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Federal Reserve NotesFEDERAL RESERVE BANK Qff^AN FRANCISCO • February1983Serving Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah & Washington

VOLCKER GIVESMONETARY POLICYOBJECTIVES FOR 1983

Federal Reserve Chairman Paul

Volcker, in Congressional testimonyon February 16, outlined the objectives and rationale of monetary policy in 1983. He noted that the job ofsetting targets for 1983 was greatlycomplicated by widespread economic and regulatory changes thathave affected the historic relation

ships between money and the economy. As a result, he said, the Federal Open Market Committee(FOMC) decided to put substantialweight on the broader aggregates ofM2 and M3 (which, by encompassing a broader range of assetsshould be less sensitive over time to

financial innovations) and to widenthe M1 target to 4-8 percent. In setting the ranges, Volcker stressedthat monetary growth during theyear would be judged "in the light ofdevelopments with respect to economic activity and prices, takingaccount of conditions in domestic

credit markets and internationally."

Free copies of the Federal Reservereport, "Monetary Policy Objectivesfor 1983," are available upon request from the Public InformationDepartment, Federal Reserve Bankof San Francisco, P.O. Box 7702,San Francisco, CA 94120. Phone:(415) 974-2246. Excerpts from thereport follow.

"The FOMC is well aware that pastcyclical expansions have typicallybeen accompanied by sharp increases in 'velocity,' particularly forthe narrower aggregates. We assume that, to some degree, that pat-

(Continued on page 2)

S.F. FED UNVEILS ECONOMICS EXHIBITION

On February 14, the FederalReserve Bank of San Francisco

opened a major educational exhibition about economics to the public.Installed in the lobby of the Bank'snew twelve-story headquartersbuilding at 101 Market Street, "TheWorld of Economics" is open to thepublic weekdays from 9 a.m. to 4p.m. Admission is free of charge.

The exhibition consists of twentyseparate displays that togetherpresent the core concepts of economics in a lively walk-throughformat. It makes full use of contem

porary exhibition technology including moving electronic and mechanical displays, computer games,murals, and historical photographs.The displays cover such economictopics as supply and demand, thecircular flow of income and spending, economic growth and the role ofgovernment policy in stabilizing theeconomy. Four computer games

give visitors the chance to assumethe roles of chairman of the Federal

Reserve Board and President of the

United States in "hands-on" formu

lation of monetary and fiscal policies.

The unique economics exhibitionwas called "an experiment in publiceducation" by the Board of Governors of the Federal Reserve System. To complement the exhibition,the San Francisco Bank plans tooffer an in-class education programto grade school and high schoolteachers. The education programwill include lesson plans, teacherguides and all other elementsneeded to teach economics as a

distinct subject or as part of othersocial sciences. It is divided into six

"clusters," each of which treats adifferent economic topic, for example, market theory or economichistory. The program was developed with the help of the EconomicLiteracy Council of California.

REGULATIONS AND OPERATIONS UPDATE

Regulation Z—Truth in Lending: On January 27, 1983,the Federal Reserve Board made public its final determinations on the consistency of certain parts of the laws ofArizona, Florida and Missouri. It found parts of Arizonalaw inconsistent with Regulation Z. Effective October 1,1983, creditors in those states are prohibited from usingprovisions in their state laws that are preempted as inconsistent with relevant federal law. The preempted provisions were detailed in the Federal Register notice of thedate of determination. Creditors may start omitting thepreempted disclosures at any time before October 1,1983.

The board delegated the making of future determinationsof the consistency of state truth-in-lending laws with federal laws to the director of the Board's Division of Con

sumer and Community Affairs, subject to Board review.

For further information, please contact David M. Vandrein Consumer Affairs at (415) 974-2965.

FOR PUBLIC COMMENT

Regulation K—International Banking Operations: TheBoard is considering comment (requested by March 14,1983) on draft regulations to implement the Bank ExportServices Act (BESA) which authorizes investments inexport trading companies by bank holding companies andcertain other banking organizations. The BESA is part of

VOLCKER GIVES OBJECTIVES FOR 1983(Continued from page 1)

the Export Trading Company Act of 1982.

The regulations proposed by the Board are limited toclarifying ambiguities in the law and providing key definitions and basic guidance to investors as to the policiesand procedures the Board will follow in carrying out itsresponsibilities under the Act.

For further information, please contact Rodney E. Reid inInternational Regulations at (415) 974-2266.

Regulation Y—Bank Holding Company Regulation: OnFebruary 22, the Federal Reserve Board asked for publiccomment on a proposal to amend Regulation Y to adddiscount securities brokerage and securities credit lending to the list of nonbanking activities permissible for bankholding companies. Comments should reach the Boardby April 8, 1983.

Discount securities brokerage in the context of the proposal means buying and selling securities solely as agentfor the account of customers. The proposal specificallyexcludes securities underwriting activities and the provision of investment advice or research services. Securities

credit lending means extending credit for the purchase orcarrying of securities by nonbank subsidiaries of bankholding companies pursuant to the Board's Regulation T(Margin Credit extended by Brokers and Dealers). Forfurther information, please contact Robert A. Johnston inApplications and Analysis at (415) 974-2352.

tern will emerge again. There is astrong presumption that the targetranges will not be exceeded orchanged without persuasive evidence, as in 1982, that institutionsor economic circumstances requiresuch change to meet our more basicobjectives...

"In approaching its policy judgments, I believe the Committee recognized the desirability of achievingand maintaining a lower level of interest rates to encourage growth,but felt that this could only be realistic in a context of building on theprogress already made against inflation. Efforts to force interest rates

down at the expense of excessiveliquidity creation could not be successful for long...

"The target range for M3, whichis least affected by institutionalchange, was left at 6V2 to 91/2 per

cent, measured from the fourthquarter of 1982 to the fourth quarterof 1983.

"The target for M2 was set at 7 to 10percent and the base was shifted tothe February-March average of thisyear to minimize the institutionaldistortions. Our assumption is theflow of funds into M2 from other sav

ings media will have sharply subsided in coming weeks...

"The degree of emphasis placed onM1 as the year progresses will bedependent upon assessment of,and the predictability of, its behaviorrelative to other economic mea

sures, and the range may subsequently be narrowed. Over the year,growth in the lower part of the rangewould be appropriate if velocityrises strongly, as has usually beenthe case during recoveries. An outcome near the upper end would be

appropriate only if velocity does notrebound sharply from the declineslast year, and tends to stabilizeclose to current levels...

"In addition, the Committee setforthfor the first time its expectations withrespect to growth of total domesticnonfinancial debt, and felt that arange of 8V2 to 111/2 percent wouldbe appropriate.

"I neither bewail nor applaud the circumstances that have put a greaterpremium on judgment and less"automaticity" in our operations; itis simply a fact of life. In makingsuch judgments, the basic point remains that, over time, the growth ofmoney and credit will need to bereduced to encourage a return to areasonable price stability. The targets set out are consistent with thatintent..." Ijjp

SAN FRANCISCO RESERVE BANK REPORTSON NEW DEVELOPMENTS IN 1982 OPERATIONS

In the first full year of operation withpriced services, the Federal Reserve Bank of San Francisco put apremium on new services and improved efficiency. The additionalchallenges presented by a quicklychanging economy and financialmarket and the ways in which theSan Francisco Fed met them are

presented in the 1982 Annual Report. An excerpt from the report ondevelopments in the Bank's operations departments follows.

During 1982 the operations of theFederal Reserve Bank of San Fran

cisco continued in an atmosphere ofrapid financial innovation. This environment has been influenced

heavily by passage of the Depository Institutions Deregulation andMonetary Control Act of 1980(MCA). However, another historicpiece of legislation was signed intolaw as the year drew to a close: theGarn-St. Germain Depository Institutions Act of 1982 is expected tofoster still more competitiveinnovation.

Under the MCA of 1980, Congressrequired depository institutions tobe subject to reserve requirementsestablished by the Federal ReserveSystem. The MCA was intended topromote improved monetary controland greater competitive equityamong institutions with similarpowers. In addition, the Act provided access to Federal Reserve

services, at explicit prices, for allinstitutions subject to reserverequirements set by the FederalReserve.

Complex EnvironmentWhile the San Francisco Federal

Reserve Bank shares the same

responsibilities and functions asother Reserve Banks in their role as

central bankers, certain aspects ofthe District are unique. Almost 30percent of the population of theTwelfth District resides in the four-

county Los Angeles metropolitanarea. In addition, the District servesa potential market of 4,000 financialinstitutions spread over five time

zones. Geographic disparity also isan important characteristic. Thevastness of the region served, andthe complexity and variety of thepopulation in the District, mean thatReserve Bank services must be tail

ored to regional needs.

New Services

The Bank formed a Financial Ser

vices department in 1981 to marketits priced services to financial institutions as provided by the MCA.Each of the Bank's five offices

serves institutions located in its re

spective zone, but District-wideresponsibility for the planning anddirection of the priced services resides in the Operations Division ofthe District's Head Office.

One of the early service innovationsby the Bank was a new on-line communications service, called FedLinethat was introduced in April 1982.FedLine originally was offered on atest basis to six pilot institutions.The reception has been so enthusiastic that FedLine computers wereinstalled in over one hundred finan

cial institutions in 1982 and over

four hundred more are scheduled

for installation in the coming year.

Initially, subscribers to the servicewill use FedLine's microcomputersto transfer funds directly through theFederal Reserve's communications

system (FEDWIRE). In 1983, however, FedLine will enable users toperform a variety of transactionsdirectly through the Federal Reserve's communication sytem.

Automation

Implementation of computer systemenhancements to support MCA programs continued to flow from theBank's Computer Services Groupthroughout the year. Check floatmonitoring and reporting was improved, and a new system to monitor the Fed's transportation networkand to track the flow and timely receipt of cash letters throughout theFederal Reserve was developed.Together, these innovations providethe means to evaluate the potential

for further reductions in float and the

granting of credit to financial institutions based on actual availability offunds.

The SHARE system for automatedsecurities handling, which was developed by the San Francisco Reserve Bank in cooperation with theSt. Louis and Kansas City ReserveBanks, was in full production atthese three Reserve Banks during1982. The Dallas Reserve Bank

also installed the system in 1982. Inaddition, planning commenced forinstallation of SHARE at the Chi

cago and New York Reserve Banksin 1983. The Cleveland and Boston

Reserve Banks also will begin theSHARE installation process in1983. Thus, the San FranciscoReserve Bank has assumed a lead

ing role within the Federal ReserveSystem in implementing resource-shared software.

The new Federal Reserve national

communications network, calledFRCS-80, was installed in SanFrancisco during 1982. This newcommunications system permits improved reliability and increasedcapacity to serve the Federal Reserve and depository institutionsmore effectively. Improved securityfor transmitting information and increased efficiency of communications circuit usage at lower totalcosts also result from the implementation of this state-of-the-art network.

The Reserve Bank also designedand gained approval for a new intra-district communications network to

link the five offices of the San Fran

cisco Reserve Bank. This network,called SPINE, is compatible with,and complementary to FRCS-80and should generate the same typeof benefits within the Twelfth District

that FRCS-80 is providing nationwide. SPINE will be installed at the

Los Angeles Branch during 1983and at the Reserve Bank's other

three branches by late 1984.

Among the many 1983 automationprojects that target internal operating efficiency improvements, thereare two that are particularly worthy

(Continued on page 4)

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of mention. One is a new online

entry system for accounting applications; another is the developmentof a chargeback system to monitorthe costs and usage of automatedservices to user functions. Both are

targeted for installation early in 1983.

Many of these innovations in automation were facilitated by the moveof the San Francisco Reserve

Bank's data center in September toits new headquarters. The upgrading of computer capacity, the installation of an improved network control center, and planned future computer upgrades in the Bank's branchoffices have positioned the TwelfthDistrict to meet the major challenges forecast for the 1980s. Withthese major enhancements the Reserve Bank should be able success

fully to handle the increased processing needs of the Federal ReserveSystem, the Twelfth District, and thefinancial institutions it serves.

Payments ServicesIn planning the future of paymentsservices in a priced environment theReserve Bank has put heavy emphasis on quality and cost control.The Bank handles approximatelyseven million checks daily fromthroughout the District. Since a critical element in managing all checkproducts, new or existing, is the

OPERATIONS

quality of the services, a specialcustomer information book was prepared to provide financial institutions with a clear understanding ofthe Bank's processing proceduresand to help reduce errors caused byimproper input.

Funds transfer (FEDWIRE) hasbeen the fastest growing bank service in the past two years. On-linefunds transfers now constitute 99

percent of total FEDWIRE activity inthe Twelfth District. Implementationof the new FedLine service men

tioned earlier, is expected to encourage most of the remaining onepercent of volume to move from offline to the much more efficient on

line during 1983. More importantly,FedLine provides the same type ofcomputerized access to small- andmedium-sized financial institutions

that, up to now, has only been available to large financial institutions.

The Automated Clearing House(ACH) was another fast-growingservice offered by the Bank during1982. The major products offered byACH are debit and credit originations which consist mainly of government disbursements, corporatepayrolls, cash concentration, andinsurance drafts. The Twelfth Dis

trict accounts for 20 percent of totalSystem volume in these combinedareas.

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Cash, Securities ServicesThe Reserve Bank continued to

meet the growing cash and Treasurysecurities needs of the institutions

and public doing business in theTwelfth District. Notwithstanding thegrowing popularity of electronicfunds transfer and the continuinguse of paper checks, substantialamounts of coin and currency continue to be needed by the Westerneconomy. In 1982, the ReserveBank put into circulation 4.8 billioncoins and 1.8 billion pieces of papercurrency. High speed currency sorting machines handle 1,200 piecesof currency a minute, automaticallydetecting counterfeits and destroying currency not fit for further use.Output of this equipment steadily isimproving the quality of currency incirculation.

The Reserve Bank is the fiscal

agent for the U.S. Government andin this role it handled substantial

amounts of bills, notes, bonds andother Treasury securities. An automated Treasury-bill processing system enables the Bank to handle a

high volume of bids in T-bill auctionssuch as those generally associatedwith very high interest rates. Forreasons of efficiency, the ReserveBank has consolidated a significantportion of its savings bond operations for the entire District in its Los

Angeles office. Wi