VOLUME 73 • NUMBER 5 • MAY 1987 FEDERAL RESERVE BULLETIN BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, D.C. PUBLICATIONS COMMITTEE Joseph R. Coyne, Chairman • Michael Bradfield • S. David Frost • Griffith L. Garwood • James L. Kichline • Edwin M. Truman The FEDERAL RESERVE BULLETIN is issued monthly under the direction of the staff publications committee. This committee is responsible for opinions expressed except in official statements and signed articles. It is assisted by the Economic Editing Section headed by Mendelle T. Berenson, the Graphic Communications Section under the direction of Peter G. Thomas, and Publications Services supervised by Linda C. Kyles. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Table of Contents 321 U.S. INTERNATIONAL TRANSACTIONS Affairs, March 24, 1987. [Vice Chairman IN 1986 Johnson presented identical testimony be- fore the Subcommittee on International Fi- The external deficit of the United States nance and Monetary Policy of the Senate widened to a record level in 1986, despite Committee on Banking, Housing, and Ur- the further decline in the foreign exchange ban Affairs, March 25, 1987.] value of the dollar. 347 ANNOUNCEMENTS 330 TREASURY AND FEDERAL RESERVE FOREIGN EXCHANGE OPERATIONS Redeposit service approved for Federal Re- serve Banks. After trading fairly steadily throughout No- vember and the first half of December, the Reductions approved in the fee structure dollar moved sharply lower until the end of for book-entry securities. January. Money stock data revised to include changes in benchmarks and seasonal fac- 336 INDUSTRIAL PRODUCTION tors. Industrial production increased an estimat- Changes in official staff commentaries on ed 0.5 percent in February. Regulations B, E, and Z. Proposal to incorporate credit risks on off- 338 STATEMENTS TO CONGRESS balance-sheet interest rate and exchange rate contracts into a proposed risk-based Martha R. Seger, Member, Board of Gover- capital measure. nors, discusses legislation that has been introduced to require disclosures of prices Admission of five state banks to member- and terms in credit card applications and to ship in the Federal Reserve System. establish a nationwide ceiling on credit card interest rates, in a statement submitted to 351 LEGAL DEVELOPMENTS the Subcommittee on Consumer Affairs and Various bank holding company, bank ser- Coinage of the House Committee on Bank- vice corporation, and bank merger orders; ing, Finance and Urban Affairs, March 18, and pending cases. 1987. 341 Manuel H. Johnson, Jr., Vice Chairman, 393 DIRECTORS OF THE FEDERAL RESERVE Board of Governors of the Federal Reserve BANKS AND BRANCHES System, provides an overview of bank- List of directors by Federal Reserve Dis- affiliated export trading companies and says trict. that the Board opposes any proposals that would increase the risk to the bank from the AI FINANCIAL AND BUSINESS STATISTICS affiliated export trading company, before the Subcommittee on Financial Institutions, A3 Domestic Financial Statistics Supervision, and Regulation of the House A44 Domestic Nonfinancial Statistics Committee on Banking, Finance and Urban A53 International Statistics Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis A69 GUIDE TO TABULAR PRESENTATION, A87 INDEX TO STATISTICAL TABLES STATISTICAL RELEASES, AND SPECIAL TABLES A89 FEDERAL RESERVE BANKS, BRANCHES, AND OFFICES A80 BOARD OF GOVERNORS AND STAFF A90 MAP OF FEDERAL RESERVE SYSTEM A82 FEDERAL OPEN MARKET COMMITTEE AND STAFF; ADVISORY COUNCILS A84 FEDERAL RESERVE BOARD PUBLICATIONS Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis U.S. International Transactions in 1986 Charles P. Thomas, of the Board's Division of securities, continuing the trend that began in International Finance, prepared this article. 1984. However, official inflows increased mark- edly, after having been negligible in 1985, as The external deficit of the United States widened foreign official agencies bought U.S. dollar as- to a record level in 1986, despite the further sets in response to upward pressure on their decline in the foreign exchange value of the currencies against the dollar. dollar. For the year as a whole, the merchandise The lower value of the dollar and the possibili- trade deficit reached $148 billion, while the cur- ty of more balanced fiscal and monetary policies rent account deficit, which includes net receipts worldwide lend credence to a slightly improved of investment income and other services in addi- outlook for the U.S. trade deficit. However, the tion to merchandise trade, reached $141 billion continuation of large current account deficits (chart 1). The depreciation of the dollar began to implies further erosion of the U.S. net foreign have noticeable effects in U.S. export markets, asset position and points to deterioration in the helping the volume of U.S. exports to grow service account in the future. strongly during 1986 in the face of some slowing in the growth of gross national product abroad; but it appears to have restrained the growth of MAJOR INFLUENCES ON imports only slightly. The slow response of the U.S. INTERNATIONAL TRANSACTIONS trade balance to the depreciation is attributable in part to normal lags in the adjustment of trade U.S. international transactions were dominated volume and prices. It also reflects an unusually in 1986 by the continued decline of the dollar and laggard response of import prices to the depreci- the persistent effects of its prolonged apprecia- ation, the uneven rate of depreciation against the tion between 1980 and 1985. Changes in econom- currencies of several key regions, and the contin- ic activity at home and abroad affected the U.S. ued expansion of U.S. consumption in spite of external balances in 1986 relatively little, as slower income growth. growth rates in the United States and the rest of The current account deficit in 1986 was fi- the world converged (chart 2). Domestic demand nanced largely by private purchases of U.S. grew somewhat more at home than abroad on average in 1986 and contributed to the sustained strength in imports. 1. U.S. trade and current accounts Changes in U.S. international price competi- Billions of dollars tiveness, measured by the ratio of foreign prices in dollar terms to U.S. prices, explain much of the movement in the U.S. trade position in recent years, as illustrated in chart 3. When foreign prices rise faster than U.S. prices or when the dollar depreciates, U.S. price competi- tiveness improves. Movements in real net ex- ports have tended to track shifts in price compet- itiveness with a lag of one to two years. The depreciation of the dollar that began in 1971 was followed by a sharp increase in net exports in the Source. U.S. Department of Commerce, Bureau of Economic Analysis. years 1973 through 1975. Similarly, the deprecia- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 322 Federal Reserve Bulletin • May 1987 2. Growth of real GNP first quarter of 1985, the dollar adjusted for Percentage change from year earlier changes in relative consumer prices appreciated 6 percent against the Canadian dollar and 25 percent against the currencies of eight major U.S. trading partners among the developing countries; against the currencies of the other major industrial countries it appreciated roughly 65 percent (chart 4). (This price-adjusted, or real, exchange rate is simply the inverse of the mea- sure of price competitiveness depicted in chart 3.) Since early 1985, the price-adjusted dollar has 1. The GNP of foreign industrial countries is the weighted average declined sharply against the currencies of the GNP for the Group of Ten countries besides the United States and industrial countries other than Canada, but it has Switzerland. Weights are proportional to each country's share in world exports plus imports during 1972-76. continued to rise against those of the developing countries on average. At the end of 1986, the value of the price-adjusted dollar was 5 percent tion during 1977-78 fostered another sharp in- above its 1980 level relative to the currencies of crease in net exports beginning in 1978. In both the industrial countries and 34 percent above the cases rapid increases in exports accounted for 1980 level relative to those of the developing most of the gain in net exports. In 1986, the countries. dollar depreciated 10 percent in nominal terms Much of the change in the dollar's value over against the currencies of 18 major trading coun- the past six years has reflected differences in tries, while U.S. consumer price inflation was 6 real, or inflation-adjusted, interest rates across percentage points lower than the average price countries. Over most of the period of floating inflation in the same 18 countries. These changes exchange rates since early 1973, the price-adjust- in exchange rates and prices improved U.S. price ed value of the dollar against the currencies of competitiveness during the year, returning the the other Group of Ten countries and the differ- index of relative consumer prices to about its ence between U.S. long-term real interest rates 1981 level. Movements in U.S. price competi- and an average of comparable rates for those tiveness based on relative wholesale prices tell countries have moved roughly together (chart 5). about the same story, qualitatively. The two series diverged beginning in early 1984, The improvement in U.S. price competitive- as the dollar continued to rise sharply despite a ness over the past two years has not been decline in the relative real return on dollar assets. uniform across countries. Between 1980 and the Since early 1985, however, the relationship ap- pears to have been reestablished. The sustained 3. U.S. price competitiveness and net exports 1 Billions of 1982 dollars 1980= 100 4.