May, theReserve Banks conducted an additional290 seminars attended by approximately37,000 participants from more than16,000 depository institutions to explainthe provisions of the regulation and theactions banks must take to comply.

In April the Board requested commenton a proposed concept under which bankspresented with checks before 2:00 p.m.would be required to pay those checkswith same-day funds without imposingpresentment fees. The Board will analyzethe more than 1,100 comments it received

to determine whether to put the idea into aformal regulatory proposal to be issuedfor public comment.

Also in April the Board approvedstandards to be used by depository insti-tutions when endorsing checks during thecollection and return process (appendixD of Regulation CC). The standard isdesigned to promote clear and uniformendorsements and to make it easier forpaying banks to return unpaid checks. InAugust the Board issued a Special Noticethat clarified the endorsement require-ments and discussed the consequences ofnot endorsing checks in accordance withthe standard.

In June the Board requested commenton a proposed amendment to RegulationCC to address the delayed disbursementof teller's checks. In comments receivedon the original proposal for RegulationCC, some banks said that the requirementto provide next-day availability for tell-er's checks might be particularly unfairbecause some banks issue teller's checksdrawn on remote banks. In these cases,the bank of first deposit may be requiredto make funds available for withdrawalbefore it could reasonably be expected toreceive funds through the collectionprocess. The rule proposed in June wouldpermit a bank to issue an official checkdrawn on another bank only if a bank offirst deposit located in the same commu-nity as the issuing bank could receivecredit for the check as early as a checkdrawn on the issuing bank.

In October the Board requested com-ment on proposed clarifying amend-ments to Regulation CC designed to aidcompliance.

Under Regulation CC, the Board de-termines, upon the request of a state,


186 Federal Reserve Banks

bank, or other interested party, whether astate law related to funds availability ispreempted by federal law. The Board hasissued such determinations for the lawsof California, Connecticut, Illinois,Maine, Massachusetts, New Jersey, NewMexico, New York, and Rhode Island,as well as for the provision in the UniformCommercial Code governing the avail-ability of cash deposits.

Other Developments in the Pricingof Federal Reserve Servicesand in the Payments Mechanism

In 1988 the Federal Reserve System as awhole recovered 100.6 percent of itsoperating expenses and imputed costs,compared with 104.6 percent in 1987.The reduced rate of recovery is attribut-able primarily to the costs of providingnew services on returned checks inaccordance with Regulation CC.

Revenue at the Reserve Banks from allpriced services totaled $801.7 million,and costs were $796.6 million, for netrevenue of $5.2 million (see the sectionon Federal Reserve Bank financial state-ments for priced services, at the end ofthis chapter). These figures include theincome and expenses related to clearingbalances, the value of priced float, andthe PSAF (the private sector adjustmentfactor-the taxes and costs of capital thatthe System would have incurred if it werea private firm).

Check Collection

The operating and imputed costs of checkcollection by the Federal Reserve in 1988were $499.0 million (see the pro formaincome statement for priced services, byservice, and note 9, at the end of thischapter). Check operations for the yeargenerated $513.8 million in revenue anda net of $10.2 million in other income andexpenses. The number of checks handled

by the Reserve Banks was 17.6 billion,an increase of 3.6 percent from 1987.

The Board approved the implementa-tion of new Federal Reserve servicesdesigned to accelerate the processing ofreturned checks by the Federal ReserveBanks and thus facilitate compliance bybanks with the check return rules ofRegulation CC. The new return services,which are explicitly priced, becameeffective September 1, 1988. Returnedcheck fees are assessed on the paying orreturning bank depositing returnedchecks with the Federal Reserve Bank.Also on September 1, Federal Reserveforward collection fees were reducedbecause of the elimination of the returncost component in those fees. In June theBoard approved the prices and deadlinesfor the new Federal Reserve returnedcheck services as well as the revisedprices and deadlines for Federal Reserveforward collection services.

In May the Board converted intopermanent services the System's pilotprograms for truncation and for theelectronic delivery of information cap-tured through Magnetic Ink CharacterRecognition (MICR). Reserve Banks willinitially provide truncation services onlyto paying banks that request this servicelocally; eventually the System intends tooffer a national service by truncating acheck (holding the physical check andtransmitting payment information elec-tronically) at the first Federal ReserveBank to receive the check. Under theextended MICR service, Reserve Bankswould deliver payment information byelectronic transmission or magnetic tape,provide returned check and retrievalservice, and deliver the checks to thepaying bank several days later.

On September 1 the Reserve Banksimplemented the provisions of Regula-tion CC (Expedited Funds AvailabilityAct). The Reserve Banks also imple-mented new services designed to reduce


Federal Reserve Banks 187

the risk to depository banks from makingfunds available for withdrawal morepromptly. The Reserve Banks beganserving as returning banks, as defined byRegulation CC, and accepting returnedchecks from any paying bank or returningbank.

In order to expedite the return process,Reserve Banks began to send returnedchecks directly to the bank of first de-posit, thus bypassing intermediary en-dorsers. The Reserve Banks began over-night processing of local returned checksfor dispatch with the forward collectionchecks the next morning. Nonlocal re-turned checks are prepared for high-speed processing ("qualified") by the firstFederal Reserve office and dispatched tothe second Federal Reserve office thefollowing night. Federal Reserve officesalso accept returned checks that havebeen qualified by the paying bank or priorreturning bank and dispatch them asquickly as forward collection checks.

Because of the requirement in Regula-tion CC for expanded notification ofreturn, the Reserve Banks also beganprocessing notifications at the request ofthe paying bank for delivery to the bankof first deposit of any returned check foran amount greater than $2,500.

Electronic Payments

The Federal Reserve System is conduct-ing a strategic study of its electronicpayments services in the 1990s. Onephase of the study is an evaluation ofalternative delivery systems for elec-tronic payments. In 1988 the FederalReserve issued a request for proposals totest new technology. Concurrently, theReserve Banks are improving the relia-bility of their current operating systems.In addition, the Federal Reserve con-tacted representatives of depository insti-tutions and other users of payment ser-vices to define more precisely the future

business requirements for its electronicpayment services.

Automated Clearinghouse

Operating and imputed costs of providingautomated clearinghouse (ACH) ser-vices in 1988 were $38.9 million; reve-nues were $42.7 million. The ReserveBanks processed 602.4 million commer-cial transactions in 1988, an increase of26.8 percent over 1987.

In July 1988, operational measuresdesigned to reduce risk in the ACHmechanism became effective. The mea-sures include uniform procedures forReserve Banks to monitor ACH pay-ments originated by financially weakdepository institutions; earlier depositdeadlines for returns of ACH debittransactions of $2,500 or more; anduniform procedures for depository insti-tutions to account for credit transactionsthat settle on holidays or other days whenthe institutions are closed.

Board staff members continued theiranalysis of the proposal, offered in De-cember 1986, to modify the proceduresfor measuring daylight overdrafts and toredefine the finality of ACH transactions.The Board took no final action on theproposal in 1988.

Finally, the Reserve Banks continuedto make progress in increasing the num-ber of electronic connections to deposi-tory institutions for the delivery of ACHtransactions. The Reserve Banks de-ployed a new software product by whichdepository institutions can gain access toFederal Reserve services, includingACH, through personal computers. Theproduct should expand the electronicdelivery of ACH transactions.

Wire Transfer of Funds

The number of wire transfers originatedduring 1988 increased 5.7 percent over



1987, to 56.3 million. Service coststotaled $64.3 million, while revenueamounted to $69.6 million. In 1988 thebasic fee for funds transfers was reducedfrom $0.50 to $0.47.

By year-end 1988, almost all electronicconnections between Reserve Banks anddepository institutions for funds transfersvia low-volume computer terminals wereconverted to standard protocols andencrypted. The System also convertedmore than one-third of its high-volumeconnections by year-end.

To reduce the risk of service disrup-tions, the Reserve Banks completed a testto evaluate ways to process work for eachother during a serious interruption inoperations. The results led to improve-ments in the reliability of Federal Reserveelectronic payment services. In Novem-ber 1988 the Board approved the creationof a contingency processing center at theLos Angeles Branch to handle fundstransfers, securities transfers, and ACHand accounting operations in the event ofa severe interruption of service at theFederal Reserve Bank of San Francisco.

Coin and Currency

In its coin and currency operations, theFederal Reserve continued to focus onthe effectiveness of controls, the effi-ciency in processing, and the mainte-nance of high quality for currency incirculation.

Priced cash services received $14.9million in revenue in 1988; the cost ofthese services was $14.2 million. In1988, four Federal Reserve Districtsprovided transportation of cash byarmored carrier and four Districts pro-vided wrapped coin to depositoryinstitutions.

Major undertakings in 1988 included adetermination of the optimal level ofquality for the currency distributed to thepublic by Federal Reserve Banks. The

Federal Reserve also initiated a majorautomation effort that will enable theBoard, the Reserve Banks, the Bureau ofEngraving and Printing, and the U.S.Mint to better manage the supply of cashthrough the exchange of data. The Fed-eral Reserve also continued to work withthe Department of the Treasury to deterthe counterfeiting of U.S. currency.

Definitive Securitiesand Noncash Collection

The System received $17.9 million inrevenue for definitive safekeeping andnoncash collection services in 1988; thecost of these services was $16.7 million.The average number of definitive-securities issues and deposits maintainedin safekeeping accounts at the ReserveBanks decreased 15.6 percent in 1988, to138,000. The number of noncash collec-tion items processed decreased 12.2percent, to 3.3 million. Reserve Bankscontinue tosearch for ways to reducecosts as the volume of work decreases inboth the definitive safekeeping and non-cash collection services.

Securities and FiscalAgency Services

The Federal Reserve provides book-entry (computerized) securities servicesfor the Department of the Treasury andfor certain federally sponsored agencies,such as the Federal National MortgageAssociation and the Federal Home LoanMortgage Corporation. Book-entry ser-vices for federal agency securities aretreated as a Federal Reserve pricedservice; these services incurred costs of$8.4 million and earned revenue of $8.7million in 1988. The Federal Reserveprocessed 2.2 million such transfersduring the year, an increase of 8.5 percentfrom 1987.



The Federal Reserve sells savingsbonds in its role as fiscal agent. Under apilot program begun in 1987 and contin-ued in 1988, the Ohio Over-the-CounterSavings Bonds project, all savings bondssold over-the-counter in Ohio are beingissued at the Pittsburgh Branch of theFederal Reserve Bank of Cleveland ratherthan at the financial institutions receivingthe applications for purchase. The datafrom the pilot program indicate thatcentralized issuance saves money for thegovernment and is acceptable toinvestors.

Float

Federal Reserve float increased to a dailyaverage of $606 million in 1988, com-pared with $454 million in 1987. Thecosts of all Federal Reserve float associ-ated with priced services are recoveredeach year.

Examinations

The Board's Division of Federal ReserveBank Operations examines the 12 Re-serve Banks and their 25 Branches eachyear, as required by section 21 of the

Federal Reserve Act. The results of theaudits are given to the manage-ment and directors of the respectiveBanks and to the Board of Governors.Also, to assess conformance with thepolicies issued by the Federal OpenMarket Committee, the division an-nually audits the accounts and holdingsof the Federal Reserve System OpenMarket Account at the Federal ReserveBank of New York and the foreign cur-rency operations conducted by thatBank. The division furnishes copiesof these reports to the Committee.The examination procedures used bythe division are reviewed each yearby a private firm of certified publicaccountants.

Income and Expenses

The accompanying table summarizes theincome, expenses, and distribution of netearnings of the Federal Reserve Banksfor 1988 and 1987.

Income, at $19,526 million, was 10.7percent higher than in 1987, primarilybecause of an increase of $1,808 millionin earnings on the System's holdings of

Income, Expenses, and Distribution of Net Earningsof Federal Reserve Banks, 1988 and 1987l

Thousands of dollars

Item 1988

19,526,4311,205,9601,081,685124,276

18,320,471-489,058

27,852248,65584,411164,245

17,554,906125,616

17,364,31964,971

1987

17,633,0121,146,9111,033,288113,623

16,486,1011,843,552

46,958252,54581,870170,675

18,030,150117,499

17,738,880173,771

Current incomeCurrent expenses

Operating expenses2

Earnings credits grantedCurrent net incomeNet addition to (deduction from) current net incomeCost of unreimbursed services to TreasuryAssessments by the Board of Governors

For expenditures of BoardFor cost of currency

Net income before payments to TreasuryDividends paidPayments to Treasury (interest on Federal Reserve notes) .Transferred to surplus

1. Details may not add to totals because of rounding.2. Operating expenses include a net periodic credit for

pension costs of $70 million in 1988 and $49 million in1987.



U.S. government securities. Total ex-penses were $1,290 million ($1,082million in Reserve Bank operating ex-penses, $124 million in earnings creditsgranted to depository institutions, and$84 million in assessments for expendi-tures by the Board of Governors). Thecost of currency was $164 million.Income from financial services was $657million.

The profit and loss account showed anet deduction of $489 million, result-ing primarily from losses on assetsdenominated in foreign currencies.Statutory dividends to member bankstotaled $126 million, $8 million morethan in 1987. The rise reflected anincrease in the capital and surplus ofmember banks and a consequentincrease in the paid-in capital stock ofthe Reserve Banks.

Payments to the U.S. Treasury,termed interest on Federal Reservenotes, totaled $17,364 million, com-pared with $17,739 million in 1987. Thepayments consist of all income after thededuction of dividends and after thededuction of the amount necessary tobring the surplus of the Banks to thelevel of capital paid in.

In the Statistical Tables section of thisREPORT, table 6 details income andexpenses of each Federal Reserve Bankfor 1988, and table 7 shows a condensedstatement for each Bank for 1914-88. Adetailed account of the assessments andexpenditures of the Board of Governorsappears in the next chapter, "Board ofGovernors Financial Statements."

Federal Reserve Bank Premises

During 1988 the Board of Governorsauthorized purchases of property forfuture expansion at the Atlanta Bank andat the Houston Branch of the Dallas Bank.The New York Bank initiated the designof its new operations center and theMinneapolis Bank completed the designof a new building for the Helena Branch.Construction of the new building for theCharlotte Branch of the Richmond Bankand the expansion of the main building ofthe Chicago Bank continued. Table 8, inthe Statistical Tables section of thisREPORT, shows the cost and book valueof premises owned by the Federal Re-serve Banks and Branches and of realestate acquired for future banking-housepurposes.

Securities and Loans of Federal Reserve Banks, 1986-88Millions of dollars, except as noted

Item and year

Average daily holdings2

198619871988

Earnings198619871988

Average interest rate (percent)198619871988

1. Includes federal agency obligations.

Total

193,354217,392233,796

16,19916,41818,358

8.387.557.85

U.S.governmentsecuritiesl

192,514216,722231,442

16,14216,37118,180

8.387.557.85

Loans

840670

2,354

5747

179

6.846.997.59

2. Based on holdings at opening of business.



Holdings of Securities and LoansAs shown in the preceding table, averagedaily holdings of securities and loansduring 1988 amounted to $233,796 mil-lion, an increase of $16,404 million over1987. Holdings of U.S. governmentsecurities increased $14,720 million andloans increased $1,684 million.

From 1987 to 1988 the average rate ofinterest on holdings of U.S. governmentsecurities increased, from 7.55 percentto 7.85 percent; and the average rate ofinterest on loans increased, from 6.99percent to 7.59 percent.

Volume of OperationsTable 9, in the Statistical Tables sectionof this REPORT, shows the volume ofoperations in the principal departmentsof the Federal Reserve Banks for theyears 1985-88.

Financial Statementsfor Priced Services

The following tables show pro formastatements for priced services for 1988,including a balance sheet, income state-ments, and a breakdown of volumes.

PRO FORMA BALANCE SHEET FOR PRICED SERVICES

As of December 31(millions)

1988 1987SHORT-TERM ASSETS (Note 1)

Imputed reserve requirements on clearing balances $ 222.0 $ 219.6Investment in marketable securities 1,628.0 1,610.4Receivables 57.7 58.3Materials and supplies 6.4 4.9

Prepaid expenses 10.9 6.7Net items in process of collection (float) 967.0 67'5.7

Total short-term assets $2,892.0

LONG-TERM ASSETS (Note 2)Premises 271.8 224.5Furniture and equipment 126.1 110.9Leases and leasehold improvements 6.1 3.0Prepaid pension costs 37.4 18.7

Total long-term assets 441.4

TOTAL ASSETS $3,333.4

SHORT-TERM LIABILITIESClearing balances and balances arising from early credit

ofuncollected items $2,817.0 $2,505.7Short-term debt 75.0 69.9

Total short-term liabilities $2,892.0

LONG-TERM LIABILITIESObligations under capital leases 1.2 1.2Longtermdebt 128.1 107.2

Total long-term liabilities 129.3

TOTAL LIABILITIES 3,021.3

EQUITY 312.1

TOTAL LIABILITIES AND EQUITY (Note 3) $3,333.4

Details may not add to totals because of rounding.The accompanying notes are an integral part of these financial statements.

$2,575.5

357.1

$2,932.7

$2,575.5

108.4

2,684.0

248.7

$2,932.7



PRO FORMA INCOME STATEMENT FOR PRICED SERVICES

For the years ending December 31(millions)

1988 1987INCOME (Note 4)

Services provided to depository institutions $667.7 $649.7

EXPENSES (Note 5)Production expenses 552.9 506.8

INCOME FROM OPERATIONS 114.8 142.9

IMPUTED COSTS (Note 6Interest on float $ 43.4 $ 27.4Interest on debt 16.2 16.1Sales taxes 8.4 7.4FDIC insurance L8 69.9 L8 52.7

INCOME FROM OPERATIONS AFTER IMPUTED COSTS 44.9 90.2

OTHER ICOME AND EPENSES (Note 7)Investment income 134.0 119.1Earnings credits 123.0 11.0 114.1 5J)

INCOME BEFORE INCOME TAXES 55.9 95.2

IMPUTED INCOME TAXES (Note 8) 18.1 32.3

NET INCOME $ 37.9 $ 62.9

MEMO

Targeted return on equity (Note 8) $ 32.7 $ 29.3

Details may not add to totals because of rounding.The accompanying notes are an integral part of these financial statements.

PRO FORMA INCOME STATEMENT FOR PRICED SERVICES, BY SERVICE

(Note 9)

For the year ending December 31, 1988 (millions)

DefinitiveCom- Wire safekeeping

mercial transfer Com- and Book-check and net mercial noncash entry Cash

Total collection settlement ACH collection securities services

INCOME FROM SERVICES $667.7 $513.8 $69.6 $42.7 $17.9 $8.7 $14.9

OPERATING EXPENSES 552.9 436.6 61.2 36.2 15.8 7.7 14.1

INCOME FROM OPERATIONS . . . 114.8 77.2 8.4 6.6 2.1 1.0 .8

IMPUTED COSTS 69.9 62.4 3.1 2.7 .9 _ / 7 A

INCOME FROM OPERATIONS

AFTER IMPUTED COSTS . . 44.9 14.7 5.4 3.9 1.2 .3 .7OTHER INCOME AND

EXPENSES, NET 11.0 10.2 J .3 A J ^ _ A

INCOME BEFORE INCOMETAXES $55 .9 $24 .9 $ 5 . 7 $ 4 . 2 $ 1 . 3 $ . 3 $ .8

*Less than $500,000 in absolute value.Details may not add to totals because of rounding.

The accompanying notes are an integral part of these financial statements.



REVENUE AND EXPENSES OF LOCALLY PRICED SERVICES(Note 10)

For the year ending December 31,1988 (millions)

Total Operating Float Total Netrevenue cost cost cost revenue

Commercial check collectionBoston $ 36.6 $ 31.6 $ 4.4 $ 36.0 $ .6NewYork 66.4 59.6 6.9 66.4 *Philadelphia 24.7 18.7 1.1 19.8 4.8Cleveland 30.1 25.4 1.7 27.0 3.0Richmond 48.2 38.7 2.9 41.6 6.6Atlanta 59.3 53.3 .6 53.9 5.4Chicago 71.3 56.8 4.2 61.0 10.2St. Louis 22.8 19.4 2.3 21.7 1.1Minneapolis 29.4 24.9 .4 25.3 4.1KansasCity 32.6 29.1 1.5 30.6 2.0Dallas 37.7 30.5 2.6 33.1 4.6San Francisco 54.6 44.5 5.6 50.1 4.5

System total $513.8 $435.3 $34.2 $469.6 $44.2

Definitive safekeeping and noncash collectionBoston $ .8 $ .7 * $ .7 $ . 1NewYork 2.9 2.5 * 2.4 .4Philadelphia 1.3 1.2 • 1.2 .1Cleveland 2.1 1.8 .1 1.9 .2Richmond .9 .9 * .9 *Atlanta 2.6 2.4 * 2.3 .3Chicago 2.7 2.0 * 2.0 .6St. Louis 1.2 1.1 * 1.1 .1Minneapolis .9 1.0 * .9 - . 1KansasCity 1.5 1.3 * 1.3 .2Dallas 1.3 1.0 * 1.0 .2San Francisco * * * * *

System total $17.9 $15.8 * $15.8 $2.2

Cash servicesBoston $ .7 . . . . . . $ .7 *NewYork * . . . . . . * *Philadelphia 1.6 . . . . . . 1.5 *Cleveland 1.9 . . . . . . 1.8 .2Richmond .1 . . . . . . .1 *Atlanta * . . . . . . * *Chicago .5 . . . . . . .4 *St. Louis .3 . . . . . . .3 *Minneapolis 2.8 . . . . . . 2.5 .3KansasCity .5 . . . . . . .5 *Dallas * . . . . . . * *San Francisco 6.5 . . . . . . 6.3 .2

System total $14.9 . . . . . . $14.1 $ . 8

*Less than $500,000 in absolute value.Details may not add to totals because of rounding.




PRICED SERVICES VOLUMES(Note 11)

Thousands of items, except as noted

1988 1987 1986Fund transfers 56,334 53,278 49,900Commercial ACH 602,406 475,114 362,557Commercial checks 17,617,744 17,007,924 16,225,812Securities transfers 2,236 2,061 1,719Definitive safekeeping 138 163 165Noncash collection 3,337 3,803 4,312Cash transportation 341 357 363


Percent change1987-88

5.726.8

3.68.5

-15.6-12.2

- 4 . 6

1986-877.1

31.04.8

19.9- 1 . 0

-11.8- 1 . 4

NOTES TO FEDERAL RESERVE BANKFINANCIAL STATEMENTSFOR PRICED SERVICES

PRO FORMA BALANCE SHEET

(1) SHORT-TERM ASSETS

The imputed reserve requirement on clearing balances andinvestment in marketable securities reflect the FederalReserve's treatment of clearing balances maintained ondeposit with Reserve Banks by depository institutions. Forpresentation of the balance sheet and the income statement,clearing balances are reported in a manner comparable tothe way correspondent banks report compensating balancesheld with them by respondent institutions. That is,respondent balances held with a correspondent are subjectto a reserve requirement established by the FederalReserve. This reserve requirement must be satisfied witheither vault cash or with nonearning balances maintained ata Reserve Bank. Following this model, clearing balancesmaintained with Reserve Banks for priced service pur-poses are subjected to imputed reserve requirements.Therefore, a portion of the clearing balances held with theFederal Reserve is classified on the asset side of the balancesheet as required reserves and is reflected in a mannersimilar to vault cash and due from bank balances normallyshown on a correspondent bank's balance sheet. Theremainder of clearing balances is assumed to be availablefor investment. For these purposes, the Federal Reserveassumes that all such balances are invested in three-monthTreasury bills.

Receivables represent (1) amounts due the ReserveBanks for priced services that have been provided toinstitutions for which payment has not yet been receivedand (2) that share of suspense-account and difference-account balances related to priced services.

The amount shown for materials and supplies representsthe inventory value of such short-term assets necessary forthe ongoing operations of priced service areas. Prepaidexpenses represent items such as salary advances andtravel advances for priced service personnel.

The account "Net items in the process of collection"represents the amount of float as of the balance-sheet dateand is the difference between the value of items in theprocess of collection-including checks, coupons, securi-ties, wire transfers, and automated clearinghouse (ACH)transactions—and the value of deferred-availability items.

The cost base for providing services that must be recoveredunder the Monetary Control Act includes the cost of floatincurred by the Federal Reserve during the period, valuedat the federal funds rate. Conventional accounting proce-dures would call for the gross amount of items in theprocess of collection and deferred availability items to beincluded on a balance sheet. However, the gross amountshave no implications for income or actual or imputed costs,and inclusion of the gross amounts could lead to misinter-pretations of the assets employed in the provision of pricedservices that must be financed. Therefore, only the netamount is shown. The net amount represents the assets thatinvolve a financing cost.

(2) LONG-TERM ASSETS

Long-term assets on the balance sheet have beenallocated to priced services with the direct determinationmethod, which uses the Federal Reserve's Planning andControl System to ascertain directly the value of assetsused solely in priced services operations and to apportionthe value of jointly used assets between priced services andnonpriced services. Also, long-term assets include anestimate of the assets of the Board of Governors directlyinvolved in the development of priced services.

Long-term assets include amounts for capital leases andleasehold improvements and for prepaid pension costsassociated with priced services. Effective January 1,1987,the Federal Reserve Banks implemented Financial Account-ing Standards Board Statement No. 87, Employers'Accounting for Pensions. Accordingly, the Reserve Banksrecognized a credit to expenses of $18.7 million and acorresponding increase in this long-term asset account in1988.

(3) LIABILITIES AND EQUITY

A matched-book capital structure has been used for thoseassets that are not "self-financing" in determining liabilityand equity amounts. Short-term assets are financed withshort-term debt. Long-term assets are financed with long-term debt and equity in a proportion equal to the ratio oflong-term debt to equity for the bank holding companiesused in the model for the private sector adjustment factor(PS AF). The PS AF model uses the 25 largest bank holdingcompanies as a basis to impute the taxes that would havebeen paid and the return on capital that would have beenprovided had Federal Reserve priced services beenfurnished by a private-sector firm.



Other short-term liabilities include clearing balancesmaintained at Reserve Banks and deposit balances arisingfrom float. Other long-term liabilities consist of obligationson capital leases.

PRO FORMA INCOME STATEMENT

The income statement reflects income and expenses forpriced services. Included in these amounts are the imputedcosts of float, imputed financing costs, and the incomerelated to clearing balances.

(4) INCOME

Income represents charges to depository institutions forpriced services. This income is realized through one of twomethods: direct charges to an institution's account orcharges against accumulated earnings credits.

(5) PRODUCTION EXPENSES

Production expenses include direct, indirect, and othergeneral administrative expenses of the Federal ReserveBanks for providing priced services. Also included are theexpenses of staff members of the Board of Governorsworking directly on the development of priced services,which were $1.7 million in 1988 and in 1987. The credit toexpenses resulting from implementation of FASB 87 (seenote 2) is reflected in production expenses.

(6) IMPUTED COSTS

Imputed float costs represent the value of float to berecovered, either explicitly or through per-item fees,during the period. Float costs include those for checks,book-entry securities, noncash collection. ACH, and wiretransfers.

The following table depicts the daily average recovery offloat by the Federal Reserve Banks for 1988. In the table,unrecovered float includes that generated by services togovernment agencies or by other central bank services.

Float recovered through income on clearing balancesrepresents increased investable clearing balances as aresult of reducing imputed reserve requirements throughthe use of a cash-items-in-process-of-collection deductionfor float when calculating the reserve requirement. Thisincome then reduces the float required to be recoveredthrough other means.

As-of adjustments and direct charges refer to midweekclosing float and interterritory check float, which may berecovered from depositing institutions through adjustmentsto the institution's reserve or clearing balance or by valuingthe float at the federal funds rate and billing the institutiondirectly.

Float recovered through per-item fees is valued at thefederal funds rate and has been added to the cost basesubject to recovery in 1988.

Daily average(millions)

Total float $931.2Unrecovered float 55.8Float subject to recovery 875.4Sources of recovery of float

Income on clearing balances 105.4As of adjustments 325.3Direct charges 121.2Per-item fees 323.6

Also included in imputed costs is the interest on debtassumed necessary to finance priced service assets and thesales taxes and FDIC insurance assessment that the FederalReserve would have paid had it been a private-sector firm.These imputed costs are among the components of thePSAF(seenote3).

(7) OTHER INCOME AND EXPENSES

Other income and expenses consist of income on clearingbalances and the cost of earnings credits granted todepository institutions on their clearing balances. Incomeon clearing balances represents the average coupon-equivalent yield on three-month Treasury bills applied tothe total clearing balance maintained, adjusted for theeffect of reserve requirements on clearing balances.Expenses for earnings credits are derived by applying theaverage federal funds rate to the required portion of theclearing balances, adjusted for the net effect of reserverequirements on clearing balances.

(8) INCOME TAXES AND RETURN ON EQUITY

Imputed income taxes are calculated at the effective taxrate derived from the PSAF model (see note 3). Thetargeted return on equity represents the after-tax rate ofreturn on equity that the Federal Reserve would haveearned had it been a private business firm, based on thebank holding company model. These items are among thecomponents of the PSAF (see note 3).

PRO FORMA INCOME STATEMENT, BY SERVICE

(9) The income statement by service reflects revenue,operating expenses, and imputed costs except for incometaxes. The effect of implementing FASB 87 (see note 2) isreported only in the "total" column in this table and has notbeen allocated to individual priced services.

Imputed costs include float and interest on debt, salestaxes, and the FDIC assessment. Float costs are based onthe actual float incurred in each priced service. Otherimputed costs are allocated among priced services accord-ing to the ratio of operating costs less shipping costs in eachpriced service to the total cost of all priced services less thetotal shipping costs of all priced services.

Other income and expenses consist of income on clearingbalances and the cost of earnings credits for the FederalReserve. Because clearing balances relate directly to theFederal Reserve's offering of priced services, the incomeand cost associated with these balances are spread to eachservice based on the ratio of income from each service tototal income.

Taxes and the after-tax targeted rate of return on equity,as shown on the pro forma income statement, have not beenspread by service because these elements relate to theorganization as a whole.

REVENUE AND EXPENSESOF LOCALLY PRICED SERVICES

(10) This table depicts the financial results for eachReserve Bank in providing locally priced services.Expenses related to research and development projects arereported at the System level; the sum of expenses for the12 Districts may not, therefore, equal the System total. Thefinancial results for each Reserve Bank shown here do notinclude the dollars to be recovered through the PSAF and



the net income on clearing balances. Therefore, toreconcile net revenue by priced service shown in this tablewith that shown in the preceding table, adjustments must bemade for imputed interest on debt, sales taxes, FDICassessment, Board expenses for priced services, and netincome on clearing balances.

PRICED SERVICES VOLUMES

(11) This table shows the number of items handled bythe Federal Reserve in its priced services operations andthe percentage changes in these numbers in recent years.Volume for the wire transfer of funds is the number of basictransactions originated; ACH volume is the total numberof commercial items processed; commercial check volumereflects the total commercial checks collected, includingboth processed and fine-sort items; volume for securitiestransfers is the number of basic transfers originated on-line; volume for definitive safekeeping is the averagenumber of issues or receipts maintained; noncash collectionvolume is the number of items assessed fees; and cashtransportation volume is the number of armored-carrierstops. •


197

Board of Governors Financial Statements

The financial statements of the Board for ined by Price Waterhouse, independentthe years 1988 and 1987 were exam- public accountants.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Governors of theFederal Reserve System

In our opinion, the accompanying balance sheets and the related statements of revenues andexpenses and fund balance and of cash flows present fairly, in all material respects, the financialposition of the Board of Governors of the Federal Reserve System at December 31,1988 and1987, and the results of its operations and its cash flows for the years then ended, in conformitywith generally accepted accounting principles. These financial statements are the responsibilityof the Board's management; our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements in accordance withgenerally accepted auditing standards and the financial audit standards in Government AuditingStandards issued by the Comptroller General. These standards require that we plan andperform the audit to obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for the opinion expressedabove.

Washington, D.C.February 24, 1989


198 Board Financial Statements

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

BALANCE SHEETS

As of December 31,1988 1987

ASSETS

CURRENT ASSETSCash $ 7,312,846 $ 7,705,996Accounts receivable 602,478 908,883Stockroom and cafeteria inventories, at cost 333,601 244,963Prepaid expenses and other assets 654,077 760,903

Total current assets 8,903,002 9,620,745

PROPERTY, BUILDINGS AND EQUIPMENT, Net (Note 3) 58,487,676 63,356,924

OTHER ASSETS - 429,357

Totalassets $67,390,678 $73,407,026

LIABILITIES AND FUND BALANCE

CURRENT LIABILITIES

Accounts payable $ 4,020,776 $ 4,593,746Accrued payroll and related taxes 2,915,138 2,547,172Accrued annual leave 4,288,264 4,185,226Other liabilities (Note 4) 833,578 237,951

Total current liabilities 12,057,756 11,564,095

FUNDBALANCE 55,332,922 61,842,931

Total liabilities and fund balance $67,390,678 $73,407,026

The accompanying notes are an integral part of these statements.


Board Financial Statements 199


STATEMENTS OF REVENUES AND EXPENSESAND FUND BALANCE

For the years ended December 31,1988 1987

BOARD OPERATING REVENUES

Assessments levied on Federal Reserve Banks for Boardoperating expenses and capital expenditures $ 84,410,500 $ 81,869,800

Other revenues (Note 4) 3,460,332 3,645,891Total operating revenues 87,870,832 85,515,691

BOARD OPERATING EXPENSES

Salaries 56,229,044 53,811,021Retirement and insurance contributions 7,095,176 6,245,296Depreciation and losses (gains) on disposals 7,601,609 7,530,325Travel 3,171,355 2,834,715Utilities 3,169,953 3,195,502Repairs and maintenance 3,099,672 2,731,026Contractual services and professional fees 3,062,980 2,235,129Postage and supplies 3,035,304 3,218,518Software 2,461,366 2,764,635Printing and binding 2,305,362 1,867,291Equipment and facility rentals 876,944 1,398,787Other expenses (Note 4) 2,272,076 2,089,415

Total operating expenses 94,380,841 89,921,660

BOARD OPERATING REVENUES (UNDER) EXPENSES (6,510,009) (4,405,969)

ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES

Assessments levied on Federal Reserve Banksfor currency costs 164,975,182 170,700,082

Expenses for currency printing, issuance,retirement, shipping, and research costs 164,975,182 170,700,082

CURRENCY ASSESSMENTS (UNDER) OVER EXPENSES — —

TOTAL REVENUES (UNDER) EXPENSES (6,510,009) (4,405,969)

FUND BALANCE, Beginning of year 61,842,931 66,248,900

FUND BALANCE, End of year $ 55,332,922 $ 61,842,931





STATEMENTS OF CASH FLOWS

For the years ended December 31,1988 1987

CASH FLOWS FROM OPERATING ACTIVITIES

Net income $(6,510,009) $(4,405,969)

Adjustments to reconcile net income to net cash

Depreciation and losses (gains) on disposals 7,601,609 7,530,325Decrease in accounts receivable, inventories and prepaid expenses,

and other assets 324,593 1,044,021Decrease in other non-current assets 429,357 1,279,149Increase in accrued annual leave 103,038 288,828Increase (decrease) in accounts payable, accrued payroll and related taxes,

and other liabilities 390,623 (616,694)Net cash provided by operating activities 2,339,211 5,119,660

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from disposals of furniture and equipment 42,608 33,334Capital expenditures (2,774,969) (6,093,208)

Net cash used in investing activities (2,732,361) (6,059,874)

NET DECREASE IN CASH (393,150) (940,214)

CASH BALANCE, Beginning of year 7,705,996 8,646,210

CASH BALANCE, End of year $ 7,312,846 $ 7,705,996



Board Financial Statements 201


NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1988 AND 1987

(1) SIGNIFICANT ACCOUNTING POLICIES

Board Operating Revenues and Expenses—Assessmentsmade on the Federal Reserve Banks for Board operatingexpenses and capital expenditures are calculated based onexpected cash needs. These assessments, other operatingrevenues, and operating expenses are recorded on theaccrual basis of accounting.

Issuance and Redemption of Federal Reserve Notes—The Board incurs expenses and assesses the FederalReserve Banks for the cost of printing, issuing, shippingand retiring Federal Reserve Notes. These assessmentsand expenses are separately reported in the statements ofrevenues and expenses because they are not Boardoperating transactions.

Property, Buildings, and Equipment—The Board's prop-erty, buildings and equipment are stated at cost lessaccumulated depreciation. Depreciation is calculated on astraight-line basis over the estimated useful lives of theassets, which range from 3 to 10 years for furniture andequipment and from 10 to 50 years for building equipmentand structures.

Other Assets -The Board made prepayments for com-puter equipment to be received in future years. In addition,maintenance on this and other computer equipmentreceived during 1987 and 1988 has been prepaid throughJanuary 1989. For 1987 OTHER ASSETS includes theequipment prepayments and the portion of the prepaidmaintenance services which will be received in 1989. Asthe equipment is received and maintenance serviceprovided, the furniture and equipment account and theappropriate expense account will be charged accordingly.

Contingency Processing Center—The Board operates onbehalf of the Federal Reserve System a contingencyprocessing center to handle data processing requirementsduring emergency situations. The Board recovers from theFederal Reserve Banks a proportionate amount of theoperating expenses of the center in the form of fees.

(2) RETIREMENT BENEFITS

Substantially all of the Board's employees participate ineither the Retirement Plan for Employees of the FederalReserve System or the Civil Service Plan. The System'sPlan is a multiemployer plan which covers employees ofthe Federal Reserve Banks, the Board, and the PlanAdministrative Office. Employees of the Board whoentered on duty prior to 1984 are covered by a contributorydefined benefits program under the plan. Employees of theBoard who entered on duty after 1983 are covered by anon-contributory defined benefits program under the plan.The Civil Service Plan is a defined contribution plan.

Contributions to the System's Plan are actuariallydetermined and funded by participating employers atamounts prescribed by the Plan's administrator. Noseparate accounting is maintained of assets contributed by

the participating employers and net pension cost for theperiod is the required contribution for the period. As ofJanuary 1,1988, actuarial calculations showed that the fairvalue of the assets of the System's Plan exceeded theprojected benefit obligations by 61 percent. Based on thesecalculations and similar calculations performed for 1987,it was determined that employer funding contributionswere not required for the years 1988 and 1987 and theBoard was not assessed a contribution for these years.Excess Plan assets will continue to fund future years'contributions.

Board contributions to the Civil Service Plan directlymatch employee contributions. The Board's contributionsto the Civil Service Plan totaled $555,700 in 1988 and$547,000 in 1987.

Employees of the Board may also participate in theFederal Reserve System's Thrift Plan. Under the ThriftPlan, members may contribute up to a fixed percentage oftheir salary. Board contributions are based upon a fixedpercentage of each member's basic contribution and were$1,594,000 in 1988 and $1,491,000 in 1987.

The Board also provides certain health benefits forretired employees. The cost of providing the benefits isrecognized by expensing the insurance premiums whichwere $245,400 in 1988 and $166,800 in 1987.

(3) PROPERTY, BUILDINGS, AND EQUIPMENT

The following is a summary of the components of theBoard's fixed assets, at cost, net of accumulateddepreciation.

As of December 31,

Land andimprovements .

BuildingsFurniture and

equipment

Less accumulateddepreciation ..

Total property,buildings andequipment

1988 1987

$ 1,301,31463,290,586

38,865,250103,457,150

$ 1,301,31462,903,355

37,005,912101,210,581

44,969,474 37,853,657

$ 58,487,676 $ 63,356,924

(4) OTHER REVENUES AND OTHER EXPENSES

The following are summaries of the components ofOther Revenues and Other Expenses.

Other RevenuesContingency

ProcessingCenter fees

Subscriptionrevenues

Miscellaneous

For the yearsended December 31,1988

$1,672,667

924,783862,882

1987

$1,593,050

1,418,513634,328



(4) OTHER REVENUES AND OTHER EXPENSES—Cont.

Total otherrevenues $3,460,332 $3,645,891

Other ExpensesSubsidies and

contributions... $ 697,237 $ 649,919Tuition, registrations

and membershipfees 571,271 517,097

Cafeteria operations,net 598,004 560,282

Miscellaneous 405,564 362,117Total other

expenses $2,272,076 $2,089,415

Beginning in 1988, the Board began recognizing incomefrom sale of publication subscriptions as revenue over theperiod the publications and statistical releases are suppliedto the subscriber rather than the cash basis previouslyfollowed. Of $1,574,783 received in 1988, $650,000represents unearned subscription revenue which is in-cluded in other liabilities.

(5) FEDERAL FINANCIAL INSTITUTIONSEXAMINATION COUNCIL

The Board is one of the five member agencies of theFederal Financial Institutions Examination Council (the"Council"). During 1988 and 1987, the Board paid$187,200 and $162,000, respectively, in assessments foroperating expenses of the Council. These amounts areincluded in subsidies and contributions for 1988 and 1987.

The Board serves as custodian for the Council's cashaccount. This cash is not reflected in the accompanyingfinancial statements. It also processes accounting transac-tions, including payroll for most of the Council employees,and performs other administrative services for which theBoard was reimbursed $31,700 in each of the years 1988and 1987.

The Board is not reimbursed for the costs of personnelwho serve on the Council and on the various task forces andcommittees of the Council. •


Statistical Tables


204 Tables

1. Detailed Statement of Condition of All Federal Reserve Banks Combined,December 31, 1988 *

ASSETS

Gold certificate account 11,059,988Special drawing rights certificate account 5,018,000Coin 397,593

Loans and securitiesLoans to depository institutions 2,171,233Federal agency obligations

Bought outright 6,966,477Held under repurchase agreement 2,100,735

U.S. Treasury securitiesBought outright

Bills 112,781,960Notes 90,950,477Bonds 29,929,395

Total bought outright 233,661,832

Held under repurchase agreement 4,760,465

Total securities 238,422,297

Total loans and securities 249,660,742

Items in process of collectionTransit items 6,943,601

Other items in process of collection 1,795,238

Total items in process of collection 8,738,839

BankpremisesLand 108,905Buildings (including vaults) 564,838Building machinery and equipment 171,938Construction account 95,876

Total bankpremises 832,652

Less depreciation allowance 192,971 639,681

Bank premises, net 748,586

Other assetsFurniture and equipment 621,499Less depreciation 348,341

Total furniture and equipment, net 273,158Denominated in foreign currencies2 9,128,949Interest accrued 3,182,481Premium on securities 1,691,882Due from Federal Deposit Insurance Corporation 3,316,178Overdrafts 56,259Prepaid expenses 158,108Suspense account 66,269Real estate acquired for banking-house purposes 7,038Other 172,120

Total other assets 18,052,442Totalassets 293,675,190


Tables 205

1.—Continued

LIABILITIES

Federal Reserve NotesOutstanding (issued to Federal Reserve Banks) 271,492,172Less held by Federal Reserve Banks 41,852,740

Total Federal Reserve notes, net 229,639,432

DepositsDepository institutions 39,346,294U.S. Treasury, general account 8,656,496Foreign, official accounts 346,951

Other depositsOfficers'and certified checks 21,096International organizations 87,001Other3 442,027

Total other deposits 550,124Deferred credit items 7,451,424

Other liabilitiesDiscount on securities 3,335,154Sundry items payable 50,656Suspense account 44,948All other 28,579

Total other liabilities 3,459,337

Total liabilities 289,450,058

CAPITAL ACCOUNTS

Capital paid in 2,112,566Surplus 2,112,566Other capital accounts4 0

Total liabilities and capital accounts 293,675,190

1. Amounts in boldface type indicate items in the Board'sweekly statement of condition of the Federal ReserveBanks.

2. Of this amount $1,478.8 million was invested insecurities issued by foreign governments, and the balancewas invested with foreign central banks and the Bank forInternational Settlements.

3. In closing out the other capital accounts at year-end,the Reserve Bank earnings that are payable to the Treasuryare included in this account pending payment.

4. During the year, includes undistributed net income,which is closed out on Dec. 31.


206 Tables

2. Statement of Condition of Each Federal Reserve Bank,December 31, 1988 and 1987

Millions of Dollars

ItemTotal

1988 1987

Boston

1988 1987

ASSETSGold certificate accountSpecial drawing rights certificate accountCoin

LoansTo depository institutionsOther

Acceptances held under repurchase agreements....

Federal agency obligationsBought outrightHeld under repurchase agreements

U.S. Treasury securitiesBought outrightl

Held under repurchase agreementsTotal loans and securities

Items in process of collectionBank premises

Other assetsDenominated in foreign currencies2

All other

Interdistrict Settlement Account

Total assets

LIABILITIESFederal Reserve notes

DepositsDepository institutionsU.S. Treasury, general accountForeign, official accountsOther

Total deposits

Deferred credit items

Other liabilities and accrued dividends3

Total liabilities

CAPITAL ACCOUNTS

Capital paid inSurplusOther capital accountsTotal liabilities and capital accounts

FEDERAL RESERVE NOTE STATEMENT

Federal Reserve notes outstanding (issued to Bank)Less: Held by Bank

Federal Reserve notes, net

Collateral for Federal Reserve notesGold certificate accountSpecial drawing right certificate accountOther eligible assetsU.S. Treasury and federal agency securities

Total collateral

11,0605,018

395

2,1700

6,9662,101

233,6624,760

249,659

8,739750

018,053

0

293,674

11,0785,018

408

3,8150

7,5531,316

218,9063,645

235,235

7,990705

7,7737,359

0

275,566

229,640 212,890

680314

20

420

4230

14,1810

14,646

48092

0613

605

17,450

14,322

293,674 275,566 17,450

706314

27

470

4660

13,5020

14,015

50193

257275

-1,124

15,064

12,503

39,3478,656347548

48,898

7,4533,457

89,448

2,1132,113

0

41,7845,313244

1,02748,368

7,1793,035

271,472

2,0472,047

0

2,3860520

2,411

373194

17,300

75750

1,8630534

1,902

355168

14,928

68680

15,064

271,49241,852

229,640

11,0605,018

213^(52

229,640

253,31340,423

212,890

11,0785,018

196J94

212,890

16,8622,540

14,322

15,1232,620

12,503


Tables 207

2.-Continued

New York

1988

3,3101,489

14

340

1987

3,1771,489

16

2,7870

Philadelphia

1988

38916229

1680

1987

38516224

1310

Cleveland

1988 1987

655 664314 31425 28

890 630 0

Richmond

1988

917461

62

1220

1987

933461

63

1810

2,3812,101

79,8554,760

89,131

1,23532

04,460

114

99,785

2,4301,316

70,4303,645

80,608

93433

1,8741,571

1,449

91,151

1970

6,6240

6,989

42146

0610

470

9,116

2290

6,6240

6,984

47846

365190

-599

8,035

4020

13,4980

14,790

24432

0793

-559

16,294

4530

13,1300

13,646

29432

466284

136

15,864

5410

18,1420

18,805

459124

0901

3,132

24,861

6380

18,4970

19,316

422111

420368

-1,736

20,358

78,077 70,471 6,655 5,706 13,704 12,987 20,096 16,550

9,1998,656

237310

18,402

7951,379

11,6535,313

130438

17,534

8751,189

1,777076

1,790

37590

1,64807

281,683

36983

1,89408

141,916

266178

2,12409

422,175

317159

3,83609

453,890

387242

2,90208

612,971

383226

98,653 90,069 8,910 7,841 16,064 15,638 24,615 20,130

566566

0

99,785

84,0575,980

541541

0

91,151

75,7095,238

103103

0

9,116

10,0193,364

9797

0

8,035

9,0483,342

115115

0

16,294

16,0712,367

113113

0

15,864

15,1922,205

123123

0

24,861

23,6873,591

114114

0

20,358

21,0524,502

75,077 70,471 6,655 5,706 13,704 12,987 20,096 16,550


208 Tables

2. Statement of Condition of Each Federal Reserve Bank,December 31, 1988 and 1987-ContinuedMillions of Dollars

ItemAtlanta

1988 1987

Chicago

1988 1987

ASSETSGold certificate accountSpecial drawing rights certificate accountCoin

LoansTo depository institutionsOther

Acceptances held under repurchase agreements

Federal agency obligationsBought outrightHeld under repurchase agreements

U.S. Treasury securitiesBought outright l

Held under repurchase agreementsTotal loans and securities

Items in process of collectionBank premises

Other assetsDenominated in foreign currencies2

All other

Interdistrict Settlement Account

Total assets

LIABILITIESFederal Reserve notes

DepositsDepository institutionsU.S. Treasury, general accountForeign, official accountsOther

Total deposits

Deferred credit items

Other liabilities and accrued dividends3

Total liabilities

CAPITAL ACCOUNTS

Capital paid inSurplus ;Other capital accounts

Total liabilities and capital accounts

FEDERAL RESERVE NOTE STATEMENT

Federal Reserve notes outstanding (issued to Bank)Less: Held by BankFederal Reserve notes, net

1. Includes securities loaned-fully guaranteed by U.S.Treasury securities pledged with Federal Reserve Banks—and excludes securities sold and scheduled to be boughtback under matched sale-purchase transactions.

2. Valued monthly at market exchange rates.

584203

36

350

3250

10,8950

11,255

72159

01,076

360

14,294

8,889

596203

37

390

3350

9,7220

10,096

61557

707228

1,742

14,281

9,206

1,394656

44

440

8460

28,3670

29,257

774100

04,185

-1,715

34,695

29,658

14,294 14,281 34,695

1,383656

31

190

8760

25,3850

26,280

62070

1,0573,185

2,605

35,887

30,029

4,1890135

4,207

657149

3,902

1961960

3,92201452

3,988

604121

13,919

1811810

3,413019107

3,539

565387

34,149

2732730

4,325020145

4,490

522324

35,365

2612610

35,887

12,5283,639

8,889

13,2884,082

9,206

32,9023,244

29,658

31,8901,861

30,029

3. Includes exchange-translation account reflecting themonthly revaluation at market exchange rates of foreign-exchange commitments.

4. Includes special investment account at the FederalReserve Bank of Chicago in Treasury bills maturing within90 days.Digitized for FRASER

http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 209

2.—Continued

St. Louis

1988 1987

368 351160 16029 28

95 380 0

Minneapolis

1988

1686611

120

1987

1696613

100

Kansas City

1988

49021630

300

1987

56221631

680

Dallas

1988 1987

676 669307 30728 29

688 4160 0

San Francisco

1988

1,42967067

100

1987

1,48367081

160

2050

6,8750

7,175

42221

0412

742

9,329

2180

6,3220

6,578

50220

241130

723

8,733

990

3,3290

3,440

38324

0371

1,010

5,473

1140

3,2900

3,414

43523

25681

-3

4,454

2620

8,7890

9,081

1,54247

0572

712

12,690

3000

8,6930

9,061

1,45447

334181

-100

11,786

3910

13,1050

14,184

69622

02,085

-2,813

15,185

4480

12,9860

13,850

57220

661257

6

16,371

8940

30,0020

30,906

1,362151

01,975

-2,058

34,502

1,0460

30,3250

31,387

1,163153

1,135609

-3,099

33,582

847 6,942 4,124 3,043 9,758 8,380 11,664 12,312 24,846 24,761

874048

886

38991

1,1650521

1,191

40777

807052

814

35348

8480516

869

37145

1,122064

1,132

1,507119

1,6890631

1,726

1,402108

2,4010130

2,414

616173

2,98501356

3,054

498157

7,44902127

7,497

1,170407

6,660022103

6,785

1,076378

9,213 8,617 5,339 4,328 12,516 11,616 14,867 16,021 33,920 33,000

58580

9,329

9,4251,578

7,847

58580

8,733

8,8041,862

6,942

67670

5,473

4,928804

4,124

63630

4,454

4,035992

3,043

87870

12,690

12,2042,446

9,758

85850

11,786

10,9632,583

8,380

1591590

15,185

14,6402,976

11,664

1751750

16,371

15,5823,540

12,312

2912910

34,502

34,1699,323

28,846

2912910

33,582

32,3577,596

24,761


210 Tables

3. Federal Reserve Open Market Transactions, 1988!

Millions of dollars

Type of transaction Jan. Feb. Mar. Apr.

U.S. TREASURY SECURITIES

Outright transactions (excluding matched transactions)Treasury bills

Gross purchasesGross salesExchangesRedemptions

Others within 1 yearGross purchasesGross salesMaturity shiftExchangesRedemptions

1 to 5 yearsGross purchasesGross salesMaturity shiftExchanges

5 to 10 yearsGross purchasesGross salesMaturity shiftExchanges

More than 10 yearsGross purchasesGross salesMaturity shiftExchanges

All maturitiesGross purchasesGross salesRedemptions

Matched transactionsGross salesGross purchases

Repurchase agreements2

Gross purchasesGross sales

Net change in U.S. Treasury securities

FEDERAL AGENCY OBLIGATIONS

Outright transactionsGross purchasesGross salesRedemptions

0490

600

00

950-754

0

00

-840749

00

-1105

oo

oo

049600

78,35878,513

10,59114,237

3465380

1,600

00

1,939-2,868

0

0800

-9522,643

0175

-987150

00075

3461,5131,600

97,89299,139

00

560000

00

2,051-2,089

0

00

-2,0512,089

oo

oo

oo

oo

56000

104,527104,572

00

423000

1,0920

868-1,688

0

3,6610

-8231,434

1,0170

-45254

966000

7,16000

86,90085,608

18,69611,088

-4,140 -1,520

Repurchase agreements2

Gross purchasesGross sales

Net change in agency obligations

Total net change in System Open Market Account .

605 13,476

00

131

4,0425,357

-1,446

-5,586

0021

00

-21

-1,541

003

00

-3

602

00

120

4,2431,447

2,676

16,151

1. Sales, redemptions, and negative figures reduce 2. In July 1984 the Open Market Trading Desk discon-holdings of the System Open Market Account; all other tinued accepting bankers acceptances in repurchasefigures increase such holdings. Details may not add to agreements,totals because of rounding. *Less than $500,000 in absolute value.


Tables 211

3.-Continued

May June July Aug. Sept. Oct. Nov. Dec. Total

oo

oo

00

1,646-4,324

0

00

-1,1023,724

00

-387400

00

-157200

oo

o

115,287115,115

15,87123,478

oo

oo

00

1,384-1,826

0

00

-1,3841,826

0000

0000

000

73,70872,966

10,5205,334

515000

00

1,033-87

0

00

-9970

00

-3687

0000

51500

81,97983,464

22,97828,164

oo

oo

00

3,932-4,296

0

00

-1,8213,971

00

-2,111325

0000

000

124,875123,220

00

1,280000

00

1,368-1,646

0

00

-1,3681,646

0000

0000

1,28000

113,886113,384

35,80030,191

375000

00

1,669-916

0

00

-1,544639

00

-125276

0000

37500

98,80497,897

4,7157,727

3,599000

00

5,264-2,391

0

00

-3,0882,091

00

-2,145300

00

-310

3,59900

98,618100,680

17,86716,463

1,125000

1,0840

1,750-1,703

0

1,8240

-1,7501,703

562000

432000

5,02800

93,65093,584

15,57514,815

8,2225880

2,200

2,1770

23,853-24,587

0

5,486800

-17,71922,515

1,579175

-5,9461,797

1,3980

-188275

18,8631,5632,200

1,168,4861,168,143

152,614151,498

-7,779 4,444 -3,186 -1,655 6,386 -3,544 7,064 5,721 15,871

0011

4,7717,566

-2,807

-10,585

oo

o

5,0832,843

2,239

6,683

0067

12,35514,594

-2,306

-5,492

0010

00

-10

-1,665

oo

o

12,1078,225

3,882

10,268

0075

2,2234,454

-2,306

-5,850

0014

4,7635,132

-383

6,681

00

135

7,6726,853

683

6,404

00

587

57,25856,473

198

16,070


212 Tables

4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,December 31, 1986-881

Millions of dollars

DescriptionDecember 31

1988 1987 1986

Increase ordecrease ( - )

1988 1987

U.S. Treasury securities, totalBy terml-15days2

16-90days91 days to 1 year1-5 years5-10 yearsMore than 10 years

By type of holdingHeld outright

Treasury bills3

Treasury notesTreasury bonds

Held under RPs

Federal agency obligations, totalBy term1-15 days2

16-90 days91 days to 1 year1-5 years5-10 yearsMore than 10 years

By type of holdingHeld outright

Federal Farm Credit BanksFederal Home Loan BanksFederal Home Loan Financing CorporationFederal Home Loan Mortgage CorporationFederal Intermediate Credit Banks4

Federal Land BanksFederal Home AdministrationFederal National Mortgage AssociationFederal National Sinking FundGovernment National Mortgage Association

participation certificates4

U.S. Postal ServiceWashington Metropolitan Area

Transit AuthorityGeneral Services Administration

Held under RPs

238,422 222,551 211,316 15,871

9,93558,44875,23655,32612,56826,909

112,78290,95029,9294,760

9,067

2,271697

1,4923,4191,000

189

1,9972,251

000

13035

2,3870

037

11714

2,101

11,36446,11276,82747,51215,31325,424

107,69182,97328,2423,645

1,561691

1,6533,4161,358

189

2,2942,251

000

20099

2,4900

5137

11714

1,315

20,48053,61162,23936,46915,45123,066

103,77568,12625,72413,691

8,869 10,143

2,704808

1,2243,8541,178

374

2,4862,252

00

30236101

2,4900

6737

11714

2,314

-1,42912,336

-1,5917,814

-2,7451,485

5,0917,9771,6871,115

7106

-1613

-3580

-2970000

- 7 0- 6 4

-1030

- 5 10

00

786

11,235

-9,117-7,49914,58811,043-1382,358

3,91614,8482,518

-10,046

198 -1,274

-1,143-118

428-437

180-185

-192- 1

00

- 3 0- 3 6

- 300

- 1 60

00

-998

1. Details may not add to totals because of rounding.2. Includes the effects of temporary transactions (repur-

chase agreements and matched sale-purchase agreements).

3. Includes the effects of matched sale-purchaseagreements.

4. There were no outstanding issues as of December 31,1988.


Tables 213

5. Number and Salaries of Officers and Employees of Federal Reserve Banks,December 31, 1988

Federal ReserveBank (including)

Branches

BostonNew YorkPhiladelphiaClevelandRichmondAtlantaChicagoSt. LouisMinneapolisKansas CityDallasSan Francisco

Total

President

Annualsalary

(dollars)

Other officers

Num-ber

Annualsalaries(dollars)

Employees

Number

Full-time

Part-time


Total

Num-ber


171,200 51 3,768,326 1,315 306 38,444,344 1,673 42,383,870198,500 158 13,326,575 3,715 53 109,593,220 3,927 123,118,295147,600 55 4,039,300 1,126 87 29,148,656 1,269 33,335,556137,800 56 3,828,300 1,332 68 32,013,430 1,457 35,979,530150,000 81 5,487,900 1,801 142 42,365,154 2,025 48,003,054163,000 72 4,907,660 2,194 91 52,162,030 2,358 57,232,690177,500 88 5,939,360 2,454 28 64,159,321 2,571 70,276,181149,000 60 3,769,600 1,185 67 27,954,455 1,313 31,873,055133,000 44 2,978,700 979 142 25,311,846 1,166 28,423,546146,500 63 4,201,800 1,605 57 38,686,861 1,726 43,035,161142,000 59 3,988,800 1,522 45 38,296,827 1,627 42,427,627171,000 102 7,089,218 2,376 69 64,714,185 2,548 71,974,403

1,887,100 889 63,325,539 21,604 1,155 562,850,329 23,660 628,062,968


214 Tables

6. Income and Expenses of Federal Reserve Banks, 1988Dollars

Item1 Total Boston New York Philadelphia Cleveland

CURRENT INCOME

LoansU.S. Treasury and federal

agency securitiesForeign currenciesPriced servicesOther

Total

CURRENT EXPENSES

Salaries and other personnelexpenses

Retirement and other benefitsFeesTravelPostage and other shipping

costsCommunicationsMaterials and supplies

Building expensesTaxes on real estateProperty depreciationUtilitiesRentOther

EquipmentPurchasesRentalsDepreciationRepairs and maintenanceEarnings-credit costsOtherShared costs, net3

RecoveriesExpenses capitalized4

TotalReimbursements

Net expenses

For notes see end of table.

355,503,582 1,917,148 4,067,423 2,486,347 555,846

18,179,534,091 1,099,303,526 6,178,080,704 522,231,597 1,055,774,529299,843,275 9,892,553 78,629,814 14,368,529 16,607,328656,805,293 44,833,234 91,692,476 32,017,493 40,109,734

34,745,057 651,088 24,766,126 567,153 571,323

19,526,431,297 1,156,217,539 6,380,785,220 571,611,487 1,114,447,833

661,695,07563,785,74214,926,89825,358,327

81,971,31711,906,87151,059,279

23,983,39128,407,98122,981,31721,681,85518,822,842

3,981,30726,577,78377,321,20945,940,759124,275,55953,752,137

0(34,276,302)(2,452,557)

1,321,700,790(115,740,657)1,205,960,134

44,546,6268,638,1035,006,1381,113,434

4,296,8761,028,0833,160,857

3,761,0372,361,7901,847,963561,072899,469

83,094385,069

5,471,2183,322,2677,837,3853,310,383(993,205)

(8,257,005)(113,297)

88,267,357(4,697,003)83,570,354

132,470,01123,675,2311,941,0673,358,905

10,242,3152,240,6289,191,926

3,462,8583,246,6473,395,97314,150,3473,371,365

05,372,02815,107,9597,229,14213,064,31211,771,372

438,940(3,624,696)

(6,370)

260,099,960(24,096,216)236,003,744

35,178,5727,649,904518,633

1,099,409

4,470,305570,355

2,721,446

1,508,7511,626,4162,208,917

42,5571,336,957

281,347900,332

4,156,6592,214,1058,872,5962,107,0582,371,756(2,531,196)

(15,058)

77,289,822(15,204,424)62,085,398

37,868,0808,001,4851,609,1361,933,977

5,917,766660,981

3,198,311

1,024,1881,499,2551,526,079339,554759,240

138,9362,309,3664,755,9473,093,98811,043,5263,583,786169,828

(3,238,503)(138,544)

86,056,383(9,775,070)76,281,313


Tables 215

6. —Continued

Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco

1,736,475 3,712,153 179,483,497 3,662,935 2,553,425 5,393,686 16,924,161 1,844,655

1,438,247,017 832,367,957 2,168,845,209 529,481,69716,742,570 26,448,953 38,564,698 8,464,42255,920,615 72,271,032 89,093,953 28,725,332

644,235 1,094,276 2,405,835 460,646

261,532,503 690,709,256 1,030,435,746 2,372,524,3509,341,521 12,341,470 25,761,815 42,679,602

37,361,790 42,891,487 48,081,040 73,807,107446,235 497,849 930,878 1,709,413

1,512,542,017 934,103,037 2,468,884,122 574,233,014 312,293,467 750,274,112 1,258,076,204 2,492,963,246

50,218,22310,255,976

475,2852,057,121

6,540,349740,628

4,602,451

2,025,2923,796,6392,024,345540,859

1,660,171

433,7331,328,1076,594,9704,192,83910,150,3264,713,550187,439

(4,534,181)(185,148)

107,818,974(7,414,075)

100,404,899

59,030,48912,906,1111,136,9772,387,612

9,327,5501,386,1395,326,078

1,708,5332,121,1612,033,072582,182

1,214,616

358,8091,803,1448,420,8725,430,41312,188,1344,758,370147,883

(1,922,976)(257,126)

130,088,043(8,588,131)

121,499,912

75,263,09114,715,747

879,7353,530,130

8,861,9611,289,3965,400,041

4,414,9392,639,2822,276,8763,319,6664,420,665

382,0656,166,9489,186,7107,155,647

24,497,2306,617,714(6,408,496)(2,338,276)(609,606)

171,661,465(12,412,611)159,248,854

33,683,8147,259,567512,826

1,288,897

4,080,392571,773

3,215,190

457,217980,745

1,491,369423,015638,266

376,972523,400

3,241,4371,926,2924,598,0192,248,085743,473

(1,176,488)(94,417)

66,989,844(7,269,273)59,720,571

29,323,3915,912,0421,088,3821,113,084

5,566,164458,283

2,129,316

1,770,0051,077,565811,887149,273

1,117,928

711,241613,391

4,056,9162,300,1036,930,4822,781,1481,712,865(695,407)(52,158)

68,875,901(3,654,226)65,221,675

45,026,2968,983,008577,200

1,945,614

6,218,229843,871

3,643,109

949,7552,214,2421,506,838183,654786,571

116,090942,265

4,389,3332,122,6668,954,4972,804,744847,919(756,083)(403,391)

91,896,427(5,498,505)86,397,922

44,019,7749,061,857299,735

2,150,255

4,181,974892,258

3,389,437

569,4261,312,9011,077,3871,202,996645,487

325,5772,757,2384,874,8182,101,2356,331,8823,594,805685,090

(1,485,502)(497,970)

87,490,659(5,070,307)82,420,353

75,066,70816,271,479

881,7843,379,889

12,267,4361,224,4765,081,117

2,331,3905,531,3382,780,611186,680

1,972,107

773,4433,476,4957,064,3704,852,0629,807,1705,461,122

96,507(3,715,989)

(79,472)

154,710,723(12,060,816)142,649,907


216 Tables

6. Income and Expenses of Federal Reserve Banks, 1988—Continued

Item1

PROFIT AND LOSS

Current net income

Additions to and deductionsfrom current net income

Profits on sales of U.S.Treasury and federalagency securities

Other additionsTotal additions

Loss on foreignexchange transactions

Other deductionsTotal deductionsNet additions to or

deductions(-) fromcurrent net income

Cost of unreimbursed Treasuryservices

Assessments by BoardBoard expenditures5

Cost of currency

Net income before payment toU.S. Treasury

Dividends paidPayments to U.S. Treasury

(interest on FederalReserve notes)

Transferred to surplus

Surplus, January 1Surplus, December 31

Total Boston New York Philadelphia Cleveland

18,320,471,163 1,072,647,185 6,214,326,244 509,526,088 1,038,166,519

22,741,685 1,405,315 7,264,559 693,204 1,369,00687,590,510 20,824 990,764 9,075 6,765

110,332,194 1,426,139 8,255,323 702,280 1,375,771

(510,875,399) (16,858,888) (134,871,105) (24,522,019) (28,098,147)(88,514,766) (34,534) (1,020,938) (15,248) (108,533)

(599,390,166) (16,893,423) (135,892,044) (24,537,267) (28,206,680)

(489,057,971) (15,467,283) (127,636,721) (23,834,987) (26,830,909)

27,852,349 1,499,201 5,038,020 2,691,151 1,924,431

84,410,500 2,848,500 22,217,800 4,014,300 4,620,100164,244,653 9,688,687 53,879,756 4,421,601 10,064,330

17,554,905,689 1,043,143,514 6,005,553,947 474,564,049 994,726,749

125,616,018 4,385,524 33,109,144 6,039,635 6,811,391

17,364,318,571 1,032,070,290 5,698,704,285 462,991,264 985,705,508

64,971,100 6,687,700 24,741,350 5,533,150 2,209,850

2,047,086,700 68,267,400 541,045,900 97,245,800 112,693,4002,112,057,800 74,955,100 565,787,250 102,778,950 114,903,250

1. Details may not add to totals because of rounding.2. The effect of the 1987 implementation of Financial

Accounting Standards Board Statement No. 87-Em-ployers' Accounting for Pensions—is recorded in the Totalcolumn only and has not been distributed to each District.Accordingly, the sum of the Districts will not equal theTotal column for this category or for Total net expenses,and New York will not add to current net income. Theeffect of FASB 87 on the Reserve Banks was a reduction inexpenses.

3. Includes distribution of costs for projects performedby one Bank for the benefit of one or more other Banks.

4. Includes expenses for labor and materials temporarilycapitalized and charged to activities when the products areconsumed.

5. For additional details, see the last four pages of thepreceding section: Board of Governors, FinancialStatements.


Tables 217

6.—Continued

Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco

1,412,137,113 812,603,125 2,309,635,267 514,512,443 247,071,793 663,876,190 1,175,655,855 2,350,313,340

1,939,69052

1,939,742

1,004,2092,570

1,006,779

2,623,05512,040

2,635,095

655,362720

656,082

343,89260,396

404,288

908,663241

908,904

1,357,68286,449,27687,806,957

3,177,04937,785

3,214,834

(28,609,022) (44,957,035) (65,392,051) (14,304,511) (15,837,137) (20,945,891) (43,935,284) (72,544,307)(21,440) (110,768) (35,413) (7,363) (58,501) (557,718) (86,461,293) (83,017)

(28,630,462) (45,067,803) (65,427,465) (14,311,874) (15,895,639) (21,503,609) (130,396,578) (72,627,324)

(26,690,720) (44,061,024) (62,792,370) (13,655,793) (15,491,350) (20,594,705) (42,589,620) (69,412,490)

2,443,149 2,347,652 3,696,045 1,217,001 1,219,849 1,634,799 1,888,319 2,252,731

4,724,500 7,452,60012,825,070 7,134,247

10,758,000 2,375,900 2,596,100 3,476,70023,270,501 5,379,479 2,368,162 6,483,890

7,387,300 11,938,7009,540,917 19,188,013

1,365,453,674 751,607,603 2,209,118,351491,884,270 225,396,332 631,686,095 1,114,249,699 2,247,521,406

7,163,926 11,283,631 16,088,003 3,495,521 4,004,145 5,127,698 10,515,965 17,591,436

1,348,753,798 725,345,821 2,181,326,998 487,948,950 217,151,037 624,448,198 1,121,027,434 2,229,845,820

9,535,950 14,978,150 11,703,350 439,800 4,241,150 2,110,200 (17,293,700) 84,150

113,919,900 180,789,500 261,303,050 58,019,850 62,604,650 84,801,500 175,324,750 291,071,000123,455,850 195,767,650 273,006,400 58,459,650 66,845,800 86,911,700 158,031,050 291,155,150


218 Tables

7. Income and Expenses of Federal Reserve Banks, 1914-88J

Dollars

Period, or FederalReserve Bank

Currentincome

Netexpenses

Net additionsor

deductions ( - )

Assessments byBoard of Governors

Boardexpenditures

Costsof currency

All Banks1914-15.1916 . . . .1917 . . . .1918 . . . .1919 . . . .

1920 . . . .1921 . . . .19221923 . . . .192419251926192719281929

19301931 . . . .19321933193419351936193719381939

194019411942194319441945194619471948 . . . .1949

19501951 . . . .19521953195419551956195719581959

1960 . . . .1961 . . . .196219631964196519661967. . . .19681969

2,173,2525,217,998

16,128,33967,584,417

102,380,583

181,296,711122,865,86650,498,69950,708,56638,340,44941,800,70647,599,59543,024,48464,052,86070,955,496

36,424,04429,701,27950,018,81749,487,31848,902,81342,751,95937,900,63941,233,13536,261,42838,500,665

43,537,80541,380,09552,662,70469,305,715

104,391,829142,209,546150,385,033158,655,566304,160,818316,536,930

275,838,994394,656,072456,060,260513,037,237438,486,040412,487,931595,649,092763,347,530742,068,150886,226,116

1,103,385,257941,648,170

1,048,508,3351,151,120,0601,343,747,3031,559,484,0271,908,499,8962,190,403,7522,764,445,9433,373,360,559

2,018,2822,081,7224,921,93210,576,89218,744,815

27,548,50533,722,40928,836,50429,061,53927,767,88626,818,66424,914,03724,894,48725,401,23325,810,067

25,357,61124,842,96424,456,75525,917,84726,843,65328,694,96526,016,33825,294,83525,556,94925,668,907

25,950,94628,535,54732,051,22635,793,81639,659,49641,666,45350,493,24658,191,42864,280,27167,930,860

69,822,22783,792,67692,051,06398,493,15399,068,436101,158,921110,239,520117,931,908125,831,215131,848,023

139,893,564148,253,719161,451,206169,637,656171,511,018172,110,934178,212,045190,561,166207,677,768237,827,579

5,875-193,001

-1,386,545-3,908,574-4,673,446

-3,743,907-6,314,796-4,441,914-8,233,107-6,191,143-4,823,477-3,637,668-2,456,792-5,026,029-4,861,642

-93,136311,451

-1,413,192-12,307,074-4,430,008-1,736,758

485,817-1,631,2742,232,1342,389,555

11,487,697720,636

-1,568,20823,768,2823,221,880-830,007-625,9911,973,001

-34,317,947-12,122,274

36,294,117-2,127,8891,583,988

-1,058,993-133,641-265,456-23,436

-7,140,914124,175

98,247,253

13,874,7023,481,628-55,779614,835725,948

1,021,614996,230

2,093,8768,519,996-557,553

302,304192,277237,795382,641594,818

709,525741,436722,545702,634663,240709,499721,724779,116697,677781,644

809,585718,554728,810800,160

1,372,0221,405,8981,679,5661,748,3801,724,9241,621,464

1,704,0111,839,5411,746,3262,415,6302,296,3572,340,5092,259,7842,639,6673,243,6703,242,500

3,433,7004,095,4974,121,6024,099,8004,174,6004,194,1005,339,8007,507,9005,917,2006,470,600

6,533,7006,265,1006,654,9007,572,8008,655,2008,576,3969,021,60010,769,59614,198,19815,020,084

1,714,4211,844,840805,900

3,099,402

2,175,5301,479,1461,105,8162,504,8301,025,7211,476,5802,178,1191,757,3991,629,7351,356,484

1,510,5202,588,0624,826,4925,336,1187,220,0684,710,3094,482,0774,561,8805,186,2476,304,316

7,315,8447,580,9138,521,42610,922,0676,489,8954,707,0025,603,1766,374,1955,973,2406,384,083

7,455,0116,755,7568,030,02810,062,90117,229,67123,602,85620,167,48118,790,08420,474,40422,125,657

For notes see end of table.


Tables 219

7.—Continued

Dividendspaid

217,4631,742,7756,804,1865,540,6845,011,832

5.654,0186,119,6736,307,0356.552.7176,682,4966,915,9587,329,1697,754,5398,458,4639,583,911

10,268,59810,029,7609,282,2448,874,2628,781,6618,504,9747,829,5817,940,9668,019,1378,110,462

8,214,9718,429,9368,669,0768,911,3429,500,126

10,182,85110,962,16011,523,04711,919,80912,329,373

13,082,99213,864,75014,681,78815,558,37716,442,23617,711,93718,904,89720,080,52721,197,45222,721,687

23,948,22525.569,54127,412,24128,912,01930,781,54832,351,60233,696,33635,027,31236,959,33639,236,599

Payments to U.S. Treasury

Franchisetax

Undersection 13b

I,i34,234 '. '. '.

2,703,894 '. '. '.

60,724,74259,974,46610,850,6053.613.056

113,64659,300

818,150249,591

2,584,6594,283,231

17,308

2,011,418 '. '. '.

'. '. '. 291,661227,448176,625119,52424,579

82,152141,465197,672244,726326,717247,65967,05435,605

Interest onFederal Reserve

notes

75,283,818166,690,356193,145,837

196,628,858254,873,588291,934,634342,567,985276,289,457251,740,721401,555,581542,708,405524,058,650910,649,768

896,816,359687,393,382799,365,981879,685,219

1,582,118,6141,296,810,0531,649,455,1641,907,498,2702,463,628,9833,019,160,638

Transferredto surplus

(section 13b)

-60^32327,695

102,88067,304

-419,140-425,653

-54,456-4,33349,602

135,003201,150262,13327,70886,772

Transferredto surplus(section 7)

1,134,23448,334,34170,651,778

82,916,01415,993,086-659,9042,545,513

-3,077,9622,473,8088,464,4265,044,119

21,078,89922,535,597

-2,297,724-7,057,69411,020,582-916,8556,510,071

607,422352,524

2,616,3521,862,4334,533,977

17,617,358570,513

3,554,10140,327,23748,409,79581,969,62581,467,0138,366,350

18,522,51821,461,770

21,849,49028,320,75946,333,73540,336,86235,887,77532,709,79453,982,68261,603,68259,214,569

-93,600,791

42,613,10070,892,30045,538,20055,864,300

-465,822,80027,053,80018,943,50029,851,20030,027,25039,432,450


220 Tables

7. Income and Expenses of Federal Reserve Banks, 1914-88—ContinuedDollars

Period, or FederalReserve Bank

Currentincome

Netexpenses

Net additionsor

deductions (—)

Assessments byBoard of Governors

Boardexpenditures

Costsof currency

1970.1971 .1972.1973 .1974 .1975 .1976.1977.1978 .1979.

1980.1981 .1982.1983 .1984.1985 .1986 .1987 .1988 .

Total, 1914-88 .

Aggregate/oreach Bank,1914-88

BostonNew YorkPhiladelphia . . . .ClevelandRichmondAtlantaChicagoSt. LouisMinneapolisKansas CityDallasSan Francisco...

3,877,218,4443,723,369,9213,792,334,5235,016,769,3286,280,090,9656,257,936,7846,623,220,3836,891,317,4988,455,309,401

10,310,148,406

12,802,319,33515,508,349,65316,517,385,12916,068,362,11718,068,820,74218,131,982,78617,464,528,36117,633,011,62319,526,431,297

276,571,876319,608,270347,917,112416,879,377476,234,586514,358,633558,128,811568,851,419592,557,841625,168,261

718,032,836814,190,392926,033,957

1,023,678,4741,102,444,4541,127,744,4901,156,867,7141,146,910,6991,205,960,134

11,441,82994,266,075

(49,615,790)(80,653,488)(78,487,237)

(202,369,615)7,310,500

(177,033,463)(633,123,486)(151,148,220)

(115,385,855)(372,879,185)

(68,833,150)(400,365,922)(412,943,156)

1,301,624,2941,975,893,3561,796,593,9172

(516,910,320)

21,227,80032,634,00235,234,49944,411,70041,116,60033,577,20141,827,70047,366,10053,321,70050,529,700

62,230,80063,162,70061,813,40071,551,00082,115,70077,377,70097,337,50081,869,80084,410,500

23,573,71024,942,52831,454,74033,826,29930,190,28837,130,08148,819,45355,008,16360,059,36568,391,270

73,124,42382,924,01398,441,027

152,135,488162,606,410173,738,745180,779,673170,674,979164,244,653

238,510,484,581 17,741,836,222 1,999,244,205 1,271,014,708 1,967,511,010

12,005,096,84369,376,122,4129,836,833,130

16,280,828,01318,788,385,4259,898,281,276

34,738,042,8678,187,287,0274,313,264,726

10,348,387,24813,763,880,88030,974,074,736

1,174,105,7493,525,480,072

935,307,3101,198,233,3031,393,781,7371,524,845,1462,334,955,874

948,898,211816,101,971

1,126,493,4811,012,280,5691,800,655,287

55,134,542534,167,103

86,170,61867,205,46192,183,673

182,174,022226,221,946

45,150,11866,677,95486,680,029

209,610,258347,868,477

45,779,286328,683,786

62,160,51898,122,69066,169,27694,744,360

180,357,67239,683,97237,826,41554,354,70982,922,773

180,179,251

114,917,920492,365,339

90,575,610124,358,035185,156,576120,997,307275,191,342

75,231,45134,325,19194,968,427

116,662,362242,761,450

Total 238,510,484,582 17,741,836,2224 1,999,244,205 1,271,014,708 1,967,511,010

1. Details may not add to totals because of rounding.2. For 1987 and subsequent years, includes the cost of

services provided to the Treasury by Federal ReserveBanks for which reimbursement was not received.

3. The $2,240,750,999 transferred to surplus wasreduced by direct changes of $500,000 for charge-off onBank premises (1927), $139,299,557 for contributions to

capital of the Federal Deposit Insurance Corporation(1934) and $3,657 net upon elimination of sec. 13b surplus(1958); and was increased by transfer of $11,131,013 fromreserves for contingencies (1945), leaving a balance of$2,112,057,800 on Dec. 31,1987.

4. See note 2, table 6.


Tables 221

7.—Continued

Dividendspaid

Payments to U.S. Treasury

Franchisetax

Undersection 13b

Interest onFederal Reserve

notes

Transferredto surplus

(section 13b)

Transferredto surplus(section 7)

41,136,55143,488,07446,183,71949,139,68252,579,64354,609,55557,351,48760,182,27863,280,31267,193,615

70,354,51674,573,80679,352,30485,151,83592,620,451

103,028,905109,587,968117,499,115125,616,018

2,160,030,490 149,138,300

3,493,570,6363,356,559,8733,231,267,6634,340,680,4825,549,999,4115,382,064,0985,870,463,3825,937,148,4257,005,779,4979,278,576,140

11,706,369,95514,023,722,90715,204,590,94714,228,816,29716,054,094,67417,796,464,29217,803,894,71017,738,879,54217,364,318,571

2,188,893 214,977,261,822 (3,657)

32,579,70040,403,25050,661,00051,178,30051,483,20033,827,60053,940,05045,727,65047,268,20069,141,200

56,820,95076,896,65078,320,350106,663,100161,995,900155,252,95091,954,150173,771,40064,971,100

2,240,750,9993

89,004,996586,093,192116,936,323175,777,068108,956,701147,368,065298,326,91668,733,05960,824,36290,002,435131,996,042286,011,331

2,160,030,491

7,111,39568,006,2625,558,9014,842,4476,200,1898,950,561

25,313,5262,755,6295,202,9006,939,100560,049

7,697,341

149,138,300

280,843369,116722,40682,930172,49379,264151,0457,464

55,61564,213102,083101,421

2,188,893

10,543,845,86064,355,883,8278,594,442,84714,618,489,86416,990,867,8507,982,401,044

31,561,621,6007,033,553,6023,354,818,3408,971,201,93512,466,603,39528,503,531,658

214,977,261,822

135,411(433,412)290,661(9,906)

(71,517)5,49111,682(26,515)64,874(8,674)55,337(17,089)

(3,657)

84,049,925603,043,821117,109,172128,137,043129,335,658201,034,190288,335,15463,600,27870,723,01391,051,650162,308,528301,022,567

2,240,750,999


222 Tables

8. Acquisition Costs and Net Book Value of Premises of Federal Reserve Banksand Branches, December 31,1988l

Dollars

Federal ReserveBank orBranch

Acquisition costs

LandBuildings(includingvaults)2

Building ma-chinery andequipment

Total3

Netbookvalue

Otherreal

estate4

BOSTON.Annex..

NEW YORK .Annex

Buffalo

PHILADELPHIA.

CLEVELAND.CincinnatiPittsburgh

RICHMOND.Annex

BaltimoreCharlotte

ATLANTA..Birmingham .Jacksonville .MiamiNashville....New Orleans.

CHICAGO .Annex

Detroit

ST. LOUIS .Little Rock .Louisville ..Memphis . . .

MINNEAPOLIS.Helena

KANSAS CITY.DenverOklahoma City..Omaha

DALLAS....El PasoHoustonSan Antonio .

SAN FRANCISCO.Los AngelesPortlandSalt Lake CitySeattle

22,036,68127,840

3,436,277477,863887,844

79,910,31689,202

18,207,3331,136,2192,693,268

5,360,169 107,307,166 91,396,90844,538 161,580 125,754

21,735,584745,855

2,265,777

43,379,1942,359,9365,846,889

28,050,650783,785

3,077,117

1,876,601 52,360,437 5,903,704 60,140,742 45,902,623

1,074,281 6,478,2012,246,599 13,537,7231,658,376 7,235,660

3,912,575 55,853,002522,733 3,725,466

6,476,114 26,826,9031,902,406 15,484,515

1,202,2553,026,988880,258

3,717,791592,342

3,087,693

14,035,8751,905,770

17,486,16911,965,9741,474,6782,956,411

4,511,942 92,922,80553,066 904,562

797,734 4,454,918

700,378 11,162,8711,148,492 2,082,669700,075 2,871,372

1,135,623 4,216,382

1,394,384 26,664,805289,619 104,184

1,798,804 9,987,2683,187,962 3,422,762

646,386 2,381,2076,534,583 10,989,009

3,772,588262,477

2,049,064482,284

15,541,9373,891,887

207,381480,222274,772

7,019,2931,398,3073,535,5912,857,743

66,620,97148,580,2442,010,2902,032,4151,890,966

6,475,7447,528,4773,309,063

14,314,3133,924,5843,842,189

946,943

3,558,5801,117,797

02,111,6641,274,5931,476,257

14,265,111426,419

2,899,301

5,283,8701,003,0221,131,2382,126,755

7,692,18968,689

8,802,6653,505,7612,153,3711,401,083

3,737,706393,301983,006658,346

17,345,6288,334,890

649,4321,293,9851,836,988

14,028,22623,312,79812,203,099

74,079,8898,172,784

37,145,20618,333,865

18,796,7106,050,555

18,366,42717,795,4293,341,6137,520,362

111,699,8581,384,0478,151,953

17,147,1184,234,1834,702,6857,478,760

35,751,378462,491

20,588,73710,116,4845,180,963

18,924,675

14,529,5872,054,0856,567,6613,998,373

99,508,53660,807,0222,867,1033,806,6224,002,725

8,659,74413,080,6849,619,998

55,450,5873,716,505

32,591,15916,950,727

13,342,8784,233,201

18,366,42714,935,2991,415,8904,893,900

92,508,7871,252,1666,068,827

10,924,7922,551,7672,690,4444,750,245

21,966,834314,549

1,224,363

909,313

283,753

1,376,047

16,837,800 149,9487,570,6874,404,446

18,194,160 2,220,765

11,624,2351,652,7685,876,4713,326,538

85,282,80157,992,0812,492,8082,848,8522,410,208

3,094,592

Total 108,905,176 641,473,754 171,928,587 922,307,517 730,154,100 9,258,780

1. Details may not add to totals because of rounding.2. Includes expenditures for construction at some

offices, pending allocation to appropriate accounts.3. Excludes charge-offs of $17,698,968 before 1952.

4. Covers acquisitions for banking-house purposes andbank premises formerly occupied and being held pendingsale.


Tables 223

9. Operations in Principal Departments of Federal Reserve Banks, 1985-8

Operation 1988 1987 1986 1985

Millions of pieces (except as noted)Loans (thousands)Currency received and countedCurrency verified and destroyedCoin received and countedChecks handled

U.S. government checksPostal money ordersMother

Issues, redemptions, and exchanges of U.S.Treasury and federal agency securities1.

Transfer of fundsFood stamps redeemed

Millions of dollarsLoansCurrency received and countedCurrency verified and destroyedCoin received and countedChecks handled

U.S. government checksPostal money ordersMother

Issues, redemptions, and exchanges of U.S.Treasury and federal agency securities1.

Transfer of fundsFood stamps redeemed

2217,5805,910

17,137

547144

17,623

18656

2,327

537,952195,64747,1843,684

608,30713,189

11,789,787

89,516,419160,730,050

10,748

2516,8815,217

19,871

568146

17,006

19152 r

2,210

151,323216,151

44,9073,517

610,67812,511

11,453,158

90,056,338152,453,528 2-r

10,322

1915,4085,584

20,461

585140

16,226

20450

2,216

193,424197,51647,8423,088

606,02911,103

10,546,900

75,447,899125,028,070

10,475

2414,6555,744

19,691

592130

15,965

17145

2,322

307,856182,09551,081

3,226

538,2619,486

9,557,753

65,866,333109,126,369

10,915

1. Before 1988, data included book-entry securitiestransfers both sent and received. To eliminate doublecounting, the 1988 data include only the transfers sent.

2. Before 1987, data were compiled using a differentmethodology,

r = Revised.


224 Tables

10. Federal Reserve Bank Interest Rates, December 31, 1988

Bank

All Federal Reserve Banks..

Loans to depository institutions

Adjustment creditand seasonal

credit1

Extended credit2

First 30 daysof borrowing After 30 days of borrowing3

6.5 6.5 9.55

1. Adjustment credit is available on a short-term basis tohelp depository institutions meet temporary needs forfunds that cannot be met through reasonable alternativesources. After May 19,1986, the highest rate establishedfor loans to depository institutions may be charged onadjustment credit loans of unusual size that result from amajor operating problem at the borrower's facility.

Seasonal credit is available to help smaller depositoryinstitutions meet regular, seasonal needs for funds thatcannot be met through special industry lenders and thatarise from a combination of expected patterns of movementin their deposits andloans. Atemporary simplified seasonalprogram established on March 8,1985, and reestablishedfor 1986 and 1987 was not renewed for 1988. See sections201.3(a) and 201.3(b)(l) of Regulation A.

2. Extended credit is available to depository institutions,

if similar assistance is not reasonably available from othersources, when exceptional circumstances or practicesinvolve only a particular institution or when an institutionis experiencing difficulties adjusting to changing marketconditions over a longer period of time.

3. For extended-credit loans outstanding more than 30days, a flexible rate somewhat above rates on marketsources of funds ordinarily will be charged, but in no casewill the rate charged be less than the basic discount rateplus 50 basis points. The flexible rate is reestablished onthe first business day of each two-week reserve mainte-nance period. At the discretion of the Federal ReserveBank, the time period for which the basic discount rate isapplied may be shortened. See section 201.3(b)(2) ofRegulation A.


Tables 225

11. Reserve Requirements of Depository Institutions'

Type of deposit, anddeposit interval2

Net transaction accounts3A

$0 million-$41.5 millionMore than $41.5 million

Nonpersonal time deposits5

By original maturityLess than 1 xh years1 Vz years or more

Eurocurrency liabilitiesAll types

Depository institution requirementsafter implementation of the

Monetary Control Act

Percent of deposits Effective date

3 12/20/8812 12/20/88

3 10/6/830 10/6/83

3 11/13/80

1. Reserve requirements in effect on Dec. 31, 1988.Required reserves must be held in the form of deposits withFederal Reserve Banks or vault cash. Nonmembers maymaintain reserve balances with a Federal Reserve Bankindirectly on a pass-through basis with certain approvedinstitutions.

For previous reserve requirements, see earlier editionsof the ANNUAL REPORT and of the Federal Reserve Bulletin.Under provisions of the Monetary Control Act, depositoryinstitutions include commercial banks, mutual savingsbanks, savings and loan associations, credit unions,agencies and branches of foreign banks, and Edgecorporations.

2. The Garn-St Germain Depository Institutions Act of1982 (Public Law 97-320) requires that $2 million ofreservable liabilities (transaction accounts, nonpersonaltime deposits, and Eurocurrency liabilities) of eachdepository institution be subject to a zero percent reserverequirement. The Board is to adjust the amount ofreservable liabilities subject to this zero percent reserverequirement each year for the succeeding calendar year by80 percent of the percentage increase in the total reservableliabilities of all depository institutions, measured on anannual basis as of June 30. No corresponding adjustment isto be made in the event of a decrease. On Dec. 20,1988, theexemption was raised from $3.2 million to $3.4 million. Indetermining the reserve requirements of depositoryinstitutions, the exemption shall apply in the followingorder: (1) net NOW accounts (NOW accounts lessallowable deductions); (2) net other transaction accounts;and (3) nonpersonal time deposits or Eurocurrencyliabilities starting with those with the highest reserve ratio.

With respect to NOW accounts and other transactionaccounts, the exemption applies only to such accounts thatwould be subject to a 3 percent reserve requirement.

3. Transaction accounts include all deposits on whichthe account holder is permitted to make withdrawals bynegotiable or transferable instruments, payment orders ofwithdrawal, and telephone and preauthorized transfers inexcess of three per month for the purpose of makingpayments to third persons or others. However, MMDAsand similar accounts subject to the rules that permit nomore than six preauthorized, automatic, or other transfersper month, of which no more than three can be checks, arenot transaction accounts (such accounts are savings de-posits subject to time deposit reserve requirements).

4. The Monetary Control Act of 1980 requires that theamount of transaction accounts against which the 3 percentreserve requirement applies be modified annually by 80percent of die percentage increase in transaction accountsheld by all depository institutions, determined as of June 30each year. Effective Dec. 20, 1988, for institutionsreporting quarterly and Dec. 27, 1988, for institutionsreporting weekly, the amount was increased from $40.5million to $41.5 million.

5. In general, nonpersonal time deposits are time de-posits, including savings deposits, that are not transactionaccounts and in which a beneficial interest is held by adepositor that is not a natural person. Also included arecertain transferable time deposits held by natural personand certain obligations issued to depository institutionoffices located outside the United States. For details, seesection 204.2 of Regulation D.


226 Tables

12. Initial Margin Requirements under Regulations T, U, G, and X1

Percent of market value

Effective date Marginstocks

Convertiblebonds

Short sales,Tonly2

1934, Oct. 1 . .1936, Feb. 1..

Apr. 1..1937, Nov. 1 .1945, Feb. 5 . .

July5. .1946, Jan. 2 1 .1947, Feb. 21.1949, Mar. 3 .1951, Jan. 17.1953, Feb. 20.1955,Jan. 4 ..

Apr. 23.1958,Jan.16.

Aug. 5 .Oct. 16.

1960, July 28 .1962, July 10.1963, Nov. 6 .1968, Mar. 11

June 8 . .1970, May 6. .1971, Dec. 6..1972, Nov. 241974, Jan. 3 ..

25-4525-55

55405075

100755075506070507090705070708065556550

506050505050

505075

100755075506070507090705070708065556550

1. These regulations, adopted by the Board of Gover-nors pursuant to the Securities Exchange Act of 1934, limitthe amount of credit to purchase and carry "marginsecurities" (as defined in the regulations) when such creditis collateralized by securities. Margin requirements onsecurities other than options are the difference between themarket value (100 percent) and the maximum loan value ofcollateral as prescribed by the Board. Regulation T wasadopted effective Oct. 15, 1934; Regulation U, effectiveMay 1,1936; Regulation G, effective Mar. 11, 1968; andRegulation X, effective Nov. 1,1971.

On Jan. 1,1977, the Board of Governors for the first timeestablished in Regulation T the initial margin requiredfor writing options on securities, setting it at 30 percent of

the current market value of the stock underlying the option.On Sept. 30,1985, the Board changed the required initialmargin, allowing it to be the same as the option maintenancemargin required by the appropriate exchange or self-regulatory organization; such maintenance margin rulesmust be approved by the Securities and Exchange Commis-sion. Effective Jan. 31, 1986, the SEC approved newmaintenance margin rules, permitting margins to be theprice of the option plus 15 percent of the market value of thestock underlying the option.

2. From Oct. 1,1934, to Oct. 31,1937, the requirementwas the margin "customarily required" by the brokers anddealers.


Tables 227

13. Principal Assets and Liabilities and Number of Insured Commercial Banks,by Class of Bank, June 30, 1988 and 1987l

Asset and liability items shown in millions of dollars

Item TotalMember banks

Total National State

Nonmemberbanks

Loans and investmentsGross loansNet loansInvestments

U.S. Treasury and federal agencysecurities

OtherCash assets, total

Deposits, totalInterbankOther transactionOther nontransaction

Equity capital

Number of banks

Loans and investmentsGross loansNet loansInvestments

U.S. Treasury and federal agencysecurities

OtherCash assets, total

Deposits, totalInterbankOther demandOther time and savings

Equity capital

Number of banks

2,127,6781,647,3631,634,411480,315

312,005168,310209,506

1,987,49359,880

583,7271,532,856184,226

13,274

1,997,6781,536,9161,524,022460,762

292,559168,203217,237

1,900,40565,613

572,7201,436,543172,546

13,829

June 30,1988

1,578,6191,251,9381,242,772326,682

208,140118,542160,869

1,442,06252,186

434,5151,084,780132,593

5,530

1,272,2731,015,8571,008,696256,415

166,24390,172128,296

1,158,53936,723

343,650886,457102,708

4,459

306,346236,080234,07670,266

41,89728,36932,573

283,52315,46390,865198,32229,885

1,071

June 30,1987

1,472,2861,163,7801,154,868308,506

191,268117,239168,383

1,368,72857,655

423,5971,005,562123,456

5,818

1,178,461935,008928,140243,453

154,37289,081132,045

1,100,27442,405334,177822,65197,100

4,724

293,825228,772226,72865,053

36,89628,15736,338

268,45415,25089,421182,91126,356

1,094

549,059395,425391,639153,634

103,86549,76948,637

545,4317,694

149,212448,076

51,634

7,744

525,392373,136369,154152,256

101,29150,96448,854

531,6767,957

149,123430,98149,090

8,011

1. All insured commercial banks in the United States.Details may not add to totals because of rounding.


228 Tables

14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items —Year-End 1918-88, and Month-End 1988l

Millions of dollars

Period

1918 . . . .1919 . . . .

1920 . . . .1921 . . . .1922 . . . .1923 . . . .1924 . . . .

1925 . . . .1926 . . . .1927 . . . .1928 . . . .1929 . . . .

1930 . . . .1931 . . . .1932 . . . .1933 . . . .1934 . . . .

1935 . . . .1936 . . . .1937 . . . .1938 . . . .1939 . . . .

1940 . . . .1941 . . . .1942 . . . .1943 . . . .1944 . . . .

1945 . . . .1946 . . . .1947 . . . .1948 . . . .1949 . . . .

1950 . . . .1951 . . . .1952 . . . .1953 . . . .1954 . . . .

1955 . . . .1956 . . . .1957 . . . .1958 . . . .1959 . . . .

1960 . . . .1961 . . . .1962 . . . .1963 . . . .1964 . . . .

Factors supplying reserve funds

Federal Reserve Bank credit outstanding

U S. Treasury andfederal agency securities

Total

239300

287234436134540

375315617228511

739817

1,8552,4372,430

2,4312,4302,5642,5642,484

2,1842,2546,189

11,54318,846

24,25223,35022,55923,33318,885

20,77823,80124,69725,91624,932

24,78524,91524,23826,34726,648

27,38428,88130,82033,59337,044

Boughtoutright

239300

287234436

80536

367312560197488

686775

1,8512,4352,430

2,4302,4302,5642,5642,484

2,1842,2546,189

11,54318,846

24,25223,35022,55923,33318,885

20,72523,60524,03425,31824,888

24,39124,61023,71926,25226,607

26,98430,47828,72233,58236,506

Heldunderrepur-chaseagree-ment

00

000

544

83

573123

4342

420

10000

00000

00000

5319666359844

394305519

9541

400159342

11538

Loans

1,7662,215

2,6871,144

618723320

643637582

1,056632

251638235

987

53

1047

3365

80

24916385

22378

6719

15628

143

108505564

458

33130

3863

186

Float2

199201

11940782752

6345632434

212014155

1239191791

8094

471681815

578580535541534

1,3681,184

967935808

1,5851,6651,4241,2961,590

1,8472,3002,9032,6002,606

Allother3

294575

262146273355390

378384393500405

37237841

13721

3828191611

81014104

21112

35421

2970664975

7451

11016294

OtherFederalReserveassets4

00

00000

00000

00000

00000

00000

00000

00000

00000

00000

Total

2,4983,292

3,3551,5631,4051,2381,302

1,4591,3811,6551,8091,583

1,3731,8532,1452,6882,463

2T4862,5002,6122,6012,593

2,2742,3616,679

12,23919,745

15,09124,09323,18124,09719,499

22,21625,00925,82526,88025,885

26,50726,69925,78427,75528,771

29,33831,36233,87136,41839,930

Goldstock5

2,8732,707

2,6393,3733,6423,9574,212

4,1124,2054,0923,8543,997

4,3064,1734,2264,0368,238

10,12511,25812,76014,51217,644

21,99522,73722,72621,93820,619

20,06520,52922,75424,24424,427

22,70622,69523,18722,03021,713

21,69021,94922,78120,53419,456

17,76716,88915,97815,51315,388

Spe-cial

draw-ing

rightscertif-icateac-

count

Trea-surycur-

rencyout-

stand-ing6

1,7951,707

1,7091,8421,9582,0092,025

1,9771,9912,0062,0122,022

2,0272,0352,2042,3032,511

2,4762,5322,6372,7982,963

3,0873,2473,6484,0944,131

4,3394,5624,5624,5894,598

4,6364,7094,8124,8944,985

5,0085,0665,1465,2345,311

5,3985,5855,5675,5785,405Digitized for FRASER


Tables 229

14.-Continued

Factors absorbing reserve funds

Cur-rency

incir-

cula-tion

Trea-surycashhold-ings7

Deposits, otherthan reserves, with


Trea-sury

For-eign Other

OtherFederalReserve

ac-counts 4

Re-quiredclear-

ingbal-

OtherFederalReserve

lia-bilities

andcapital4

Member bank

WithFederalReserveBanks

Cur-rencyand

coin9

Re-quired 1(

Ex-cess 10

4,9515,091

5,3254,4034,5304,7574,760

4,8174,8084,7164,6864,578

4,6035,3605,3885,5195,536

5,8826,5436,5506,8567,598

8,73211,16015,41020,49925,307

28,51528,95228,86828,22427,600

27,74129,20630,43330,78130,509

31,15831,79031,83432,19332,591

32,86933,91835,33837,692

288385

218214225213211

203201208202216

211222272284

3,029

2,5662,3763,6192,7062,409

2,2132,2152,1932,3032,375

2,2872,2721,3361,3251,312

1,2931,2701,270761796

767775761683391

377422380361

5151

5796113851

1617182329

195483

121

544244142923634

368867799579440

977393870

1,123821

668247389346563

394441481358504

485465597880

9673

5123419

846566

67919420

2999172199397

1,133774793

1,3601,204

862508392642767

895526550423490

402322356272345

217279247171

2528

1815261920

2119212124

223124128169

226160235242256

599586485356394

446314569547750

565363455493441

554426246391694

533320393291

118208

298285276275258

272293301348393

375354355360241

253261263260251

284291256339402

495607563590106

714746111839907

925901998

1,122841

9411,0441,0071.065

00

00000

00000

00000

00000

00000

00000

00000

00000

0000

00

00000

00000

00000

00000

00000

00000

00000

00000

0000

1,6361,890

1,7811,7531,9341,8982^220

2,2122,1942,4872,3892,355

2,4711,9612,5092,7294,096

5,5876,6067,0278,72411,653

4,02612,45013,11712,88614,373

15,91516,13917,89920,47916,568

17,68120,05619,95020,16018,876

19,00519,05919,03418,50418,174

17,08117,38717,45417.049

00

00000

00000

00000

00000

00000

00000

00000

0000

310

2,5442,5443,2624.099

1,5851,822

01,654

01,8842,161

2,2562.2502,4242,4302,428

2,3751,9941,9331,8702,282

2,7434,6225,8155,5196,444

7,4119,36511,12911,65012,748

14,45715,57716,40019,27715,550

16,50919,66720,52019,39718,618

18,90319,08919,09118,57418,619

18,98818,98820,07120.677

5168

09901459

-44-5663

-41-73

96-33576859

1,814

2,8441,9841,2123,2055,209

6,6153,0851,9881,2361,625

1,458562

1,4991,2021.018

1,172389

-570763258

102-30-57-70

-135

63796645471


230 Tables

14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items -Year-End 1918-88, and Month-End 1988 ^ContinuedMillions of dollars

Period

1965 . . . .1966 . . . .1967. . . .1968 . . . .1969 . . . .

1970. . . .1971 . . . .1972 . . . .1973 . . . .1974 . . . .

1975 . . . .1976 . . . .1977 . . . .1978 . . . .1979 . . . .

1980 . . . .1981 . . . .1982 . . . .1983 . . . .1984 . . . .1985 . . . .1986. . . .1987. . . .1988 . . . .

1988Jan. . . .Feb . . .Mar. . .Apr . . .May...June...July. . .Aug. . .Sept...Oct... .Nov.. .Dec . . .

Factors supplying reserve funds

Federal Reserve Bank credit outstanding

U.S. Treasury andfederal agency securities

Total

40,76844,31649,15052,93757,154

62,14270,80471,23080,49585,714

94,124104,093111,274118,591126,167

130,592140,348148,837160,795169,627191,248221,459231,420247,489

225,834224,293224,895241,045230,460237,144231,651229,986240,524234,405241,086247,489

Boughtoutright12

40,47843,65548,98052,937

7,1543

62,14269,48171,11980,39584,760

92,789100,062108,922117,374124,507

128,038136,863144,544159,203167,612186,025205,454226,459240,628

225,834224,293224,895230,642230,460229,718231,651229,986230,764230,157235,803240,628

Heldunderrepur-chaseagree-ment

290661170

00

01,323

111100954

1,3354,0312,3521,2171,660

2,5543,4854,2931,5922,0155,223

16,0054,9616,861

000

10,4030

7,42600

9,4904,2485,2836,861

Loans

137173141186183

33539

1,9811,258

299

21125

2651,1741,454

1,8091,601

717918

3,5773,0601,5653,8152,170

333336

2,3112,5903,3042,4643,6503,2372,1542,2752,3282,170

Float2

2,2482,4952,5763,4433,440

4,2614,3433,9743,0992,001

3,6882,6013,8106,4326,767

4,4671,7622,7351,605

833988

1,261811

1,286

396897298371122259774659

1,1991,690

3891,286

Allother3

1871931645864

5726110668

999

1,126991954587704

776195

1,480418

00000

000000000000

OtherFederalReserveassets4

0000

2,743

1,1231,0681,2601,1523,195

3,3123,1822,4424,5435,613

8,7399,2309,8908,728

12,34715,30217,47515,83718,803

15,95414,26915,03816,23614,38814,78016,36517,63818,24819,35218,16818,803

Total

43,34047,17752,03156,62464,584

67,91876,51578,55186,07292,208

102,461110,892118,745131,327140,705

146,383153,13663,659

172,464186,384210,598241,760251,883269,748

242,517239,795242,542260,242248,274254,647252,440251,520261,855257,722261,971269,748

Goldstock5

13,73313,15911,98210,36710,367

10,73210,13210,41011,56711,652

11,59911,59811,71811,67111,172

11,16011,15111,14811,12111,09611,09011,08411,07811,060

11,06811,06311,06311,06311,06311,06311,06311,06111,06211,06211,05911,060

Spe-cial

draw-ing

rightscertif-icateac-

count-

400400400400400

5001,2001,2501,3001,800

2,5183,3184,6184,6184,6184,7185,0185,0185,018

5,0185,0185,0185,0185,0185,0185,0185,0185,0185,0185,0185,018

Trea-surycur-

rencyout-

stand-ing6

5,5756,3176,7846,7956,852

7,1477,7108,3138,7169,253

10,21810,81011,33111,83113,083

13,42713,68713,78615,73216,41817,07517,56718,17718,799

18,19718,24818,31318,36918,42518,50118,53118,58118,63718,69318,74318,799

1. For a description of figures and discussion of theirsignificance, see Banking and Monetary Statistics,1941-1970 (Board of Governors of the Federal ReserveSystem, 1976), pp. 507-23.

2. Beginning with 1960, figures reflect a minor changein concept; see Federal Reserve Bulletin, vol. 47 (February1961), p. 164.

3. Principally acceptances and, until Aug. 21, 1959,industrial loans, authority for which expired on that date.

4. For the period before Apr. 16, 1969, includes thetotal of Federal Reserve capital paid in, surplus, othercapital accounts, and other liabilities and accrued divi-dends, less the sum of bank premises and other assets, andwas reported as "Other Federal Reserve accounts"; there-after, "Other Federal Reserve assets" and "Other FederalReserve liabilities and capital" are shown separately.

5. For the period before Jan. 30, 1934, includes goldheld in Federal Reserve Banks and in circulation.

6. Includes currency and coin (other than gold) issueddirectly by the Treasury. The largest components arefractional and dollar coins. For details see "Currency andCoin in Circulation," Treasury Bulletin.

7. Coin and paper currency held by the Treasury, aswell as any gold in excess of the gold certificates issued tothe Reserve Bank.

8. Beginning in November 1979, includes reserves ofmember banks. Edge corporations, and U.S. agencies andbranches of foreign banks. Beginning on Nov. 13, 1980,includes reserves of all depository institutions.

9. Between Dec. 1,1959, and Nov. 23,1960, part wasallowed as reserves; thereafter all was allowed.

10. Estimated through 1958. Before 1929, data wereavailable only on call dates (in 1920 and 1922 the call dateswere Dec. 29). Beginning on Sept. 12,1968, the amount isbased on close-of-business figures for the reserve periodtwo weeks before the report date.


Tables 231

14.-Continued

Factors absorbing reserve funds

Cur-rency

incir-

cula-tion

Trea-surycashhold-ings7

Deposits, otherthan reserves, with


Trea-sury

For-eign Other

OtherFederalReserve

ac-counts4

Re-quiredclear-

ingbal-

ances

OtherFederalReserve

lia-bilities

andcapital4

Member bankreserves8

WithFederalReserveBanks

Cur-rencyand

Re-quired10

Ex-

42,05644,66347,22650,96153,950

57,90361,06866,51672,49779,743

86,54793,717103,811114,645125,600

136,829144,774154,908171,935183,796197,488211,995230,205247,649

223,152223,574227,073228,282232,732235,513234,990235,881235,527237,094242,472247,649

7601,1761,344695596

431460345317185

483460392240494

441443429479513550447454395

438457479479459432397398389397402395

668416

1,123703

1,312

1,1562,0201,8552,5422,113

7,28510,3937,1144,1964,075

3,0624,3015,0333,6615,3169,^517,5885,3138,656

10,2762,4722,40316,1863,0309,7623,9104,39013,0236,1515,1988,656

150174135216134

148294325251418

353352379368429

411505328191253480287244347

355343534215288382269231338301251347

355588563747807

1,233999840

1,41914

1,27514

1,0901,3571,1871,2561,412

617781

1,033851867

1,041917

1,027548

315438436360491351291392358348398548

211-147-773

-1,3530

00000

00000

000000000

000000000000

00000

00000

00000

0117436

1,0131,1261,4901,8121,6871,605

1,6741,6581,6711,6601,6601,6581,6421,6341,6051,6621,6131,605

00000

1,9862,1312,1432,6692,935

2,9683,0633,2924,2754,957

4,6715,2614,9905,3925,9525,9406,0887,1297,683

6,9267,1397,0477,4507,2357,1097,2007,0207,8998,4638,0587,683

18,44719,77921,09221,81822,085

24,15027,78825,64727,06025,843

26,05225,15826,87031,15229,792

27,45625,11126,05320,41320,69327,14146,29540,09737,742

33,66438,04337,10640,06037,09834,02338,35236,23437,43338,07938,39937,742

4,1634,3104,6314,9215,187

5,4235,7436,2166,7817,370

8,0368,6289,42110,53811,429

13,65415,57616,66617,821n.a.n.a.n.a.n.a.n.a.

n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.

22,84824,32125,90527,43928,173

30,03332,49632,04435,26837,011

35,19735,46137,61542,69444,217

40,55842,14541,39139,179n.a.n.a.n.a.n.a.n.a.


-238-232-182-700-901

-4601,035

9812

-1,360-3,798

-1,103!--1,535-1,265-893

-2,835

675-1,4421,328-945n.a.n.a.n.a.n.a.n.a.


11. Beginning on Dec. 1,1966, includes federal agencyobligations held under repurchase agreements and begin-ning on Sept. 29, 1971, federal agency issues boughtoutright.

12. Includes, beginning in 1969, securities loaned—fully guaranteed by U.S. government securities pledgedwith Federal Reserve Banks-and excludes securities soldand scheduled to be bought back under matched sale-purchase transactions.

13. Beginning with week ending Nov. 15, 1972,includes $450 million of reserve deficiencies on whichFederal Reserve Banks are allowed to waive penalties for atransition period in connection with bank adaptation toRegulation J as amended, effective Nov. 9, 1972. Allow-able deficiencies are as follows (beginning with first state-ment week of quarter, in millions): 1973-Q1, $279; Q2,$172; Q3, $112; Q4, $84; 1974-Q1, $67; Q2, $58. Thetransition period ended with the second quarter of 1974.

14. For the period before July 1973, includes certaindeposits of domestic nonmember banks and foreign-ownedbanking institutions held with member banks and rede-posited in full with Federal Reserve Banks in connectionwith voluntary participation by nonmember institutions inthe Federal Reserve System program of credit restraint.

As of Dec. 12, 1974, the amount of voluntary non-member bank and foreign-agency and branch deposits atFederal Reserve Banks that are associated with marginalreserves are no longer reported. However, two amountsare reported: (1) deposits voluntarily held as reserves byagencies and branches of foreign banks operating in theUnited States and (2) Eurodollar liabilities.

15. Adjusted to include waivers of penalties for reservedeficiencies, in accordance with change in Board policyeffective Nov. 19, 1975.Digitized for FRASER


232 Tables

15. Changes in Number of Banking Offices in the United States, 1988'

Type of officeand change

Banks, Dec. 31,1987...

Changes during 1988New banksCeased banking

operationBanks converted

into branchesOther4

Net change

Banks, Dec. 31,1988..

Branches andadditional offices,Dec. 31,1987

Changes during 1988De novoBanks converted

into branchesDiscontinuedSale of branchOther4

Net change4

Branches andadditional offices,Dec. 31,1988

Total

Commercial banks2

Total

Member

Total National State

Nonmember

Insured Non-insured3

Mutualsavingsbanks

Insured Non-insured

14,375 14,004 5,749 4,640 1,109 7,994 261 370 1

231 228 99 69 30 129 0 3 0

-201 -201 -103 - 8 1 - 2 2 - 9 5 - 3 - 9 0

-598 -586 -403 -344 - 5 9 -183 0 - 1 2 0- 1 3 - 2 7 108 91 17 -131 - 4 23 0

-581 -586 -299 -265 - 3 4 -280 - 7 5 0

13,794 13,418 5,450 4,375 1,075 7,714 254 375 1

47,981 45,411 29,260 23,924 5,336 16,019 132 2,565 5

1,459 1,320 775 628 147 538 7 139 0

598 586 403 344 59 183 0 12 0-942 -910 -604 -469 -135 -306 0 - 3 2 0

0 - 2 1 - 2 0 - 1 2 - 8 - 1 0 21 0371 281 577 525 52 -272 - 2 4 90 0

1,486 1,256 1,131 1,016 115 142 - 1 7 230 0

49,467 46,667 30,391 24,940 5,451 16,161 115 2,795 51. Preliminary. Final data will be available in the Annual 3. As of Dec. 31, 1988, includes noninsured national

Statistical Digest, 1988, forthcoming. trust companies.2. Includes stock savings banks and nondeposit trust 4. Includes interclass changes,

companies.


Tables 233

16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of LiabilitiesApproved by the Board of Governors, 1988

Columbia Bank, Avondale, Arizona, to acquireassets and liabilities of The North AmericanBank, Phoenix, Arizona

SUMMARY REPORT BY THE ATTORNEY GENERAL

No report received. Request for report on thecompetitive factors was dispensed with, as autho-rized by the Bank Merger Act, to permit the FederalReserve System to act immediately to safeguard thedepositors of The North American Bank.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(1/8/88)Columbia Bank (Applicant) has assets of $9.4million and The North American Bank (Bank) hasassets of $30.5 million.

The Federal Deposit Insurance Corporation(FDIC) has recommended immediate action by theFederal Reserve System to prevent the probablefailure of Bank.

Farmers & Merchants Bank and Trust Com-pany, Aberdeen, South Dakota, to merge withBank of Cresbard, Cresbard, South Dakota


No report received. Request for report on thecompetitive factors was dispensed with, as autho-rized by the Bank Merger Act, to permit the FederalReserve System to act immediately to safeguarddepositors of Bank of Cresbard.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE(2/3/88)Farmers & Merchants Bank and Trust Company(Applicant) has assets of $94.2 million and Bank ofCresbard (Bank) has assets of $8.9 million.

The Office of the Comptroller of the Currency(OCC) has recommended immediate action by theFederal Reserve System to prevent the probablefailure of Bank.

Farmers State Bank of Western Illinois, NewWindsor, Illinois, to merge the assets and liabilities0/Bank of Viola, Viola, Illinois


(12/18/87)The proposed transaction would not be significantlyadverse to competition.


(2/18/88)Farmers State Bank of Western Illinois (Applicant)has assets of $28.4 million and Bank of Viola(Bank) has assets of $10.9 million. Applicant andBank are located in the same banking market. On a

pro forma basis, Applicant's market share will bewithin Department of Justice and Board guidelines.

The banking factors and considerations relatingto the convenience and needs of the community areconsistent with approval.

Citizens Bank and Trust Company, Baytown,Texas, to merge the assets and liabilities of FirstAmerican Bank & Trust of Baytown, Baytown,Texas


No report received. Request for report on thecompetitive factors was dispensed with, as autho-rized by the Bank Merger Act, to permit the FederalReserve System to act immediately to safeguard thedepositors of First American Bank & Trust ofBaytown.


(3/11/88)Citizens Bank and Trust Company (Applicant) hasassets of $ 149.2 million and First American Bank &Trust of Baytown (Bank) has assets of $35.7million.

The FDIC has recommended immediate actionby the Federal Reserve System to prevent theprobable failure of Bank.

Central Bank, Hollidaysburg, Pennsylvania, tomerge the assets and liabilities of the Broad TopCity office of Mellon Bank (Central), N. A., StateCollege, Pennsylvania




(3/28/88)Central Bank (Applicant) has assets of $159.8million and the branch of Mellon Bank (Branch) hasassets of $4.1 million. Applicant and Branchoperate in the same banking market. On a pro formabasis, Applicant's market share is within Depart-ment of Justice and Board guidelines.


State Bank and Trust of Colorado Springs,Colorado Springs, Colorado, to merge the assetsand liabilities of Citizens National Bank, Colo-rado Springs, Colorado


234 Tables

16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of LiabilitiesApproved by the Board of Governors, 1988 — Continued


No report received. Request for report on thecompetitive factors was dispensed with, as autho-rized by the Bank Merger Act, to permit the FederalReserve System to act immediately to safeguard thedepositors.


(4/21/88)State Bank and Trust (Applicant) has assets of$12.7 million and Citizens National Bank (Bank)has assets of $17.6 million.


Interstate Bank North, Houston, Texas, toacquire the assets and liabilities o/First NationalBank of Kingwood, Kingwood, Texas




(5/26/88)Interstate Bank North (Applicant) has assets of$37.7 million and First National Bank of Kingwood(Bank) has assets of $16.1 million. The OCC hasrecommended immediate action by the FederalReserve System to prevent the probable failure ofBank.

Citizens Bank and Trust Company, Baytown,Texas, to merge certain assets and liabilities ofLone Star Bank, Baytown, Texas




(5/26/88)Citizens Bank and Trust Company (Applicant) hasassets of $19.0 million and Lone Star Bank (Bank)has assets of $12.1 million.


Citizens Bank, Smithville, Tennessee, to mergewith Bank of Ardmore, Ardmore, Tennessee




(6/6/88)Citizens Bank (Applicant) has assets of $204 millionand Bank of Ardmore (Bank) has assets of $54million. Applicant and Bank operate in the samebanking market. On a pro forma basis, Applicant'smarket share will be within the Department ofJustice and Board guidelines.


First Interstate Bank of California, Los Angeles,California, to merge with Bank of Contra Costa,Walnut Creek, California




(6/16/88)First Interstate Bank of California (Applicant) hasassets of $19.6 billion and Bank of Contra Costa(Bank) has assets of $175.9 million. Applicant andBank are not located in the same banking market.


Irving Trust Company, New York, New York, toacquire certain assets and liabilities of the Seoul,South Korea, branch of Continental IllinoisNational Bank and Trust Company of Chicago,Chicago, Illinois




(6/27/88)Irving Trust Company (Applicant) has assets of$20.5 billion and the Seoul, South Korea, branch(Branch) has assets of $129 million. Applicant andBank are not located in the same banking market.

The banking factors and considerations relating


Tables 235

16.-Continued

to the convenience and needs of the community areconsistent with approval.

Beaver Trust Company, Beaver, Pennsylvania,to acquire the assets and liabilities of branchoffices of First Seneca Bank, Butler, Pennsyl-vania and of Union National Bank, Pittsburgh,Pennsylvania




(8/11/88)Beaver Trust Company (Applicant) has assets of$ 187 million and the branches of First Seneca Bankand of Union National Bank (Branches) haveacquired assets of $46.8 million. Applicant andBranches do not operate in the same bankingmarket.


Norstar Bank, Hempstead, New York, to acquirecertain assets and liabilities of three branches ofChemical Bank, New York, New York

SUMMARY REPORT BY THE ATTORNEY GENERAL(7/22/88)The proposed transaction would not be significantlyadverse to competition.


(8/30/88)Norstar Bank (Applicant) has assets of $2.3 billionand the branches of Chemical Bank (Branches)have assets of $108 million. Applicant and Bankoperate in the same banking market. On a pro formabasis, Applicant's market share is within Depart-ment of Justice and Board guidelines.


First Community Bank, Inc., Princeton, WestVirginia, to merge with First National Bank ofGrafton, Grafton, West Virginia




(9/7/88)First Community Bank, Inc. (Applicant), has assetsof $250.6 millionand First National Bank of Grafton(Bank) has assets of $34.0 million. Applicant andBank do not operate in the same banking market.


Merchants State Bank, Freeman, South Dakota,to acquire certain assets and liabilities of HurleyState Bank, Hurley, South Dakota




(9/9/88)Merchants State Bank (Applicant) has assets of $22million and Hurley State Bank (Branch) has assetsof $ 10 million. Applicant and Branch do not operatein the same banking market.


First Virginia Bank-South Central, Amherst,Virginia, to merge certain assets and liabilities oftwo branches of Colonial American NationalBank, Roanoke, Virginia




(10/4/88)First Virginia Bank-South Central (Applicant) hasassets of $43.6 million and the branches of ColonialAmerican National Bank (Branches) have assets of$2.5 million. Applicant and Branches operate in thesame banking market. On a pro forma basis,Applicant's market share is within Department ofJustice and Board guidelines.


Isabella Bank and Trust, Mount Pleasant,Michigan, to merge the assets and liabilities of theShepherd branch of Commercial National Bankof Alma, Alma, Michigan


236 Tables

16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of LiabilitiesApproved by the Board of Governors, 1988-Continued




(10/24/88)Isabella Bank and Trust (Applicant) has assets of$154.3 million and Commercial National Bank(Branch) has assets of $4.2 million. Applicant andBranch do not operate in the same banking market.


Bank of Woodward, Woodward, Oklahoma, toassume the assets and liabilities of Bank of theNorthwest, Woodward, Oklahoma


No report received. Request for report on thecompetitive factors was dispensed with, as autho-rized by the Bank Merger Act, to permit the FederalReserve System to act immediately to safeguarddepositors of Bank of the Northwest.


(11/15/88)Bank of Woodward (Applicant) has assets of $103million and Bank of the Northwest (Bank) hasassets of $22 million.


First Interstate Bank of California, Los Angeles,California, to merge with Point West Bancorpand its banking subsidiary, Point West Bank,both of Sacramento, California




(11/23/88)First Interstate Bank of California (Applicant) hasassets of $19.7 billion and Point West Bancorp(Bank) has banking assets of $168.3 million.Applicant and Bank are not in the same bankingmarket.


First Community Bank, Inc., Princeton, WestVirginia, to merge with Valley Bank & TrustCompany, Bluefield, West Virginia




(11/29/88)First Community Bank, Inc. (Applicant), has assetsof $283.4 million and Valley Bank & Trust Com-pany (Bank) has assets of $15.4 million. Applicantand Bank operate in the same banking market. On apro forma basis, Applicant's market share is withinDepartment of Justice and Board guidelines.


State Bank of Caledonia, Caledonia, Michigan,to acquire certain assets and deposit liabilities ofthe Middleville Branch of PrimeBank, Middle-ville, Michigan




(11/30/88)State Bank of Caledonia (Applicant) has assets of$56.9 million and the Middleville Branch (Branch)has deposit liabilities of $8.9 million. Applicant andBank do not operate in the same banking market.


First Community Bank, Forest, Virginia, toassume deposit liabilities from three branches ofSignet Bank/Virginia, Richmond, VirginiaSUMMARY REPORT BY THE ATTORNEY GENERAL



(12/9/88)First Community Bank (Applicant) has assets of$27 million and the branches of Signet Bank/Vir-ginia (Branches) have assumed deposits of $48million. Applicant and Branches do not operate inthe same banking market.


16.-Continued

237



Continental Bank and Trust Company, SaltLake City, Utah, to merge with Tracy-CollinsBank and Trust Company, Salt Lake City, Utah


No report received. Request for report on thecompetitive factors was dispensed with, as autho-rized by the Bank Merger Act, to permit the FederalReserve System to act immediately to safeguarddepositors of Tracy-Collins Bank and TrustCompany.


(12/23/88)Continental Bank and Trust Company (Applicant)has assets of $410.9 million and Tracy-CollinsBank and Trust Company (Bank) has assets of$213.3 million.

Mergers Approved Involving Wholly OwnedSubsidiaries of the Same Bank HoldingCompany

In each of the following cases, the Summary Reportby the Attorney General indicates that the transac-tion would not have a significantly adverse effect oncompetition because the proposed merger is essen-tially a corporate reorganization. The Board ofGovernors, the Federal Reserve Bank, or theSecretary of the Board of Governors, whicheverapproved the application, determined that thecompetitive effects of the proposed transaction, thefinancial and managerial resources and prospects ofthe banks concerned, as well as the convenienceand needs of the community to be served wereconsistent with approval.

InstitutionlAssets

(millionsof dollars)

Date ofapproval

First of America-Straits Area, Cheboygan, MichiganMergerFirst of American Bank, N. A., Sault Ste. Marie, Michigan

Trustcorp Bank, Toledo, OhioMergerTrustcorp Co. Dayton, Dayton, OhioTrustcorp Company, N. A., Columbus, Ohio

Marine Bank of Champaign, Champaign, IllinoisMergerMarine American National Bank of Champaign, Champaign, Illinois

Chemical Bank and Trust Company, Midland, MichiganMergerChemical Bank Bay Area, Bay City, Michigan

Trustcorp Bank, Lenawee, Adrian MichiganMergerJipson-Carter State Bank, Blissfield, Michigan

Old Kent Bank of Kalamazoo, Kalamazoo, MichiganMergerOld Kent Bank of Allegan, Allegan, MichiganOld Kent Bank of Battle Creek, Battle Creek, MichiganOld Kent Bank of South Haven, South Haven, MichiganOld Kent Bank of Three Rivers, Three Rivers, Michigan

85

52

2,898

40

100

89

452

9

147

31

521

42414132

1/20/88

1/26/88

3/18/88

3/18/88

4/15/88

4/22/88


238 Tables

16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of LiabilitiesApproved by the Board of Governors, 1988 —Continued

Institutionl (millionsof dollars)

Date ofapproval

Sovran Bank/Central South, Nashville, TennesseeMergerSovran Bank/Williamson County, Franklin, Tennessee

Bank One, Mansfield, Mansfield, Ohio.MergerBank One, Ashland, Ashland, Ohio

United Jersey Bank, Hackensack, New JerseyMergerUnited Jersey Bank Edgewater N. A., Englewood, New Jersey.

United Jersey Bank, Hackensack, New JerseyMergerUnited Jersey Bank/Wood Ridge, N. A., Wood Ridge, New Jersey.

Landmark Bank, Fairview Heights, IllinoisMergerLandmark Bank Edgemont, East St. Louis, Illinois .Landmark Bank St. Clair County, OTallon, Illinois.Landmark Bank, Mascoutah, Illinois

First City Bank of Dallas, Dallas, TexasMergerFirst City Bank-East Dallas, Dallas, TexasFirst City Bank-Market Center, N. A., Dallas, TexasFirst City Bank Valley View, Dallas, TexasFirst City Bank-Farmers Branch, Farmers Branch, Texas.First City Bank of Garland, N. A., Garland, TexasFirst City National in Grand Prairie, Grand Prairie, Texas.First City Bank of Lancaster, Lancaster, TexasFirst City Bank of Richardson, Richardson, Texas

State Savings Bank of South Lyon, South Lyon, Michigan.MergerFirst of America Bank-Ann Arbor, Ann Arbor, Michigan .

Scottsdom Bank, Scottsdom, Arizona.MergerThunderbird Bank, Phoenix, Arizona.

First City Bank of Dallas, Dallas, TexasMergerFirst City Bank of Lewisville, Lewisville, TexasFirst City Bank of Piano, N. A., Piano, Texas

First Interstate Bank of California, Los Angeles, California .MergerPoint West Bank, Sacramento, California

2,700

349

349

70

4,025

155

4,183

102

62

932925

1,600

10570

1351551348083

240

46

495

52

315

1,500

13162

19,700

168

7/1/88

7/13/88

8/1/88

9/7/88

9/29/88

9/29/88

10/20/88

11/16/88

11/22/88

11/23/88


Tables 239

16.-Continued

Institutionl

Cole Taylor Bank/Drovers, Chicago, IllinoisMergerCole Taylor Bank/Main, Chicago, IllinoisCole Taylor Bank/Skokie, Skokie, IllinoisCole Taylor Bank/Ford City, Chicago, Illinois

First City Bank of Dallas, Dallas, TexasMergerFirst City Bank-Central Arlington, Arlington, TexasFirst City National Bank of Arlington, Arlington, TexasFirst City National Bank of Colley, Colleyville, TexasFirst City Bank-Forest Hill, Forest Hill, TexasFirst City National Bank of Fort Worth, Fort Worth, Texas

Sovran Bank/Central South, Nashville, TennesseeMergerSovran Bank/Clarksville, Clarksville, Tennessee

First Bank of Johnson City, Johnson City, IllinoisMergerFirst Bank of Carbondale, Carbondale, Illinois

Assets(millions

of dollars)

Date ofapproval

340 11/29/88

287182291

1,500 11/29/88

87245

554675

3,000 12/13/88

135

29 12/22/88

26

1. Each proposed transaction was to be effected underthe charter of the first-named bank. The entries are in

chronological order of approval.

Mergers Approved Involving a NonoperatingInstitution with an Existing Bank

The following transactions have no significant effecton competition; they merely facilitate the acquisi-tion of the voting shares of a bank or banks by aholding company. In such cases the summary reportby the attorney general indicates that the transactionwill merely combine an existing bank with anonoperating institution; in consequence, andwithout regard to the acquisition of the surviving

bank by the holding company, the merger wouldhave no effect on competition. The Board ofGovernors, the Federal Reserve Bank, or theSecretary of the Board of Governors, whicheverapproved the application, determined that theproposal would, in itself, have no adversecompetitive effects, and that the financial factorsand considerations relating to the convenience andneeds of the community were consistent withapproval.


240 Tables

16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of LiabilitiesApproved by the Board of Governors, 1988—Continued

InstitutionlAssets

(millionsof dollars)2

Date ofapproval

The ACB Bank, Apple Creek, OhioMergerApple Creek Banking Company, Apple Creek, Ohio.

Orrstown Interim Bank, Orrstown, Pennsylvania .MergerOrrstown Bank, Orrstown, Pennsylvania

Commonwealth Bank, Arlington, TexasMergerCommonwealth Bank-Lamar, N.A. , Arlington, Texas .

Norstar Bank of Callicoon, Callicoon, New York .MergerNorstar Bank of Upstate NY, Albany, New York..

F&M Bank-Martinsburg, Martinsburg, West VirginiaMergerMerchants and Farmers Bank

*St. Elmo Bank, St. Elmo, IllinoisMergerFayette County Bank, St. Elmo, Illinois .

New Bank, Madisonville, TennesseeMergerBank of Madisonville, Madisonville, Tennessee

Richwood Interim Bank, Richwood, OhioMergerRichwood Banking Company, Richwood, Ohio .

Ripley Bank Merger Subsidiary, Inc., Ripley, West Virginia .MergerBank of Ripley, Ripley, West Virginia ,

Ranson Interim Bank, Ranson, West VirginiaMergerBlakeley Bank and Trust Company, Ranson, West Virginia.

Central Florida Bancshares, Inc., Maitland, FloridaMergerFirst American Bank of Orange County, Maitland, Florida .

21

74

113

94

53

16

86

46

38

64

41

1/27/88

2/5/88

4/1/88

4/26/88

5/23/88

6/20/88

7/29/88

8/18/88

8/29/88

9/26/88

11/4/88

1. Each proposed transaction was to be effected under 2. Where no assets are listed, the bank is newlythe charter of the first-named bank. The entries are in organized and not in operation,chronological order of approval.


Federal ReserveDirectories and Meetings


242 Directories and Meetings

Board of Governors of the Federal Reserve SystemDecember 31,1988

Term expires

ALAN GREENSPAN of New York, Chairmanl January 31,1992MANUEL H. JOHNSON of Virginia, Vice Chairman1 January 31,2000MARTHA R. SEGER of Michigan January 31,1998WAYNE D. ANGELL of Kansas January 31,1994H. ROBERT HELLER of California January 31,1996EDWARD W. KELLEY, JR., of Texas January 31,1990JOHN P. LAWARE of Massachusetts January 31,2002

OFFICE OF BOARD MEMERSJOSEPH R. COYNE, Assistant to the BoardDONALD J. WINN, Assistant to the BoardBOB STAHLY MOORE, Special Assistant

to the Board

DIVISION OF MONETARY AFFAIRSDONALD L. KOHN, DirectorDAVID E. LINDSEY, Deputy DirectorBRIAN F. MADIGAN, Assistant DirectorRICHARD D. PORTER, Assistant DirectorNORMAND R.V. BERNARD, Special Assistant

to the Board

OFFICE OF STAFF DIRECTORFOR MANAGEMENTS. DAVID FROST, Staff DirectorEDWARD T. MULRENIN, Assistant

StaffDirectorPORTIA W. THOMPSON, Equal Employment

Opportunity Programs Officer

OFFICE OF STAFF DIRECTOR FORFEDERAL RESERVE BANK ACTIVITIESTHEODORE E. ALLISON, StaffDirector

OFFICE OF THE EXECUTIVEDIRECTOR FOR INFORMATIONRESOURCES MANAGEMENTALLEN E. BEUTEL, Executive DirectorSTEPHEN R. MALPHRUS, Deputy Executive

Director

OFFICE OF THE SECRETARYWILLIAM W. WILES, SecretaryBARBARA R. LOWREY, Associate SecretaryJAMES MCAFEE, Associate Secretary

LEGAL DIVISIONMICHAEL BRADFIELD, General CounselJ. VIRGILMATTINGLY, JR., Deputy

General CounselRICHARD M. ASHTON, Associate

General CounselOLIVER IRELAND, Associate General CounselRICKI R. TIGERT, Assistant General CounselMARYELLEN A. BROWN, Assistant

to the General Counsel

DIVISION OF RESEARCHAND STATISTICSMICHAEL J. PRELL, DirectorEDWARD C. ETTIN, Deputy DirectorTHOMAS D. SIMPSON, Associate DirectorLAWRENCE SLIFMAN, Associate DirectorMARTHA BETHEA, Deputy

Associate DirectorPETER A. TINSLEY, Deputy

Associate DirectorMYRON L. KWAST, Assistant DirectorSUSAN J. LEPPER, Assistant DirectorMARTHA S. SCANLON, Assistant DirectorDAVID J. STOCKTON, Assistant DirectorJOYCE K. ZICKLER, Assistant DirectorLEVON H. GARABEDIAN, Assistant Director

(Administration)

1. The designations as Chairman and Vice Chairmanexpire on August 10, 1991, and August 4, 1990, respec-tively, unless the services of these members of the Boardshall have terminated sooner.


Directories and Meetings 243

DIVISION OF INTERNATIONALFINANCEEDWIN M. TRUMAN, Staff DirectorLARRY J. PROMISEL, Senior

Associate DirectorCHARLES J. SIEGMAN, Senior

Associate DirectorDAVID H. HOWARD, Deputy

Associate DirectorROBERT F. GEMMILL, Staff AdviserDONALD B. ADAMS, Assistant DirectorPETER HOOPER, IE, Assistant DirectorKAREN H. JOHNSON, Assistant DirectorRALPH W. SMITH, JR. , Assistant Director

DIVISION OF FEDERAL RESERVEBANK OPERATIONSCLYDE H. FARNSWORTH, JR. , DirectorDAVID L. ROBINSON, Associate DirectorC. WILLIAM SCHLEICHER, JR., Associate

DirectorCHARLES W. BENNETT, Assistant DirectorJACK DENNIS, JR. , Assistant DirectorEARL G. HAMILTON, Assistant DirectorJOHN H. PARRISH, Assistant DirectorLOUISE L. ROSEMAN, Assistant DirectorFLORENCE M. YOUNG, Adviser

DIVISION OF BANKING SUPERVISIONAND REGULATIONWILLIAM TAYLOR, Staff DirectorDON E. KLINE, Associate DirectorFREDERICK M. STRUBLE, Associate DirectorWILLIAM A. RYBACK, Deputy Associate

DirectorSTEPHEN C. SCHEMERING, Deputy

Associate DirectorRICHARD SPILLENKOTHEN, Deputy

Associate DirectorHERBERT A. BIERN, Assistant DirectorJOE M. CLEAVER, Assistant DirectorROGER T. COLE, Assistant DirectorJAMES I. GARNER, Assistant DirectorJAMES D. GOETZINGER, Assistant DirectorMICHAEL G. MARTINSON, Assistant DirectorROBERT S. PLOTKIN, Assistant DirectorSIDNEY M. SUSS AN, Assistant DirectorLAURA M. HOMER, Securities Credit Officer

DIVISION OF CONSUMERAND COMMUNITY AFFAIRSGRIFFITH L. GARWOOD, DirectorGLENN E. LONEY, Assistant DirectorELLEN MALAND, Assistant DirectorDOLORES S. SMITH, Assistant Director

DIVISION OF HUMANRESOURCES MANAGEMENTDAVID L. SHANNON, DirectorJOHN R. WEIS, Associate DirectorANTHONY V. DIGIOIA, Assistant DirectorJOSEPH H. HAYES, JR., Assistant DirectorFRED HOROWITZ, Assistant Director

DIVISION OF SUPPORT SERVICESROBERT E. FRAZIER, DirectorGEORGE M. LOPEZ, Assistant DirectorDAVID L. WILLIAMS, Assistant Director

OFFICE OF THE CONTROLLERGEORGE E. LIVINGSTON, ControllerSTEPHEN J. CLARK, Assistant Controller

(Programs and Budgets)DARRELL R. PAULEY, Assistant Controller

(Finance)

DIVISION OF HARDWARE ANDSOFTWARE SYSTEMSBRUCE M. BEARDSLEY, DirectorTHOMAS C. JUDD, Assistant DirectorELIZABETH B. RIGGS, Assistant DirectorROBERT J. ZEMEL, Assistant Director

DIVISION OFAPPLICATIONS DEVELOPMENTAND STATISTICAL SERVICESWILLIAM R. JONES, DirectorDAY RADEBAUGH, Assistant DirectorRICHARD C. STEVENS, Assistant DirectorPATRICIA A. WELCH, Assistant Director

OFFICE OF THE INSPECTOR GENERALBRENT L. BOWEN, Inspector General



Federal Open Market CommitteeDecember 31,1988

MembersALAN GREENSPAN, Chairman, Board of GovernorsE. GERALD CORRIGAN, Vice Chairman, President, Federal Reserve Bank of New YorkWAYNE D. ANGELL, Board of GovernorsROBERT P. BLACK, President, Federal Reserve Bank of RichmondROBERT P. FORRESTAL, President, Federal Reserve Bank of AtlantaH. ROBERT HELLER, Board of GovernorsW. LEE HOSKINS, President, Federal Reserve Bank of ClevelandMANUEL H. JOHNSON, Board of GovernorsEDWARD W. KELLEY, JR. , Board of GovernorsJOHN P. LAWARE, Board of GovernorsROBERT T. PARRY, President, Federal Reserve Bank of San FranciscoMARTHA R. SEGER, Board of Governors

Alternate MembersROGER GUFFEY, President, Federal Reserve Bank of Kansas CitySILAS KEEHN, President, Federal Reserve Bank of ChicagoTHOMAS C. MELZER, President, Federal Reserve Bank of St. LouisFRANK E. MORRIS, President, Federal Reserve Bank of BostonJAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York

OfficersDONALD L. KOHN, JOHN M. DAVIS,

Secretary and Economist Associate EconomistNORMAND R.V. BERNARD, RICHARD G. DAVIS,

Assistant Secretary Associate EconomistMICHAEL BRADFIELD, DAVID E. LINDSEY,

General Counsel Associate EconomistERNEST T. PATRIKIS, CHARLES J. SIEGMAN,

Deputy General Counsel Associate EconomistMICHAEL J. PRELL, THOMAS D. SIMPSON,

Economist Associate EconomistEDWIN M. TRUMAN, LAWRENCE SLIFMAN,

Economist Associate EconomistJOHN H. BEEBE, SHEILA L. TSCHINKEL,

Associate Economist Associate EconomistJ. ALFRED BROADDUS, JR.,

Associate Economist

PETER D. STERNLIGHT, Manager for Domestic Operations,System Open Market Account

SAM Y. CROSS, Manager for Foreign Operations,System Open Market Account

During 1988, the Federal Open Market Federal Open Market Committee in thisCommittee held eight regularly scheduled REPORT.)meetings (see Record of Policy Actions of the



Federal Advisory CouncilDecember 31,1988

MembersDistrict 1 - J. TERRENCE MURRAY, President, Fleet/Norstar Financial Group, Inc., Chairman

and Chief Executive Officer, Fleet National Bank, Providence, Rhode IslandDistrict 2-WILLARD C. BUTCHER, Chairman and Chief Executive Officer, The Chase

Manhattan Bank, N. A., New York, New YorkDistrict 3-SAMUEL A. MCCULLOUGH, President and Chief Executive Officer,

Meridian Bancorp, Inc., Reading, PennsylvaniaDistrict 4-THOMAS H. O'BRIEN, President and Chief Executive Officer, PNC Financial Corp,

Pittsburgh, PennsylvaniaDistrict 5 - FREDERICK DEANE, JR. , Chairman of the Board and Chief Executive Officer,

Signet Banking Corporation, Richmond, VirginiaDistrict 6-BENNETT A. BROWN, Chairman and Chief Executive Officer,

Citizens and Southern Georgia Corporation and The Citizens and Southern National Bank,Atlanta, Georgia

District 7-CHARLES T. FISHER, III, Chairman and President, National Bank of Detroit,Detroit, Michigan

District 8-DONALD N. BRANDIN, Chairman of the Board and Chief Executive Officer,Boatmen'sBancshares, Inc., St. Louis, Missouri

District 9 - D . H. ANKENY, JR. , Chairman and Chief Executive Officer,First Bank System, Minneapolis, Minnesota

District 10 - F . PHILLIPS GILTNER, President, First National Bank of Omaha,Omaha, Nebraska

District 11 — T. C. FROST, Chairman of the Board, Frost National Bank, San Antonio, TexasDistrict 1 2 - P A U L HAZEN, President and Chief Operating Officer, Wells Fargo and Co.,

San Francisco, CaliforniaOfficersCHARLES T. FISHER, HI, President BENNETT A. BROWN, Vice President

HERBERT V. PROCHNOW, SecretaryWILLIAM J. KORSVIK, Associate Secretary

DirectorsSAMUEL A. MCCULLOUGH DONALD N. BRANDIN

The Federal Advisory Council met on Feb- the twelve Federal Reserve Districts, isruary 4-5, May 5-6, September 8-9, and required by law to meet in Washington at leastNovember 3-4, 1988. The Board of Gover- four times each year and is authorized by thenors met with the council on February 5, May Federal Reserve Act to consult with, and6, September 9, and November 4, 1988. The advise, the Board on all matters within thecouncil, which is composed of one represen- jurisdiction of the Board,tative of the banking industry from each of



Consumer Advisory CouncilDecember 31,1988

MembersNAOMI G. ALBANESE, Former Professor of Home Economics, Greensboro, North CarolinaSTEPHEN BROBECK, Executive Director, Consumer Federation of America, Washington, D.C.EDWIN B. BROOKS, President, Security Federal Savings and Loan Association, Richmond,

VirginiaJUDITH N. BROWN, Treasurer, American Association of Retired Persons, Edina, MinnesotaMICHAEL S. CASSIDY, Senior Vice President, Chase Manhattan Bank, New York, New YorkBETTY TOM CHU, Chairman, Trust Savings Bank, Arcadia, CaliforniaJERRY D. CRAFT, Senior Vice President, First National Bank of Atlanta, Atlanta, GeorgiaDONALD C. DAY, President, New England Securities Corporation, Boston, MassachusettsRICHARD B. DOBY, Financial Services Consultant, Doby and Associates, Denver, ColoradoRICHARD H. FINK, President, Citizens for a Sound Economy, Washington, D.C.NEIL J. FOGARTY, Attorney, Hudson County Legal Services, Jersey City, New JerseySTEPHEN GARDNER, Assistant Attorney General, State of Texas, Dallas, TexasKENNETH A. HALL, President (South Division) First United Bank, Picayune, MississippiELENA HANGGI, Director, Institute for Social Justice, Little Rock, ArkansasROBERT A. HESS, President and General Manager, Wright Patman Congressional Federal

Credit Union, Washington, D.C.ROBERT J. HOBBS, Deputy Director, National Consumer Law Center, Boston, MassachusettsRAMON E. JOHNSON, Professor of Finance, University of Utah, Salt Lake City, UtahROBERT W. JOHNSON, Professor of Management andDirector, Credit Research Center, Purdue

University, West Lafayette, IndianaA. J. KING, Chairman and Chief Executive Officer, Valley Bank of Kalispell, Kalispell,

MontanaJOHN M. KOLESAR, President, Ameritrust Development Bank, Cleveland, OhioALAN B. LERNER, Senior Executive Vice President, Associates Corporation, Dallas, TexasRICHARD L. D. MORSE, Professor of Family Economics, Kansas State University, Manhattan,

KansasWILLIAM E. ODOM, Chairman of the Board, Ford Motor Credit Company, Dearborn,

MichiganSANDRA R. PARKER, Chairman, Banking Committee, Richmond United Neighborhoods,

Richmond, VirginiaSANDRA PHILLIPS, Executive Director, Pittsburgh Partnership for Neighborhood Development,

Pittsburgh, PennsylvaniaJANE SHULL, Director, Institute for the Study of Civic Values, Philadelphia, PennsylvaniaRALPH E. SPURGIN, President and Chief Executive Officer, Limited Credit Services, Inc.,

Columbus, OhioLAWRENCE WINTHROP, President, Consumer Credit Counseling Service of Oregon, Inc.,

Portland Oregon



Consumer Advisory Council—Continued

OfficersSTEVEN W. HAMM, Chairman EDWARD J. WILLIAMS, Vice Chairman

The Consumer Advisory Council met with financial industry, and representatives ofmembers of the Board of Governors on March consumer and community interests. It was17-18, July 14-15, and October27-28,1988. established pursuant to the 1976 amendmentsThe council is composed of academics, state to the Equal Credit Opportunity Act to advisegovernment officials, representatives of the the Board on consumer financial services.

Thrift Institutions Advisory CouncilDecember 31,1988

MembersGERALD M. CZARNECKI, Chairman of the Board and Chief Executive Officer, HONFED,

Honolulu, HawaiiROBERT S. DUNCAN, Chairman, President, and Chief Executive Officer, Magnolia Federal

Bank for Savings, Hattiesburg, MississippiBETTY GREGG, Immediate Past President and Chief Executive Officer, Desert Schools Federal

Credit Union, Scottsdale, ArizonaJAMIE J. JACKSON, President, Landmark Capital, Inc., Houston, TexasTHOMAS A. KINST, President and Chief Executive Officer, Land of Lincoln Savings and Loan,

Hoffman Estates, IllinoisRAY MARTIN, Chairman and Chief Executive Officer, Coast Savings and Loan Association,

Los Angeles, CaliforniaJOE C. MORRIS, Chairman of the Board, Columbia Savings Association,

Overland Park, KansasJOSEPH W. MOSMILLER, Chairman and Chief Executive Officer, Loyola Federal Savings and

Loan Association, Baltimore, MarylandJANET M. PAVLISKA, President and Chief Executive Officer, BankFive for Savings, Arlington,

MassachusettsLouis H. PEPPER, Chairman and Chief Executive Officer, Washington Mutual Savings Bank,

Seattle, WashingtonWILLIAM G. SCHUETT, President and Chief Executive Officer, Security Savings

and Loan Association, Milwaukee, WisconsinDONALD B. SHACKELFORD, Chairman of the Board, State Savings Bank, Columbus, Ohio

OfficersJAMIE J. JACKSON, President GERALD M. CZARNECKI, Vice President

The members of the Thrift Institutions Advi- unions, savings and loan associations, andsory Council met with the Board of Governors savings banks, consults with and advises theon February 25, May 24, September 13, and Board on issues pertaining to the thriftNovember 15, 1988. The council, which industry and on various other matters withinis composed of representatives from credit the Board's jurisdiction.



Officers of Federal Reserve Banks, Branches, and OfficesDecember 31,1988!

BANK,Branch, ox facility

BOSTON3

NEW YORK3....

Buffalo

PHILADELPHIA

CLEVELAND3..

CincinnatiPittsburgh

RICHMOND3 . . .

Baltimore

Charlotte

Culpeper

ATLANTA

BirminghamJacksonvilleMiamiNashvilleNew Orleans

CHICAGO3

Detroit

ST. LOUIS

Little RockLouisville

Memphis

MINNEAPOLIS .

Helena

Chairman2

Deputy ChairmanPresident

First Vice PresidentVice Presidentin charge of Branch

George N.Hatsopoulos

Richard N. Cooper

John R. OpelEllen V. Futter

Mary Ann Lambertsen

Nevius M. CurtisPeter A. Benoliel

Charles W. ParryJohn R. Miller

Owen B.ButlerJames E. Haas

Robert A. GeorgineHanne M. Merriman

Thomas R. SheltonG. Alex Bernhardt

Bradley Currey, Jr.Larry L. Prince

Roy D. TerryE.William Nash, Jr.Sue McCourt CobbCondon S. BushSharon A. Perlis

Robert J. DayMarcus Alexis

Richard T. Lindgren

Robert L. Virgil, Jr.H. Edwin Trusheim

James R. RodgersLois H. GraySandra B. Sanderson

Michael W.WrightJohn A. Rollwagen

Marcia S. Anderson

Frank E. MorrisRobert W.

Eisenmenger

E. Gerald CorriganJames H. Oltman

John T. Keane

Edward G. BoehneWilliam H. Stone, Jr.

W. Lee HoskinsWilliam H.

Hendricks

Robert P. BlackJimmie R.

Monhollon

Robert P. ForrestalJack Guynn

Silas KeehnDaniel M. Doyle

Thomas C. MelzerJames R. Bowen

Gary H. SternThomas E. Gainor

Charles A. Cerino4

Harold J. Swart4

Robert D. McTeer, Jr.4

Albert D.Tinkelenberg4

JohnG. Stoides4

Delmar Harrison 4

FredR.Herr4

James D. Hawkins4

James T. Curry, IIIDonald E. NelsonRobert J. Musso

Roby L.Sloan4

John F. BreenHoward WellsPaul I. Black, Jr.

Robert F.McNellis



BANK,Branch, or facility

KANSAS CITY

DenverOklahoma CityOmaha

DALLAS

El PasoHoustonSan Antonio

SAN FRANCISCO

Los AngelesPortlandSalt Lake CitySeattle

Chairman2

Deputy ChairmanPresident

First Vice PresidentVice Presidentin charge of Branch

Irvine O. Hockaday, Jr. Roger GuffeyFred W. Lyons, Jr. Henry R. Czerwinski

James C. Wilson Kent M. ScottPatience S. Latting David J. FranceKenneth L. Morrison Harold L. Shewmaker

Bobby R. Inman Robert H. Boykin Tony J. Salvaggio4

Hugh G. Robinson William H. WallacePeyton Yates Sammie C. ClayWalter M. Mischer, Jr. Robert Smith in 4

Robert F. McDermott Thomas H. Robertson

Robert F. Erburu Robert T. Parry John F. Hoover4

Carolyn S. Carl E. PowellChambers

Richard C. Seaver Thomas C. Warren5

Paul E. Bragdon Angelo S. Carella 4

Don M. Wheeler E. Ronald Liggett4

Carol A. Nygren Gerald R. Kelly 4

1. A current list of these officers appears each month inthe Federal Reserve Bulletin.

2. The Chairman of a Federal Reserve Bank, by statute,serves as Federal Reserve Agent.

3. Additional offices of these Banks are located atLewiston, Maine; Windsor Locks, Connecticut; Cranford,

New Jersey; Jericho, New York; Utica at Oriskany, NewYork; Columbus, Ohio; Columbia, South Carolina;Charleston, West Virginia; Des Moines, Iowa; Indianapo-lis, Indiana; and Milwaukee, Wisconsin.

4. Senior Vice President.5. Executive Vice President.

Conference of Chairmen

The Chairmen of the Federal Reserve Banksare organized into the Conference of Chair-men, which meets to consider matters ofcommon interest and to consult with, andadvise, the Board of Governors. Such meet-ings, attended also by the deputy chairmen,were held in Washington on June 1 and 2 andNovember 30 and December 1, 1988.

The Executive Committee of the Confer-ence of Chairmen during 1988 comprisedRobert J. Day, Chairman; Robert F. Erburu,Vice Chairman; and John R. Opel, member.

On December 1, 1988, the Conferenceelected its Executive Committee for 1989,naming Robert F. Erburu as Chairman,Bradley Currey, Jr. as Vice Chairman, andPeter A. Benoliel as the other member.

Conference of Presidents

The presidents of the Federal Reserve Banksare organized into the Conference of Presi-dents, which meets periodically to considermatters of common interest and to consultwith, and advise, the Board of Governors.

On November 3, 1987, the Conferenceelected Gary H. Stern, President of the Fed-eral Reserve Bank of Minneapolis, as itsChairman for 1988, and Robert P. Forrestal,President of the Federal Reserve Bank ofAtlanta, as its Vice Chairman. The Confer-ence appointed Carolyn A. Verret, of theFederal Reserve Bank of Minneapolis, as itsSecretary, and Christopher G. Brown, of theFederal Reserve Bank of Atlanta, as itsAssistant Secretary.

Conference of FirstVice Presidents

The Conference of First Vice Presidents ofthe Federal Reserve Banks was organized in1969 to meet periodically for the consider-ation of operations and other matters.

On November 20, 1987, the Conferenceelected Thomas E. Gainor, First Vice Presi-dent of the Federal Reserve Bank of Minne-apolis, as its Chairman for 1988, and JackGuynn, First Vice President of the FederalReserve Bank of Atlanta, as its Vice Chair-man. The Conference appointed Carolyn A.Verret, of the Federal Reserve Bank of



Minneapolis, as its Secretary, and Christo-pher G. Brown, of the Federal Reserve Bankof Atlanta, as its Assistant Secretary.

Directors

The following list of directors of FederalReserve Banks and Branches shows for eachdirector the class of directorship, the principalbusiness affiliation, and the date the termexpires. Each Federal Reserve Bank has ninemembers on its board of directors: three ClassA and three Class B directors, who are electedby the stockholding member banks, and threeClass C directors, who are appointed by theBoard of Governors of the Federal ReserveSystem. Directors are chosen without discrim-ination as to race, creed, color, sex, ornational origin.

Class A directors represent the stockhold-ing member banks in each Federal ReserveDistrict. Class B and Class C directorsrepresent the public and are chosen with due,but not exclusive, consideration to the inter-ests of agriculture, commerce, industry, ser-vices, labor, and consumers; they may not beofficers, directors, or employees of any bankor bank holding company. In addition, ClassC directors may not be stockholders of anybank or bank holding company.

For the election of Class A and Class Bdirectors, the Board of Governors classifiesthe member banks of each Federal ReserveDistrict into three groups. Each group, whichcomprises banks with similar capitalization,elects one Class A director and one Class Bdirector. The Board of Governors designatesone Class C director as chairman of the boardof directors and Federal Reserve Agent ofeach District Bank and appoints another ClassC director as deputy chairman.

Federal Reserve Branches have either fiveor seven directors, a majority of whom areappointed by the parent Federal ReserveBank; the others are appointed by the Board ofGovernors. One of the directors appointed bythe Board is designated annually as chairmanof the board of that Branch in a mannerprescribed by the parent Federal ReserveBank.

For the name of the chairman and deputychairman of the board of directors of eachReserve Bank and of the chairman of eachBranch, see the preceding table, "Officers ofFederal Reserve Banks, Branches, andOffices."



Term expiresDec. 31

District 1-BOSTON

Class AWilliam C. Bullock, Jr Former Chairman, Merrill/Northstar, Bangor, 1988

Maine

Joel B. Alvord Chairman and Chief Executive Officer, Shawmut 1989National Corporation, Hartford, Connecticut

Richard D. Wardell President and Chief Executive Officer, National 1990Iron Bank of Salisbury, Salisbury,Connecticut

Class BMatina S. Horner President, Radcliffe College, Cambridge, 1988

Massachusetts

Richard M. Oster President and Chief Executive Officer, Cookson 1989America, Inc., Providence, Rhode Island

Stephen R. Levy Chairman and Chief Executive Officer, Bolt 1990Beranek and Newman, Inc., Cambridge,Massachusetts

Class CGeorge N. Hatsopoulos Chairman of the Board and President, Thermo 1988

Electron Corporation, Waltham,Massachusetts

Richard N. Cooper Maurits C. Boas Professor of International 1989Economics, Harvard University, Cambridge,Massachusetts

Richard L. Taylor President, Taylor Properties, Inc., Boston, 1990Massachusetts

District 2-NEW YORK

Class AJohn F. McGillicuddy Chairman of the Board and Chief Executive 1988

Officer, Manufacturers Hanover TrustCompany, New York, New York

Alberto M. Paracchini Chairman of the Board and President, Banco de 1989Ponce, Ponce, Puerto Rico

J. Kirby Fowler President and Chief Executive Officer, The 1990Flemington National Bank and TrustCompany, Flemington, New Jersey

Class BRichard L. Gelb Chairman and Chief Executive Officer, Bristol- 1988

Myers Company, New York, New York

John A. Georges Chairman and Chief Executive Officer, 1989International Paper Company, New York,New York



Term expiresDec. 31

John F. Welch, Jr Chairman and Chief Executive Officer, GE, 1990Fairfield, Connecticut

Class CMaurice R. Greenberg President and Chief Executive Officer, American 1988

International Group, Inc., New York,New York

John R. Opel Chairman of the Executive Committee, 1989International Business Machines Corporation,Armonk, New York

Ellen V. Futter President, Barnard College, Columbia 1990University, New York, New York

BUFFALO BRANCH

Appointed by the Federal Reserve BankR. Carlos Carballada President and Chief Executive Officer, Central 1988

Trust Company, Rochester, New York

Donald I. Wickham President, Tri-Way Farms, Inc., Stanley, 1988New York

Harry J. Sullivan President, Salamanca Trust Company, 1989Salamanca, New York

Norman W. Sinclair President and Chief Executive Officer, Lockport 1990Savings Bank, Lockport, New York

Appointed by the Board of GovernorsMary Ann Lambertsen Vice President, Human Resources, The Quaker 1988

Oats Company, Fisher-Price Division, EastAurora, New York

Matthew Augustine President and Chief Executive Officer, Eltrex 1989Industries, Inc., Rochester, New York

Paul E. McSweeney Executive Vice President, United Food and 1990Commercial Workers, District UnionLocal One, AFL-CIO, Amherst,New York

District 3 - PHILADELPHIA

Class AClarence D. McCormick President, Farmers and Merchants National 1988

Bank, Bridgeton, New Jersey

George A. Butler Chairman and Chief Executive Officer, First 1989Pennsylvania Bank, N.A., Philadelphia,Pennsylvania

Constantinos I. Costalas Chief Executive Officer, Glendale National Bank 1990of New Jersey, Voorhees, New Jersey



Term expiresDec. 31

Class BNicholas Riso Executive Vice President, AHOLD, U.S.A., 1988

Harrisburg, Pennsylvania

Carl E. Singley Partner, White, McClelland, and Singley, 1989Philadelphia, Pennsylvania

Charles F. Seymour Chairman, Jackson-Cross Company, 1990Philadelphia, Pennsylvania

Class CNeviusM. Curtis Chairman and Chief Executive Officer, 1988

Delmarva Power, Wilmington, Delaware

Peter A. Benoliel Chairman of the Board, Quaker Chemical 1989Corporation, Conshohocken, Pennsylvania

Jane G. Pepper President, The Pennsylvania Horticultural 1990Society, Philadelphia, Pennsylvania

District 4-CLEVELAND

Class AWilliam A. Stroud Chairman and Chief Executive Officer, 1988

First-Knox Bane Corporation, Mount Vernon,Ohio

Frank Wobst Chairman and Chief Executive Officer, 1989Huntington Bancshares Incorporated,Columbus, Ohio

William H. May Chairman and President, First National Bank of 1990Nelsonville, Nelsonville, Ohio

Class BDaniel M. Galbreath President, John W. Galbreath and Company, 1988

Columbus, Ohio

Laban P. Jackson, Jr Chairman of the Board, International Spike, 1989Inc., Lexington, Kentucky

Verna K. Gibson President, The Limited Stores, Inc., Columbus, 1990Ohio

Class CJohn R. Miller Former President and Chief Operating Officer, 1988

The Standard Oil Company (Ohio),Cleveland, Ohio

Charles W. Parry Director and Retired Chairman and Chief 1989Executive Officer, Aluminum Company ofAmerica, Pittsburgh, Pennsylvania

Robert D. Storey Partner, Burke, Haber, and Berick, Cleveland, 1990Ohio



Term expiresDec. 31

CINCINNATI BRANCH

Appointed by the Federal Reserve BankRobert A. Hodson President and Chief Executive Officer, 1st 1988

Security Bank, Hillsboro, Ohio

Robert M. Duncan President, First National Bank of Louisa, 1989Louisa, Kentucky

Jack W. Buchanan President, Sphar and Company, Inc., 1990Winchester, Kentucky

Jerry L.Kirby Chairman of the Board, President, and Chief 1990Executive Officer, Citizens Federal Savingsand Loan Association, Dayton, Ohio

Appointed by the Board of GovernorsKate Ireland National Chairman, Frontier Nursing Service, 1988

Wendover, Kentucky

Owen B. Butler Chairman of the Board (Retired), The Procter 1989and Gamble Company, Cincinnati, Ohio

Marvin Rosenberg Partner, Towne Properties, Ltd., Cincinnati, 1990Ohio

PITTSBURGH BRANCH

Appointed by the Federal Reserve BankLawrence F. Klima President, The First National Bank of 1988

Pennsylvania, Erie, Pennsylvania

Thomas G. Dove Chairman of the Executive Committee and Chief 1989Executive Officer, Wheeling Dollar Bank,Wheeling, West Virginia

George A. Davidson, Jr Chairman and Chief Executive Officer, 1990Consolidated Natural Gas Company,Pittsburgh, Pennsylvania

Stephen C. Hansen President and Chief Executive Officer, Dollar 1990Bank, F.S.B., Pittsburgh, Pennsylvania

Appointed by the Board of GovernorsJames E. Haas President and Chief Operating Officer, National 1988

Intergroup, Inc., Pittsburgh, Pennsylvania

Karl M. von der Hey den Senior Vice President-Finance, and Chief 1989Financial Officer, H. J. Heinz Company,Pittsburgh, Pennsylvania

Milton A. Washington President and Chief Executive Officer, 1990Allegheny Housing RehabilitationCorporation, Pittsburgh, Pennsylvania



District 5-RICHMOND

Term expiresDec. 31

Class AK. Donald Menefee Chairman of the Board and Chief Executive 1988

Officer, Madison National Bank, andChairman of the Board and President, JamesMadison Limited, Washington, D.C.

Chester A. Duke President and Chief Executive Officer, Marion 1989National Bank, Marion, South Carolina

John F. McNair III President and Chief Executive Officer, 1990Wachovia Bank and Trust Company, N. A.and The Wachovia Corporation,Winston-Salem, North Carolina

Class BEdward H. Covell President, The Covell Company, Easton, 1988

Maryland

Thomas B. Cookerly President, Broadcast Division, Allbritton 1989Communications, Washington, D.C.

JackC. Smith Chairman ofthe Board and Chief Executive 1990Officer, K-VA-T Food Stores, Inc., Grundy,Virginia

Class CRobert A. Georgine President, Building and Construction Trades 1988

Department, AFL-CIO, Washington, D.C.

Leroy T. Canoles, Jr President, Kaufman and Canoles, Norfolk, 1989Virginia

Hanne M. Merriman President and Chief Executive Officer, 1990Honeybee, Inc., New York, New York

BALTIMORE BRANCH

Appointed by the Federal Reserve BankH. Grant Hathaway Chairman ofthe Board, Equitable Bank, N. A., 1988

Baltimore, Maryland

Joseph W. Mosmiller Chairman of the Board, Loyola Federal Savings 1988and Loan Association, Baltimore, Maryland

Charles W. Hoff III President and Chief Executive Officer, Farmers 1989and Mechanics National Bank, Frederick,Maryland

Raymond V. Haysbert, Sr. ... President and Chief Executive Officer, Parks 1990Sausage Company, Baltimore, Maryland

Appointed by the Board of GovernorsThomas R. Shelton President, Case Foods, Inc., Salisbury, 1988

Maryland



Term expiresDec. 31

John R. Hardesty, Jr President, Preston Energy, Inc., Kingwood, 1989West Virginia

Gloria L. Johnson Deputy Director of Administration, The 1990Baltimore Museum of Art, Baltimore,Maryland

CHARLOTTE BRANCH

Appointed by the Federal Reserve BankJ. Donald Collier President and Chief Executive Officer, 1988

Orangeburg National Bank, Orangeburg,South Carolina

James G. Lindley Chairman and Chief Executive Officer, South 1988Carolina National Corporation, andChairman, President and Chief ExecutiveOfficer, The South Carolina National Bank,Columbia, South Carolina

John A. Hardin Chairman of the Board and President, First 1989Federal Savings Bank, Rock Hill,South Carolina

James M. Culberson, Jr Chairman and President, The First National 1990Bank of Randolph County, Asheboro, NorthCarolina

Appointed by the Board of GovernorsG. Alex Bernhardt President, Bernhardt Industries, Inc., Lenoir, 1988

North Carolina

Anne M. Allen Vice President, Allen Construction Company, 1989Greensboro, North Carolina

William E. Masters President, Perception, Inc., Easley, South 1990Carolina

District 6 -ATLANTA

Class AVirgil H. Moore, Jr Chairman and Chief Executive Officer, First 1988

Farmers and Merchants National Bank,Columbia, Tennessee

Mary W. Walker Vice Chairman, The National Bank of Walton 1989County, Monroe, Georgia

E. B. Robinson, Jr Chairman and Chief Executive Officer, Deposit 1990Guaranty National Bank and DepositGuaranty Corporation, Jackson, Mississippi

Class BBernard F. Sliger President, Florida State University, Tallahassee, 1988

Florida



Term expiresDec. 31

Paul W. Green President and Chief Executive Officer, American 1989Cast Iron Pipe Company, Birmingham,Alabama

Gary J. Chouest President, Edison Chouest Offshore, Inc., 1990Galliano, Louisiana

Class CLarry L. Prince President and Chief Operating Officer, Genuine 1988

Parts Company, Atlanta, Georgia

Bradley Currey, Jr President, Rock-Tenn Company, Norcross, 1989Georgia

Edwin A. Huston Senior Executive Vice President-Finance, Ryder 1990System, Inc., Miami, Florida

BIRMINGHAM BRANCH

Appointed by the Federal Reserve BankWilliam F. Childress President, First American Federal Savings and 1988

Loan Association, Huntsville, Alabama

Milton A. Wendland Owner-Operator, Autauga Farming Company, 1988Autaugaville, Alabama

John H. Newman, Jr President and Chief Executive Officer, First 1989National Bank of Scottsboro, Scottsboro,Alabama

Harry B. Brock, Jr Chairman and Chief Executive Officer, Central 1990Bank of the South, Birmingham, Alabama

Appointed by the Board of GovernorsRoy D. Terry President and Chief Executive Officer, Terry 1988

Manufacturing Company, Inc., Roanoke,Alabama

Nelda P. Stephenson President, Nelda Stephenson Chevrolet, Inc., 1989Florence, Alabama

A. G. Trammell President, Alabama Labor Council, AFL-CIO, 1990Birmingham, Alabama

JACKSONVILLE BRANCH

Appointed by the Federal Reserve BankRobert R. Deison Chairman of the Board and President, Andrew 1988

Jackson State Savings and Loan Association,Tallahassee, Florida

George W. Gibbs III President, Atlantic Dry Dock Corporation, 1988Jacksonville, Florida

A. Bronson Thayer Chairman and Chief Executive Officer, First 1989Florida Banks, Inc., Tampa, Florida



Term expiresDec. 31

Buell G. Duncan, Jr Chairman, President, and Chief Executive 1990Officer, Sun Bank, N.A., Orlando,Florida

Appointed by the Board of GovernorsE. William Nash, Jr President, South-Central Operations, The 1988

Prudential Insurance Company of America,Jacksonville, Florida

Saundra H. Gray Co-Owner, Gemini Springs Farm, DeBary, 1989Florida

Winnie F. Taylor Professor of Law, University of Florida, 1990Gainesville, Florida

MIAMI BRANCH

Appointed by the Federal Reserve BankWilliamH. Losner President and Chief Executive Officer, The First 1988

National Bank of Homestead, Homestead,Florida

James H. Robinson President, Sun Bank/South Florida, N. A., Fort 1989Lauderdale, Florida

Robert M. Taylor Chairman and Chief Executive Officer, 1990The Mariner Group, Inc., Fort Myers,Florida

Frederick A. Teed President and Chief Executive Officer, 1990Community Savings, F.A., Riviera Beach,Florida

Appointed by the Board of GovernorsSue McCourt Cobb Attorney, Greenberg, Traurig, Askew, 1988

Hoffman, Lipoff, Rosen, and Quentel, PA.,Miami, Florida

Jose L. Saumat Chairman, Kaufman and Roberts, Inc., Miami, 1989Florida

Robert D. Apelgren President, Apelgren Corporation, Pahokee, 1990Florida

NASHVILLE BRANCH

Appointed by the Federal Reserve BankW. L. Calloway, Jr Chairman, Quality Lawn Systems, Inc., 1988

Nashville, Tennessee

Shirley A. Zeitlin President, Shirley Zeitlin and Company 1981Realtors, Nashville, Tennessee

James A. Rainey Chairman, Sovran Financial Corporation/ 198Central South, Nashville,Tennessee



Term expiresDec. 31

Lawrence A. Roseberry Chairman, First National Bank and Trust 1990Company, Chairman and Chief ExecutiveOfficer, First Franklin Bancshares, Inc.,Athens, Tennessee

Appointed by the Board of GovernorsCondon S. Bush President, Bush Brothers and Company, 1988

Dandridge, Tennessee

Patsy R. Williams Partner, Rhyne Lumber Company, Newport, 1989Tennessee

Victoria B. Jackson President and Chief Executive Officer, Diesel 1990Sales and Service, Inc. and Prodiesel, Inc.,Nashville, Tennessee

NEW ORLEANS BRANCH

Appointed by the Federal Reserve BankRobert M. Shofstahl President and Chief Executive Officer, Pelican 1988

Homestead and Savings Association,Metairie, Louisiana

Alan R. Barton President and Chief Executive Officer, 1988Mississippi Power Company, Gulfport,Mississippi

Robert S. Gaddis President and Chief Executive Officer, 1989Trustmark National Bank, Laurel, Mississippi

Ronald M. Boudreaux President and Chief Executive Officer, First 1990National Bank of St. Landry Parish,Opelousas, Louisiana

Appointed by the Board of GovernorsSharon A. Perlis President, Sharon A. Perlis, (APLC), Metairie, 1988

Louisiana

James A. Hefner President, Jackson State University, Jackson, 1989Mississippi

Caroline G. Theus President, Ingle wood Land and Development 1990Company, Alexandria, Louisiana

District 7-CHICAGO

Class AJohn W. Gabbert President and Chief Executive Officer, First of 1988

America Bank-LaPorte, N.A., LaPorte,Indiana

B. F. Backlund Chairman and Chief Executive Officer, 1989Bartonville Bank, Bartonville, Illinois

Barry F. Sullivan Chairman of the Board, First Chicago 1990Corporation, Chicago, Illinois



Term expiresDec. 31

Class BMax J. Naylor Farmer, Jefferson, Iowa 1988

PaulJ. Schierl Chairman of the Board and Chief Executive 1989Officer, Fort Howard Corporation, GreenBay, Wisconsin

Edward D. Powers Chairman of the Board and Chief Executive 1990Officer, Mueller Company, Decatur, Illinois

Class CCharles S. McNeer Chairman of the Board and Chief Executive 1988

Officer, Wisconsin Energy Corporation,Milwaukee, Wisconsin

Robert J. Day Chairman and Chief Executive Officer, 1989USG Corporation, Chicago,Illinois

Marcus Alexis Dean, College of Business Administration, 1990University of Illinois at Chicago, Chicago,Illinois

DETROIT BRANCH

Appointed by the Federal Reserve BankDonald R. Mandich Chairman and Chief Executive Officer, 1988

Comerica Bank-Detroit, Detroit, Michigan

Ronald D. Story Chairman and President, The Ionia County 1989National Bank of Ionia, Ionia,Michigan

James A. Aliber Chairman of the Board and Chief Executive 1990Officer, First Federal of Michigan, Detroit,Michigan

Frederik G. H. Meijer Chairman of the Board, Meijer, Incorporated, 1990Grand Rapids, Michigan

Appointed by the Board of GovernorsPhyllis E. Peters Director, Professional Standards Review, 1988

Touche Ross and Company, Detroit,Michigan

Richard T. Lindgren Former President and Chief Executive Officer, 1989Cross and Trecker Corporation, BloomfieldHills, Michigan

Beverly Beltaire President, P R Associates, Inc., Detroit, 199(Michigan

District 8-ST. LOUIS

Class AVacancy 19'



Term expiresDec. 31

David W. Kemper II Chairman and Chief Executive Officer, 1989Commerce Bank of St. Louis, N.A., Clayton,Missouri, and President and Chief ExecutiveOfficer, CommerceBancshares, Inc., KansasCity, Missouri

H. L. Hembree III Chairman of the Executive Committee, 1990Merchants National Bank, Fort Smith,Arkansas

Class BRobert J. Sweeney Consultant, Murphy Oil Corporation, El 1988

Dorado, Arkansas

Frank M. Mitchener, Jr President, Mitchener Farms, Inc., Sumner, 1989Mississippi

Roger W. Schipke Senior Vice President, GE Appliances, GE, 1990Louisville, Kentucky

Class CRobert L. Virgil, Jr Dean, John M. Olin School of Business, 1988

Washington University in St. Louis,St. Louis, Missouri

H. Edwin Trusheim Chairman and Chief Executive Officer, General 1989American Life Insurance Company, St. Louis,Missouri

Janet McAfee Weakley President, Janet McAfee, Inc., Clayton, 1990Missouri

LITTLE ROCK BRANCH

Appointed by the Federal Reserve BankRobert C. Connor, Jr President, Union National Bank of Little Rock, 1988

Little Rock, Arkansas

Patricia M. Townsend President, Townsend Company, Stuttgart, 1989Arkansas

David Armbruster President, First America Federal Savings Bank, 1990Fort Smith, Arkansas

W. Wayne Hartsfield President and Chief Executive Officer, First 1990National Bank, Searcy, Arkansas

Appointed by the Board of GovernorsJames R. Rodgers Airport Manager, Little Rock Regional Airport, 1988

Little Rock, Arkansas

L. Dickson Flake President, Barnes, Quinn, Flake, and Anderson, 1989Inc., Little Rock, Arkansas

William E. Love President, Sound-Craft Systems, Inc., 1990Morrilton, Arkansas



Term expiresDec. 31

LOUISVILLE BRANCH

Appointed by the Federal Reserve BankAllan S. Hanks Director, The Anderson National Bank, 1988

Lawrenceburg, Kentucky

Morton Boyd President, First Kentucky National Corporation, 1989Louisville, Kentucky

Irving W. Bailey II President and Chief Operating Officer, 1990Capital Holding Corporation, Louisville,Kentucky

Wayne G. Overall, Jr President, First Federal Savings Bank, 1990Elizabethtown, Kentucky

Appointed by the Board of GovernorsLois H. Gray Chairman of the Board, James N. Gray 1988

Construction Company, Inc., Glasgow,Kentucky

Thomas A. Alvey Delegate, Owensboro Council of Labor, 1989Owensboro, Kentucky

Raymond M. Burse President, Kentucky State University, Frankfort, 1990Kentucky

MEMPHIS BRANCH

Appointed by the Federal Reserve BankWilliam H. Brandon, Jr President, First National Bank of Phillips 1988

County, Helena, Arkansas

Michael J. Hennessey President, Munro and Company, Inc., Wynne, 1989Arkansas

Thomas M. Garrott President and Chief Operating Officer, 1990National Bank of Commerce and NationalCommerce Bancorporation, Memphis,Tennessee

Larry A. Watson Chairman of the Board and President, Liberty 1990Federal Savings Bank, Paris, Tennessee

Appointed by the Board of GovernorsKatherine Hinds Smythe President, Memorial Park, Inc., Memphis, 1988

Tennessee

Sandra B. Sanderson President and Chief Executive Officer, 1989Sanderson Plumbing Products, Inc.,Columbus, Mississippi

Seymour B. Johnson Owner, Kay Planting Company, Indianola, 1990Mississippi



Term expiresDec. 31

District 9 - MINNEAPOLIS

Class ADuane W. Ring President, Norwest Bank La Crosse, N. A., La 1988

Crosse, Wisconsin

Charles W. Ekstrum President and Chief Executive Officer, First 1989National Bank, Philip, South Dakota

Joel S. Harris President, Yellowstone Holding Company, 1990Columbus, Montana

Class BRichard L. Falconer District Manager-Finance, U.S. West 1988

Communications, Minneapolis,Minnesota

Bruce C. Adams Partner, Triple Adams Farms, Lansford, North 1989Dakota

Earl R. St. John, Jr President and Owner, St. John Forest Products, 1990Inc., Spalding, Michigan

Class CJohn A. Rollwagen Chairman and Chief Executive Officer, 1988

Cray Research Inc., Minneapolis,Minnesota

Michael W. Wright Chairman, President, and Chief Executive 1989Officer, Super Valu Stores, Inc., Minneapolis,Minnesota

Delbert W. Johnson President and Chief Executive Officer, 1990Pioneer/Norelkote, Minneapolis,Minnesota

HELENA BRANCH

Appointed by the Federal Reserve BankNoble E. Vosburg President and Chief Executive Officer, Pacific 1988

Hide and Fur Corporation, Great Falls,Montana

Robert H. Waller President and Chief Executive Officer, First 1988Interstate Bank of Billings, N.A., Billings,Montana

F. Charles Mercord President and Managing Officer, First Federal 1989Savings Bank of Montana, Kalispell, Montana

Appointed by the Board of GovernorsMarcia S. Anderson President, Bridger Canyon Stallion Station, Inc., 1988

Bozeman, Montana

Warren H. Ross President, Ross 8-7 Ranch, Inc., Chinook, 1989Montana



Term expiresDec. 31

District 10-KANSAS CITY

Class ARobert L. Hollis Chairman ofthe Board and Chief Executive 1988

Officer, First National Bank and TrustCompany, Okmulgee, Oklahoma

Harold L. Gerhart, Jr President and Chief Executive Officer, First 1989National Bank, Newman Grove, Nebraska

Roger L. Reisher Co-Chairman, FirstBank Holding Company of 1990Colorado, Lake wood, Colorado

Class BJerry D. Geist Chairman and President, Public Service 1988

Company of New Mexico, Albuquerque,New Mexico

Richard D. Harrison Chairman and Chief Executive Officer, Fleming 1989Companies, Inc., Oklahoma City, Oklahoma

S. Dean Evans, Sr Partner, Evans Grain Company, Salina, Kansas 1990

Class CIrvine O. Hockaday, Jr President and Chief Executive Officer, Hallmark 1988

Cards, Inc., Kansas City, Missouri

Fred W. Lyons, Jr President and Chief Executive Officer, Marion 1989Laboratories, Inc., Kansas City, Missouri

Thomas E. Rodriguez President and General Manager, Thomas E. 1990Rodriguez and Associates, P.C., Aurora,Colorado

DENVERBRANCH

Appointed by the Federal Reserve BankGeorge S. Jenks President and Chief Executive Officer, Sunwest 1988

Financial Services, Inc., Albuquerque,New Mexico

W. Richard Scarlett III President, Jackson State Bank, Jackson Hole, 1988Wyoming

Henry A. True III Partner, True Companies, Casper, Wyoming 1989

Junius F. Baxter Chairman of the Board and Chief Executive 1990Officer, Bank Western, a Federal SavingsBank, Denver, Colorado

Appointed by the Board of GovernorsAnthony W. Williams Attorney, Williams, Turner, & Holmes, PC. , 1988

Grand Junction, Colorado

James C. Wilson Management Consultant, Longmont, Colorado 1989

Gilbert Sanchez President, New Mexico Highlands University, 199CLas Vegas, New Mexico



Term expiresDec. 31

OKLAHOMA CITY BRANCH

Appointed by the Federal Reserve BankWilliam O. Alexander Chairman, Continental Federal Savings and 1988

Loan Association, Oklahoma City,Oklahoma

W. Dean Hidy Chairman of the Board, Triad Bank, N. A., 1988Tulsa, Oklahoma

WilliamH. Crawford Chairman and Chief Executive Officer, First 1989National Bank and Trust Company,Frederick, Oklahoma

Appointed by the Board of GovernorsJohn F. Snodgrass President and Trustee, The Samuel Roberts 1988

Noble Foundation, Inc., Ardmore, Oklahoma

PatienceS. Latting Oklahoma City, Oklahoma 1989

OMAHA BRANCH

Appointed by the Federal Reserve BankJohn R. Cochran President and Chief Executive Officer, Norwest 1988

Bank Nebraska, N.A., Omaha, Nebraska

John T. Selzer President, Scottsbluff National Bank and Trust 1989Company, Scottsbluff, Nebraska

Charles H. Thorne Chairman of the Board, First Federal Savings 1989and Loan Association of Lincoln, Lincoln,Nebraska

Appointed by the Board of GovernorsJanice D. Stoney President and Chief Executive Officer, 1988

Northwestern Bell Telephone Company,Omaha, Nebraska

Kenneth L. Morrison President, Morrison Enterprises, Hastings, 1989Nebraska

District 11-DALLAS

Class ACharles T. Doyle Chairman and Chief Executive Officer, Gulf 1988

National Bank, Texas City, Texas

Robert G. Greer Chairman of the Board, Tanglewood Bank, 1989N.A., Houston, Texas

T. C. Frost Chairman of the Board, The Frost National 1990Bank, San Antonio, Texas

Class BRobert Ted Enloe III President, Lomas and Nettleton Financial 1988

Corporation, Dallas, Texas



Term expiresDec. 31

Gary E. Wood President, Texas Research League, Austin, 1989Texas

Robert L. Pfluger Rancher, San Angelo, Texas 1990

Class CHugh G. Robinson President, Cityplace Development Corporation, 1988

Dallas, Texas

Leo E. Linbeck, Jr Chairman and Chief Executive Officer, Linbeck 1989Construction Corporation, Houston, Texas

Bobby R. Inman Chairman of the Board and Chief Executive 1990Officer, Westmark Systems Inc., Austin,Texas

ELPASO BRANCH

Appointed by the Federal Reserve BankHumberto F. Sambrano Partner, Urban General Contractors, Inc., 1988

El Paso, Texas

David L. Stone President, The Portales National Bank, Portales, 1989New Mexico

Henry B. Ellis President and Chief Credit Officer, MBank 1990El Paso, N.A., El Paso, Texas

Ethel Ortega Olson Owner, NAMBE of Ruidoso, Ruidoso, 1990New Mexico

Appointed by the Board of GovernorsPeyton Yates President, Yates Drilling Company, Artesia, 1988

New Mexico

Vacancy 1989

DianaS. Natalicio President, The University of Texas at El Paso, 1990El Paso, Texas

HOUSTON BRANCH

Appointed by the Federal Reserve BankJeff Austin, Jr President, First National Bank of Jacksonville, 1988

Jacksonville, Texas

Jenard M. Gross President, Gross Builders, Inc., Houston, Texas 1989

Clive Runnells President and Director, Runnells Cattle 1990Company, Bay City, Texas

David E. Sheffield Vice Chairman, Texas National Bank of 1990Victoria, Victoria, Texas

Appointed by the Board of GovernorsGilbert D. Gaedcke, Jr Chairman of the Board and Chief Executive 1988

Officer, Gaedcke Equipment Company,Houston, Texas



Term expiresDec. 31

Walter M. Mischer, Jr President and Chief Operating Officer, The 1989Mischer Corporation, Houston, Texas

Andrew L. Jefferson, Jr Attorney, Jefferson and Mims, Houston, 1990Texas

SAN ANTONIO BRANCH

Appointed by the Federal Reserve BankJane Flato Smith Investor and Rancher, San Antonio, Texas 1988

C. Ivan Wilson Chairman of the Board and Chief Executive 1989Officer, First City Bank of Corpus Christi,Corpus Christi, Texas

Robert T. Rork Regional Chairman, NCNB Texas, Dallas, 1990Texas

Sam R. Sparks President, Sam R. Sparks, Inc., Progreso, Texas 1990

Appointed by the Board of GovernorsRobert F. McDermott Chairman of the Board and President, United 1988

Services Automobile Association, SanAntonio, Texas

Lawrence E. Jenkins Vice President (Retired), Austin Division, 1989Lockheed Missiles & Space Co., Inc., Austin,Texas

Ruben M. Garcia Chief Executive Officer, Modern Machine Shop, 1990Inc., Laredo, Texas

District 12-SAN FRANCISCO

Class ASpencer F. Eccles Chairman and Chief Executive Officer, 1988

First Security Corporation, Salt LakeCity, Utah

Rayburn S. Dezember Chairman of the Board and Chief Executive 1989Officer, Central Pacific Corporation, andChairman, American National Bank,Bakersfield, California

R. Blair Hawkes President and Chief Executive Officer, Ireland 1990Bank, Malad City, Idaho

Class BTogo W. Tanaka Chairman, Gramercy Enterprises, Inc., 1988

Los Angeles, California

John C. Hampton President and Chief Executive Officer, 1989Willamina Lumber Company, Portland,Oregon

John N. Nordstrom Co-Chairman of the Board, Nordstrom, Inc., 1990Seattle, Washington



Term expiresDec. 31

Class CCarolyn S. Chambers President and Chief Executive Officer, 1988

Chambers Communications Corp., Eugene,Oregon

Robert F. Erburu Chairman of the Board and Chief Executive 1989Officer, The Times Mirror Company,Los Angeles, California

Cordell W. Hull Executive Vice President and Director, Bechtel 1990Group, Inc., San Francisco, California

LOS ANGELES BRANCH

Appointed by the Federal Reserve BankHoward C. McCrady Vice Chairman, Valley National Corporation, 1988

Phoenix, Arizona

William L. Tooley Chairman, Tooley and Company, Investment 1988Builders, Los Angeles, California

Fred D. Jensen Chairman of the Board, President, and Chief 1989Executive Officer, National Bankof Long Beach, Long Beach,California

Ross M. Blakely Chairman of the Executive Committee of the 1990Board, Coast Savings and Loan, Los Angeles,California

Appointed by the Board of Governors

Thomas R. Brown, Jr Chairman of the Board, Burr-Brown 1988Corporation, Tucson, Arizona

Yvonne Brathwaite Burke .... Partner, Jones, Day, Reavis and Pogue, Los 1989Angeles, California

Richard C. Seaver Chairman, Hydril Company, Los Angeles, 1990California

PORTLAND BRANCH

Appointed by the Federal Reserve BankStuart H. Compton Chairman and Chief Executive Officer, Pioneer 1988

Trust Bank, N.A., Salem, Oregon

Wayne E. Phillips, Jr Vice President, Phillips Ranch, Inc., Baker, 1989Oregon

Stephen G. Kimball President and Chief Executive Officer, 1990Baker Boyer Bancorp, Walla Walla,Washington

G. Dale Weight Chairman of the Board and Chief Executive 1990Officer, Benjamin Franklin Savings and LoanAssociation, Portland, Oregon



Term expiresDec. 31

Appointed by the Board of GovernorsG. Johnny Parks Former Northwest Regional Director, 1988

International Longshoremen's andWarehousemen's Union, Portland, Oregon

Paul E. Bragdon Assistant to the Governor for Education, Office 1989of the Governor, Salem, Oregon

Sandra A. Suran Small Business Advocate, State of Oregon, 1990Salem, Oregon

SALT LAKE CITY BRANCH

Appointed by the Federal Reserve BankGerald R. Christensen Chairman and President, First Federal Savings 1988

and Loan Association, Salt Lake City, Utah

Ronald S. Hanson President, Zions First National Bank, Salt Lake 1989City, Utah

Curtis H. Eaton President and Vice Chairman of the Board, Twin 1990Falls Bank and Trust Company, Twin Falls,Idaho

Virginia P. Kelson Management Consultant in Organization 1990Development, Salt Lake City, Utah

Appointed by the Board of GovernorsD. N. Rose President and Chief Executive Officer, Mountain 1988

Fuel Supply Company, Salt Lake City, Utah

RobertN. Pratt President and Chief Operating Officer, 1989Bonneville Pacific Corporation, Salt LakeCity, Utah

Don M. Wheeler President, Wheeler Machinery Company, Salt 1990Lake City, Utah

SEATTLE BRANCH

Appointed by the Federal Reserve BankW. W. Philip Chairman and Chief Executive Officer, Puget 1988

Sound Bancorp, Tacoma, Washington

H. H. Larison President, Columbia Paint and Coatings, 1989Spokane, Washington

B. R. Beeksma Chairman of the Board, InterWest Savings Bank, 1990Oak Harbor, Washington

WilliamS. Randall Chairman, President and Chief Executive 1990Officer, First Interstate Bank of Washington,N.A., Seattle, Washington

Appointed by the Board of GovernorsByron I. Mallott Chief Executive Officer, Sealaska Corporation, 1988

Juneau, Alaska



Term expiresDec. 31

Carol A. Nygren Partner, Laventhol and Horwath, Seattle, 1989Washington

Irma Goertzen Hospital Administrator, University Hospital, 1990University of Washington, Seattle,Washington


Index


Index

273

Acceptances, bankers {See Bankersacceptances)

Accounting standards, 173Adjustable-rate mortgages

{See Regulations: Z)Agriculture

Loans, 172-73Seasonal credit program, 68, 70, 71U.S. Department of, Packers and

Stockyards Administration, 150,151American Bankers Association, 148American Institute of Certified Public

Accountants, 173Anti-Drug Abuse Act of 1988, 164Assets and liabilities

Banks, by class, 227Board of Governors, 197-202Federal Reserve Banks, 206-09

Audits {See Examinations, inspections,regulations, and audits)

Availability of funds and collection ofchecks {See Regulations: CC)

Balance of payments {See Internationaldevelopments, review of 1988)

Bank Control Act, 176Bankers acceptances

Authority to purchase and to enter intorepurchase agreements, 73-75

Federal Reserve BanksHoldings, 206-09

Bank holding companies{See also Regulations: Y)

Antitrust Action, 179Applications by, processing and notice of

Board decisions, 174-78Bank Merger Act, 175Board decisions, 175, 176, 177Change in Bank Control Act, 176Delegation of applications, 175Enforcement, 170Examination, inspection,

and regulation, 169, 184International activities, 170, 178Legislative recommendations, 156-57Litigation, 159-62Number and assets, 169

Bank holding companies —Continued

Policy statement, 67-68Stock repurchases by, 178Surveillance and monitoring, 172Transfer agents, 172Unregulated practices ,153

Bank Holding Company Act of 1956{See also Regulations: Y)

Foreign investments, 179Legislative recommendations and

litigation, 159, 163, 175Regulation and compliance, 174-78

Bank Holding Companies and Change inBank Control {See Regulations: Y)

Bank Merger Act, 175Banking offices, changes in number, 232Banking supervision and regulation by

Federal Reserve System, 167-82Bank mergers and consolidations, 233-40Bank Secrecy Act, 179Basic banking, 157Basle Accord, 168Basle Committee on Banking Regulations

and Supervisory Practices, 167-68Board of Governors

{See also Federal Reserve System)Cash, sources, uses, and balance

at end of 1988,197-202Consumer Advisory Council

{See Consumer Advisory Council)Financial statements, 197-202Interpretations {See Interpretations)Litigation, 159-62Members and officers, 242-43Policy actions {See Policy actions)Pricing of Federal Reserve services

{See Fees)Publications {See Publications)Regulations {See Regulations)Regulatory simplification, 183-84Salaries, 213

Branch banksFederal Reserve {See Federal Reserve

Banks, Branches)Foreign branches of U. S. banking

organizations, 170, 178-179


274 Index

California, state exemption, 144Call reports (See Condition statements)Capital accounts

Banks, by class, 222Federal Reserve Banks, 205, 206, 208

Check clearing and collectionFees for Federal Reserve services, 66,

185-96Float (See Float)Volume of operations, 191, 223

Commercial banks (See also Insuredcommercial banks)

Banking offices, changes in number, 232Supervision and regulation by Federal

Reserve System, 167-82Transfers of funds (See Transfers

of funds)Commodity Credit Corporation, 8Community Affairs Program, 147Community Reinvestment Act

Examination under, 148, 154Testimony, 156

Competitive Equality Banking Act of 1987(See also Expedited Funds AvailabilityAct), 65, 168, 172, 177, 185

Comptroller of the Currency, 148, 149, 163,168, 171, 176

CompuServe, Inc., 174Condition statements of Federal Reserve

Banks, 204-09Conference of State Bank Supervisors, 173Consumer Advisory Council, 155, 246Consumer and community affairs, 143-58Consumer Complaint Control System, 151Course for Financial Institution

Examiners, 148Credit (See also Loans)

Card disclosures, 146Equal Credit Opportunity (See Truth in

Lending Act)Mortgages, 17, 63, 144-45,146,147,

165,166, 183Seasonal program, 68, 70, 71Special purpose credit programs, 145

Credit by Brokers and Dealers(See Regulations: T)

Credit Practices Rule (See Regulations: A A)Currency and coin services, 188Currency and Foreign Transactions

Reporting Act (See Bank SecrecyAct)

Definitive securities, 188Debt-equity swaps (See also

Regulations: K), 183Depository institutions

Checks (See Check clearing andcollection)

Interest on deposits (See Interest rates)Reserve requirements

(See Regulations: D)Reserves and related items, 228-31Services to (See Fees)

DepositsBanks, by class, 227Checks (See Check clearing and

collection)Federal Reserve Banks, 206-09, 228-31Interest rates (See Interest rates)Reserve requirements (See Reserve

requirements of depositoryinstitutions)

Directors, Federal Reserve Banks andBranches, list, 250-70

Discount rates at Federal Reserve Banks(See Interest rates)

DividendsFederal Reserve Banks, 189, 216-17,

218-21

Earnings of Federal Reserve Banks(See also Federal Reserve Banks,income and expenses), 189,214-21

Economy in 1988, 5-11Business, 7, 32, 47Foreign, 20-22, 30, 46Government, 8, 33, 49Households, 5, 31,46Labor markets, 9, 33, 49Price developments, 10, 34, 49

Economic DevelopmentAdministration, 148

Edge and agreement corporationsExaminations, 170International activities, 170, 178, 179

Educational activities (See Training)Education Foundation of State Bank

Supervisors, 173Electronic data processing, 171Electronic Funds Transfer Act

Compliance, 151Economic effects, 151

Electronic funds transfer (See Transfersof funds and Regulations: E)


Index 275

Equal Credit Opportunity ActCompliance, 145Regulation B (See Regulations: B)

Examinations, inspections, regulation,and audits

Bank holding companies, 169Compliance, 148, 149Federal Reserve Banks, 185-96International banking activities, 170, 178Specialized, 171State member banks, 169Surveillance and Monitoring

program, 169, 172Exchange Stabilization Fund, 20Expedited Funds Availability Act, 65-67,

143-44,157-58, 162, 184Expenses (See Income and expenses)Export Trading Companies, 179

Fair Credit and Charge Card DisclosureAct of 1988,146,165

Fair Housing Act, 158Farm Credit Administration, 150, 180Farmer Mac Program, 173Federal Advisory Council, 245Federal agency securities

Authority to purchase and to enter intorepurchase agreements, 73-75,96-97,133

Federal Reserve Bank holdings andearnings, 190, 206-12, 228-29

Federal Reserve open markettransactions, 1988, 210-11

Repurchase agreements, 73-75, 205,206-09,210-11,212

Federal Bureau of Investigation, 174Federal Deposit Insurance Corporation,

148, 149, 163, 168, 170, 176Federal Financial Institutions Examination

Council, 67, 148, 172, 174Federal Home Loan Bank Board, 147, 148,

149, 177,180Federal National Mortgage Association, 188Federal Open Market Committee

Examinations, 189Meetings, 78, 89, 97, 104, 114, 121, 126,

134Members and officers

Calendar-year membershipchange, 133

List, 244Policy actions, 73-151

Federal Reserve ActExaminations, 189Legislative recommendations and

litigation, 163-66Provisions, 170

Federal Reserve BanksAssessments for expenses of Board

of Governors, 199, 216-17, 218-21Bank premises, 190, 204, 206-09, 222Branches

Bank premises, 190, 199, 222Chicago, 148Directors, list, 250-70St. Louis, 57Vice presidents in charge, 248

Capital accounts, 205, 206-09Chairmen and deputy chairmen, 248-49Check collection, 186-87Coin and currency service, 188Condition statement, 204-09Delegated authority, 175, 176Deposits, 205, 206-09, 231Directors, list, 250-70Dividends paid, 189, 216-17, 219, 221Examination or audit, 189Income and expenses, 189, 191, 192Interest rates, 68, 70, 224Loans and securities, 190, 204, 206-09,

212, 214, 228, 230Officers and employees, number and

salaries, 213Operations, volume, 191, 194, 223Premises, 190Presidents and first vice presidents, 213,

248-49Pricing of services, 186-89, 191-96,

228-29Priced services, pro forma balance

sheet, 191Profit and loss, 230-31Training, 148, 173

Federal Reserve Board (See Boardof Governors)

Federal Reserve notesCondition statement data, 206-09Cost of issuance and redemption, 188,

199,201,216-17Interest paid to U.S. Treasury on, 189,

192Litigation, 159

Federal Reserve's Reciprocal Currency(Swap) Network, 24


276 Index

Federal Reserve System (See also Boardof Governors)

Banking supervision andregulation by, 167-82

Consumer affairs (See Consumer andcommunity affairs)

Foreign currency operations (See Foreigncurrencies)

Maps, 280-81Membership, 182Training, 148, 173

Federal Savings and Loan InsuranceCorporation, 17,55

Federal Trade CommissionAct, 153Pamphlets, 150

FeesFederal Reserve services to depository

institutionsAutomated clearinghouse service, 187Check clearing and collection, 186Coin and currency, 188Electronic payments, 187Pricing of, 186-89,214-15Securities, 188Wire transfers of funds, 187

Financial Accounting Standards Board, 173Financial Institutions Supervisory Act, 161,

170Financial markets and monetary policy,

12-18Float (See also Check clearing and

collection), 187, 188, 189Foreign banking and financing

(See Regulations: K)Foreign branches of U.S. banking

organizations, 179Foreign currencies

Authorization and directive for operationsin, and review of documents, 24, 76,78

Deposit issuance, 184Federal Reserve income on, 214-17

Freedom of Information Act, 183

Garn-St Germain Depository InstitutionsAct of 1982,64

Glass-Steagall Act, 161,167Gold certificate accounts of Reserve Banks

and gold stock, 206-09, 228, 230Government check cashing, 157Government Securities Act of 1986, 171

Home equity lines of credit, 146, 150,165Home Equity Loan Consumer Protection

Act of 1988, 146, 165Home Mortgage Disclosure Act of 1975

(See Regulations: C)Housing and Community Development Act

of 1987, 166Housing and Urban Development, U.S.

Department of, 148

Income and expensesBoard of Governors, 197-202Federal Reserve Banks, 189-90, 192-93,

214-21Indiana, state preemption, 146Insured commercial banks (See also

Commercial banks)Assets and liabilities, by class

ofbank, 227Banking offices, changes in number, 232Number, by class of bank, 227

Interagency Enforcement Policy, 149Interest on deposits (See Interest rates)Interest rates

Federal Reserve BanksDiscount rates, 1988, 68, 70Votes, 71Table, 224

Internal Revenue Service, 151, 180International banking activities, 170, 178International banking facilities, 178International banking operations

(See Regulations: K)International developments, review of 1988,

19,24International Lending Supervisory Act

of 1983,167International Monetary Fund, 22International transactions, 22-24Interpretations of regulations, 147Interstate Commerce Commission, 151Investments

Banks, by class, 227Federal Reserve Banks, 204, 206-09Foreign, by U.S. banking organizations,

179State member banks, 227

Justice, U.S. Department of, 159

Labor market developments, 9-10


Index 277

Legislation enacted (See also specific act),163-66

Legislative recommendationsBoard of Governors, 156Other agencies with enforcement

responsibilities, 158Litigation

Bank holding companies, 159-62Board procedures and regulations,

challenges to, 160-62Loans (See also Credit)

Agricultural (See Agriculture)Banks, by class, 227Executive officers of state member

banks, 182Federal Reserve Banks

Depository institutions, 204, 206-09,214-17,230

Holdings and income, 190-91, 204,206-09, 214, 228,230

Interest rates, 68, 70, 224Mortgage, brochures, 146,147Volume of operations, 223

Management and Budget, Office of, 147Management Consignment Program,

FHLBB, 177Management Interlocks Revision Act

of 1988, 164Margin credit regulation (See Regulations: T)Margin requirements, 226Member banks (See also Depository

institutions and National banks)Assets, liabilities, and capital

accounts, 227Banking offices, changes in number, 232Borrowings and loans (See Loans)Foreign branches, 178Membership in Federal Reserve

System, 182Number, 227Reserve requirements, 225Reserves and related items, 228-31State member banks

(See State member banks)Surveillance and monitoring program,

169,172Transfers of funds

(See Transfers of funds)Monetary Control Act of 1980, 63Monetary policy

es. 15-18

Monetary policy—ContinuedFinancial markets relative to, 12-18,

35-40Reports to the Congress, 25-60Review of 1988, 3-11

MortgagesBrochures by Federal Trade

Commission, 147Home Equity Loan Consumer Protection

Act of 1988, 165Home mortgage disclosure, 17, 63,

144-45, 146,183Housing and Community Development

Act of 1987, 166Mutual savings banks, 232

National Association of AttorneysGeneral, 150

National Association of SecuritiesDealers, 180

National banks (See also Member banks)Assets, liabilities, and capital

accounts, 227Banking offices, changes in number, 232

National Credit Union Administration, 148,149, 180

National League of Cities, 148National People's Action, 148National Women's Business Council, 166New York, state preemption, 145Nonmember depository institutions

Assets and liabilities, 227Banking offices, changes in number, 232Number, 227

Omnibus Trade and Competitiveness Actof 1988, 163, 180

Organization for Economic Cooperation andDevelopment, 21

OTC margin bond (See alsoRegulations: T), 184

Over-the-counter marginable stocks, 180

Paperwork Reduction Act, 147Payments mechanism (See Fees)Policy actions

Board of GovernorsDiscount rates at Federal Reserve

Banks, 68-71Regulations, 68-71Statements and other artions fO f\l


278 Index

Policy actions—ContinuedFederal Open Market Committee

(See also System Open MarketAccount), 73-141

Presidents and vice presidents of FederalReserve Banks

Conferences, 249List, 248-49Salaries of presidents, 213

Pricing of Federal Reserve services,185-89,191-96,214-15

Profit and loss, Federal Reserve Banks,216-17

Publications"Compliance: A Self Assessment

Guide," 149Mortgage brochures, 146, 147

Real estate loans (See Mortgages)Regulation of banking organizations

(See Banking supervision andregulation by Federal Reserve System)

Regulations (See also Regulatory reviewprogram)

B, Equal Credit OpportunityCompliance, 150New York, state preemption, 145

C, Home Mortgage DisclosureRevision and adoption of new reporting

forms, 63Revision to incorporate amendments

to Home Mortgage DisclosureAct, 144, 166, 183

D, Reserve Requirements of DepositoryInstitutions

Amendment to increase transactionbalances, 63

E, Electronic Funds TransferCompliance, 151

K, International Banking OperationsAmendment to liberalize conditions

on debt-for-equity swaps, 64T, Credit by Brokers and Dealers

Amendment, foreign debt securitiesfor margin credit, 65

Y, Bank Holding Companies and Changein Bank Control

Amendment to implement CompetitiveEquality Banking Act of 1987, 65

Z, Truth in LendingCompliance, 149Credit card disclosures, 146

Regulations—ContinuedZ, Truth in Lending—Continued

Home equity lines of credit, 146Indiana, state preemption, 146Revision, adjustable-rate

mortgages, 145AA, Credit Practices Rule

California, state exemption, 144,147CC, Expedited Funds Availability

Adoption, Expedited FundsAvailability Act, 65, 143, 148

Interim rules regardingpayable-through checks, 66

Regulatory review program, 144, 147,183-84

Regulatory Policy and PlanningCommittee, 183

Regulatory simplification, 183-84Report on Formal Enforcement Actions, 170Repurchase agreements

Authority to purchase andto enter into, 73-75

Bankers acceptances (See Bankersacceptances)

Federal agency securities (See Federalagency securities)

U.S. Treasury securities (See U.S.Treasury securities)

Reserve requirements of depositoryinstitutions

Regulation D (See Regulations: D)Securities, 180Table, 225

Reserves and related items, 228-31Right to Financial Privacy Act, 147, 164Risk-based capital standards, 67, 168Rules Regarding Availability

of Information, 183

SalariesBoard of Governors, 199Federal Reserve Banks, 213

Schools (See Training)Seasonal credit program, 68, 70, 71Securities (See also specific types)

Credit, 226Dealers, policy statement, 67Definitive, 188Over-the-counter, 180Regulation, 180

Securities Act Amendments of 1975,171Securities and Exchange Commission, 151,

180,181


Index 279

Securities Exchange Act of 1934, 180, 181Senior Forum for Current Regulatory

Issues, 173Small Business Act, 166Small Business Administration, 148, 151Special drawing rights, 204, 206-09, 228,

230State member banks

(See also Member banks)Applications by, 175,178Assets and liabilities, 227Bank Control Act, 176Bank Holding Company Act, 175Bank Merger Act, 175Banking offices, changes in number, 232Board decisions, 175, 177Calendar-year membership change, 133Complaints against, 152Examinations and inspections, 169, 184Financial disclosure by, 181Fees (See Fees)Interest on deposits (See Interest rates)Loans to executive officers, 182Membership in Federal Reserve

System, 182Mergers and consolidations (See Bank

mergers and consolidations)Number, by class of bank, 169, 227Reserve requirements (See Reserve

requirements of depositoryinstitutions)

Surveillance and monitoring, 172Transfer agents, 172

Stock market credit (See Securities credit)Supervision of banking organizations

(See Banking supervision andregulation by Federal Reserve System)

System Open Market AccountAuthority to effect transactions in

domestic operationsDomestic Open Market Operations

Authorization for, 73-75, 96-97,133

Domestic Policy Directive, 75, 78, 89,97,104,114,121,126,134

Foreign Currency Directive, 78Foreign currency operations

Authorization for, 76

Transfer Agents, 172Transfers of funds (See also Fees

and Regulations: E)Check clearing and collection (See Check

clearing and collection)Federal Reserve operations, volume, 191,

194, 223Pricing of Federal Reserve services,

186-89,191-96,214Transportation, U.S. Department of, 150Treasury, U.S. Department of, 171Treasury securities

Authority to buy, to enter into repurchaseagreements, and to lend, 73, 96, 133

Bank holdings, by class of bank, 227Federal Reserve Banks

Holdings, 191, 204, 206-09, 212, 228,230

Income, 189,214-21Transfers by, 189

Open market transactions, 210-11Repurchase agreements

Authorization for, 73Board policy statement, 62, 67Tables, 204, 206-09, 210-11, 212,

228,230Truth in Lending Act (See Regulations: Z)

World Bank, 22, 174Women's Business Ownership Act

of 1988, 145

Thrift Institutions Advisory Council, 247Training, 148, 173 FRB 1-10,000-0589


280

Maps of the Federal Reserve System

12I SAN FRANCISCO 10

MINNEAPOLIS

KANSAS CITY

DALLAS

2 BOSTON

/CHICAGO • • a • NEW YORK

CLEVELAND ° ^PHILADELPHIA

A D WASHINGTON

ST. LOUIS

86 .ATLANTA

RICHMOND

5

LEGEND

Both pages

• Federal Reserve Bank city

Facing page

• Federal Reserve Branch city

Q Board of Governors of the Federal — Branch boundaryReserve System

NOTE

The Federal Reserve officially identifiesDistricts by number and Reserve Bankcity (shown on both pages) and by letter(shown on the facing page).

In the 12th District, the Seattle Branchserves Alaska, and the San FranciscoBank serves Hawaii.

The System serves commonwealthsand territories as follows: the New YorkBank serves the Commonwealth of Puerto

Rico and the U.S. Virgin Islands; the SanFrancisco Bank serves American Samoa,Guam, and the Commonwealth of theNorthern Mariana Islands. The Board ofGovernors revised the boundaries of theSystem most recently in August 1986.


281

BOSTON

Buffalo

NEW YORK PHILADELPHIA

4 DPittsburgh

•Cincinnati

CLEVELAND

5 Baltimore

Charlotte

RICHMOND

Birmingham

• Nashville

'^v—^—^Jacksonville

ATLANTA

G

Detroit •

CHICAGO

H

Louisville

• Memphis

Littl? ) m

Rock (

ST. LOUIS

10

^ ^ Omaha •

• j_ _ , Denver I

I ^jj^^^K/Km- Jf ihoma City

KANSAS CITY

12

SAN FRANCISCO


arfr_1988

Documents

federal reserve bank

federal reserve act

monetary policy andthe

action159 bank

dealers65 regulation

competitiveness act

fraser http

board procedures