Annual Report of the Federal Reserve Board, 2008
95th 2008 BoardofGovernorsoftheFederalReserveSystem
This publication is available from the Board of Governors of the Federal Reserve System, PublicationsFulfillment,Washington,DC20551.ItisalsoavailableontheBoard’swebsite, atwww.federalreserve.gov.
Letter of Transmittal Board of Governors of the Federal Reserve System Washington, D.C. June 2009 The Speaker of the House of Representatives: Pursuant to the requirements of section 10 of the Federal Reserve Act, I am pleased to submit the ninety-fifth annual report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 2008. Sincerely, Ben Bernanke Chairman
Overview of the Federal Reserve As the nation’s central bank, the etyofSystemfunctions,includingoper- Federal Reserve System has numerous, ating a nationwide payments system; varied responsibilities: distributing the nation’s currency and v conductingthenation’smonetarypol- coin; under authority delegated by the Board of Governors, supervising and icy by influencing monetary and regulating bank holding companies and credit conditions in the economy v supervising and regulating banking state-chartered banks that are members of the System; serving as fiscal agents institutions, to ensure the safety and of the U.S. Treasury; and providing a soundnessofthenation’sbankingand variety of financial services for the financial system and to protect the Treasury, other government agencies, credit rights of consumers v maintaining the stability of the finan- and other fiscal principals. A major component of the Federal cial system and containing systemic Reserve System is the Federal Open riskthatmayariseinfinancialmarkets v providing financial services to de- Market Committee (FOMC), which is made up of the members of the Board pository institutions, the U.S. governof Governors, the president of the Fedment, and foreign official institutions eral Reserve Bank of New York, and The Federal Reserve is a federal sys- presidentsoffourotherFederalReserve tem composed of a central, governmen- Banks, who serve on a rotating basis. tal agency—the Board of Governors— The FOMC establishes monetary policy and 12 regional Federal Reserve Banks. and oversees open market operations, The Board of Governors, located in the Federal Reserve’s main tool for Washington, D.C., is made up of seven influencing overall monetary and credit members appointed by the President of conditions. The FOMC sets the federal the United States and supported by a funds rate, but the Board has sole austaff of about 2,100. In addition to con- thority over changes in reserve requireducting research, analysis, and policy- ments and must approve any change in making related to domestic and interna- the discount rate initiated by a Reserve tional financial and economic matters, Bank. the Board plays a major role in the Two other groups play roles in the supervision and regulation of the U.S. functioning of the Federal Reserve: bankingsystemandadministersmostof depository institutions, through which the nation’s laws regarding consumer monetary policy operates, and advisory creditprotection.Italsohasbroadover- councils,whichmakerecommendations sightresponsibilityforthenation’spay- to the Board and the Reserve Banks ments system and the operations and regarding System responsibilities. activities of the Federal Reserve Banks. All federally chartered banks are, by The Federal Reserve Banks, which law, members of the Federal Reserve combine public and private elements, System. State-chartered banks may are the operating arms of the central become members if they meet Board banking system. They carry out a vari- requirements. Á
Contents Monetary Policy and Economic Developments 3 MONETARYPOLICYREPORTOFFEBRUARY2009 3 Part1—Overview:MonetaryPolicyandtheEconomicOutlook 6 Part2—RecentFinancialandEconomicDevelopments 35 Part3—MonetaryPolicyin2008andEarly2009 40 Part4—SummaryofEconomicProjections 51 Appendix—FederalReserveInitiativestoAddressFinancialStrains 58 Abbreviations 59 MONETARYPOLICYREPORTOFJULY2008 59 Part1—Overview:MonetaryPolicyandtheEconomicOutlook 61 Part2—RecentEconomicandFinancialDevelopments 88 Part3—MonetaryPolicyovertheFirstHalfof2008 Federal Reserve Operations 95 BANKINGSUPERVISIONANDREGULATION 96 ScopeofResponsibilitiesforSupervisionandRegulation 97 SupervisionforSafetyandSoundness 109 SupervisoryPolicy 120 SupervisoryInformationTechnology 121 StaffDevelopment 122 RegulationoftheU.S.BankingStructure 125 EnforcementofOtherLawsandRegulations 125 FederalReserveMembership 127 CONSUMERANDCOMMUNITYAFFAIRS 127 MortgageCredit 133 CreditCards 135 OverdraftServices 136 OtherRegulatoryActions:ProposedRulesonRisk-BasedPricingNotices 137 OtherSupervisoryActivitiesRelatedtoCompliancewithConsumerProtectionand CommunityReinvestmentLaws 154 OutreachandResponsetoCommunityDevelopmentNeedsinHistorically UnderservedCommunitiesandMarkets 155 AdvicefromtheConsumerAdvisoryCouncil 163 FEDERALRESERVEBANKS 163 DevelopmentsinFederalReservePricedServices 166 DevelopmentsinCurrencyandCoin 167 DevelopmentsinFiscalAgencyandGovernmentDepositoryServices 170 ElectronicAccesstoReserveBankServices
170 InformationTechnology 171 ExaminationsoftheFederalReserveBanks 172 IncomeandExpenses 173 SOMAHoldingsandLoans 175 InvestmentsofConsolidatedVariableInterestEntities 175 ReserveBankBranchClosure 175 FederalReserveBankPremises 177 ProFormaFinancialStatementsforFederalReservePricedServices 181 THEBOARDOFGOVERNORSANDTHE GOVERNMENTPERFORMANCEANDRESULTSACT 181 StrategicPlan,PerformancePlan,andPerformanceReport 181 Mission 181 GoalsandObjectives 185 FEDERALLEGISLATIVEDEVELOPMENTS 185 HousingandEconomicRecoveryActof2008 194 EmergencyEconomicStabilizationActof2008 200 HigherEducationOpportunityActof2008 Records 205 RECORDOFPOLICYACTIONSOFTHEBOARDOFGOVERNORS 205 RulesandRegulations 209 PolicyStatementsandOtherActions 213 SpecialLiquidityFacilitiesandOtherInitiatives 218 DiscountRatesforDepositoryInstitutionsin2008 223 MINUTESOFFEDERALOPENMARKETCOMMITTEEMEETINGS 224 MeetingHeldonJanuary29–30,2008 249 MeetingHeldonMarch18,2008 260 MeetingHeldonApril29–30,2008 282 MeetingHeldonJune24–25,2008 301 MeetingHeldonAugust5,2008 311 MeetingHeldonSeptember16,2008 319 MeetingHeldonOctober28–29,2008 345 MeetingHeldonDecember15–16,2008 361 LITIGATION Federal Reserve System Organization 365 BOARDOFGOVERNORS 368 FEDERALOPENMARKETCOMMITTEE 369 FEDERALADVISORYCOUNCIL
370 CONSUMERADVISORYCOUNCIL 371 THRIFTINSTITUTIONSADVISORYCOUNCIL 372 FEDERALRESERVEBANKSANDBRANCHES 391 MEMBERSOFTHEBOARDOFGOVERNORS,1913–2008 Statistical Tables 396 1. FederalReserveOpenMarketTransactions,2008 400 2. FederalReserveBankHoldingsofU.S.TreasuryandFederalAgencySecurities, December31,2006–2008 401 3. FederalReserveBankInterestRatesonLoanstoDepositoryInstitutions, December31,2008 A.RatesonSelectedLoans B.RatesonTermAuctionFacilityLoansOutstanding 402 4. ReserveRequirementsofDepositoryInstitutions,December31,2008 403 5. Banking Offices and Banks Affiliated with Bank Holding Companies in the UnitedStates,December31,2007and2008 404 6A.Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items,Year-End1984–2008andMonth-End2008 408 6B. Loans and Other Credit Extensions, by Type, Year-End 1984–2008 and Month- End2008 410 6C.Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items,Year-End1918–1983 414 7. PrincipalAssetsandLiabilitiesofInsuredCommercialBanks,byClassofBank, June30,2008and2007 415 8. InitialMarginRequirementsunderRegulationsT,U,andX 416 9A. Statement of Condition of the Federal Reserve Banks, by Bank, December 31, 2008and2007 421 9B. Statement of Condition of the Federal Reserve Banks, December 31, 2008 and 2007,SupplementalInformation—CollateralHeldagainstFederalReserveNotes: FederalReserveAgent’sAccounts 422 10. IncomeandExpensesoftheFederalReserveBanks,byBank,2008 426 11. IncomeandExpensesoftheFederalReserveBanks,1914–2008 432 12. OperationsinPrincipalDepartmentsoftheFederalReserveBanks,2005–2008 433 13. Number and Annual Salaries of Officers and Employees of the Federal Reserve Banks,December31,2008 434 14. Acquisition Costs and Net Book Value of the Premises of the Federal Reserve BanksandBranches,December31,2008
Federal Reserve System Audits 437 AUDITSOFTHEFEDERALRESERVESYSTEM 439 BOARDOFGOVERNORSFINANCIALSTATEMENTS 453 FEDERALRESERVEBANKSCOMBINEDFINANCIALSTATEMENTS 485 OFFICEOFINSPECTORGENERALACTIVITIES 486 GOVERNMENTACCOUNTABILITYOFFICEREVIEWS Maps of the Federal Reserve System 488 Index 493
Monetary Policy and Economic Developments
3 Monetary Policy Report of February 2009 Part 1 ness and consumer confidence around Overview: Monetary Policy the world. Over the summer, a weakenand the Economic Outlook ing U.S. economy and continued financial turbulence led to a broad loss of The U.S. economy weakened markedly confidence in the financial sector. In in the second half of 2008 as the tur- September, the government-sponsored moil in financial markets intensified, enterprises Fannie Mae and Freddie credit conditions tightened further, and Mac were placed into conservatorship asset values continued to slump. Condibytheirregulator,andLehmanBrothers tions in the labor market worsened sig- Holdings filed for bankruptcy. The innificantlyafterearlyautumn,andnearly surance company American Internaall major sectors of the economy registional Group, Inc., or AIG, also came tered steep declines in activity late last under severe pressure, and the Federal year. Meanwhile, inflation pressures di- Reserve, with the full support of the minished appreciably as prices of en- Treasury, agreed to provide substantial ergy and other commodities dropped liquidity to the company. In addition, a sharply, the margin of resource slack in number of other financial institutions the economy widened, and the foreign failed or were acquired by competitors. exchange value of the dollar strength- As a result of the Lehman Brothers ened. bankruptcy, a prominent money market The second half of 2008 saw an inmutual fund suffered capital losses, tensification of the financial and ecowhich prompted investors to withdraw nomic strains that had initially been large amounts from such funds. The triggered by the end of the housing resulting massive outflows undermined boom in the United States and other the stability of short-term funding marcountries and the associated problems kets, particularly the commercial paper in mortgage markets. The ensuing turmarket, upon which corporations rely moil in global credit markets affected heavilytomeettheirshort-termborrowassetvalues,creditconditions,andbusiingneeds.Againstthisbackdrop,investors pulled back broadly from risk-tak- Note: Included in this chapter are the text, ing in September and October, liquidity tables, and selected figures from the Monetary in short-term funding markets vanished Policy Report submitted to Congress on Februfor a time, and prices plunged across ary24,2009,pursuanttosection2BoftheFederalReserveAct.Thefiguresincludedherehave asset classes. Securitization markets, been renumbered, and therefore the figure num- with the exception of those for govbersinthisreportdifferfromthefigurenumbers ernment-supported mortgages, essenintheMonetaryPolicyReport.Thecompleteset tially shut down. offiguresisavailableontheBoard’swebsite,at www.federalreserve.gov/boarddocs/hh. Reflecting in part the adverse devel- Othermaterialsinthisannualreportrelatedto opments in financial markets, economic the conduct of monetary policy include the min- activity dropped sharply in late 2008 utes of the 2008 meetings of the Federal Open and has continued to contract so far in Market Committee (see the ‘‘Records’’ section) 2009. In the labor market, the pace of and statistical tables 1–4 (at the back of this report). job losses quickened considerably be-
4 95th Annual Report, 2008 ginning last autumn, the unemployment Core inflation—which excludes the dirate has risen to its highest level since recteffectsofmovementsinfoodandenthe early 1990s, and other measures of ergy prices—also slowed significantly labor market conditions—for example, latelastyearandentered2009atasubthe number of persons working part dued pace. Mirroring the drop in headtime because full-time jobs are not line inflation, survey measures of nearavailable—have worsened noticeably. term inflation expectations have fallen The deteriorating job market, along to very low levels in recent months, with the sizable losses of equity and while the latest readings on longer-term housing wealth and the tightening of inflation expectations are similar to credit conditions, has depressed con- those in 2007 and early 2008. sumer sentiment and spending; these The Federal Reserve has responded factorshavealsocontributedtothecon- forcefully to the crisis since its emertinued steep decline in housing activity. gence in the summer of 2007. By the In addition, businesses have instituted middle of last year, the Federal Open widespreadcutbacksincapitalspending Market Committee (FOMC) had lowin response to the weakening outlook ered the federal funds rate 325 basis for sales and production as well as points.1Andasindicationsofeconomic the difficult credit environment. And in weakness proliferated and the financial contrast to the first half of the year— turbulence intensified in the second when robust demand for U.S. exports half,theFOMCcontinuedtoeasemonprovided some offset to the softness in etary policy aggressively; at its Decemdomestic demand—exports slumped in ber meeting, the Committee established the second half as economic activity a target range for the federal funds rate abroad fell. In all, real gross domestic of 0 to 1⁄ 4 percent and indicated that product (GDP) in the United States economic conditions are likely to wardeclined slightly in the third quarter of rantexceptionallylowlevelsofthefed- 2008 and is currently estimated by the eral funds rate for some time. Bureau of Economic Analysis to have In addition, the Federal Reserve took droppedatanannualrateof33⁄ 4 percent a number of measures during the secin the fourth quarter; real GDP seems ond half of 2008 to shore up financial headed for another considerable de- markets and support the flow of credit crease in the first quarter of 2009. to businesses and households. (See the The downturn in sales and produc- appendix for descriptions of these protion, along with steep declines in the grams.) In response to intensified stresprices of energy and other commodities ses in dollar funding markets, the Fedand a strengthening in the exchange eral Reserve announced extensions of value of the dollar, has contributed to a its Term Auction Facility and signifisubstantial lessening of inflation pres- cantlyexpandeditsnetworkofliquidity sures in the past several months. In- swap lines with foreign central banks. deed, overall inflation, as measured by To support the functioning of the comthe price index for personal consump- mercial paper market in the aftermath tionexpenditures,turnednegativeinthe of the Lehman Brothers bankruptcy, the fourth quarter of 2008; over the first Federal Reserve established the Assetthree quarters of the year, overall infla- BackedCommercialPaperMoneyMartion had averaged nearly 41⁄ 2 percent at an annual rate, largely because of sharp 1. Alistofabbreviationsisavailableattheend increases in food and energy prices. ofthischapter.
Monetary Policy Report of February 2009 5 ket Mutual Fund Liquidity Facility in parent holding companies as well as for September as well as the Commercial all balances in non-interest-bearing Paper Funding Facility and Money transaction deposit accounts at partici- Market Investor Funding Facility in pating insured depository institutions. October. In an effort to restart certain In November, Citigroup came under securitization markets and support ex- significant financial pressure. In retensions of credit to consumers, the sponse, the FDIC, the Treasury, and the Federal Reserve in November an- Federal Reserve provided a package of nounced the Term Asset-Backed Secu- loans and guarantees to bolster Citirities Loan Facility, which is scheduled group’s financial condition; a similar to begin operation in coming weeks. To package was arranged for Bank of support the mortgage and housing mar- America in January. Since October, ketsandtheeconomymorebroadlyand governments in many advanced econoto encourage better functioning in the mies have announced support plans for market for agency securities, the Fed- their banking systems. These programs eral Reserve announced programs in have included large-scale capital injec- November to purchase agency-guar- tions, expansions of deposit insurance, anteed mortgage-backed securities and and guarantees of some forms of bank agency debt. These initiatives have re- debt. sulted in a notable expansion of the The measures taken by the Federal Federal Reserve’s balance sheet, and Reserve,otherU.S.governmententities, the FOMC has indicated that it expects and foreign governments have helped the size of the balance sheet to remain restore a degree of stability to some at a high level for some time as a result financial markets. In particular, strains of open market operations and other in short-term funding markets have measures to support financial markets eased noticeably since the fall, some and to provide additional stimulus to corporate risk spreads have declined the economy in an environment of very modestly, and measures of volatility low short-term interest rates. have generally retreated. Nevertheless, Other U.S. government entities and significant stress persists in most marforeign governments also implemented kets, and financial institutions remain avarietyofpolicymeasuresinresponse under considerable pressure; as a result, to the intensification of financial strains the flow of credit to households and over the course of the fall and winter. businesses continues to be impaired. The Treasury announced a temporary In conjunction with the January 2009 guarantee of the share prices of money FOMC meeting, the members of the market mutual funds and, beginning in Board of Governors of the Federal October, used authority granted under Reserve System and presidents of the the Emergency Economic Stabilization Federal Reserve Banks, all of whom Act to purchase preferred shares in a participate in FOMC meetings, prolarge number of depository institutions. vided projections for economic growth, That same month, the Federal Deposit unemployment,andinflation;thesepro- Insurance Corporation (FDIC) intro- jections are presented in part 4 of this ducedaTemporaryLiquidityGuarantee report. Given the strength of the forces Program under which it offers guaran- weighing on the economy, FOMC tees for selected senior unsecured obli- participants viewed the outlook as havgations of participating insured deposi- ing weakened significantly in recent tory institutions and many of their months. Participants generally expected
6 95th Annual Report, 2008 economic activity to contract sharply in 1. Change in Real Gross Domestic the near term and then to move onto a Product, 2002–08 path of gradual recovery, bolstered by monetary easing, government efforts to Percent, annual rate stabilize financial markets, and fiscal 4 stimulus.Participantsexpectedtotaland core inflation to be lower in 2009 than 3 over the four quarters of 2008, in large H1 2 measure because of the recent declines 1 in commodity prices and rising slack in + resource utilization; inflation was fore- _0 cast to remain low in 2010 and 2011. 1 Participants generally judged that the 2 degree of uncertainty surrounding the 3 outlook for both economic activity and 4 inflation was greater than historical norms. Most participants viewed the 2002 2004 2006 2008 risks to growth as skewed to the down- NOTE: Here and in subsequent figures, except as side, and nearly all saw the risks to the noted, change for a given period is measured to its final inflation outlook as either balanced quarter from the final quarter of the preceding period. or tilted to the downside. Participants SOURCE: Department of Commerce, Bureau of Economic Analysis. also reported their assessments of the ratestowhichmacroeconomicvariables wouldbeexpectedtoconvergeoverthe prices plunged, and markets for private longer run under appropriate monetary asset-backedsecuritiesremainedlargely policy and in the absence of further shutdown.Asaresult,pressuresonthe shockstotheeconomy.Thecentralten- already strained balance sheets of fidencies of these longer-run projections nancial institutions increased, thereby were 2.5 percent to 2.7 percent for real threateningtheviabilityofsomeinstitu- GDP growth, 4.8 percent to 5.0 percent tions and impinging on the flow of fortheunemploymentrate,and1.7per- credit to households and businesses. In centto2.0percentfortheinflationrate. part reflecting the cascading effects of these developments throughout the wider economy, conditions in the labor Part 2 market deteriorated markedly. More- Recent Financial over, industrial production contracted and Economic Developments sharply as manufacturers responded ag- The downturn in economic activity that gressively to declines in both domestic has been unfolding since late 2007 and foreign demand. According to the steepened appreciably in the second advance estimate from the Bureau of half of 2008 as the strains in financial Economic Analysis, real gross domarkets intensified. After the financial mestic product (GDP) fell at an annual difficulties experienced by Fannie Mae rateof33⁄ 4 percentinthefourthquarter, and Freddie Mac during the summer and it seems headed for another sizable andthebankruptcyofLehmanBrothers decrease in the first quarter of 2009 Holdings in mid-September, short-term (figure 1). Meanwhile, inflation presfunding markets were severely dis- sures have diminished as prices of enrupted, risk spreads shot up, equity ergyandothercommoditieshaveplum-
Monetary Policy Report of February 2009 7 2. Change in the Chain-Type Price though these actions have helped re- Index for Personal Consumption store a measure of stability to some Expenditures, 2002–08 markets, financial conditions remain quitestressed,andaggregatecreditcon- Percent, annual rate ditions continue to be impaired as a Total result. Excluding food and energy 4 Financial Stability 3 Developments 2 Evolution of the Financial Turmoil The current period of pronounced tur- 1 moil in financial markets began in the + summer of 2007 after a rapid deteriora- _0 tion in the performance of subprime mortgages caused largely by a down- 2002 2004 2006 2008 turninhousepricesinsomepartsofthe country. Investors pulled back from SOURCE: Department of Commerce, Bureau of Economic Analysis. risk-taking, and liquidity diminished sharply in the markets for interbank funding and structured credit products meted, the margin of resource slack has more generally. House prices continued widened, and the foreign exchange to fall rapidly in the first part of 2008, value of the dollar has strengthened mortgage delinquencies and defaults (figure 2). continued to climb, and concerns about In response to the extraordinary fi- credit risk mounted. The increased nancial strains, the Federal Reserve im- financial strains led to a liquidity crisis plemented a number of unprecedented in March at The Bear Stearns Compapolicy initiatives to support financial nies,Inc.,amajorinvestmentbank,and stability and promote economic growth. toitsacquisitionbyJPMorganChase& These initiatives included lowering the Co. Subsequent aggressive monetary target for the federal funds rate to a policyeasingandmeasurestakenbythe range of 0 to 1⁄ 4 percent, beginning di- Federal Reserve to bolster the liquidity rect purchases of agency debt and of financial institutions contributed to agency mortgage-backed securities, somerecoveryinfinancialmarketsdurbroadening liquidity programs to finan- ing the spring. cial intermediaries and other central Nevertheless,strainsinfinancialconbanks, and initiating programs in sup- ditionsintensifiedgoingintothesecond port of systemically important market halfoftheyear.Inparticular,amidworsegments. Other U.S. government enti- ries that the capital of Fannie Mae and ties also undertook extraordinary initia- Freddie Mac would be insufficient to tives to support the financial sector by absorb mounting losses on their mortinjecting capital into the banking sys- gage portfolios, the stock prices of the tem and providing guarantees on sel- two government-sponsored enterprises ected liabilities of depository institu- (GSEs)begantodeclinesignificantlyin tions. Many foreign central banks and June, and their credit default swap governments took similar steps. Al- (CDS) spreads—which reflect inves-
8 95th Annual Report, 2008 3. Spreads on Credit Default Swaps for 4. Libor Minus Overnight Index Swap Selected U.S. Financial Companies, Rate, 2007–09 2007–09 Basis points Basis points 300 275 250 250 225 200 200 175 150 150 One-year Investment 125 100 banks 100 50 75 One-month Bank holding 50 0 companies 25 Jan. July Jan. July Jan. Jan. July Jan. July Jan. 2007 2008 2009 2007 2008 2009 NOTE: The data are daily and extend through Feb- NOTE: The data are daily and extend through Feb- ruary 19, 2009. An overnight index swap (OIS) is an ruary 18, 2009. Median spreads for six bank holding interest rate swap with the floating rate tied to an index companies and nine investment banks. of daily overnight rates, such as the effective federal SOURCE: Markit. funds rate. At maturity, two parties exchange, on the basis of the agreed notional amount, the difference between interest accrued at the fixed rate and interest accrued by averaging the floating, or index, rate. Libor tors’ assessments of the likelihood of is the London interbank offered rate. the GSEs defaulting on their debt obli- SOURCE: For Libor, British Bankers’ Association; for the OIS rate, Prebon. gations—rose sharply. Market anxiety eased somewhat in the second half of July after the Treasury proposed stat- to one another, conditions in short-term utory changes, subsequently approved funding markets continued to be by the Congress, under which it could strained during the summer. The relalend and provide capital to the GSEs. tive cost of borrowing in the interbank Nevertheless, pressures on these enter- market—as exemplified by the London prises continued over the course of the interbank offered rate (Libor), a refersummer; as a result, option-adjusted encerateforawidevarietyofcontracts, spreads on agency-guaranteed mort- including floating-rate mortgages—ingage-backed securities (MBS) widened creased sharply (figure 4).2 In addition, and interest rates on residential mort- required margins of collateral (known gages rose further. as haircuts) and bid-asked spreads wid- Meanwhile,investoruneaseaboutthe ened in the markets for repurchase outlook for the broader banking sector agreements (repos) backed by many reemerged. In July, the failure of Indy- types of securities, including agency MacFederalBank,alargethriftinstitu- securities that previously were considtion, raised further concerns about the ered very safe and liquid. profitability and asset quality of many On September 7, the Treasury and financial institutions. Over the summer, the Federal Housing Finance Agency CDS spreads for major investment and announcedthatFannieMaeandFreddie commercial banks rose, several large Mac had been placed into conservatorinstitutions announced sharp declines in ship. To maintain the GSEs’ ability to earnings, and anecdotal reports suggested that the ability of most financial 2. Typically, the relative cost is measured by firms to raise new capital was limited comparing the Libor rate with the rate on (figure 3). With banks reluctant to lend comparable-maturityovernightindexswaps.
Monetary Policy Report of February 2009 9 purchase home mortgages, the Treasury 5. Commercial Paper, 2007–09 announcedplanstoestablishabackstop lending facility for the GSEs, to pur- Basis points Basis points chase up to $100 billion of preferred Spreads A2/P2-rated stock in each of the two firms, and to 500 nonfinancial 500 initiate a program to purchase agency 400 400 MBS. After the announcement, interest 300 300 rate spreads on GSE debt narrowed as 200 AA-rated 200 investors became confident that the asset-backed 100 100 Treasury would support the obligations + + of the GSEs. Option-adjusted interest _0 _0 rate spreads on MBS issued by the Billions of dollars Billions of dollars GSEsfell,andratesandspreadsonnew 280 Outstandings 1,300 conforming fixed-rate mortgages declined. Nevertheless, other financial 240 Asset-backed 1,200 1,100 institutionscontinuedtofacedifficulties 200 1,000 in obtaining liquidity and capital as 160 900 investors remained anxious about their 120 Unsecured 800 solvency and, more broadly, about the nonfinancial 80 700 implications of worsening financial conditions for the availability of credit Jan. July Jan. July Jan. 2007 2008 2009 tohouseholdsandbusinessesandsofor the economic outlook. NOTE: The data are weekly and extend through February 18, 2009. Commercial paper yield spreads are for Amidthisbroaddownturnininvestor an overnight maturity and are expressed relative to the confidence, and after large mortgage- AA nonfinancial rate. Outstandings are seasonally adjusted. related losses in the third quarter, Leh- SOURCE: Depository Trust and Clearing Corporation. man Brothers came under pressure as counterparties refused to provide shortterm funding to the investment bank, man Brothers’ debt, the net asset value even on a secured basis. Eventually, of a major money market mutual fund with no other firm willing to acquire it fell below $1 per share—also known as and with its borrowing capacity limited “breaking the buck,” an event that had by a lack of collateral, Lehman Broth- not occurred in many years—thereby ers filed for bankruptcy on September prompting rapid and widespread inves- 15.3 Over the previous weekend, Bank tor withdrawals from prime funds (that of America announced its intention to is, money market mutual funds that acquire Merrill Lynch, which had also hold primarily private assets). Prime come under severe funding pressures. fundsrespondedtothesurgeinredemp- In large part because of losses on Leh- tions by reducing their purchases of short-term assets, including commercial paper—which many businesses use to 3. ThebankruptcyofLehmanBrothersandthe obtain working capital—and by shortconservatorship of Fannie Mae and Freddie Mac constituted credit events of unprecedented scale ening the maturity of those instruments for the CDS market. Nevertheless, settlement of that they did purchase, leading to a the outstanding CDS contracts on these entities deterioration of the commercial paper proceeded smoothly over the subsequent weeks, market (figure 5). Meanwhile, investors apparently due in part to the increased margins increasingly demanded safe assets, and demanded by holders of CDS protection in the periodleadinguptoearlySeptember. funds that hold only Treasury securities
10 95th Annual Report, 2008 experiencedasharpincreaseininflows, Investor anxiety about investment whichcausedyieldsonTreasurybillsto banks, which had escalated rapidly in plummet. Intense demands among thewakeofLehmanBrothers’collapse, investors to hold Treasury securities, abated somewhat after Morgan Stanley coupled with increased concerns about and Goldman Sachs were granted bank counterparty credit risk, reportedly led holding company charters by the Fedto a substantial scaling back of activity eral Reserve. However, on September among traditional securities lenders in 25 the resolution of another failing the Treasury market. The decreased financial institution, Washington Muactivity contributed, in turn, to disrup- tual, imposed significant losses on tions in the Treasury repo and cash senior and subordinated debt holders as markets that were evidenced by a very well as on shareholders. As a consehigh volume of fails-to-deliver. Re- quence, investors marked down their expectations regarding likely governdemptions from prime funds slowed ment support for the unsecured nondeafter the Treasury and the Federal posit liabilities of financial institutions, Reserve took actions in September and which further inhibited the ability of October to support these funds (see the some banking organizations to obtain appendix). funding. Among these institutions was Around the same time that the diffi- WachoviaCorp.,theparentcompanyof culties at Lehman Brothers emerged, the fourth-largest U.S. bank by asset the financial condition of American size at the time, which was ultimately International Group, Inc., or AIG— acquired by Wells Fargo in early Octoa large, complex insurance conglomber. erate—deteriorated rapidly, and the Against this backdrop, investors company found short-term funding, pulled back from risk-taking even furupon which it was heavily reliant, ther, funding markets for terms beyond increasingly difficult to obtain. In view overnight largely ceased to function, of the likely spillover effects to other and a wide variety of financial firms financial institutions of a disorderly experienced increasing difficulty in failure of AIG and the potential for sigobtaining funds and raising capital. nificant pass-through effects to the Libor rates rose at all maturities while broader economy, the Federal Reserve comparable-maturity overnight index Board on September 16, with the full swap(OIS)ratesfell,leavingspreadsat support of the Treasury, authorized the record levels. Strains were also evident Federal Reserve Bank of New York to in the federal funds market, in which lend up to $85 billion to the firm to overnight funds traded over an unusuassistitinmeetingitsobligationsandto ally wide range and activity in term facilitate the orderly sale of some of its funds dropped sharply. Conditions in businesses. (AIG, the Treasury, and the repo markets worsened further, as hair- Federal Reserve later modified the cuts and bid-asked spreads on nonterms of this arrangement, as described Treasury collateral increased, and the in the appendix.) Meanwhile, CDS overnight rate on general Treasury colspreads for other insurance companies lateral traded near zero. Despite subrose, and their equity prices fell, amid stantial new issuance, yields on shortconcerns regarding their profitability dated Treasury bills also traded near and declines in the values of their zero. Fails-to-deliver in the Treasury investment portfolios. market and overnight lending of securi-
Monetary Policy Report of February 2009 11 ties from the portfolio of the System 6. Gross Issuance of Selected Mortgage- Open Market Account soared to record and Asset-Backed Securities, 2003–08 highs. Spreads on asset-backed commercial paper (ABCP) and on lower- Billions of dollars, annual rate rated unsecured commercial paper is- Non-agency RMBS 2,250 sued by nonfinancial firms widened CMBS 2,000 Consumer ABS 1,750 significantly. 1,500 Conditions in other financial markets 1,250 also deteriorated sharply in September 1,000 and October. CDS spreads on corporate 750 500 debt surged, and the rates on invest- H1 H2 250 ment-grade and high-yield bonds rose 2003 2004 2005 2006 2007 2008 dramatically relative to comparablematurity Treasury yields. Secondary- NOTE: Non-agency RMBS are residential mortgagebacked securities issued by institutions other than market bid prices for leveraged loans Fannie Mae, Freddie Mac, and Ginnie Mae; CMBS are dropped to record-low levels as institu- commercial mortgage-backed securities; consumer ABS tional investors pulled back from the (asset-backed securities) are securities backed by credit card loans, nonrevolving consumer loans, and auto market, and the implied spread on an loans. index of loan credit default swaps (the SOURCE: For RMBS and ABS, Inside MBS & ABS LCDX) widened to record levels. Bid- and Merrill Lynch; for CMBS, Commercial Mortgage Alert. asked spreads on high-yield corporate bonds and leveraged loans increased inanattempttomeetmountingredempsignificantly, and liquidity and price tion requests on the part of their invesdiscovery in the CDS market remained tors and other funding needs. impaired, especially for contracts In the stock market, prices tumbled involving financial firms. Spreads on and volatility soared to record levels commercial mortgage-backed securities during the autumn as investors grew (CMBS) and consumer asset-backed more concerned about the prospects of securities (ABS) also widened dramatifinancial firms and about the likelihood cally, as securitizations other than of a deep and prolonged recession (figgovernment-supported MBS came to a ure 7). Equity-price declines were parstandstill (figure 6). The turmoil ticularly pronounced among financial affected even the Treasury market, in which interest rate spreads between 7. Stock Price Indexes, 1998–2009 yields on the most recently issued Treasury securities and yields on January 3, 2005 = 100 comparable-maturity off-the-run securities (that is, those securities that were 140 previously issued)—an indicator of the Wilshire 5000 120 liquidity in this market—surged from 100 already elevated levels. Foreign finan- 80 cial markets experienced many of the 60 same disturbances as domestic markets Dow Jones financial index 40 (see the section “International Develop- 20 ments”). Price movements in all of 1999 2001 2003 2005 2007 2009 these markets were likely exacerbated by sales of securities by hedge funds NOTE: The data are daily and extend through February 18, 2009. and other leveraged market participants SOURCE: Dow Jones Indexes.
12 95th Annual Report, 2008 and energy firms, but they were gener- antee for selected senior unsecured allywidespreadacrosssectorsandwere obligations of participating insured deaccompanied by substantial net out- pository institutions and many of their flowsfromequitymutualfunds.During parent holding companies as well as for this period, the premium that investors all balances in non-interest-bearing demanded for holding equity shares— transaction deposit accounts at particigauged roughly by the gap between the pating insured depository institutions. earnings-price ratio and the yield on Aftertheseactionsandtheannounce- Treasury securities—shot up, reflecting ments of similar programs in a number the heightened risk aversion that pre- of other countries, stresses in financial vailed in financial markets. marketseasedsomewhat,thoughconditions remained strained. In the interbank funding market, Libor fixings at Policy Actions most maturities declined noticeably and and the Market Response spreads over comparable-maturity OIS To strengthen confidence in the U.S. rates narrowed. Meanwhile, spreads on financial system, during the autumn the highly rated unsecured commercial Federal Reserve, at times acting in con- paper and ABCP narrowed after the cert with foreign central banks, ex- FederalReserveannouncedmeasuresin panded its existing liquidity facilities support of this market, and issuance and announced several additional initia- rebounded somewhat from its lows in tives, including programs to support September and October. Conditions in short-term funding markets and to pur- global short-term dollar funding marchase agency debt obligations and kets also improved significantly after MBS.(Theseinitiativesarediscussedin the Federal Reserve substantially exmore detail in the appendix.) Because panded its program of liquidity swaps of the sharply diminished availability with foreign central banks, which of market funding, several Federal increased the amount of dollar funding Reserve facilities were used heavily auctioned in foreign markets, and a throughout the remainder of the year. number of foreign governments took In addition, the Treasury announced measures to strengthen and stabilize a temporary guarantee program for their banking systems. money market mutual funds and pro- Despite these improvements, invesposed the Troubled Asset Relief Pro- torsremainedconcernedaboutthesoundgram (TARP) to use government funds ness of financial institutions. Spreads tohelpstabilizethefinancialsystem;on on CDS for U.S. banks widened further October 3, the Congress approved and in November, which raised the prospect provided funding for this program as of significant increases in banks’ costs part of the Emergency Economic Stabi- of raising the funds they needed for lization Act. Using funds from the lending. Citigroup, in particular, saw its TARP,theTreasuryestablishedavolun- CDS spread widen dramatically after it tary capital purchase plan under which announced that it would take large the U.S. government would buy pre- losses on its securities portfolio. To ferred shares from eligible institutions. support market stability, the U.S. gov- Additionally, under the Temporary ernment on November 23 entered into Liquidity Guarantee Program (TLGP), an agreement with Citigroup to provide the Federal Deposit Insurance Corpora- a package of capital, guarantees, and tion(FDIC)providedatemporaryguar- liquidity access. Subsequently, CDS
Monetary Policy Report of February 2009 13 spreads for financial institutions re- October. However, C&I lending deversed a portion of their earlier widen- clined over the past few months as ing, and some nonfinancial risk spreads some businesses reportedly paid down also narrowed. outstanding loans and stepped up their Conditions in debt markets continued issuance in the corporate bond market. to ease after the passing of year-end, In addition, banks continued to report although most of these markets remain decreased demand for credit late last much less liquid than normal. Yields year in response to slowing business and spreads on corporate bonds and investment and reduced merger and commercial paper have decreased no- acquisition activity. Most banks continticeably in recent weeks, but activity in ued to tighten standards and terms on the leveraged loan market continues to C&Iloanstofirmsofallsizes.Issuance be very weak. Equity prices for fi- of leveraged loans by banks, which had nancial firms have continued to trend already been very low through the first downward, and CDS spreads for such half of last year, was essentially nil in firms have fluctuated around extremely the second half, largely because of a elevated levels. Investors expressed re- drop in mergers and leveraged buyouts, newed concern over financial institu- which these loans are often used to tionsinJanuaryafteranumberoffirms, finance. Commercial real estate (CRE) most notably Bank of America Corpo- loans on banks’ books expanded over ration, reported large net losses for the 2008asawhole.However,withthecomfourth quarter. The Treasury, the FDIC, mercial mortgage securitization market and the Federal Reserve announced on essentially closed by mid-year, the rate January16thattheyhadenteredintoan of growth of this loan category stepped agreement with Bank of America to down significantly in the second half— provide a package of capital, guaran- a decrease consistent with the reported tees, and liquidity access (see the ap- tighteningofstandardsandadrop-offin pendix). Although markets responded demand for these loans. favorably to this action, the uncertain Bank loans to households also deprospects of the financial sector con- clined over the second half of 2008 and tinue to weigh heavily on market senti- early2009,ledbyasharpcontractionin ment. residential mortgage loans on banks’ books,asdemandweakenedfurtherand banks sold such loans to the GSEs. Banking Institutions However, loans drawn under existing and the Availability of Credit revolving home equity lines of credit Commercial bank credit grew moder- continued to rise briskly during the secatelyover2008asawholeasbothbusi- ond half of the year, an increase likely nesses and households at times drew influenced by a drop in the prime rate, heavily on existing lending commit- on which the rates on such loans are ments, but it contracted noticeably often based. Growth of consumer loans toward the end of the year and in early originated by banks expanded at a solid 2009. In the face of the severe financial pace through October but weakened market disruptions, some companies considerably in November and Decemturned to already committed lines of ber. However, the amount of such loans credit with banks, which caused the held on banks’ books generally contingrowth of commercial and industrial ued to expand late in the year, as banks (C&I) loans to spike in September and had difficulty selling these loans be-
14 95th Annual Report, 2008 cause of ongoing disruptions in securi- quarter. These developments in part tization markets. Recently, consumer reflected write-downs on securities loan growth has also reportedly been holdings and increases in loan-loss probuoyed by banks’ decisions to build visioning in response to deteriorating inventory in anticipation of issuance asset quality. In the fourth quarter, the into the Term Asset-Backed Securities overall loan delinquency rate at com- Loan Facility (TALF). mercial banks increased to more than In the Senior Loan Officer Opinion 41⁄ 2 percent, its highest level since the Survey on Bank Lending Practices con- early 1990s, and the total charge-off ducted in both October 2008 and Janu- rate rose to more than 13⁄ 4 percent, surary 2009, very large net fractions of passing its peaks in the previous two banksreportedhavingtightenedlending recessions. The ratio of loan-loss restandards for all major loan types. Sig- serves to net charge-offs—an indicator nificant net fractions of respondents of reserve adequacy—dropped below also reported a widespread weakening its previous nadir reached in the early of loan demand. In line with the nearly 1990s. 33 percent drop (annual rate) in total Depository institutions’ access to unused loan commitments reported in funding has improved as a result of the fourth-quarter Call Reports, many various Federal Reserve liquidity probanks indicated in the January survey grams and the TLGP, under which elithat they had cut the size of existing gible firms have issued $169 billion of credit lines to businesses and house- FDIC-guaranteed bonds to date. In holds (figure 8). addition, the capital of banking organi- Earnings growth at depository insti- zations has been boosted by more than tutions slowed markedly in 2008, and $200 billion of preferred stock purprofitability as measured by return on chases under the TARP. Still, the recent assetsandreturnonequitydroppeddra- downward trend in the equity prices of matically; indeed, commercial banks most banks and the elevated level of posted an aggregate loss in the fourth their CDS spreads suggest that market participantsremainconcernedaboutthe long-term profitability and potential 8. Change in Unused Bank Loan Commitinsolvency of some depository instituments to Businesses and Households, 1990:Q2–2008:Q4 tions. The financial turmoil has led to sig- Percent, annual rate nificant changes in the structure of the broad banking industry, with two large 20 investment banks and one large finance 10 company recently converting to bank + _0 holding companies to obtain better 10 access to government funding pro- 20 grams; a handful of large insurance firms, motivated partly by their desire 30 to apply for TARP funding, have like- 1990 1993 1996 1999 2002 2005 2008 wise converted to thrift holding compa- NOTE: The data, which are not seasonally adjusted, nies. In addition, several failures and are quarterly and extend through 2008:Q4. mergers of large financial institutions SOURCE: Federal Financial Institutions Examination resulted in increased concentrations of Council, Consolidated Reports of Condition and Income (Call Report). industry assets and deposits in 2008.
Monetary Policy Report of February 2009 15 Domestic Developments 9. Net Change in Private Payroll Employment, 2002–09 In part reflecting the intensifying deterioration in financial conditions, nearly Thousands of jobs, 3-month moving average all major sectors of the U.S. economy recorded sizable declines in activity in 200 late 2008, and the weakness has ex- 100 + tended into early 2009. Conditions in _0 the labor market have worsened sub- 100 stantiallysinceearlyautumnasemploy- 200 ment has fallen rapidly, the unemployment rate has climbed, and firms 300 continue to announce more layoffs. 400 Housing remains on a steep downward 500 trend, and both consumer spending and 600 business investment have contracted significantly. In addition, demand for 2003 2005 2007 2009 U.S. exports has slumped in response to thedeclineinforeigneconomicactivity. NOTE: Nonfarm business sector. The data are monthly and extend through January 2009. Meanwhile, overall consumer price in- SOURCE: Department of Labor, Bureau of Labor flation turned negative in late 2008 as Statistics. energy prices tumbled, and core inflation slowed noticeably. catethatfirmsplanoncontinuingtolay off workers in the near term. Virtually all major industries have The Labor Market experienced considerable job losses recently. Manufacturing employment Conditions in the labor market deteriorated throughout 2008, but they wors- 10. Civilian Unemployment Rate, ened markedly in the autumn as job 1975–2009 losses accelerated and the unemployment rate jumped. In total, private pay- Percent rolls fell 33⁄ 4 million between the onset of the recession in December 2007 and January 2009, with roughly half of the 10 reduction occurring during the past three months (figure 9). Indeed, since November, private payroll employment 8 hasfallen600,000permonth,compared with average monthly job losses of 6 340,000 in September and October and 160,000 over the first eight months of 4 2008. The civilian unemployment rate, which stood at 4.9 percent in December 2007, has marched steadily upward 1979 1989 1999 2009 over the past year, and it reached 7.6 percent in January 2009, its highest NOTE: The data are monthly and extend through January 2009. level since 1992 (figure 10). Moreover, SOURCE: Department of Labor, Bureau of Labor private surveys and news reports indi- Statistics.
16 95th Annual Report, 2008 has fallen nearly 500,000 over the past at the start of the recession. The inthree months and has dropped more crease in involuntary part-time work than 1 million since December 2007. has been widespread across industries. Layoffs in truck transportation and The labor force participation rate, wholesale trade, which are closely which typically falls during periods of related to activity in the manufacturing labor market weakness, has decreased sector, show a similar pattern. The of late. The decline has probably been decline in construction employment, dampedsomewhatbytheavailabilityof which began in early 2007, has also extended unemployment insurance sped up, in part because the ongoing benefits, which may have encouraged contraction in homebuilding has been some workers who would have otheraccompanied more recently by weak- wise discontinued their job search ness in nonresidential building. In the effortstocontinuelookingforwork.4In service-producing sector, job losses addition, the reduction in household have mounted at retail establishments, wealth over the past couple of years providers of financial services, and pro- may have prompted some individuals fessional and business services firms, who would have otherwise dropped out all of which have been adversely af- of the labor force to remain in, and it fected by the downturn in economic may have caused some who would not activity. A noticeable exception has have entered the labor force to do so. been the continued brisk hiring by pro- Broad measures of nominal hourly viders of health services. compensation, which includes both The increase in joblessness has been wages and benefits, posted moderate widespread across demographic, educa- increases in 2008. For example, comtional, and occupational groups. In pensation per hour in the nonfarm busi- January 2009, the unemployment rate ness sector—a measure derived from for men aged 25 years and older was the compensation data in the national 3 percentage points above its average income and product accounts (NIPA)— level in the fourth quarter of 2007, rose 31⁄ 2 percent in nominal terms in while the rate for women aged 25 years 2008, similar to the increases over the and older was up 2 percentage points; preceding few years. as typically occurs during recessions, unemployment rates for teenagers and young adults showed even larger in- 4. UnderlegislationenactedinJune2008,the creases. Among the major racial and EmergencyUnemploymentCompensation(EUC) ethnic groups, unemployment rates for programbegantoprovideanadditional13weeks of benefits to workers who exhaust their regular blacks and Hispanics have risen somebenefits (typically 26 weeks). In November, the what more than those for whites, a difprogram was expanded to provide additional ferential also typical of periods when benefits to workers who exhaust the previously labor market conditions weaken. More- available13weeksofEUCbenefits(anadditional over, the number of workers who 7 weeks for all eligible individuals and a further 13 weeks for individuals in states with high are working part time for economic unemployment rates—defined as a state unemreasons—a group that includes indi- ploymentrateof6percentorabove).Thisexpanvidualswhosehourshavebeencutback sion, as well as the original EUC program, was bytheiremployersaswellasthosewho scheduled to expire in March 2009, but the American Recovery and Reinvestment Act of want full-time jobs but are unable to 2009extendeditthroughDecember2009;theact find them—has soared to nearly 8 milalso increased payments to recipients of unemlion,morethan3millionaboveitslevel ploymentcompensationby$25perweek.
Monetary Policy Report of February 2009 17 The wage component of hourly com- 11. Private Housing Starts, 1995–2008 pensationalsorosemoderatelyinnominal terms in 2008, and because con- Millions of units, annual rate sumer price inflation over the year as a whole was low, much of the gain in nominal wages was reflected in higher 1.6 Single-family real wages. For example, over the four quarters of last year, average hourly 1.2 earnings,ameasureofhourlywagesfor production and nonsupervisory workers, increased nearly 4 percent in nomi- .8 nal terms—and rose 2 percent after accounting for the rise in the price Multifamily .4 index for overall personal consumption expenditures (PCE). However, because of sharp cutbacks in hours worked, real 1996 2000 2004 2008 average weekly earnings were up just 1 percent. Moreover, for many workers, NOTE: The data are quarterly and extend through 2008:Q4. real weekly earnings actually declined: SOURCE: Department of Commerce, Bureau of the In manufacturing, real average weekly Census. earnings fell 1 percent last year, while in retail trade, this measure of real measured in the NIPA, subtracted 3⁄ 4 weekly earnings fell more than percentagepointfromtheannualrateof 2percent. change in GDP in the second half of 2008, about as much as in the first half. The further drop in housing starts and The Household Sector residential building permits in January suggests that housing will continue to Residential Investment exertasubstantialdragonthechangein and Housing Finance real GDP in early 2009. Housing activity remained on a steep The further contraction in housing downward trend in the second half of demand in the second half of 2008 2008. Home sales and prices slumped partly reflected the bleaker picture for further, and homebuilders continued to household income and wealth. Potential curtail new construction in response to homebuyers may also have been deweak demand and elevated backlogs of terred by concerns about the likelihood unsold new homes. In the single-family of additional declines in house prices sector, new units were started at an and fears of buying into a falling maraverage annual rate of just 460,000 ket. And while individuals who qualiunits in the fourth quarter of 2008— fied for fixed-rate conforming mortroughly 75 percent below the quarterly gages were able to take advantage of high reached in mid-2005 (figure 11). historically low interest rates, many Starts in the multifamily sector aver- potential homebuyers with blemished aged just 200,000 units in the fourth credit histories or who were in a posiquarter; for 2008 as a whole, multifam- tiontomakeonlysmalldownpayments ily starts totaled 285,000, the lowest found it difficult to obtain loans. In the level in more than a decade. In all, the market for new single-family homes, decline in residential investment, as sales fell nearly 30 percent (not at an
18 95th Annual Report, 2008 annual rate) between the second and with job loss and other life events by fourth quarters, which brought the total refinancing their homes and extracting decline in sales since their peak in mid- equity or by selling the properties. 2005 to 70 percent. The slippage in However, the considerable declines in sales has continued to hamper builders’ housing equity, along with tighter lendefforts to gain control of their inven- ing standards, mean that even prime tories. Although the stock of unsold loans are more difficult to refinance, new homes fell considerably in the sec- and weak housing demand has made ondhalfof2008,itdidnotfallasmuch selling difficult. As a consequence, boras sales; thus, the months’ supply of rowers have increasingly fallen behind unsold new homes continued to move in their monthly obligations. Indeed, in up, reaching a level nearly three times November 2008, 25 percent of subthat recorded during the first half of the prime mortgages were seriously dedecade. In the market for existing linquent (the latest available data).5 As single-familyhomes,thedeclineinsales of December 2008, 33⁄ 4 percent of in recent quarters has been less proprime mortgages were seriously denounced than for new homes, but this linquent—much lower than the level of situationcouldreflectthefactthatthese seriousdelinquencyfornonprimeloans, sales figures include some transactions but still almost twice the level of a year involving foreclosed homes and other earlier. distressed properties, which tend to sell Foreclosures also have risen appreat heavily discounted prices. Existing ciably of late. Indeed, available data home sales ended the year more than suggest that more than 2 million homes 30 percent below the highs of a few entered the foreclosure process in 2008, years earlier. compared with foreclosure starts of House prices fell sharply in the second half of 2008, with the latest 11⁄ 2 million in 2007 and 1 million or lessineachoftheprecedingfouryears. 12-month readings in major nationwide As with delinquencies, declining house indexes showing prices of existing prices have been a key contributor to homes down between 9 percent and the rise in foreclosures. At the same 19 percent. One such measure, the time, rising foreclosures have exacer- LoanPerformance repeat-sales price bated the decline in house prices by index, fell 11 percent over the increasing the number of heavily dis- 12 months ending in December and counted properties on the market and stood19percentbelowitspeakinearly thus exerting downward pressure on 2006. Declines in home prices have prices of otherwise comparable occubeen especially steep in Arizona, Calipied homes. Lenders and public policy fornia, Florida, and Nevada. These makers have taken steps to limit the states, which had experienced some of number of avoidable foreclosures by thelargestincreasesinhomepricesearmodifying mortgages and putting in lier in the decade, have generally seen place programs such as Hope for the largest increases in delinquency Homeowners, established by the Fedrates and foreclosure actions initiated eral Housing Administration (FHA). by lenders. The drop in home prices is contributing to worsening payment problems 5. A mortgage is defined as seriously delinamong mortgage borrowers. Traditionquent if the borrower is 90 days or more behind ally, some homeowners have coped inpaymentsorthepropertyisinforeclosure.
Monetary Policy Report of February 2009 19 In an environment of generally weak 12. Mortgage Rates, 1993–2009 housing demand, falling home prices, tighter lending standards, and rising Percent foreclosures, total household mortgage 9 debt appears to have posted an outright 8 decline in 2008—the first in the history Fixed rate 7 of the series, which extends back to the 6 1950s. In secondary mortgage markets, 5 securitization of mortgages by Fannie 4 Mae and Freddie Mac has fallen in Adjustable rate 3 recent months, and gross issuance of GSE-backed MBS has lately just out- 1994 1997 2000 2003 2006 2009 paced maturing issues so that levels NOTE: The data, which are weekly and extend outstanding have only inched up since through February 18, 2009, are contract rates on 30-year mortgages. the summer. Issuance of Ginnie Mae SOURCE: Federal Home Loan Mortgage Corporation. securities backed by FHA loans has continued to be strong, but the nonlevel of this spread reflects, in part, the agency MBS market remains closed. absence of functioning securitization The FHA has offered an alternative marketsforjumbomortgagesaswellas source of mortgage financing for some an increased aversion by banks to maknonprime and near-prime borrowers, ing potentially risky loans. and such lending has picked up lately; still, it has replaced only part of the Consumer Spending reduction in credit from other sources, and Household Finance largely because of the FHA’s relatively strict lending standards and higher Consumer spending held up reasonably costs. well in the first part of 2008. However, Interest rates on 30-year fixed-rate spending slackened noticeably toward conforming mortgages have fallen the end of the second quarter despite about100basispoints,onnet,sincethe the boost to household income from the November 25 announcement of the tax rebates authorized by the Economic Federal Reserve’s program to purchase Stimulus Act of 2008, and consumer MBS issued by the housing GSEs and outlays entered the second half of the Ginnie Mae, and they currently stand at year on a downward trajectory. Against 5 percent (figure 12). However, interest a backdrop of sizable job losses, derates for nonconforming jumbo fixed- creasesinhouseholdnetworth,anddifrate loans have declined by less than ficulties in obtaining credit, real PCE those for conforming mortgages in declined at an annual rate of more than recent months, which has caused the 31⁄ 2 percent in the second half of 2008 extraordinarilywidespreadbetweenthe (figure 13). two rates to widen further.6 The high single-family home in the contiguous United States is currently equal to the greater of 6. Conformingmortgagesarethoseeligiblefor $417,000 or 115 percent of an area’s median purchase by Fannie Mae and Freddie Mac; they house price; it cannot exceed $625,500. Jumbo must be equivalent in risk to a prime mortgage mortgages are those that exceed the maximum with an 80 percent loan-to-value ratio, and they size of a conforming loan; they are typically cannot exceed the conforming loan limit. The extended to borrowers with relatively strong conforming loan limit for a first mortgage on a credithistories.
20 95th Annual Report, 2008 13. Change in Real Income and effects of the contraction in employ- Consumption, 2002–08 ment and the decrease in hours worked by those who retained jobs. Apart from Percent, annual rate transfer payments, most types of non- Disposable personal income wage income performed poorly as well. 6 Personal consumption Measuredonapercapitabasis,average expenditures 5 real after-tax income was essentially 4 unchanged last year, compared with an 3 average increase of nearly 2 percent 2 during the preceding five years. 1 In addition to the weakness in in- + _0 come, consumer spending has been restrainedinrecentquartersbyasizable 1 decrease in household net worth. This 2 source of restraint on spending likely 3 reflects not only the most recent drops 2002 2004 2006 2008 in equity and house prices but also the laggedeffectsoftheappreciabledecline SOURCE: Department of Commerce, Bureau of Economic Analysis. in wealth during 2007 and the first half of 2008. The loss of wealth, along with heightened concerns about the pros- The downshift in consumer spending pects for jobs and income, helped push reflected both a sharp pullback in pur- consumer sentiment to very low levels. chases of goods and a marked decelera- These factors also contributed to a tion in expenditures on services. Out- noticeableupturninthepersonalsaving lays for new light motor vehicles (cars, rate, which rose to nearly 3 percent in sportutilityvehicles,andpickuptrucks) thefourthquarterof2008afterfluctuatwere especially hard hit. Indeed, at an ingbetween0and1percentformostof annual rate of just 101⁄ 4 million units, the period since 2005. sales of light vehicles in the fourth Nonmortgage consumer debt outquarter were nearly 4 million units standing appears to have fallen, on net, below the already reduced pace during in the second half of 2008 after having the first nine months of the year; they increased at an annual rate of 4 percent fellfurtherinJanuary2009despiterela- in the first half. Part of the drop in tively low gasoline prices and a sub- borrowing was likely due to weaker stantial increase in sales incentives in demand for loans, but the available evirecent months. dence also suggests that lenders tight- Real disposable personal income ened the supply significantly. Indeed, (DPI)—that is, after-tax income ad- results from the Senior Loan Officer justed for inflation—rose just 11⁄ 4 per- Opinion Survey released in October cent in 2008. Some of the weakness in 2008 and January 2009 revealed that real DPI reflected softness in aggregate many banks tightened standards and wage and salary income, which fell terms for consumer loans, actions that slightly in real terms. As noted earlier, includedloweringcreditlimitsonexisthourly wages posted a solid increase in ing credit card accounts. Lenders also realtermslastyear,buttheeffectofthis reportedly continued to tighten underincrease on aggregate wages and sala- writing standards on non-governries was outweighed by the negative ment-guaranteed student loans, and
Monetary Policy Report of February 2009 21 some major providers of these loans 14. Change in Real Business Fixed exited the market. Investment, 2002–08 Partofthetighteningoflendingstandards and terms no doubt reflects lend- Percent, annual rate ers’concernsaboutthecreditqualityof Structures households. Indeed, the performance of Equipment and software 20 consumer loans has continued to wor- 10 sen in recent months, albeit less starkly + than that of mortgages. Delinquency _0 rates for most types of consumer lend- 10 ing—credit cards, auto loans, and nonrevolving loans—rose significantly, on net, over the course of 2008, and most High-tech equipment such rates now stand at or above the and software levels seen during the 2001 recession. 40 Other equipment excluding Household bankruptcy rates also in- transportation creased sharply in 2008. 20 The pullback in consumer credit also + likely reflects, in part, the difficulties in _0 the market for asset-backed securities. Untilthefirsthalfof2008,asubstantial 2002 2004 2006 2008 fraction of consumer credit had been NOTE: High-tech equipment consists of computers funded with ABS, but since the third and peripheral equipment and communications quarter,issuanceofcreditcard,automo- equipment. bile, and student loan ABS has slowed SOURCE: Department of Commerce, Bureau of Economic Analysis. to a trickle. As noted earlier, to facilitate renewed issuance of consumer and appear to have fallen slightly in early small business ABS and thus support 2009, their spreads to Treasury rates economic activity, the Federal Reserve remain quite elevated. announced in November plans for the Term Asset-Backed Securities Loan Fa- The Business Sector cility, which will begin operations in the coming weeks.7 Spreads on AAA- Fixed Investment rated ABS rose through most of last yearbuthavedeclinedlately,reportedly After having posted small gains in the in anticipation of the opening of the first half of 2008, real business fixed TALF. investment edged down in the third Against this backdrop, interest rates quarter and fell sharply in the fourth on auto loans generally rose somewhat quarter(figure14).Theretrenchmentin during the second half of 2008, and investment reflected both a steep drop those on most other types of consumer in outlays on equipment and software loanswerelittlechanged,despiteasub- (E&S) and a sharp deceleration in stantial decrease in rates on com- spending on nonresidential construction parable-maturity Treasury securities. after 21⁄ 2 years of robust gains. Invest- Although some consumer interest rates ment demand appears to have been depressed by the downturn in sales, production, and profitability as well as 7. A description of the TALF is in the appendix. by the reduced availability and higher
22 95th Annual Report, 2008 cost of credit from securities markets, wasdriven,inpart,bytheweakeningin banks, and other lenders. aggregate output and employment. In Real spending for E&S fell at annual addition, recent reports from bank lendrates of 71⁄ 2 percent in the third quarter ing officers suggest that financing for and 28 percent in the fourth quarter. new construction projects has become Business outlays on motor vehicles, even more difficult to obtain. whichhadfallensharplyinthefirsthalf of the year, continued to plunge in the Inventory Investment second half. Outlays for other major One hallmark of the economic landcomponents of E&S also recorded sizscape over the past year has been the able declines. Real investment in inforprompt response of producers to the mation technology equipment—which slowing in final sales. For much of had risen moderately in the first half of 2008, the production adjustments rethe year—fell at a 121⁄ 2 percent annual sulted in a rapid pace of inventory liqrate, on average, in the second half as uidation and were sufficient to prevent business demand for computers, softthe emergence of widespread stock ware, and communications equipment imbalances. In the fourth quarter, howdropped appreciably. Real spending on ever, the precipitous drop in final equipment other than information techdemand left many firms holding invennology and transportation, which had tories in excess of desired levels—a been moving essentially sideways since view expressed by respondents to a the end of 2005, held up through the variety of business surveys at the turn third quarter. However, it fell at an of the year. Accordingly, available data annual rate of about 20 percent in the suggestthatproducerscontinuedtopare fourth quarter, and the slow pace of back output in January 2009. orders lately, along with the downbeat The inventory overhang at year-end tone in recent surveys of business conwas especially acute in the motor vehiditions,pointstofurtherdeclinesinthis clesector.Althoughautomakersslashed broad category of spending in early productionduringthefourthquarter,the 2009. collapse in sales last autumn pushed up On net, real outlays for nonresidendealers’ stocks, and the days’ supply of tialconstructionpostedasmallincrease cars and light trucks soared to nearly in the second half of 2008. However, 100 days—well above industry norms. gains were concentrated in energy- In response, motor vehicle manufacturrelated sectors—drilling and mining ersinstitutedevenlargercutsinproducstructures, petroleum refineries, and tion in early 2009. These cuts should transmission and distribution facilhelp ease the pressure on dealers’ ities—and likely reflected the earlier stocks, though further progress will run-upinthepriceofcrudeoil.Outside require continued restraint on producthe energy-related sectors, spending tion, a meaningful pickup in sales, or turned down in the second half of last both. year as construction of office buildings softened and spending on nonoffice Corporate Profits commercial buildings (a category that and Business Finance includes retail, wholesale, and some warehouse space) fell sharply. The de- Operating earnings per share for S&P cline was related to the rise in vacancy 500 firms fell an estimated 17 percent rates over the past few quarters, which in 2008. Losses were especially pro-
Monetary Policy Report of February 2009 23 nounced for financial firms. In the non- 200 basis points in September and financial sector, earnings at firms other October. Rates on lower-grade nonfithan oil and gas companies generally nancial paper have also decreased in slowed over the course of 2008 and recent months, but their spreads to declined outright in the fourth quarter. highly rated paper remain elevated by In addition, in light of the deterioration historical standards. in the economy, analysts significantly Bank lending to businesses expanded markeddowntheirprojectionsforearn- in September and October as firms ings in 2009. reportedly drew on existing lines of Borrowing by domestic nonfinancial credit. More recently, however, loans to businesses—primarily through the cor- commercial and industrial borrowers porate bond market, the commercial have registered significant declines. In paper market, and bank loans—slowed addition, the growth of commercial real markedly in the second half of 2008. estate loans—which are often used to The deceleration reflected not only a finance construction and land develreduced desire of businesses to borrow opment—slowed substantially in the and invest in response to the worsening second half of the year. Given the deteeconomic outlook but also a reduced riorating economic outlook, tighter willingness of potential lenders to pro- credit standards, and businesses’ decivide funding for risky projects. In the sions to scale back new investment, corporate bond market, issuance of both C&I and CRE lending seem likely investment-grade securities by nonfi- to fall further in the first part of 2009 nancial firms was solid throughout the (figure 15). year;incontrast,speculative-gradeissu- In the equity market, initial offerings ance has been scant in recent months. by nonfinancial corporations were very After moving up in the first half of the sparse through the second half of 2008, year, the cost of longer-term financing andseasonedofferings(excludingfirms rose further as interest rates on both in the energy sector) were also weak. investment- and speculative-grade cor- Equity retirements—which often occur porate bonds soared in the fall. While as a result of share repurchases that corporate bond rates were climbing, are associated with cash-financed Treasury yields dropped, pushing inter- mergers—continued to outpace the estratespreadsoncorporatebondswell combined amount of private and public above previous record highs. The in- issuance, a development due, in part, to creases in spreads appeared to derive the completion of a few large mergers. from both the anticipation of an in- However, share repurchases are esticrease in defaults and a further reduc- mated to have moderated a bit in recent tion in investors’ willingness to take months, and announcements of future risk. In the commercial paper market, cash-financed mergers have slowed sigshort-term borrowing by highly rated nificantly, likely because of the weaker nonfinancial firms has increased since economic outlook and tighter lending the summer; the rise reflects impor- conditions. tantly the Federal Reserve programs The credit quality of nonfinancial supporting issuance by stronger firms. firms deteriorated in the second half of Indeed,ratesonhighlyratedpaperwith the year. The aggregate ratio of debt to maturities of less than 30 days have assets climbed further, and the aggreaveraged around 20 basis points since gate ratio of liquid assets to total assets late November, compared with nearly declined notably. Ratings downgrades
24 95th Annual Report, 2008 15. Net Percentage of Domestic Banks 2008,nearly$300billionhigherthanin Tightening Standards and Increasing fiscal 2007 and equal to more than Spreads on Commercial and Industrial 3 percent of nominal GDP. So far in Loans to Large and Medium-Sized fiscal 2009, the deficit has increased Borrowers, 1993–2009 substantially further, mostly because of outlaysundertheTroubledAssetRelief Percent Program and the effects of the weak 100 economyonrevenuesandspending.8In 80 60 January, the Congressional Budget Of- 40 fice estimated that the deficit for fiscal Standards 20 2009 as a whole would total more than 0 _20 $1 trillion under the spending and taxa- Spreads _ _ 6 4 0 0 tion policies in place at that time, a fig- _80 ure that excludes the budgetary impact of the American Recovery and Rein- 1994 1997 2000 2003 2006 2009 vestment Act of 2009. NOTE: The data are drawn from a survey generally Federal receipts fell nearly 2 percent conducted four times per year; the last observation is from the January 2009 survey, which covers 2008:Q4. in nominal terms in fiscal 2008 and Net percentage is the percentage of banks reporting a stood at 173⁄ 4 percent of nominal GDP; tightening of standards or an increase in spreads less the they dropped further during the first percentage reporting an easing or a decrease. Spreads are measured as the loan rate less the bank’s cost of four months of fiscal 2009. The decline funds. The definition for firm size suggested for, and has been most pronounced in corporate generally used by, survey respondents is that large and medium-sized firms have annual sales of $50 million or receipts, which have fallen at doublemore. digit rates as corporate profits have SOURCE: Federal Reserve Board, Senior Loan Officer dropped and as firms have presumably Opinion Survey on Bank Lending Practices. adjusted payments to take advantage of the bonus depreciation provisions conon nonfinancial corporate bonds picked tained in the Economic Stimulus Act. up and outpaced upgrades, and the Excluding the rebates provided to most share of corporate bonds rated B3 or households under the act, individual below by Moody’s increased to about income tax receipts rose moderately in 61⁄ 2 percent. Delinquency rates on C&I fiscal 2008. However, so far in fiscal loans increased noticeably in the fourth quarter, and delinquency rates on CRE loans rose further, mainly because of 8. IntheMonthlyTreasuryStatements,equity purchasesundertheTARPandtheGSEconservacontinued rapid weakening in the pertorship are treated on a cash-flow basis, which formance of residential and commercial meansthattheoutlaysarerecordedastheyoccur; construction loans. aflowofreceiptswillberecordedinfutureyears to reflect any dividends on the shares of equity and the proceeds from the eventual sale of the The Government Sector shares. In contrast, the Congressional Budget Office (CBO) treats these transactions on an Federal Government accrual basis and thus records outlays as the net presentvaluecostoftheequitypurchases,rather Thedeficitinthefederalunifiedbudget thantheentireamountthatisdisbursed;underthe is in the midst of a massive widening. CBO approach, there is no offsetting flow of Mainly reflecting the deceleration in receipts in future years. According to the Treasury, the unified budget deficit for the first four economic activity and the provisions of monthsoffiscal2009totaled$569billion;under theEconomicStimulusActof2008,the theCBOapproach,theyear-to-datedeficitwould deficitroseto$455billioninfiscalyear be$361billion.
Monetary Policy Report of February 2009 25 2009,individualreceiptshavebeenrun- real construction spending has essenning below year-earlier levels, likely tially moved sideways. because of the weakness in nominal The financial positions of most personal income and reduced capital states—with the exceptions of Arizona, gains realizations. California, Michigan, and a few Excluding financial transactions, others—were fairly solid at the end of nominalfederaloutlaysincreased8per- fiscal year 2008.9 However, so far in cent in fiscal 2008 after having risen fiscal2009,revenueshavebeenrunning just 3 percent in fiscal 2007. Defense significantly below expected levels outlaysrose12percentinfiscal2008as because of the softness in personal and the rapid run-up in budget authority corporate incomes and the weakness in over the past three years continued to retail sales. States’ initial plans to adbolster spending; increases in defense dress the widening budget gaps have included cuts in spending on education funding in recent years have been suband other programs, hiring freezes and stantial not only for operations in Iraq furloughs, and some tapping of rainy and Afghanistan but also for activities dayfunds;incomingquarters,however, not directly related to those conflicts. the dominant influence on state budgets Federal spending also rose sharply in will be the infusion of grants-in-aid fiscal 2008 for programs that provide under the 2009 federal stimulus packsupporttolower-incomehouseholds.So age, which will help cushion the effects far in fiscal 2009, federal outlays for of the economic downturn on states’ defense and low-income support probudgets. At the local level, property tax grams have continued to rise rapidly. receipts continued to be propped up in Also, spending for Medicare has picked 2008 by the lagged effects of the draup lately, and outlays for Social Secumatic increases in house prices over the rity have been lifted by the large costfirst half of the decade.10 Nevertheless, of-living adjustment that took place in the sharp fall in house prices over the January. As for the part of federal past two years is likely to put substanspending that is a direct component of tial downward pressure on local rev- GDP, real federal expenditures for conenues before long. Moreover, many sumption and gross investment rose at state and local governments will need an annual rate of 10 percent, on averto set aside money in coming years to age, in the second half of calendar year rebuild their employee pension funds 2008, mostly because of the sizable afterthelossesexperiencedin2008and increase in defense spending. tofundtheirongoingobligationstoprovide health care to their retired employ- State and Local Government ees. Aggregate real expenditures on consumption and gross investment by state 9. State government fiscal years end on June 30inallbutfourstates. and local governments were little 10. The lag between changes in house prices changed, on net, in the second half of andchangesinpropertytaxrevenuelikelyoccurs 2008 after posting a small increase in becausemanylocalitiesaresubjecttostatelimits the first half. In part reflecting the ontheannualincreasesintotalpropertytaxpayments and property value assessments. Thus, mountingpressuresonthesector’sbudincreasesinmarketpricesforhousesmaynotbe gets, state and local employment has reflected in property tax bills until well after the been about flat since mid-2008, while fact.
26 95th Annual Report, 2008 The External Sector 17. Prices of Oil and Nonfuel Commodities, 2004–09 In contrast to the first half of 2008— whenrobustexportsprovidedsomeoff- January 2004 = 100 Dollars per barrel set to the softness in domestic de- 260 140 mand—the external sector provided 240 Oil littlesupporttoeconomicactivityinthe 220 120 200 100 second half of the year. After decelerat- 180 80 ing in the third quarter, real exports 160 140 60 declined sharply in the fourth quarter, 120 Nonfuel 40 as economic activity abroad contracted. 100 commodities Real imports, which had been declining 80 20 earlier in 2008, also dropped consider- 2004 2005 2006 2007 2008 2009 ably in the fourth quarter, dragged NOTE: The data are monthly. The oil price is the spot down by deteriorating U.S. demand price of West Texas intermediate crude oil, and the last observation is the average for February 1–18, 2009. The (figure 16). The declines in trade flows price of nonfuel commodities is an index of 45 in late 2008 were widespread across primary-commodity prices and extends through January major types of products and U.S. trad- 2009. SOURCE: For oil, the Commodity Research Bureau; ing partners. In addition, exports were for nonfuel commodities, International Monetary Fund. depressed by production disruptions at Boeing. deficit of 5 percent of nominal GDP a The U.S. trade deficit narrowed con- year earlier. siderably at the end of 2008, which The price of crude oil in world marlargely reflected a sharp decline in the kets was extremely volatile in 2008. price of imported oil. The trade deficit Afterending2007atabout$95perbarwas$555billionatanannualrateinthe rel, the spot price of West Texas interfourth quarter of 2008, or about 4 per- mediate(WTI)crudeoilsurgedtomore cent of nominal GDP, compared with a than $145 by mid-July amid both surprisingly robust oil demand, especially 16. Change in Real Imports and Exports from emerging market economies, and of Goods and Services, 2002–08 continued restraint in near-term supply (figure 17). Since mid-July, the finan- Percent, annual rate cial market turmoil and the resulting Imports sharp downturn in global economic Exports 15 activityhavedraggeddownoildemand. 10 Despite attempts by OPEC to rein in H1 production, the rapid drop in demand 5 + and concerns about future prospects for _0 the global economy led to a collapse in 5 oil prices. The spot price of WTI fell about 75 percent from its peak to near 10 $40 per barrel in January of this year. 15 Far-dated futures prices for crude oil 20 have fallen somewhat less, which likely reflectstheviewthatOPECactionswill 2002 2004 2006 2008 eventually reduce supply and that global oil demand will rebound in the SOURCE: Department of Commerce, Bureau of Economic Analysis. medium term.
Monetary Policy Report of February 2009 27 Import prices rose rapidly in the first into the summer, they diminished aphalf of 2008, but the increase was preciably toward year-end as prices of reversedinthesecondhalf.Thatpattern energy and other commodities dropped primarily reflected the sharp swing in and the degree of slack in the economy oil prices, but it was also influenced by increased. The chain-type price index amarkedslowinginnonoilimportprice for total personal consumption expendiinflation from its rapid pace in the first tures fell at an annual rate of 51⁄ 2 perhalf of the year. Even excluding oil, cent in the fourth quarter after rising pricesofimportedgoodsdeclinedinthe rapidly over the first three quarters fourth quarter of 2008, driven by both of the year. The core PCE price inthe sharp fall in non-oil commodity dex—which excludes food and energy prices and the appreciation of the dollar items—rose at an annual rate of just that occurred in the latter half of the 1⁄ 2 percent in the fourth quarter after year. increases of 21⁄ 4 percent, on average, over the first three quarters of the year. National Saving Over 2008 as a whole, core PCE prices Total net national saving—that is, the increased 13⁄ 4 percent. Data for PCE saving of households, businesses, and pricesinJanuary2009arenotyetavailgovernments excluding depreciation able, but information from the concharges—fell further in 2008. After sumer price index (CPI) and other having ticked up to 3 percent of nomi- sources suggests that both the total and nal GDP in 2006, net national saving core PCE price indexes posted modest dropped steadily over the subsequent increases in that month. two years as the federal budget deficit Since peaking in July, consumer widened, the fiscal positions of state energy prices have fallen dramatically, andlocalgovernmentsdeteriorated,and with most of the decline coming during private saving remained low; in the the last three months of 2008. Largely third quarter of 2008, net national sav- reflecting the drop in crude oil prices, ing stood at negative 13⁄ 4 percent of the price of gasoline fell from around GDP.Nationalsavingwilllikelyremain $4 per gallon, on average, in July to low this year in light of the weak econ- less than $2 per gallon in December; in omy and the recently enacted federal mid-February, it was in the neighborfiscal stimulus package. Nonetheless, if hood of $2 per gallon. Prices of natural not boosted over the longer run, persis- gas, which typically move roughly in tent low levels of national saving will line with crude oil prices over periods likely be associated with both low rates of several months, also fell sharply in of capital formation and heavy borrow- the second half of 2008 after a substaning from abroad, which would limit the tial run-up in the first half of the year. rise in the standard of living of U.S. Consumer prices for electricity continresidentsovertimeandhampertheabil- ued to move up through the end of the ity of the nation to meet the retirement year—likely because of higher prices needs of an aging population. earlier in the year for fossil fuel inputs to electricity generation—though in- Prices and Labor Productivity creases appear to have slowed in early 2009. Prices In contrast, consumer food prices Although inflation pressures were el- continued to rise rapidly into the auevated during the first half of 2008 and tumn. Increases were substantial both
28 95th Annual Report, 2008 forfoodconsumedathomeandforpur- one-year inflation expectations, which chased meals and beverages, which had moved above 5 percent last spring typically are influenced more by labor and early summer, fell throughout the and other business costs than by farm second half of last year; since Decemprices. Since November, however, in- ber, they have fluctuated around 2 percreases in consumer food prices have cent. As for longer-term inflation exbeen quite modest. Farm prices, which pectations, the Reuters/University of hadsoaredbetween2006andmid-2008 Michigan survey measure of median 5as a consequence of strong world de- to 10-year inflation expectations was mand and the increased use of corn for about 3 percent in January and early the production of ethanol, fell sharply February of this year, similar to the in the second half of last year as pros- readings during 2007 and the early part pects for domestic and foreign demand of 2008. for food weakened and the demand for ethanol eased. Typically, changes in Productivity and farm prices start to show through fairly Unit Labor Costs quickly to consumer food prices, and the small increases in the CPI for food Labor productivity has held up surprisin the past couple of months suggest ingly well in the past year. Although that a noticeable moderation in con- productivity growth has often stalled sumer food price inflation is under during previous recessions, output per way. hour in the nonfarm business sector The slowdown in core inflation in rose 23⁄ 4 percent over the course of late 2008 was widespread, although it 2008, the same rate as in 2007. The was particularly steep for motor vehi- continuedriseinproductivityduringthe cles,apparel,andotherconsumergoods second half of last year, at a time when that were heavily discounted by retail- output was contracting, likely reflects ers in an environment of weak demand the aggressive downsizing undertaken and excess inventories. In addition, the by firms in response to their worsening cost pressures that seemed to be boost- sales prospects. Moreover, although ing core inflation earlier in the year estimatesoftheunderlyingpaceofproebbed as pass-throughs of the previous ductivitygrowtharequiteuncertain,the large increases in the prices of energy buoyancy of productivity in recent and materials ran their course and the quarters suggests that the fundamental effects of recent declines in these prices forces supporting a solid underlying started to show through to consumer trend—for example, the rapid pace of prices. The strengthening in the ex- technological change and the ongoing change value of the dollar and the de- effortsbyfirmstouseinformationtechceleration of import prices also helped nology to improve the efficiency of ease the upward pressure on core infla- their operations—remain in place. tion. Reflectingthesolidgaininlaborpro- Survey-based measures of near-term ductivity, along with the subdued ininflation expectations have receded as crease in nominal hourly compensation actual inflation has come down, while noted earlier, unit labor costs in the indicators of longer-term inflation ex- nonfarm business sector rose just 3⁄ 4 pectations have been steadier. Accord- percent in 2008. The increase in unit ing to the Reuters/University of Michi- labor costs was about the same as that gan Surveys of Consumers, median recorded in 2007.
Monetary Policy Report of February 2009 29 Monetary Policy Expectations 18. Interest Rates on Selected Treasury and Treasury Rates Securities, 2004–09 The current target range for the federal Percent funds rate, 0 to 1⁄ 4 percent, is substan- 10-year 5 tially below the level that investors 4 expected at the end of June 2008; pol- 2-year 3-month icy expectations were steadily revised 3 downward over the second half of the 2 year as the financial and economic out- 1 + look worsened. Toward the end of the _0 year, readings on interest rate expecta- 2004 2005 2006 2007 2008 2009 tions from money market futures and options were complicated by persistent NOTE: The data are daily and extend through February 18, 2009. tradingoffederalfundsbelowthetarget SOURCE: Department of the Treasury. rate, which resulted from the large increase in reserve balances accompanying the expansion of the Federal clined substantially (figure 18). In addi- Reserve’sliquidityprograms.Neverthe- tion, the generally negative market senless, investors clearly anticipated that timent and speculation that the Federal thefederalfundsratewouldremainlow Reserve might begin purchasing large for quite some time amid increasing quantities of longer-maturity Treasury concerns about the health of financial securities contributed at times to downinstitutions, weakness in the real econ- ward pressure on Treasury yields. Offomy,andamoderationininflationpres- setting these factors to some degree sures. Futures quotes currently suggest were market expectations that the that investors expect the federal funds Treasury’s issuance of long-term debt, rate to remain around its current level which rose notably over the course of throughoutthefirsthalfofthisyearand 2008, would pick up further in 2009. thentorisegraduallythroughtheendof On net, yields on 2- and 10-year notes 2010. However, uncertainty about the fell about 200 and 140 basis points, size of term premiums and potential respectively, during the second half of distortions created by the zero lower 2008. boundforthefederalfundsratemakeit In contrast to yields on their nominal difficult to obtain from futures prices a counterparts, yields on Treasury indefinitive reading on the policy expec- flation-protected securities (TIPS) rose tations of market participants. Options over the second half of 2008, which prices suggested that investor uncer- resulted in a noticeable reduction in tainty about the future path for policy measured inflation compensation—the was increasing considerably through difference between comparable-matur- October, as strains in financial markets ity nominal and TIPS yields. Some of intensified, but these measures of un- this reduction was reversed in the early certainty have subsequently trended part of 2009. Inferences about inflation downward. expectations based on TIPS yields have As the economic outlook worsened been difficult to make recently because during the second half of the year and these yields appear to have been afinflation pressures ebbed, yields on fected to a degree by movements in longer-maturity Treasury securities de- liquidity premiums and because special
30 95th Annual Report, 2008 factors have buffeted yields on nominal State and Local Treasury issues. Government Borrowing Federal Borrowing On net, borrowing by state and local governments in the market for munici- Federal debt soared in the second half pal securities was subdued in the secof 2008. The more than $1 trillion of ondhalfof2008.Theissuanceofshort- Treasury borrowing since the summer term municipal debt was robust, reflects importantly the need to finance boosted in part by the need to fund the Treasury’s purchases of agency operating expenditures at a time of MBS and equity; the TARP, under weak revenues. However, issuance of which the Treasury has purchased prelong-term debt, which is generally used ferred shares in a number of financial to fund capital spending projects or to institutions; and the Supplementary refund existing long-term debt, slowed Financing Program, under which the significantly.Interestratesonlong-term Treasury has increased deposits at the debt climbed sharply across the matu- FederalReservetohelpfundtheexpanrityspectruminthesecondhalfof2008 sion of the Federal Reserve’s balance in the face of considerable strain on the sheet. The ratio of federal debt held by budgets of many state and local govthe public to nominal GDP surged to ernments and sharp deteriorations in almost45percentattheendofcalendar market functioning. More recently, year 2008 and seems certain to increase however, municipal bond rates have again in the first part of 2009, as bordropped markedly, in part because marrowing is expected to remain strong ket participants appeared to view the with the weak economy and budgetary federal stimulus package as likely to initiatives. improve the financial condition of state Despite the heavy issuance of Treaand local governments. sury securities in the second half of the year,therapidgrowthoffederallyguar- Monetary Aggregates anteed debt issued by banking institutions under the Temporary Liquidity The M2 monetary aggregate increased GuaranteeProgram,andcontinuedissu- at a 10 percent annual rate during the anceofGSEsecurities,demandatmost second half of 2008 and 81⁄ 2 percent for Treasury auctions was solid, as inves- theyearasawhole.11Therapidgrowth tors sought the safety of Treasury securities. Demand for Treasury bills was extremely strong, and yields in second- 11. M2 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the arymarketssometimesfellclosetozero vaults of depository institutions; (2) traveler’s (and even below zero at times), even as checksofnonbankissuers;(3)demanddepositsat the supply of bills increased markedly. commercialbanks(excludingthoseamountsheld Foreign custody holdings of Treasury by depository institutions, the U.S. government, securities at the Federal Reserve Bank and foreign banks and official institutions) less cash items in the process of collection and Fedof New York grew nearly 40 percent eral Reserve float; (4) other checkable deposits over 2008, although the proportion of (negotiable order of withdrawal, or NOW, nominal coupon securities purchased at accounts and automatic transfer service accounts auctions by foreign investors generally atdepositoryinstitutions,creditunionsharedraft accounts, and demand deposits at thrift instituremained in the 10 percent to 30 pertions); (5) savings deposits (including money cent range observed over the past sevmarketdepositaccounts);(6)small-denomination eral years. time deposits (time deposits in amounts of less
Monetary Policy Report of February 2009 31 reflected in part a marked decrease in International Developments some market interest rates relative to the rates offered on M2 assets, as well International Financial Markets as increased demand for safe and liquid assetsduringthefinancialturmoil.Dur- Although foreign banks continued to ing the second half of the year, the sigreportlossesoverthesummerandfundnificant slowdown in the growth of ingconditionsremainedstrained,global retail money market mutual funds was financial markets were relatively calm offset by a rapid increase in small time in July and August of 2008. This situadeposits, as banks bid aggressively for tion changed abruptly in September, as these deposits to buttress their funding. globalinterbankandotherfundingmar- The currency component of the money kets seized up and lending came to a stock also increased briskly, an indicanear standstill. These developments tion of solid demand for U.S. banknotes were followed by the collapse of sevfrom both foreign and domestic eral prominent foreign financial institusources. Flows into demand deposits tions. In late September, the banks were significant after the introduction BradfordandBingley,Fortis,andDexia of the Temporary Liquidity Guarantee were partially or fully nationalized, and Program, which apparently drew funds Hypo Real Estate Holding AG received out of other money market instruments. a large capital injection from the Ger- The monetary base—essentially the man government. sum of currency in the hands of the The deepening of the crisis led many public and bank reserves—has inforeign governments to announce uncreased rapidly in recent months, priprecedented measures to restore credit marily owing to heavy use of the market functioning, including large- Federal Reserve’s liquidity programs. Creditextendedthroughtheseprograms scale capital injections into the banking caused the balance sheet of the Federal system,expansionsofdepositinsurance Reserve to expand considerably over programs, and guarantees of some thecourseof2008,andthisgrowthwas forms of bank debt. Most major central financed largely by the creation of banks cut policy rates sharply as the reserve balances. The increase in re- financial crisis led to a dramatic deteserve balances almost entirely repre- rioration in the outlook for economic sented an increase in excess reserves activity and inflation; in October, coorrather than an increase in required dinated policy rate cuts were made by reserves. In early 2009, the size of the the Federal Reserve and five other cenbalance sheet has decreased somewhat, tral banks. To address global dollar which reflects a runoff in credit ex- funding pressures, the Federal Reserve tended through the Commercial Paper greatly expanded its program of liquid- Funding Facility and a decrease in ity swaps with foreign central banks by draws on liquidity swap lines with for- increasing the dollar amounts extended eign central banks. as well as the number of countries with which it has swap agreements. (The central banks with swap arrangements than$100,000)lessindividualretirementaccount are discussed in the appendix.) These (IRA) and Keogh balances at depository instituconcertedglobalmeasuresseemtohave tions; and (7) balances in retail money market soothed conditions and had restored mutual funds less IRA and Keogh balances at moneymarketmutualfunds. somemeasureofstabilitytomarketsby
32 95th Annual Report, 2008 theendoftheyear,althoughcreditmar- The Federal Reserve’s broadest meakets abroad are still impaired. sure of the nominal trade-weighted for- Stock markets in the advanced for- eign exchange value of the dollar rose eign economies were nearly flat over about 12 percent, on net, over the sec- July and August of 2008 but fell ond half of 2008 (figure 19). Much of sharply beginning in late September; this rise reflected gains against major market volatility rose to record levels foreign currencies. The dollar appreciwith the deepening of the financial cri- ated13percentagainsttheeuro,20persis. On net, broad equity price indexes cent against the Canadian dollar, and in Europe, Japan, and Canada fell 36 percent against sterling. The dollar’s 20 percent to 40 percent over the sec- strength was attributable to several facondhalfoflastyearandhavecontinued tors, including the realization by many to decline this year. Long-term sover- investors that foreign growth would eign bond yields fell sharply in Europe slow much more sharply than had been and Canada in the latter part of 2008, earlieranticipatedaswellasanincrease which reflected both the easing of indemandfortherelativesafetyofU.S. monetary policy and diminished growth assets such as Treasury securities. In prospects, but have risen somewhat, on contrast to its strength against other balance, in early 2009. In contrast, major currencies, the dollar depreciated yields on inflation-protected long-term 14 percent against the yen, as market securities rose in many countries, and volatility led many Japanese investors inflation compensation (the difference to sell foreign assets. between yields on nominal securities and those on inflation-protected securities) fell sharply. As in the United 19. U.S. Dollar Nominal Exchange Rate, Broad Index, 2005–09 States, measures of inflation compensationwerequitevolatile,however,asthe December 31, 2007 = 100 liquidity of inflation-protected securities fell markedly. 125 Although in early 2008 the emerging market economies looked as if they 120 might escape the most serious conse- 115 quences of the financial crisis, the in- 110 tensification of financial strains in September 2008 led to sharp and sudden 105 capital outflows from many emerging 100 markets as investors in the advanced 95 economies sought to repatriate funds. Downdrafts in financial markets were 90 reinforced by concerns over the effects of declining exports to the advanced 2005 2006 2007 2008 2009 economies and, for commodity export- NOTE: The data, which are in foreign currency units ers, plummeting commodity prices. per dollar, are daily. The last observation for the series is February 18, 2009. The broad index is a weighted Most stock markets in the emerging average of the foreign exchange values of the U.S. economiesfell20percentto40percent, dollar against the currencies of a large group of the most on net, over the second half of the year, important U.S. trading partners. The index weights, which change over time, are derived from U.S. export and risk spreads on emerging market shares and from U.S. and foreign import shares. debt rose sharply. SOURCE: Federal Reserve Board.
Monetary Policy Report of February 2009 33 The dollar also rose against the cur- securities in 2008. Foreign demand was renciesofmostemergingmarketecono- particularly weak for U.S. agency and mies, including appreciation of more corporate bonds, with the weakness than 30 percent against both the Mexi- especially pronounced in the second can peso and the Brazilian real. The half of the year. dollar appreciated much less against Foreign official net purchases of U.S. most emerging Asian currencies, al- assets remained relatively steady in though it did rise more than 20 percent 2008, at a pace slightly above that of against the Korean won. In response to 2007.However,thecompositionofoffithese pressures, many central banks in cial net purchases in the third and bothLatinAmericaandAsiaintervened fourth quarters moved sharply away in support of their currencies. from U.S. agency securities and was concentrated almost exclusively in U.S. Treasury securities. Foreign official ac- The Financial Account quisitionscontinuedtobedominatedby Although the current account deficit Asian institutions in 2008. is estimated to have narrowed in 2008, Prior to the turmoil, U.S. investors’ it remains sizable. Turbulence in glo- net purchases of foreign securities typibal financial markets has noticeably cally generated a financial outflow. changed the composition of the associ- These purchases slowed following the atedfinancialflows.Beforetheturmoil, turmoil and more recently have turned financial inflows were primarily in the to sizable net sales—generating a fiform of net purchases of U.S. securities nancial inflow—as U.S. investors have by foreign private investors and some- pulled out of foreign investments. In what smaller net purchases by foreign addition, U.S. residents considerably reofficial institutions. Since late 2007, duced their deposits in foreign banks in however, foreign private net purchases 2008. of U.S. securities have dropped sharply, Theturmoilalsoledtounusualflows leavingforeignofficialinflowstoplaya from the banking sector and from offimuch larger role. Furthermore, whereas cial transactions in the form of the Fedbeforetheturmoilprivateforeigninves- eral Reserve’s liquidity swap arrangetorspurchasedlargesumsofU.S.assets ments with foreign central banks. Net issued by private entities, since then flowsreportedbybankingofficesinthe foreign investments—both official and United States are typically small. Since private—have been dominated by a the onset of the turmoil through mid- “flight to safety” to U.S. Treasury secu- 2008, however, banks have generated rities. Finally, in the third quarter of unusuallylargeoutflows,inpartreflect- 2008, reductions in holdings of foreign ing a response to heightened demand assets by private U.S. residents played resulting from interbank funding presan unusual role, which added signifi- sures in European markets. As central cantly to net private inflows. banks acted to address these concerns Overall, inflows from foreign private withtheexpansionoftheswaparrangeacquisitions of U.S. securities in 2008 ments in September 2008, the private werejustone-fifthoftheflowsobtained banking outflows slowed to a halt. Forin the previous two years, on average. eign central banks eased dollar pres- Although purchases of U.S. Treasury sures abroad by lending to their domessecurities rose considerably, there were tic banks the dollar liquidity acquired unprecedented net sales in other U.S. from the Federal Reserve. Further
34 95th Annual Report, 2008 drawings on the swap lines in October Aftermovingupsomewhatduringmost and December contributed to a strong of 2008, core inflation is now declining reversal of banking flows (back toward in most advanced foreign economies. the United States, on net) in the fourth Official monetary policy rates have quarter. been lowered significantly since the beginningof2008inresponsetosevere financial market turbulence, decelerat- Advanced Foreign Economies ing economic activity, and waning in- Economic performance in the major flation. After some easing early last advanced foreign economies weakened year by the Bank of England and the sharply in the second half of 2008, as BankofCanada,rapidlyrisingfoodand global financial market turbulence, energy costs led these central banks to shrinking world trade, and collapsing pause, and, in the case of the European business and consumer confidence Central Bank (ECB), raise rates in the weighed on activity. Across the ad- summer. However, in the fall, as finanvancedforeigneconomies,creditcondi- cial conditions deteriorated and comtions and lending standards tightened modity prices fell, policymakers in the considerably, industrial production de- major industrial economies cut rates clined, and retail sales slowed. Housing sharply, including a coordinated move markets weakened everywhere and per- in October. In total, the Bank of formed particularly poorly in countries England has lowered its policy rate that earlier had experienced housing from 51⁄ 2 percent in January of 2008 to booms, such as Ireland, Spain, and the 1 percent. The Bank of Canada and the United Kingdom. By the third quarter ECB have also dropped rates to 1 perof last year, both Japan and the euro cent and 2 percent, respectively. In area had entered recessions, and output Japan, interest rates were lowered to fell sharply in all the major advanced near zero in December. In addition to foreign economies in the fourth quarter, substantial reductions in policy rates, with most countries experiencing espe- central banks in the major advanced cially severe declines in exports and economies have taken a number of private investment. extraordinary measures to improve After surging in response to acceler- liquidity in financial markets, including ating commodity prices in the first half the large-scale provision of term fundof last year, headline rates of inflation inginlocalcurrencyanddollarmarkets fell noticeably as a result of collapsing and the significant expansion of allowcommodity prices and worsening ec- able collateral for central bank funding. onomic conditions. The 12-month Some foreign central banks are turning change in consumer prices peaked in to or contemplating other measures to the third quarter of 2008 for all the support activity, such as purchases of major economies, and the peak values private-sector assets. Governments in rangedfromahighof51⁄ 4 percentinthe the major industrial economies have United Kingdom to 21⁄ 4 percent in also announced fiscal packages to bol- Japan. The most recent figures are sub- ster activity. stantially lower and range from 3 percent in the United Kingdom to below Emerging Market Economies 1 percent in Japan. Excluding food and energy prices, the swings in consumer Economic performance weakened drapriceinflationhavebeenmoresubdued. matically in emerging market countries
Monetary Policy Report of February 2009 35 in the second half of 2008. In the first andChinaplungedinthesecondhalfof halfoftheyear,growthinmanyemerg- 2008, and authorities across emerging ing market economies was relatively Asia have introduced more stimulative robust, and as food and energy prices monetary and fiscal policies to bolster soared, policymakers focused on con- their economies. taining inflationary pressure. However, InMexico,growthwasanemicinthe inthesecondhalf,weakerdemandfrom first half of last year, but it improved in theadvancedeconomiesweighedonthe the third quarter, largely because of export sectors of these countries, global strong activity in the agricultural and financial turmoil led to tighter credit service sectors. However, output is esticonditions, and in some cases, plunging mated to have declined sharply in the commodity prices contributed to eco- fourth quarter, as weakness in the U.S. nomic difficulties. By the end of the manufacturing sector and financial year, output in emerging market econo- stresshavebeguntoweighontheMexmies was dropping sharply, and in- ican economy. In Brazil, economic acflationary pressures were moderating. tivity remained firm through much of These developments prompted policy- theyear,butindicatorssuggestthatoutmakers in many countries to shift their put fell sharply in the fourth quarter. focus to more stimulative monetary and Russia’s economy and financial sysfiscal policies to mitigate the effects of tem experienced considerable stress the economic downturn. overthesecondhalfoftheyearbecause In China, the pace of activity slowed of the steep drop in oil and other comsubstantially in 2008, and concerns modity prices, the turmoil in global regarding high inflation and an over- financial markets, and geopolitical tenheatingeconomyrecededandgaveway sions resulting from the conflict with to efforts to bolster activity. Since Sep- Georgia. Russian international reserves tember, Chinese authorities have low- fell substantially, largely because of ered benchmark lending and deposit interventions to support the currency rates as well as bank reserve require- and the financial and corporate sectors ments several times. In November, a more broadly. Several countries in large fiscal stimulus plan that focused emerging Europe also came under sigon infrastructure investment was an- nificantfinancialpressuresinthefourth nounced, and Chinese authorities also quarter of 2008, which reflected the enacted other policies designed to sup- aftermath of a period of very high rates port the export sector, the real estate ofcreditexpansionaswellaslargecurmarket, and small and medium-sized rent account deficits and external fienterprises. After appreciating signifi- nancingneeds.Hungary,Latvia,Serbia, cantly in the first half of the year, the and Ukraine received official assistance exchange value of the renminbi vis-a`- from the International Monetary Fund. vis the dollar was relatively stable in the second half of 2008. Part 3 Elsewhere in emerging Asia, the Monetary Policy in 2008 downturn in activity has been dramatic. and Early 2009 Hong Kong, Singapore, South Korea, and Taiwan all posted substantial con- Aftereasingthestanceofmonetarypoltractions in real GDP at the end of last icy 225 basis points over the first half year. Demand for these countries’ of 2008, the Federal Open Market goods from the advanced economies Committee (FOMC) lowered the target
36 95th Annual Report, 2008 federal funds rate further in the second With these considerations in mind, half, ultimately bringing it to a range of the FOMC kept the target federal funds 0 to 1⁄ 4 percent.12 The Federal Reserve rate unchanged at 2 percent at its alsotookanumberofadditionalactions August meeting. The accompanying to increase liquidity and improve mar- policy statement indicated that, alket functioning. Some of these mea- though downside risks to growth resures resulted in a substantial increase mained, the upside risks to inflation inthesizeoftheFederalReserve’sbal- were also of significant concern to the ance sheet; further, the FOMC an- Committee.Thisriskassessment,which nounced at its December meeting that many market participants reportedly the focus of policy going forward interpreted as essentially balanced, was would be to support the functioning of in line with expectations at the time. financial markets and stimulate the Accordingly, the expected path for poleconomy through open market opera- icy was little changed in the wake of tions and other measures that would the announcement, and the response in sustainthesizeoftheFederalReserve’s broader financial markets was minimal. balance sheet at a high level. By the time of the meeting on Sep- Information available last summer tember 16, the outlook for inflation had indicated that residential construction moderated as a result of substantial remained on a downward trend, the declines in the prices of oil and other labor market had weakened further, and commodities as well as weakening agindustrial production had declined. gregate demand. Various measures of Althoughaggregateoutputwasreported inflation expectations declined between to have expanded in the second quarter, the two meetings, nominal wage infinancial market developments sug- creases continued to be moderate, and gested that the economy would likely productivity growth remained solid. In come under considerable stress in the addition, declining employment and near future—in particular, tight credit softening final sales contributed to a conditions, the ongoing housing con- weaker outlook for near-term economic traction, and the rise in energy prices activity. Still, some firms reportedly were expected to weigh on economic werecontinuingtopassthroughtotheir growth over the subsequent few quar- customers previous increases in the ters. Core consumer price inflation re- costs of energy and raw materials, and mained relatively stable, but headline readings on core and headline inflation inflation was elevated as a result of remained elevated. In this environment, large increases in food and energy the Committee was concerned that high prices. inflation might become embedded in expectations and thereby impart considerable momentum to overall inflation. 12. Members of the FOMC in 2008 consisted Financial strains had increased over the of members of the Board of Governors of the intermeeting period, although the con- FederalReserveSystemplusthepresidentsofthe sequencesofthebankruptcyofLehman FederalReserveBanksofCleveland,Dallas,Minneapolis, New York, and Philadelphia; in 2009, Brothers Holdings on September 15 FOMCmembersconsistofmembersoftheBoard were not yet clear at the time of the of Governors plus the presidents of the Federal meeting. Indeed, the substantial easing Reserve Banks of Atlanta, Chicago, New York, of monetary policy over the previous Richmond, and San Francisco. Participants at year, combined with ongoing measures FOMCmeetingsconsistofmembersoftheBoard ofGovernorsandallReserveBankpresidents. to foster market liquidity, was seen as
Monetary Policy Report of February 2009 37 likelytosupportactivitygoingforward. tiescontributedtoasubstantialincrease Thus, members agreed that keeping the inthesizeoftheFederalReserve’sbalfederal funds target rate unchanged at ance sheet. Two initiatives were intro- 2percentattheSeptembermeetingwas duced to help manage the expansion of appropriate. the balance sheet and promote control Over the following weeks, stresses in of the federal funds rate. First, on Sepfinancial markets continued to mount. tember 17, the Treasury announced a Interest rate spreads in interbank fund- temporary Supplementary Financing ing markets widened markedly, corpo- Program at the request of the Federal rate and municipal bond yields rose, Reserve. Under this program, the Treaand equity prices dropped sharply. The sury issues short-term bills over and declineinthenetassetvalueofamajor above its regular borrowing program, money market mutual fund below $1 with the proceeds deposited at the Fedper share sparked a flight out of prime eral Reserve. Second, using authority money market funds and caused a grantedundertheEmergencyEconomic severe impairment of the functioning of Stabilization Act, the Federal Reserve the commercial paper market. In re- announced on October 6 that it would sponse to the extraordinary stresses in begin paying interest on required and financial markets, the Federal Reserve, excess reserve balances. The payment together with U.S. government entities of interest on excess reserves was inand many foreign central banks and tended to assist in maintaining the fedgovernments, implemented a number of eral funds rate close to the target set by unprecedented policy initiatives. Mea- the Committee by creating a floor on sures taken by the Federal Reserve interbank market rates. Initially, the around this time, discussed in detail in interest rate paid on required reserve the appendix, included the establish- balances was set as a spread below the ment of the Asset-Backed Commercial average targeted federal funds rate es- Paper Money Market Mutual Fund tablished by the FOMC over each re- Liquidity Facility, Commercial Paper serve maintenance period, and the rate Funding Facility, and Money Market paid on excess balances was set as a Investor Funding Facility, which were spreadbelowthelowesttargetedfederal intended to improve the liquidity in funds rate for each reserve maintenance short-term debt markets and ease the period. Subsequently, with the federal strains in credit markets more broadly. funds rate trading consistently below In addition, to address the sizable de- the target rate, the spreads were elimimandfordollarfundinginforeignjuris- nated. dictions, the FOMC authorized in- In late September and into October, creases in its existing liquidity swap macroeconomic conditions deteriorated lines with foreign central banks and in both the United States and Europe, established lines with additional central prices of crude oil and other commodibanks. In domestic markets, the Federal ties dropped substantially, and some Reserve raised the regular auction measuresofexpectedinflationdeclined. amounts of the 28- and 84-day maturity In light of these developments and the Term Auction Facility (TAF) auctions extraordinary turmoil in financial marand announced two forward TAF auc- kets, the Committee members agreed tions to provide funding over year-end. thatdownsideriskstoeconomicgrowth The expansion of existing liquidity had increased and that upside risks to facilities and the creation of new facili- inflationhaddiminished;atanunsched-
38 95th Annual Report, 2008 uled meeting in early October, the weeks. Reflecting investor concerns FOMCcutitstargetto11⁄ 2 percentinan about the condition of financial instituunprecedented coordinated policy ac- tions, spreads on credit default swaps tionwithfiveothermajorcentralbanks. for U.S. banks widened sharply, and This action, along with the accompany- thoseforinsurancecompaniesremained ing statement, led investors to mark very elevated. down further the expected path for the Available evidence also suggested federal funds rate. further tightening in consumer and At its October 28-29 meeting, the small business credit conditions; in FOMClowereditstargetforthefederal view of this tightening, the Federal funds rate an additional 50 basis points, Reserve announced on November 25 to 1 percent. The Committee’s state- plans for the Term Asset-Backed Secument noted that economic activity ap- rities Loan Facility (TALF) to support peared to have slowed markedly, a lending to these borrowers. The Federal development due importantly to weak- Reserve also announced on November ening consumer and business spending 25 that, to help reduce the cost and and softening demand from many for- increase the availability of residential eign economies. Moreover, the intensi- mortgage credit, it would initiate a profication of financial market turmoil was gram to purchase up to $100 billion in likely to exert additional restraint on direct obligations of housing-related spending by further tightening credit government-sponsored enterprises and conditions for households and busi- up to $500 billion in mortgage-backed nesses. The Committee noted that, in securities (MBS) backed by Fannie light of the declines in the prices of Mae, Freddie Mac, and Ginnie Mae. energy and other commodities and the The announcement and implementation weaker prospects for economic activity, of the agency purchase program apit expected inflation to moderate in peared to reduce spreads on agency coming quarters to levels consistent debt; conditions for high-quality borwith price stability. With risks to eco- rowers in the primary residential mortnomic activity to the downside, the gage market subsequently recovered Committee indicated that it would somewhat. monitor economic and financial devel- Although some financial markets opments carefully and act as needed to exhibitedsignsofimprovedfunctioning promote sustainable economic growth ahead of the December meeting, finanand price stability. cial conditions generally remained very The decision of the FOMC at its strained. Credit conditions had contin- October meeting was broadly in line ued to tighten for both households and with market expectations and elicited businesses, and ongoing declines in onlyamodestreactioninfinancialmar- equity and house prices further reduced kets. However, subsequent economic household wealth. Against this backdata releases suggested that economic drop, indicators of aggregate economic activity was weaker and inflation lower activity continued to worsen. The Comthan had been earlier anticipated. Those mittee expected economic activity to readings, along with continued strains contract sharply in the fourth quarter of in financial markets that weighed on 2008andinearly2009;itnotedthatthe investor sentiment, contributed to a uncertainty surrounding the outlook sharp downward revision in the ex- was considerable and that the downside pectedpathofpolicyoverthefollowing risktoeventhisdourtrajectoryforeco-
Monetary Policy Report of February 2009 39 nomic activity was a serious concern. financial markets and stimulate the Inflation pressures had diminished economy. In addition, the statement appreciably as energy and other com- indicated that the Committee stood modity prices dropped and economic ready to expand purchases of agency activity slumped. Looking forward, debt and agency MBS and that it was members agreed that inflation pressures evaluating the potential benefits of purappeared set to moderate further in chasinglonger-termTreasurysecurities. coming quarters, and some saw risks The FOMC members emphasized that that inflation could drop below rates their expectation about the path of the they viewed as most consistent over federal funds rate was conditioned on time with the Federal Reserve’s dual their view of the likely path of ecomandateformaximumemploymentand nomic activity. The interest rates on price stability. required reserve balances and excess With the federal funds rate already reserve balances were both set at trading at very low levels as a result of 25 basis points. These monetary policy the large volume of excess reserves decisions apparently were more aggresassociated with the Federal Reserve’s sive than investors had been expecting. liquidity operations, participants agreed Marketparticipantsweresomewhatsurthat the Committee would soon need to prised both by the size of the reduction use other tools to impart additional in the target federal funds rate and by monetary stimulus to the economy. The the statements that policy rates would Federal Reserve had already adopted a likely remain low for some time and series of programs that were providing that the FOMC might engage in addiliquidity support to a range of institu- tionalnontraditionalpolicyactionssuch tions and markets, and a continued asthepurchaseoflonger-termTreasury focus on the quantity and the composi- securities. tion of Federal Reserve assets appeared Incoming data over the following to be necessary and desirable. Partici- weeks indicated a continued sharp pants agreed that maintenance of a low contraction in economic activity. The level of short-term interest rates for housing market remained on a steep some time and reliance on the use of downward trend, consumer spending balance sheet policies and communica- continued its significant decline, the tions about monetary policy could be slowdown in business equipment ineffective and appropriate, in light of the vestment intensified, and foreign desharpdeteriorationintheeconomicout- mand weakened. Conditions in the lookandtheappreciableeasingofinfla- labor market continued to deteriorate tionary pressures. rapidly, and the drop in industrial pro- Accordingly, the Committee an- duction accelerated. Headline consumer nounced a target range for the federal prices fell in November and December, funds rate of 0 to 1⁄ 4 percent and indi- which reflected declines in consumer cated that weak economic conditions energy prices; core consumer prices were likely to warrant exceptionally were about flat in those months. Credit low levels of the federal funds rate for conditions generally remained tight, some time. The statement also noted with financial markets fragile and some that the size of the Federal Reserve’s parts of the banking sector under subbalance sheet would be maintained at a stantial stress. However, modest signs high level through open market opera- of improvement were evident in some tions and other measures to support financial markets—particularly those
40 95th Annual Report, 2008 that were receiving support from Fed- light of evolving financial market deeral Reserve liquidity facilities and velopments. It will also continue to other government actions. assess whether expansions of, or modi- At the meeting in January 2009, par- fications to, lending facilities would ticipants anticipated that a gradual re- serve to further support credit markets covery in U.S. economic activity would andeconomicactivityandhelppreserve begin in the second half of the year in price stability. response to monetary easing, another dose of fiscal stimulus, relatively low energy prices, and continued efforts by Part 4 thegovernmenttostabilizethefinancial Summary of sector and increase the availability of Economic Projections credit. As of late January, however, The following material appeared as an with financial conditions strained and addendumtotheminutesoftheJanuary the near-term economic outlook weak, 27−28, 2009, meeting of the Federal most participants agreed that the Com- Open Market Committee. mittee should continue to focus on supporting the functioning of financial In conjunction with the January 27-28, markets and stimulating the economy 2009 FOMC meeting, the members of through purchases of agency debt and the Board of Governors and the presi- MBS and other measures—including dents of the Federal Reserve Banks, all the implementation of the TALF—that of whom participate in deliberations of will keep the size of the Federal Re- the FOMC, provided projections for serve’s balance sheet at a high level for economic growth, unemployment, and some time. Committee members agreed inflation in 2009, 2010, 2011, and over that keeping the target range for the the longer run. Projections were based federal funds rate at 0 to 1⁄ 4 percent on information available through the would be appropriate. They also agreed conclusion of the meeting, on each to continue using liquidity and asset- participant’s assumptions regarding a purchase programs to support the func- range of factors likely to affect ecotioning of financial markets and to nomic outcomes, and on his or her stimulate the economy. assessment of appropriate monetary In its January statement, the FOMC policy. “Appropriate monetary policy” reemphasized that the Federal Reserve is defined as the future policy that, will use all available tools to promote basedoncurrentinformation,isdeemed the resumption of sustainable economic most likely to foster outcomes for ecogrowth and to preserve price stability. nomic activity and inflation that best TheCommitteealsostatedthat,inaddi- satisfytheparticipant’sinterpretationof tiontothepurchasesofagencydebtand theFederalReserve’sdualobjectivesof MBS already under way, it was pre- maximum employment and price stabilpared to purchase longer-term Treasury ity. Longer-run projections represent securities if evolving circumstances in- eachparticipant’sassessmentoftherate dicated that such transactions would be to which each variable would be exparticularly effective in improving con- pected to converge over time under ditions in private credit markets. The appropriate monetary policy and in the Committee will continue to monitor absence of further shocks. carefully the size and composition of FOMC participants viewed the outthe Federal Reserve’s balance sheet in look for economic activity and inflation
Monetary Policy Report of February 2009 41 as having weakened significantly since judged that their projections for both last October, when their last projections economic activity and inflation were were made. As indicated in Table 1 and subject to a degree of uncertainty exdepicted in Figure 1, participants pro- ceeding historical norms. Nearly all jectedthatrealGDPwouldcontractthis participants viewed the risks to the year, that the unemployment rate would growth outlook as skewed to the downincrease substantially, and that con- side, and all participants saw the risks sumer price inflation would be signifi- to the inflation outlook as either balcantlylowerthaninrecentyears.Given anced or tilted to the downside. the strength of the forces currently weighing on the economy, participants The Outlook generally expected that the recovery would be unusually gradual and pro- Participants’ projections for the change longed: All participants anticipated that in real GDP in 2009 had a central tenunemployment would remain substan- dency of –1.3 to –0.5 percent, comtially above its longer-run sustainable pared with the central tendency of –0.2 rateattheendof2011,evenabsentfur- to 1.1 percent for their projections last ther economic shocks; a few indicated October. In explaining these downward that more than five to six years would revisions, participants referred to the be needed for the economy to converge further intensification of the financial to a longer-run path characterized by crisisanditseffectoncreditandwealth, sustainable rates of output growth and the waning of consumer and business unemployment and by an appropriate confidence, the marked deceleration in rate of inflation. Participants generally global economic activity, and the weak- Table1. EconomicProjectionsofFederalReserveGovernorsandReserveBankPresidents, January2009 Percent Centraltendency1 Range2 Variable Longer Longer 2009 2010 2011 2009 2010 2011 Run Run ChangeinrealGDP... –1.3to–0.5 2.5to3.3 3.8to5.0 2.5to2.7 –2.5to0.2 1.5to4.5 2.3to5.5 2.4to3.0 Octoberprojection .. –0.2to1.1 2.3to3.2 2.8to3.6 n.a. –1.0to1.8 1.5to4.5 2.0to5.0 n.a. Unemploymentrate ... 8.5to8.8 8.0to8.3 6.7to7.5 4.8to5.0 8.0to9.2 7.0to9.2 5.5to8.0 4.5to5.5 Octoberprojection .. 7.1to7.6 6.5to7.3 5.5to6.6 n.a. 6.6to8.0 5.5to8.0 4.9to7.3 n.a. PCEinflation......... 0.3to1.0 1.0to1.5 0.9to1.7 1.7to2.0 –0.5to1.5 0.7to1.8 0.2to2.1 1.5to2.0 Octoberprojection .. 1.3to2.0 1.4to1.8 1.4to1.7 n.a. 1.0to2.2 1.1to1.9 0.8to1.8 n.a. CorePCEinflation3... 0.9to1.1 0.8to1.5 0.7to1.5 0.6to1.5 0.4to1.7 0.0to1.8 Octoberprojection .. 1.5to2.0 1.3to1.8 1.3to1.7 1.3to2.1 1.1to1.9 0.8to1.8 Note: Projections of change in real gross domestic assessmentoftheratetowhicheachvariablewouldbe product(GDP)andofinflationarefromthefourthquar- expectedtoconvergeunderappropriatemonetarypolicy terofthepreviousyeartothefourthquarteroftheyear andintheabsenceoffurthershockstotheeconomy.The indicated.PCEinflationandcorePCEinflationarethe Octoberprojectionsweremadeinconjunctionwiththe percentage rates of change in, respectively, the price FOMCmeetingonOctober28−29,2008. indexforpersonalconsumptionexpenditures(PCE)and 1. Thecentraltendencyexcludesthethreehighestand thepriceindexforPCEexcludingfoodandenergy.Pro- threelowestprojectionsforeachvariableineachyear. jectionsfortheunemploymentratearefortheaverage 2. Therangeforavariableinagivenyearincludesall civilianunemploymentrateinthefourthquarterofthe participants’projections,fromlowesttohighest,forthat yearindicated.Eachparticipant’sprojectionsarebased variableinthatyear. onhisorherassessmentofappropriatemonetarypolicy. 3. Longer-runprojectionsforcorePCEinflationare Longer-run projections represent each participant’s notcollected.
42 95th Annual Report, 2008 ness of incoming data on spending and during the first half of this year; they employment. Participants anticipated a noted that consumer spending would broad-based decline in aggregate output likelybedampedbythedeteriorationin
Monetary Policy Report of February 2009 43 labor markets, the tightness of credit JanuaryFOMCmeeting.Nearlyallparconditions, the continuing decline in ticipants’ projections were more than a house prices, and the recent sharp percentagepointhigherthantheirprevireduction in stock market wealth, and ousforecastsmadelastOctober,reflectthey saw reductions in consumer de- ing the sharp rise in actual unemploymand contributing to further weakness ment that occurred during the final in business investment. However, par- months of 2008 as well as participants’ ticipants expected that the economy weaker outlook for economic activity would begin to recover—albeit grad- this year. Most participants anticipated ually—during the second half of the that output growth in 2010 would not year,mainlyreflectingtheeffectsoffis- be substantially above its longer-run cal stimulus and of Federal Reserve trendrateandhencethatunemployment measures providing support to credit would decline only modestly next year. markets. Witheconomicactivityandjobcreation Looking further ahead, participants’ generally projected to accelerate in growth projections had a central ten- 2011, participants anticipated that jobdencyof2.5to3.3percentfor2010and lessness would decline more apprecia- 3.8 to 5.0 percent for 2011. Participants blythatyear,asisevidentfromthecengenerally expected that strains in finan- tral tendency of 6.7 to 7.5 percent for cialmarketswouldebbonlyslowlyand their unemployment rate projections. hence that the pace of recovery in 2010 Participants expected that the unemwould be damped. Nonetheless, partici- ployment rate would decline further pants generally anticipated that real after2011,andmostsawitsettlinginat GDP growth would gain further mo- a rate of 4.8 to 5.0 percent over time. mentum in 2011, reaching a pace that The central tendency of participants’ would temporarily exceed their esti- projections for total PCE inflation this mates of the longer-run sustainable rate yearwas0.3to1.0percent,aboutaperof economic growth and would thereby centagepointlowerthanthecentraltenhelp reduce the slack in resource utili- dency of their projections last October. zation. Most participants expected that, Many participants noted that recent absent further shocks, economic growth readings on inflation had been surpriswould eventually converge to a rate of inglylow,andsomeanticipatedthatthe 2.5 to 2.7 percent, reflecting longer- unexpected declines in the prices of term trends in the growth of productiv- energy and other commodities that had ity and the labor force. occurred in the latter part of 2008 Participants anticipated that labor would continue to hold down inflation market conditions would deteriorate at the consumer level in 2009. Particisubstantially further over the course of pants also marked down their projecthisyear,andnearlyallexpectedthatun- tions for core PCE inflation this year in employment would still be well above light of their views about the indirect itslonger-runsustainablerateattheend effects of lower energy prices and the of 2011. Participants’ projections for influence of increased resource slack. the average unemployment rate during Looking beyond this year, particithe fourth quarter of 2009 had a central pants’ projections for total PCE inflatendency of 8.5 to 8.8 percent, mark- tion had a central tendency of 1.0 to edly higher than last December’s actual 1.5 percent for 2010, 0.9 to 1.7 percent unemployment rate of 7.2 percent the for2011,and1.7to2.0percentoverthe latest available figure at the time of the longerrun.Participants’longer-runpro-
44 95th Annual Report, 2008 jectionsfortotalPCEinflationreflected Table2. AverageHistoricalProjection theirindividualassessmentsofthemea- ErrorRanges sured rates of inflation consistent with Percentagepoints the Federal Reserve’s dual mandate for Variable 2009 2010 2011 promoting price stability and maximum employment. Most participants judged ChangeinrealGDP1 ...... ±1.2 ±1.4 ±1.4 Unemploymentrate1 ....... ±0.5 ±0.8 ±1.0 that a longer-run PCE inflation rate of Totalconsumerprices2..... ±0.9 ±1.0 ±0.9 2 percent would be consistent with the Note: Error ranges shown are measured as plus or dual mandate; others indicated that 11⁄ 2 minus the root mean squared error of projections that or13⁄ 4 percentinflationwouldbeappro- werereleasedinthewinterfrom1987through2007for thecurrentandfollowingtwoyearsbyvariousprivate priate. Modestly positive longer-run and government forecasters. As described in the box inflation would allow the Committee to “ForecastUncertainty,”undercertainassumptions,there stimulate economic activity and support isabouta70percentprobabilitythatactualoutcomesfor realGDP,unemployment,andconsumerpriceswillbein employmentbysettingthefederalfunds rangesimpliedbytheaveragesizeofprojectionerrors ratetemporarilybelowtheinflationrate madeinthepast.FurtherinformationisinDavidReifwhen the economy is buffeted by a schneiderandPeterTulip(2007),“GaugingtheUncertaintyoftheEconomicOutlookfromHistoricalForecastlarge negative shock to demands for ing Errors,” Finance and Economics Discussion Series goods and services. Participants gener- 2007-60 (Board of Governors of the Federal Reserve System,November). ally expected that core and overall 1. Fordefinitions,refertogeneralnoteintable1. inflationwouldconvergeovertime,and 2. Measure is the overall consumer price index, the that persistent economic slack would pricemeasurethathasbeenmostwidelyusedingovernmentandprivateeconomicforecasts.Projectionispercontinuetoweighoninflationoutcomes cent change, fourth quarter of the previous year to the for the next few years and hence that fourth quarter of the year indicated. The slightly nartotal PCE inflation in 2011 would still rower estimated width of the confidence interval for inflationinthethirdyearcomparedwiththatforthesecbe below their assessments of the ond year is likely the result of using a limited sample appropriate inflation rate for the longer periodforcomputingthesestatistics. run. gree of uncertainty about the future Risks to the Outlook course of the financial crisis and its impact on the real economy; for exam- Participants continued to view uncer- ple, rising unemployment and weaker tainty about the outlook for economic growth could exacerbate delinquencies activity as higher than normal.13 The on household and business loans, leadrisks to their projections for real GDP ing to higher losses for financial firms growth were judged as being skewed to and so to a further tightening of credit thedownsideandtheassociatedrisksto conditionsthatwouldinturnputfurther their projections for the unemployment downward pressure on spending to a rate were tilted to the upside. Partici- greater degree than currently foreseen. pants highlighted the considerable de- Inaddition,someparticipantsnotedthat a substantial degree of uncertainty was associated with gauging the stimulative 13. Table 2 provides estimates of forecast effects of nontraditional monetary poluncertaintyforthechangeinrealGDP,theunemploymentrate,andtotalconsumerpriceinflation icy tools that are now being employed overtheperiodfrom1987to2007.Attheendof given that conventional policy easing thissummary,thebox“ForecastUncertainty”dis- waslimitedbythezerolowerboundon cusses the sources and interpretation of uncernominal interest rates. Others referred tainty in economic forecasts and explains the touncertaintiesregardingthesize,comapproachusedtoassesstheuncertaintyandrisks attendingparticipants’projections. position, and effectiveness of the fiscal
Monetary Policy Report of February 2009 45 stimulus package—which was still of recovery in financial markets, and under consideration at the time of the the evolution of households’ desired FOMC meeting—and of further mea- saving rates. The dispersion in particisures to stabilize the banking system. pants’ longer-run projections reflected As in October, most participants con- differences in their estimates regarding tinuedtoviewtheuncertaintysurround- the sustainable rates of output growth ing their inflation projections as higher and unemployment to which the econthan historical norms. A slight majority omy would converge under appropriate of participants judged the risks to the policyandintheabsenceofanyfurther inflation outlook as roughly balanced, shocks. while the rest viewed these risks as Figures 2.C and 2.D provide correskewedtothedownside.Participantsin- sponding information regarding the dicated that elevated uncertainty about diversity of participants’ views regardglobal growth was clouding the outlook ingtheinflationoutlook.Thedispersion for prices of energy and other comin participants’ projections for total modities and hence contributing to PCE inflation in 2009 was substantially greater uncertainty in their inflation greater than for their projections made projections. Many participants stated last October, due to increased diversity that their assessments regarding the of participants’ views regarding the levelofuncertaintyandbalanceofrisks near-term evolution of prices of energy to the inflation outlook were closely and raw materials and the extent to linked to their judgments about the which changes in those prices would be uncertainty and risks to the outlook for likely to pass through into overall inflaeconomic activity. Some participants tion. The dispersion in participants’ notedtheriskthatinflationexpectations projections for core PCE inflation in might become unanchored and drift 2009 was noticeably lower than last downward in response to persistently October, but the dispersion in their prolow inflation outcomes, while others jections for core inflation in 2010 and pointed to the possibility of an upward 2011 was markedly wider, reflecting shift if investors became concerned that varying assessments about the timing stimulative policy measures might not andpaceofeconomicrecovery,thesenbe unwound in a timely fashion once sitivity of inflation to slack in resource the economy begins to recover. utilization, the prevalence of downward nominal wage rigidity, and the likeli- Diversity of Views hood that inflation expectations will Figures 2.A and 2.B provide further remain firmly anchored. A few particidetails on the diversity of participants’ pants anticipated that inflation in 2011 views regarding likely outcomes for would be close to their longer-run proreal GDP growth and the unemploy- jections. However, most participants’ ment rate, respectively. For 2009 to projections for total PCE inflation in 2011, the dispersion in participants’ 2011 were below their longer-run proprojections for each variable was jections, primarily reflecting the anticiroughly the same as for their projec- pated effects of substantial slack over tions last October. This dispersion the next three years; this inflation gap mainlyindicatedthediversityofpartici- was about 1⁄ 4 to 1⁄ 2 percentage point for pants’ assessments regarding the stimu- some participants but exceeded a full lative effects of fiscal policy, the pace percentage point for others.
46 95th Annual Report, 2008
Monetary Policy Report of February 2009 47
48 95th Annual Report, 2008
Monetary Policy Report of February 2009 49
50 95th Annual Report, 2008 Forecast Uncertainty The economic projections provided by the in the past and the risks around the promembers of the Board of Governors and jections are broadly balanced, the numthe presidents of the Federal Reserve bers reported in table 2 would imply a Banksinformdiscussionsofmonetarypol- probability of about 70 percent that icy among policymakers and can aid pub- actual GDP would expand between lic understanding of the basis for policy 1.8 percent to 4.2 percent in the current actions. Considerable uncertainty attends yearand1.6percentto4.4percentinthe these projections, however. The economic second and third years. The correspondand statistical models and relationships ing 70 percent confidence intervals for used to help produce economic forecasts overall inflation would be 1.1 percent to are necessarily imperfect descriptions of 2.9percentinthecurrentyear,1.0percent the real world. And the future path of the to 3.0 percent in the second year, and economy can be affected by myriad 1.1percentto2.9percentinthethirdyear. unforeseen developments and events. Because current conditions may differ Thus, in setting the stance of monetary from those that prevailed on average policy,participantsconsidernotonlywhat over history, participants provide judgappears to be the most likely economic ments as to whether the uncertainty outcome as embodied in their projections, attachedtotheirprojectionsofeachvaribut also the range of alternative possibili- able is greater than, smaller than, or ties, the likelihood of their occurring, and broadly similar to typical levels of forethe potential costs to the economy should cast uncertainty in the past as shown in theyoccur. table 2. Participants also provide judg- Table2summarizestheaveragehistori- ments as to whether the risks to their cal accuracy of a range of forecasts, projections are weighted to the upside, including those reported in past Monetary downside, or are broadly balanced. That PolicyReportsandthosepreparedbyFed- is, participants judge whether each varieral Reserve Board staff in advance of ableismorelikelytobeaboveorbelow meetings of the Federal Open Market their projections of the most likely out- Committee. The projection error ranges come. These judgments about the uncershown in the table illustrate the consider- tainty and the risks attending each parable uncertainty associated with economic ticipant’s projections are distinct from forecasts. For example, suppose a partici- thediversityofparticipants’viewsabout pant projects that real GDP and total con- the most likely outcomes. Forecast unsumer prices will rise steadily at annual certainty is concerned with the risks ratesof,respectively,3percentand2per- associated with a particular projection, cent. If the uncertainty attending those rather than with divergences across a projections is similar to that experienced numberofdifferentprojections.
Monetary Policy Report of February 2009 51 Appendix greater assurance about the cost and Federal Reserve Initiatives availability of funding. First, the Fedto Address Financial Strains eral Reserve Board approved a 50 basis point reduction in the primary credit Since the onset of the financial turmoil rate to narrow the spread between the in the summer of 2007, the Federal primary credit rate and the Federal Reserve has announced several new Open Market Committee’s target fedmeasurestoaddressthestrainsinfinaneral funds rate to 50 basis points. Seccial markets, as well as enhancements ond, the Federal Reserve Board anto its existing liquidity facilities. (For nounced a change to the Reserve outstanding balances related to these Banks’ usual practices to allow the profacilities, see table.) vision of term financing for as long as 30 days, renewable by the borrower. Provision of Liquidity To bolster market liquidity further in to Banks and Dealers the face of increasing financial strains, onMarch16,2008,theFederalReserve Modifications to the Board unanimously approved a request Primary Credit Program by the Federal Reserve Banks to de- Followingtheonsetofthefinancialtur- crease the spread of the primary credit moil, the Federal Reserve Board an- rate over the FOMC’s target federal nounced temporary changes to its pri- funds rate to 1⁄ 4 percentage point. The marycreditdiscountwindowfacilityon Board also approved an increase in the August 17, 2007. These changes were maximum maturity of primary credit designed to provide depositories with loans to 90 days from 30 days. FederalReserveProvisionofLiquidityandCredit,2007−09 Millionsofdollars Dec.31, June30, Feb.18, Asset 2007 2008 2009 Provisionofliquiditytobanksanddealers Primarycreditprogram ............................................ 8,620 24,095 65,144 TermAuctionFacility.............................................. 40,000 150,000 447,563 Liquidityswapswithforeigncentralbanks.......................... 21,000 62,000 375,005 SecuritieslentundertheTermSecuritiesLendingFacility ........... n.a. 104,097 115,280 PrimaryDealerCreditFacilityandotherbroker-dealercredit......... n.a. 1,455 25,268 Provisionofliquiditytoothermarketparticipants Asset-BackedCommercialPaperMoneyMarketMutual FundingFacility................................................. n.a. n.a. 12,722 NetportfolioholdingsofCommericalPaperFundingFacility ........ n.a. n.a. 248,671 NetportfolioholdingsofLLCsfundedthroughtheMoneyMarket InvestorFundingFacility ........................................ n.a. n.a. 0 Supportofcriticalinstitutions NetportfolioholdingsofMaidenLaneI,II,andIIILLCs1 .......... n.a. 29,970 72,231 CreditextendedtoAmericanInternationalGroup,Inc................ n.a. n.a. 37,357 Note:LLCisalimitedliabilitycompany. vestmentportfolioofsubsidiariesofAmericanInterna- 1. TheFederalReservehasextendedcredittoseveral tional Group, Inc. (AIG). Maiden Lane III LLC was LLCsinconjunctionwitheffortstosupportcriticalinsti- formedtopurchasemultisectorcollateralizeddebtoblitutions.MaidenLaneLLCwasformedtoacquirecertain gationsonwhichtheFinancialProductsgroupofAIG assetsofTheBearStearnsCompanies,Inc.MaidenLane haswrittencreditdefaultswapcontracts. II LLC was formed to purchase residential mortgage- n.a. Notavailable. backed securities from the U.S. securities lending rein- Source: FederalReserveBoard.
52 95th Annual Report, 2008 The Term Auction Facility Liquidity Swap Lines with Foreign Central Banks To address elevated pressures in shortterm funding markets, in December To address the increasing demand for 2007 the Board of Governors of the dollar funding in foreign jurisdictions, Federal Reserve System approved the in December 2007, the Federal Open establishment of a Term Auction Facil- Market Committee (FOMC) authorized ity(TAF).Underthisprogram,theFed- temporary reciprocal currency arrangeeral Reserve auctions term funds to ments (swap lines) with the European depository institutions against the wide Central Bank (ECB) and the Swiss variety of collateral that can be used to National Bank (SNB). These arrangesecure loans at the discount window. ments initially provided dollars in By increasing the access of depository amountsofupto$20billionand$4bilinstitutions to funding, the TAF has lion to the ECB and the SNB, respectively, for use in their jurisdictions. The supportedtheabilityofsuchinstitutions FOMC approved these liquidity swap to meet the credit needs of their cuslines for a period of up to six months tomers. and later extended this term to October Each depository institution that is 30, 2009. judged to be in generally sound finan- As demand for dollar funding rose cial condition by its Reserve Bank (and further over the course of 2008, the likely to remain so over the term of the FOMC authorized the expansion of its loan) can participate in TAF auctions. existing swap lines with the ECB and All advances must be fully collateral- SNB. In the fall, the formal quantity ized. Each TAF auction is for a fixed limitsontheselines,aswellasonswap amount of funds, with the rate deterlines that were set up with the Bank of minedbytheauctionprocess(subjectto Japan and the Bank of England, were a minimum bid rate). A depository eliminated. The FOMC also authorized institution submits bids through its Renew liquidity swap lines with 10 other serve Bank. The minimum bid rate for central banks: the Reserve Bank of the auctions was initially established at Australia, the Banco Central do Brasil, the overnight index swap (OIS) rate the Bank of Canada, the Danmarks corresponding to the maturity of the Nationalbank, the Bank of Korea, the creditbeingauctioned.InJanuary2009, Bank of Mexico, the Reserve Bank of the minimum bid rate was changed to New Zealand, the Norges Bank, the the interest rate paid by the Federal Monetary Authority of Singapore, and Reserve on excess reserve balances. the Sveriges Riksbank. Initially, TAF auctions were in amounts of $20 billion and provided The Term Securities Lending Facility primarily 28-day term funds. Over the course of 2008, the Federal Reserve On March 11, 2008, to address increasextended the term of some auctions to ing liquidity pressures in funding mar- 84 days and raised the regular amounts kets,theFederalReserveannouncedthe of both the 28- and 84-day TAF auc- establishment of a Term Securities tions to $150 billion. The Federal Lending Facility (TSLF). Under the Reserve also conducted two forward TSLF, the Federal Reserve lends up to TAF auctions in November for $200 billion of Treasury securities to $150billioneach,whichprovidedfund- primary dealers for a term of 28 days ing over year-end. (rather than overnight, as in the regular
Monetary Policy Report of February 2009 53 securities lending program); the lending Provision of Liquidity is secured by a pledge of other securi- to Other Market Participants ties. Initially, the eligible collateral included other Treasury securities, fed- The Asset-Backed Commercial Paper eral agency debt, federal agency resi- Money Market Mutual Fund dential mortgage-backed securities Liquidity Facility (MBS), and non-agency AAA/Aaa- On September 19, 2008, the Federal rated private-label residential MBS. In Reserve announced the creation of September, this list was broadened to the Asset-Backed Commercial Paper include all investment-grade debt se- Money Market Mutual Fund Liquidity curities. The TSLF is intended to Facility (AMLF). Under this program, strengthen the financing position of prithe Federal Reserve extends nonremary dealers and foster improved concourse loans at the primary credit rate ditionsinfinancialmarketsmoregenerto U.S. depository institutions and bank ally. Securities are made available holding companies to finance their purthroughweeklyauctions.Thisfacilityis chases of high-quality asset-backed currently scheduled to expire on Octocommercial paper (ABCP) from money ber 30, 2009. market mutual funds. This initiative is intendedtoassistmoneyfundsthathold The Primary Dealer such paper in meeting demands for Credit Facility redemptions by investors and to foster liquidity in the ABCP markets and Tobolstermarketliquidityandpromote broader money markets. Although the orderly market functioning, on March AMLF was initially authorized through 16, 2008, the Federal Reserve Board January 2009, the Board subsequently voted unanimously to authorize the extended its operation through October Federal Reserve Bank of New York to 30, 2009. create a lending facility—the Primary Dealer Credit Facility—to improve the ability of primary dealers to provide The Commercial Paper financing to participants in securitiza- Funding Facility tion markets. This facility became available for business on Monday, On October 7, the Federal Reserve March 17, and was originally instituted authorized the creation of the Commerfor a term of six months; this term was cial Paper Funding Facility (CPFF) to subsequently extended, and the facility provide a liquidity backstop to U.S. iscurrentlysettoexpireonOctober30, issuers of commercial paper. The CPFF 2009.Collateralpledgedtosecureloans is intended to improve liquidity in under this facility was initially limited short-term funding markets and thereby to investment-grade debt securities; increase the availability of credit for subsequently, eligible collateral was businesses and households. The CPFF expanded to include all collateral eli- iscurrentlyauthorizedtopurchasecomgible for pledge in triparty funding mercial paper through October 30, arrangements through the major clear- 2009. ing banks. The interest rate charged on Under the CPFF, Federal Reserve such credit is the same as the primary credit is provided to a special purpose credit rate at the Federal Reserve Bank vehicle (SPV) that, in turn, purchases of New York. commercial paper of eligible issuers.
54 95th Annual Report, 2008 TheFederalReserveBankofNewYork includeU.S.dollar-denominatedcertifihas committed to lend to the SPV on a cates of deposit and commercial paper recourse basis, with such loans secured issued by highly rated financial instituby all the assets of the SPV. The SPV tions and having remaining maturities purchases from eligible issuers three- of 90 days or less. Eligible investors month U.S. dollar-denominated com- currently include U.S. money market mercial paper through the Federal mutual funds and other similar entities. Reserve Bank of New York’s primary By backstopping the sales of money dealers. Eligible issuers are U.S. issuers market instruments in the secondary of commercial paper, including U.S. market,theMMIFFshouldimprovethe issuers with a foreign parent company. liquidity of money market investors, The SPV purchases only U.S. dollar- thus increasing their ability to meet denominated commercial paper (includ- redemption requests and their willinging ABCP) that is rated at least A-1/ ness to invest in money market instru- P-1/F1. ments. Improved money market condi- The maximum amount of a single tions enhance the ability of banks and issuer’s commercial paper that the SPV other financial intermediaries to acmay own at any time is the greatest commodate the credit needs of busiamount of U.S. dollar-denominated nesses and households. commercial paper the issuer had out- The SPVs will purchase eligible standing on any day between January 1 moneymarketinstrumentsfromeligible and August 31, 2008. The SPV will not investors using financing from the purchase additional commercial paper MMIFF and from the issuance of from an issuer whose total commercial ABCP.TheSPVswillissuetotheseller paper outstanding to all investors of each eligible asset ABCP equal to (including the SPV) equals or exceeds 10percentoftheasset’spurchaseprice, the issuer’s limit. Pricing is based on with the remaining 90 percent of the the three-month OIS rate plus fixed transaction funded in cash. The Federal spreads.Atthetimeofitsregistrationto Reserve Bank of New York will comuse the CPFF, each issuer must pay a mit to lend to each SPV 90 percent of facility fee equal to 0.1 percent of the the purchase price of each eligible maximum amount of its commercial asset. These loans will be on an overpaper the SPV may own. night basis and at the primary credit rate. The loans will be senior to the The Money Market Investor ABCP, with recourse to the SPV, and Funding Facility secured by all the assets of the SPV. At thetimeofanSPV’spurchaseofadebt On October 21, 2008, the Federal instrument issued by a financial institu- Reserve announced the creation of the tion, the debt instruments of that finan- Money Market Investor Funding Facil- cial institution may not constitute more ity (MMIFF). Under the MMIFF, the than 15 percent of the assets of the Federal Reserve Bank of New York SPV, except during an initial ramp-up willprovideseniorsecuredfundingtoa period when the concentration limit series of SPVs to facilitate an industry- may be 20 percent. The SPVs financed supported private-sector initiative to by the MMIFF are scheduled to enter a finance the purchase of eligible assets wind-down process on October 30, from eligible investors. Eligible assets 2009.
Monetary Policy Report of February 2009 55 The Term Asset-Backed Securities would be supported by the provision by Loan Facility the Treasury of additional funds from the Troubled Asset Relief Program On November 25, 2008, the Federal (TARP). Reserve Board announced plans for the All U.S. persons who own eligible Term Asset-Backed Securities Loan collateral may participate in the TALF, Facility(TALF),afacilitythatwillhelp and each borrower must use a primary market participants meet the credit dealer to access the TALF. The Federal needs of households and small busi- Reserve Bank of New York will offer a nesses by supporting the issuance of fixed amount of loans under the TALF asset-backed securities (ABS) collater- on a monthly basis. Via a competitive, alized by student loans, auto loans, sealed-bid auction process, the Federal credit card loans, and loans guaranteed Reserve Bank of New York will award by the Small Business Administration. loans in amounts equal to the market TheTALFisdesignedtoincreasecredit value of the ABS less a haircut. The availabilityandsupporteconomicactiv- loans will be nonrecourse, will be ity by facilitating renewed issuance of secured at all times by the ABS, and consumer and small business ABS at will have a three-year term, with intermore normal interest rate spreads. est payable monthly. The Treasury, Under the current design of the under the TARP, will provide credit TALF, the Federal Reserve Bank of protection to the Federal Reserve Bank New York will lend up to $200 billion of New York in connection with the on a nonrecourse basis to holders of TALF. The facility will cease making certainAAA-ratedABSbackedbycon- new loans on December 31, 2009, sumer and small business loans. Eli- unless the Board agrees to extend the gible securities must have been issued facility. on or after January 1, 2009, and all or substantially all of the credit exposures Direct Purchases of Assets underlying eligible ABS must be newly or recently originated exposures to On September 19, 2008, the Federal U.S.-domiciled obligors. Originators of Reserve announced that, to support the credit exposures underlying eligible market functioning, the Open Market ABS must have agreed to comply with, Trading Desk would begin purchasing or already be subject to, the executive federal agency discount notes in the compensation requirements of the secondary market for the System Open Emergency Economic Stabilization Act Market Account. These instruments are of 2008. short-term debt obligations issued by On February 10, 2009, the Federal Fannie Mae, Freddie Mac, and the Fed- Reserve Board announced that it is pre- eral Home Loan Banks. Similar to pared to undertake a substantial expan- secondary-market purchases of Treasion of the TALF. The expansion could sury securities, purchases of Fannie increase the size of the TALF to as Mae, Freddie Mac, and Federal Home much as $1 trillion and could broaden Loan Bank debt are conducted with the the eligible collateral to encompass Federal Reserve’s primary dealers other types of newly issued AAA-rated through a series of competitive aucasset-backed securities, such as com- tions. mercial MBS and private-label residen- To help reduce the cost and increase tial MBS. An expansion of the TALF the availability of residential mortgage
56 95th Annual Report, 2008 credit, the Federal Reserve announced assets on the market, a much broader on November 25 a program to purchase financial crisis likely would have enup to $100 billion in direct obligations sued. Thus, the Federal Reserve judged of housing-related government-spon- that a disorderly failure of Bear Stearns sored enterprises (GSEs) and up to would have threatened overall financial $500 billion in MBS backed by Fannie stability and would most likely have Mae, Freddie Mac, the Federal Home had significant adverse implications for Loan Banks, and Ginnie Mae. Pur- the U.S. economy. chasesofagencydebtobligationsbegan After discussions with the Securities in December, and purchases of MBS andExchangeCommissionandinclose began in January. consultation with the Treasury, the Fed- The program to purchase GSE direct eral Reserve determined that it should obligations has initially focused on invoke emergency authorities to profixed-rate, noncallable, senior bench- vide special financing to facilitate the mark securities issued by Fannie Mae, acquisition of Bear Stearns by JPMor- Freddie Mac, and the Federal Home gan Chase & Co. JPMorgan Chase LoanBanks.Overthecourseofthepro- agreed to purchase Bear Stearns and gram, the Federal Reserve may change assume the company’s financial obthescopeofpurchasablesecurities.Pur- ligations. The Federal Reserve agreed chaseswillbemadethroughamultiple- to supply term funding, secured by price competitive auction process. Pri- $30 billion in Bear Stearns assets, to mary dealers are eligible to transact facilitate the purchase. A limited liabildirectly with the Federal Reserve and ity company, Maiden Lane LLC, was are encouraged to submit offers for formed to facilitate the arrangements themselves and their customers. associated with the purchase by acquiring certain assets of Bear Stearns and managing those assets through time to Support of Critical Institutions maximize repayment of the credit ex- Bear Stearns tended and to minimize disruption to financial markets. JPMorgan Chase In mid-March of 2008, The Bear completed the acquisition of Bear Stearns Companies, Inc., a major in- StearnsonJune26,andtheFederalRevestment bank and primary dealer, was serve extended approximately $29 bilpushed to the brink of failure after los- lion of funding to Maiden Lane on that ing the confidence of investors and date. finding itself without access to shortterm financing markets. A bankruptcy American International Group filing would have forced the secured creditors and counterparties of Bear In early September, the condition of Stearns to liquidate underlying collat- American International Group, Inc. eral, and given the illiquidity of mar- (AIG), a large, complex financial instikets, those creditors and counterparties tution, deteriorated rapidly. In view of might well have sustained substantial the likely systemic implications and the losses. If they had responded to losses potential for significant adverse effects or the unexpected illiquidity of their on the economy of a disorderly failure holdings by pulling back from provid- of AIG, on September 16, the Federal ingsecuredfinancingtootherfirmsand Reserve Board, with the support of the by dumping large volumes of illiquid Treasury, authorized the Federal Re-
Monetary Policy Report of February 2009 57 serve Bank of New York to lend up to collateralized debt obligations on which $85 billion to the firm to assist it in AIG has written credit default swap meeting its obligations and to facilitate contracts. the orderly sale of some of its businesses. This facility had a 24-month Citigroup term, with interest accruing on the out- Market anxiety about the condition of standing balance at a rate of 3-month Citigroup intensified in November Libor plus 850 basis points, and was 2008, especially in the wake of the collateralized by all of the assets of firm’s announcement that it would lay AIG and its primary nonregulated suboff 52,000 workers and absorb $17 bilsidiaries. On October 8, the Federal lion in distressed assets from structured Reserve announced an additional proinvestment vehicles that it sponsored, gram under which it would lend up to and concerns about the firm’s access to $37.8 billion to finance investmentfunding mounted. To support financial grade, fixed-income securities held by market stability, the U.S. government AIG. These securities had previously on November 23 entered into an agreebeen lent by AIG’s insurance company ment with Citigroup to provide a packsubsidiaries to third parties. age of capital, guarantees, and liquidity In November, the Treasury anaccess. As part of the agreement, the nounced that it would purchase $40 bil- Treasury and Federal Deposit Insurance lion of newly issued AIG preferred Corporation (FDIC) are providing capishares under the TARP, which allowed tal protection against outsized losses on the Federal Reserve to reduce from a pool of about $306 billion in residen- $85 billion to $60 billion the total tial and commercial real estate and amount available under the credit facilother assets, Citigroup has issued preity. Further, the interest rate on that ferredsharestotheTreasuryandFDIC, facility was reduced to Libor plus andtheTreasuryhaspurchasedanaddi- 300 basis points, the fee on undrawn tional $20 billion in Citigroup preferred funds was reduced to 75 basis points, stock using TARP funds. In addition and the term of the facility was lengthand if necessary, the Federal Reserve ened from two years to five years. The standsreadytobackstopresidualriskin Federal Reserve also announced plans theassetpoolbyprovidingnonrecourse to restructure its lending related to AIG credit. by extending credit to two newly formed limited liability companies. The Bank of America first, Maiden Lane II LLC, received a $22.5 billion loan from the Federal Despite the improvement in bank fund- Reserve and a $1 billion subordinated ing markets after year-end, Bank of loan from AIG and purchased residen- America also came under intense prestial mortgage-backed securities from sure. In mid-January 2009, the firm AIG. As a result of these actions, the reported a $1.8 billion net loss for the securitieslendingfacilityestablishedon fourth quarter, and it was further October 8 was subsequently repaid and strainedbyitsmergeronJanuary2with terminated. The second new company, Merrill Lynch, which reported a fourth- Maiden Lane III LLC, received a quarter loss of $23 billion on a pretax $30 billion loan from the Federal Re- basis and $16 billion on an after-tax serveanda$5billionsubordinatedloan basis. On January 16, Bank of America from AIG and purchased multisector entered into an agreement with the
58 95th Annual Report, 2008 Treasury, the FDIC, and the Federal CRE commercial real estate Reserve similar to that arranged with FOMC Federal Open Market Citigroup in November. Under the ar- Committee; also, rangement, the Treasury and the FDIC the Committee provide protection against the possibility of unusually large losses on a pool GSE government-sponsored of approximately $118 billion of finan- enterprise cialinstruments.Inaddition,andifnec- Libor London interbank offered rate essary,theFederalReservewillprovide MBS mortgage-backed securities nonrecourse credit to Bank of America against this pool of financial instru- MMIFF Money Market Investor Funding Facility ments. As a fee for this arrangement, Bank of America issued preferred OIS overnight index swap shares to the Treasury and the FDIC. PDCF Primary Dealer Credit Facility SFP Supplementary Financing Abbreviations Program ABS asset-backed securities TAF Term Auction Facility AMLF Asset-Backed Commercial TALF Term Asset-Backed Securities Paper Money Market Mutual Loan Facility Fund Liquidity Facility TARP Troubled Asset Relief C&I commercial and industrial Program CMBS commercial mortgage-backed TLGP Temporary Liquidity securities Guarantee Program CPFF Commercial Paper Funding TSLF Term Securities Lending Facility Facility Á
59 Monetary Policy Report of July 2008 Part 1 the stance of monetary policy. After Overview: Monetary Policy cutting the target federal funds rate and the Economic Outlook 100 basis points in the second half of 2007, the FOMC reduced rates another TheU.S.economyremainedsluggishin 225 basis points over the first four the first half of 2008, and steep inmonths of 2008. The further easing of creases in commodity prices boosted policy was seen as consistent with fosconsumer price inflation. The housing tering price stability over time, given market continued to contract, weighing the Committee’s expectation that a flaton overall economic activity. Against a tening-out of energy prices and increasbackdrop of mounting losses incurred ing economic slack would damp inflabymajorfinancialinstitutions,financial tionary pressures. market conditions deteriorated sharply The most recent economic projecfurther toward the end of the first tions of participants in FOMC meetings quarter—a development that threatened (Board members and Reserve Bank toseverelyimpairthefunctioningofthe presidents) are presented in part 4 of overall financial system and to hinder this report. According to these projececonomic growth. In response, the Fedtions, the economy is expected to exeralReserveundertookanumberofsigpand slowly over the rest of this year. nificant actions to address liquidity FOMC participants anticipate a gradual pressures faced by banks and other strengthening of economic growth over financial institutions, thereby augmentcoming quarters as the lagged effects of ing the liquidity-enhancing measures past monetary policy actions, amid implemented in the second half of gradually improving financial market 2007. Taken together, these measures conditions, begin to provide additional fosteredsomeimprovementinthefunclift to spending and as housing activity tioningoffinancialmarkets,butconsidbegins to stabilize. FOMC participants erable strains persist. In view of the marked up their forecasts of inflation implicationsofthesubstantialreduction for 2008 as a whole, reflecting the in credit availability and the continuing upward pressure on inflation from risdecline in housing activity for the ecoing commodity prices. However, with nomic outlook, the Federal Open Marlonger-run inflation expectations anticiket Committee (FOMC) further eased pated to remain reasonably well anchored, with futures markets indicating Note: The discussion in this chapter consists that commodity prices are expected to ofthetextandtablesfromparts1−3oftheMon- flatten out, and with pressures on reetary Policy Report submitted to Congress sources likely to ease, inflation is proon July 15, 2008 (the figures from that report are available on the Board’s website, at jected to moderate appreciably in 2009. www.federalreserve.gov/boarddocs/hh). Part 4 of FOMCparticipantsindicatethatconsidthat report is identical to the addendum to the erable uncertainty surrounds the outminutesoftheJune24−25,2008,meetingofthe look for economic growth and that they FederalOpenMarketCommitteeandispresented see the risks around that outlook as with those minutes in the “Records” section of thisannualreport. skewed to the downside. They also see
60 95th Annual Report, 2008 prospects for inflation as unusually ers and financial markets more generuncertain, and they view the risks sur- ally, which would bolster the availabilrounding their forecasts for inflation as ity of credit to the overall economy.1 skewed to the upside. (See the box entitled “The Federal Re- In the second half of 2007, the dete- serve’s Liquidity Operations.”) Other rioratingperformanceofsubprimemort- steps taken by the Federal Reserve in gagesintheUnitedStatestriggeredare- recent months to address strains in assessment of credit and liquidity risks financial markets include a further easacross a broad range of assets, leading ing in the terms for bank borrowing at to widespread strains and turbulence in the discount window and an increase in domestic and international financial the amount of credit made available to markets. During the first quarter of banks through the Term Auction Facil- 2008, reports of further losses and ity. The FOMC also authorized inwrite-downs at major financial institu- creases in its currency swap arrangetions intensified concerns about credit ments with the European Central Bank and liquidity risks and resulted in a fur- and the Swiss National Bank to facilither sharp reduction of market liquidity. tate an expansion of dollar lending op- Risk spreads—particularly for struc- erations to banks in their jurisdictions. tured credit products—widened dra- Over the second quarter, financial matically, and securitization activity all market conditions improved somebut shut down in a number of markets. what—credit spreads generally nar- By March, many securities dealers and rowed, liquidity pressures ebbed, and other institutions that had relied heavily financial institutions made progress in onshort-termfinancinginmarketsforre- raising new capital. Still, asset prices purchase agreements were facing much continuetobevolatile,andmanyfinanmore stringent borrowing conditions. cial markets and institutions remain In mid-March, a major investment under considerable stress. Very rebank, The Bear Stearns Companies, cently, the share prices of Fannie Mae Inc., was pushed to the brink of failure and Freddie Mac dropped sharply on after suddenly losing access to short- investor concerns about their financial term financing markets. The Federal condition and capital position. The Reserve judged that a disorderly failure Treasury announced a legislative initiaof Bear Stearns would have threatened tive to bolster the capital, access to overall financial stability and would liquidity, and regulatory oversight of mostlikelyhavehadsignificantadverse the government-sponsored enterprises implications for the U.S. economy. (GSEs). As a supplement to the Trea- After discussions with the Securities sury’s existing authority to lend to the and Exchange Commission and in con- GSEs, the Board of Governors estabsultation with the Treasury, the Federal lished a temporary arrangement that Reserve determined that it should in- allows the Federal Reserve to extend voke emergency authorities to provide credit to Fannie Mae and Freddie Mac, special financing to facilitate the acqui- if necessary. sition of Bear Stearns by JPMorgan Chase & Co. The Federal Reserve also 1. Primary dealers are firms that trade in U.S. used emergency authorities to establish government securities with the Federal Reserve the Term Securities Lending Facility Bank of New York. On behalf of the Federal ReserveSystem,theNewYorkFed’sOpenMarand the Primary Dealer Credit Facility ket Desk engages in such trades to implement to support the liquidity of primary deal- monetarypolicy.
Monetary Policy Report of July 2008 61 Thesluggishpaceofeconomicactiv- Overall consumer price inflation, as ity in the first half of 2008 was accom- measured by the price index for perpanied by a further deterioration in the sonal consumption expenditures, relabor market. Private-sector payroll mained elevated in the first half of employment declined at an average 2008, largely because of the sharp monthly pace of 94,000, and the un- increases in the prices of many comemployment rate rose to 51⁄ 2 percent. modities. The decline in the foreign ex- Moreover, real labor income appears to change value of the dollar has boosted have been flat in the first half of the import prices more generally and thus year. Although wages rose in nominal has also put upward pressure on inflaterms, the purchasing power of those tion. Nonetheless, increases in labor nominal gains was eroded by the rapid costs and core consumer prices (which increases in consumer prices. Declining exclude the direct effects of movements employment, stagnant real wages, and in energy and food prices) have relower equity and home values weighed mained moderate. The rapid advance in on consumer sentiment and spending. overall prices has boosted some mea- In addition, amid falling house prices sures of inflation expectations: Nearand rising foreclosures, activity in the term inflation expectations have risen housing sector continued to decrease. considerably in recent months, and The resulting softness in business sales some indicators of longer-term inflation and profits also made the environment expectationshavealsomovedup—adeforcapitalspendinglesshospitable.The velopment that will require close moniweakness in overall domestic demand toring in the period ahead. was partly offset by strong growth of exports,whichweresupportedbyasustained expansion of foreign activity and Part 2 a lower dollar. Recent Economic The substantial further rise this year and Financial Developments in the prices of many commodities, especially oil and agricultural products, Thegrowthofeconomicactivity,which largely reflected strong growth of phys- slowed sharply in the fourth quarter of ical demand that outstripped supply in 2007, remained subpar in the first half these markets. Although weakening of 2008. Although the restraint on economicactivityandrisingpriceshave activity late in 2007 was concentrated tempered demand for commodities in inthehousingsector,spilloverstoother many industrialized nations, demand areas of the economy began to show has continued to grow in booming through more clearly in the first half of emerging market economies. However, 2008.Meanwhile,consumerpriceinflasupplies of commodities have generally tion has remained elevated this year, not kept pace for a variety of reasons, primarily because of steep increases in including political tensions in some oil- the prices of many commodities. Probproducing nations, higher input costs, ably in response to the sizable rise in lags in the development of new capac- headline price indexes, some indicators ity, and more recently, floods in the of longer-term inflation expectations Midwest. To varying degrees, the re- have risen in recent months. However, sulting increases in materials prices increases in labor costs and core prices havepassedthroughintoretailpricesof have been fairly stable, reflecting in energy, food, and some other items. part the softening in aggregate activity.
62 95th Annual Report, 2008 Financial market stress that had de- lenging mortgage lending environment veloped over the second half of last and the concerns of prospective homeyear intensified in the first quarter of buyers about further declines in house this year. Increased concerns about the prices are likely continuing to depress possibility of a global economic slow- housing demand. down and a generalized flight from Asnewhomesaleshavecontinuedto riskier assets contributed to sharply decline, homebuilders have struggled to wider risk spreads, heightened volatil- work down their substantial overhang ity, and impaired liquidity across a ofunsoldhouses.Asaconsequence,resrange of markets. The Federal Reserve idential construction activity has been responded to these developments and pared further this year. In the singletheir potential adverse implications for family housing sector, new units were the economy by aggressively easing the started at an annual rate of 674,000 in stanceofmonetarypolicyandbytaking May—down more than 13 percent this a number of steps to bolster liquidity year and roughly 60 percent since the and enhance market functioning. Con- peak reached in the first quarter of ditions in financial markets improved 2006. Despite these deep production somewhat in the wake of these actions, cuts, the stock of unsold homes has but significant strains remain. With moved down only 20 percent from its credit conditions tight, equity and home record high in early 2006. When evaluvalues falling, and rapidly rising com- ated relative to the three-month average modity prices boosting costs and con- pace of sales, the months’ supply of sumer prices, growth of household and unsoldnewhomeshascontinuedtorise business spending appears to have been andstoodat101⁄ 2 monthsinMay.Inthe sluggish over the first half of the year. multifamily sector, starts averaged an annual rate of about 320,000 units duringthefirstfivemonthsof2008,alevel The Household Sector of activity at the lower end of its range Residential Investment and Finance inthepastseveralyears.Alltold,thedecline in residential investment trimmed Housing demand, residential construc- the growth rate of real gross domestic tion, and home prices have all contin- product(GDP)about1percentagepoint ued to fall so far this year. Following a in the first quarter of 2008 and appears decline at an annual rate of 43 percent to have held down the second-quarter inthesecondhalfof2007,salesofnew growth rate by about the same amount. homes decreased at an annual rate of House prices also have continued to 32 percent in the first five months of fall. The monthly price index published 2008. However, sales of single-family bytheOfficeofFederalHousingEnterexisting homes, which dropped at an prise Oversight dropped at a 6 percent annual rate of 26 percent in the second annual rate in the first four months of half of last year, have been about un- 2008 (the latest available data), a changed this year. Moreover, pending slightlyfasterrateofdeclinethaninthe home sales, which provide a glimpse of second half of 2007.2 In May, the avthe pace of existing home sales in the months ahead, on net leveled out in the 2. This index is the purchase-only version of spring, hinting at some stabilization in the repeat-transactions price index for existing transactions in the resale market. Still, single-family homes published by the Office of for the overall housing sector, the chal- FederalHousingEnterpriseOversight.
Monetary Policy Report of July 2008 63 erage price of existing single-family across all categories of mortgage loans. homessold—whichdoesnotcontrolfor Problems remained especially severe changesinthemixofhousessoldbutis for subprime loans. However, the available on a more timely basis—was growth rate of subprime delinquencies about 71⁄ 4 percent below that of a year has slowed this year, while that of earlier. Although lower prices should prime and near-prime delinquencies— eventually help bolster housing de- particularly on adjustable-rate loans— mand, survey and anecdotal reports haspickedup.Creditqualityisstrongly suggest that expectations of further related to the origination date of morthousepricedeclinesarequiteprevalent, gage loans, with loans originated in aconsiderationthatmaymakepotential 2006 and 2007 much more likely to buyers reluctant to purchase homes experience delinquency and default until prices show signs of stabilizing. than loans originated in previous years. The rising volume of foreclosures The poorer performance of the more likely has contributed to falling house recent loan vintages reflects a general prices. Continuing the upward trend deterioration in underwriting standards that began in late 2006, about 550,000 through early 2007 and the decline in loans began the foreclosure process in house prices since 2007, which has inthe first quarter of 2008—more than creasedtheoccurrenceofnegativehomedouble the average quarterly rate from owner equity for houses purchased near 2003 to 2005. This rise in foreclosure the peak of the real estate market. starts will increase the supply of houses New subprime mortgage loans refor sale unless borrowers can make up mained largely unavailable in the first the missed payments or arrange with halfof2008,andborrowerswithhigher the lenders or mortgage servicers to credit risk had to turn to government havetheirloansmodified.3Lendersand guarantee programs, such as that of the mortgage servicers have increasingly Federal Housing Administration, to obbeenworkingwithborrowerstomodify tain mortgage loans. The availability of loans to allow borrowers to remain in prime mortgage credit has been held their homes. However, some borrowers down by a further tightening of lending may not be able to afford even reduced standards at many commercial banks, monthly payments, and other borrowers according to the Senior Loan Officer maynotwishtokeeptheirpropertiesin Opinion Survey on Bank Lending Pracan environment of falling house prices. tices conducted in January and April. Thus,theshareofforeclosurestartsthat Securitization of mortgages by the govultimately result in the loss of a home ernment-sponsored enterprises (GSEs), seems likely to be higher in the current Fannie Mae and Freddie Mac, was roepisode than customarily has been the bust through April, although the GSEs case.(Seetheboxentitled“RecentFed- tightened standards and increased guareralReserveInitiativestoAddressProb- antee fees. For prime loans, interest lems in the Mortgage Market”.) rates on conforming fixed-rate mort- Theratesofdelinquencycontinuedto gages were up slightly, on net, over the rise in the first few months of 2008 firsthalfof2008afterdecliningmoderately late last year.4 Rates on conform- 3. A loan may be modified by reducing the principal balance, reducing the interest rate, or 4. Conformingmortgagesarethoseeligiblefor extending the term so as to make monthly pay- purchase by Fannie Mae and Freddie Mac; they mentsmoreaffordable. must be equivalent in risk to a prime mortgage
64 95th Annual Report, 2008 Recent Federal Reserve Initiatives to Address Problems in the Mortgage Market The high rate of mortgage foreclosures is ers with detailed analyses identifying creating personal, economic, and social neighborhoods at high risk of foreclodistress for many homeowners and com- sures. With this information, community munities.TheFederalReserveiscollabo- leaders can target their scarce resources rating with other regulators, community to borrowers in need of counseling and groups, policy organizations, financial otherinterventionsthatmayhelpprevent institutions, and public officials to iden- unnecessary foreclosures. One example tifysolutionstopreventunnecessaryfore- ofthiseffortistheonlinedynamicmaps closures and their negative effects. The and data that illustrate nonprime loan Federal Reserve also has taken a number conditions across the United States. In of regulatory and supervisory actions to addition, community affairs offices reducethelikelihoodofsuchproblemsin across the Federal Reserve System have thefuture. sponsored or cosponsored more than 75 In2007,theFederalReserveandother eventsrelatedtoforeclosuressinceJanubanking agencies called on mortgage ary 2007, reaching more than 5,800 lenders and mortgage servicers to work attendees including lenders, counselors, closely with borrowers who are having community development specialists, and difficultymeetingtheirmortgagepayment policymakers. obligations.Foreclosurecannotalwaysbe TheFederalReservealsoishelpingto avoided, but prudent loan workouts and address the challenges that foreclosed other loss-mitigation techniques that help homes present, such as decreased home troubled borrowers can be less costly to values and vacant properties that can lendersthanforeclosure. deteriorate from neglect. Toward this TheFederalReserve’sHomeownership end, the Federal Reserve entered into a andMortgageInitiativesreflectacompre- partnership this spring with Neighborhensive strategy across the Federal Works America, a national nonprofit Reserve System to provide information organization, to work together in identiandoutreachtopreventunnecessaryfore- fying strategies to mitigate the effect of closures and to stabilize communities. foreclosures and vacant homes on com- Under these initiatives, the Federal munities. In June 2007, the Federal Reserve has been providing community Reservebeganhostingaseriesofforums coalitions, counseling agencies, and oth- in several cities across the country to ing adjustable-rate mortgages dropped driedup—remainedelevatedinthefirst in January but have since reversed a half of 2008, and spreads between rates portion of that decline. Offered rates on offered on these loans and on conformjumbo fixed-rate loans—which ran up ing loans stayed unusually wide.5 To in the second half of last year as the securitization market for such loans 5. Jumbo mortgages are those that exceed the maximum size of a conforming loan; they are with an 80 percent loan-to-value ratio, and they typically extended to borrowers with relatively cannotexceedtheconformingloanlimit. strongcredithistories.
Monetary Policy Report of July 2008 65 examinetheeffectsthatforeclosureshave correctiveorenforcementactions,aswaron neighborhoods in both strong and ranted, at selected nondepository lenders weak housing markets and to assess the with significant subprime mortgage optools available to local communities to erations. addresstheconsequencesofforeclosures. In December 2007, the Board pro- The Federal Reserve is committed to posednewrulesundertheHomeOwnerfosteringanenvironmentthatsupportsthe ship and Equity Protection Act to ban homeownership goals of creditworthy unfair and deceptive mortgage lending borrowerswithappropriateconsumerpro- practices. The Board received about tection and responsible lending practices. 4,500commentsontheproposaland,tak- It is using its regulatory and supervisory ing into consideration these comments, authorities to help avoid future problems issued new rules in July. For consumers inmortgagemarkets.Incoordinationwith receiving higher-priced mortgages, the otherfederalsupervisoryagenciesandthe final rules prohibit lenders from extend- Conference of State Bank Supervisors, ingcreditwithoutregardtoaborrower’s the Federal Reserve issued principles- ability to repay, require lenders to verify based guidance on specific types of incomeandassetstheyrelyuponinmakadjustable-rate subprime mortgages in ing loans, require lenders to establish June 2007. The guidance is designed to escrowaccountsfortaxesandinsurance, helpensurethatborrowerswhochoosean andprohibitprepaymentpenaltiesunless adjustable-rate mortgage get a loan that certain conditions are met. In addition, theycanaffordtorepayandcanrefinance the rules also are designed to curtail without prepayment penalty for a reason- deceptive mortgage advertising and to able period before the first interest rate ensure that consumers receive mortgage reset. The Federal Reserve issued similar disclosures at a time when the informaguidance on nontraditional mortgages in tion is likely to be most useful to them. 2006. Finally,theBoardalsoisundertakinga Strong uniform enforcement of the broadandrigorousreviewoftheTruthin consumerprotectionregulationsthatgov- Lending Act, which involves extensive ern mortgage lenders is critical to avoid consumer testing of mortgage disclosure future problems in mortgage markets. documents. Clearer and easier-to-under- Together with other federal and state stand disclosures should help consumers supervisoryagencies,theFederalReserve better evaluate the loans that are offered launched a pilot program to review con- to them and thus make more-appropriate sumer protection compliance and impose choiceswhenfinancingtheirhomes. support the market for larger loans, the mortgage-backed securities (MBS). As Congress raised the conforming loan a result, the secondary market for such limit temporarily for 2008, which mortgages has thus far failed to thrive. allowed the GSEs to back these mort- Concerns expressed by public policygages. However, because the pre- makers persuaded Fannie Mae and payment characteristics of jumbo mort- Freddie Mac to make greater efforts to gage borrowers are different from those jump-start trading in the market for of other borrowers, the GSEs and other jumbo conforming loans, and the GSEs market participants decided not to pool have recently taken a variety of actions these “jumbo conforming” mortgages to encourage the development of that with other mortgages when creating market.
66 95th Annual Report, 2008 The weakness in the housing market gasoline prices curbed demand for was associated with a sharp slowing in sport-utility vehicles and pickup trucks. the growth of household mortgage debt Outlays for other types of goods fell toanannualrateof3percentinthefirst slightlyinthefirstquarterbutappearto quarter of 2008, down from 63⁄ 4 percent have turned back up in recent months. in 2007 and 111⁄ 4 percent in 2006. The Spending on services has held up well available indicators suggest that mort- in recent quarters. gage debt likely slowed further in the Following a sharp deceleration in the second quarter. second half of last year, real labor income has been flat so far this year, as Consumer Spending nominal wage gains have been eroded and Household Finance by rising consumer prices. Average hourlyearnings,ameasureofwagesfor The growth rate of consumer spending production or nonsupervisory workers, slowed some in the first half of 2008 rose at the same rate as the PCE price fromitssolidpaceinthesecondhalfof index in the five months through May; 2007. The slowing reflected a number thus, wages were unchanged in real of restraining influences. The growth terms. In the past couple of months, rate of real labor income has stepped part of the strain on household incomes downsubstantiallysincelastsummeras caused by the stagnation in real wages labor market conditions have weakened was likely alleviated temporarily by the andasrisingpricesforfoodandenergy tax rebates that were paid out in May have put a sizable dent in consumers’ and June. As a result of these rebates, purchasing power. At the same time, growth in real disposable personal inhousehold wealth has been reduced by come (DPI)—that is, after-tax income declining values of both equities and adjusted for inflation—which was subhouses. In addition, borrowing at banks parinthefourthquarterof2007andthe tofinanceoutlayshasbecomemoredif- first quarter of 2008, likely jumped in ficult as terms and standards on con- the second quarter. Despite an increase sumer credit have been tightened. Al- in transfers reflecting the recently pasthough the tax rebates that households sed extension of unemployment insurbegan receiving in the spring are likely ance benefits, real DPI is likely to fall cushioning these effects to some extent, backinthethirdquarterasthedisburseconsumersappeartobequitedownbeat. ment of rebates slows considerably. Measures of consumer confidence, After several years of providing an which had dropped sharply in the sec- impetus to spending, household wealth ond half of 2007, plunged further in the has been a negative influence this year. first half of this year and now stand at Changes in household net worth tend to or below the low levels reached in the influence consumer spending most early 1990s. heavily over a period of a year or two. Real personal consumption expendi- Accordingly, the drop last year in the tures(PCE)roseatamodestannualrate ratio of household net worth relative to of 1 percent in the first quarter. The income probably weighed on consumpavailable data suggest that spending tion outlays in the first half of 2008. picked up in the second quarter, report- Moreover, this year’s declines in resiedly boosted by tax rebates. Spending dential real estate values and in equity on light motor vehicles was lackluster prices have exacerbated the situation. in the first half of the year, as high Flagging wealth has likely left house-
Monetary Policy Report of July 2008 67 holds less inclined to raise their spend- Secondary-market data suggest that ing at a rate that exceeds income funding for credit card and auto loans growth,andthepersonalsavingratehas has been well maintained in recent flattened out over the past few quarters. months. Notably, issuance of asset- InMay,thesavingratejumpedto5per- backed securities (ABS) tied to credit cent, as the immediate effect of tax card loans and auto loans has remained rebates in many households was to robust, despite spreads of yields boost savings. on these securities over comparable- Overall household debt increased at maturity swap rates that continue to be an annual rate of about 31⁄ 2 percent in nearhistoricallyhighlevels.Incontrast, the first quarter of 2008, a notable pressures in secondary markets for studeceleration from the 63⁄ 4 percent ad- dent loan ABS have reportedly affected vance in 2007. Household debt appears the availability of such credit. The reto have slowed further in the second imbursement formula for governquarter. Because the growth of house- ment-guaranteed student loans did not hold debt was slightly less than the adequately compensate lenders for the growthinnominalDPIinthefirstquar- higher funding cost in securitization ter and interest rates on mortgage and markets, and issuance of guaranteed consumer debt declined a bit, the ratio studentloanABSdroppedsharplyearly of financial obligations to DPI ticked in 2008. Legislation enacted in May down. gave the Department of Education and Consumer (nonmortgage) debt ex- the Treasury the authority to provide panded at an annual rate of 53⁄ 4 percent short-term liquidity to institutions that in the first quarter, about the same pace lend to students, and availability of stuas in 2007. Consumer debt growth held dent loans appears to have improved. updespiteareportedtighteningoflend- However, concerns persist about access ing terms and standards at banks. In to loans by students at community and part, this pattern may reflect some sub- career colleges, as these loans tend to stitution away from mortgage credit. be less profitable for lenders. Also,interestratesonautoloansandon credit cards generally declined in the The Business Sector first half of this year but by less than short-term market interest rates. Fixed Investment Overall credit quality of consumer loans has deteriorated somewhat in After having posted robust gains in the recent months. Delinquency rates on middle of last year, real business fixed consumer loans at commercial banks investment lost some steam in the and captive auto finance companies fourthquarterandekedoutonlyasmall rose in the first quarter but stayed advance in the first quarter of 2008. within the range experienced over the Economic and financial conditions that past 10 years. Although household influence capital spending deteriorated bankruptcy filings remained low rel- appreciably late last year and early this ative to the levels seen before the year: Business sales slowed, corporate changes in bankruptcy law imple- profits fell, and credit conditions for mented in late 2005, the bankruptcy some borrowers tightened. In addition, rate rose modestly in the first few the heightened concern about the ecomonths of 2008. nomic outlook may have caused some
68 95th Annual Report, 2008 firms to postpone or abandon plans for and funding through the commercial capital expansion this year. mortgage-backed securities (CMBS) Real business outlays for equipment market has continued to be extremely and software were flat in the first quar- limited. ter. Growth in real spending on hightech equipment and software slowed to Inventory Investment an annual rate of about 10 percent, down from the 13 percent pace re- Despite sluggish final sales, inventories corded in 2007. In addition, business declined again in the first quarter of spending on motor vehicles tumbled. 2008asfirmsactedpromptlytoprevent Investment in equipment other than inventory imbalances from arising. high tech and transportation dropped at Automakers, which had worked to anannualrateof33⁄ 4 percentinthefirst bring days’ supply down to a sustainquarter after a smaller decline in the ablelevellastyear,havemovedaggresprevious quarter. The available indica- sively to keep production aligned with tors suggest that capital spending on demand in recent quarters. Excluding equipment and software fell in the sec- motor vehicles, real inventory investond quarter: Business purchases of new ment fell in the fourth quarter of 2007 motorvehiclesreportedlyslippedagain; to its lowest level in several years and shipments of nondefense capital goods then turned negative in the first quarter (adjusted to exclude both transportation of this year. According to the limited items and goods that were sent abroad) available data, nonauto businesses conwere lower, on average, in April and tinuedtoliquidaterealinventoriesearly May than in the first quarter; and the in the second quarter. Business surveys tone of recent surveys of business con- suggest that companies are generally ditions remained downbeat. comfortable with their current stock Nonresidential construction activity, levels. Nonetheless, a few industries, which exhibited considerable vigor in most notably those producing construc- 2006 and 2007, slowed appreciably in tion supplies, are showing some evithe first quarter of 2008. Real outlays dence of inventory overhangs. for new commercial buildings declined sharply in the first quarter, and in- Corporate Profits creases in outlays for most other types and Business Finance of building stepped down. More-recent data on construction expenditures sug- The sluggish pace of business investgest that spending on nonresidential ment in recent months is due in part to structures may have bounced back in the weakening of domestic profitability thesecondquarter.However,deteriorat- and the tighter credit conditions faced ing economic and financial conditions by some businesses. In the first quarter indicate that this rebound may be short- of 2008, total economic profits for all lived. In addition to the weakening of U.S. corporations were down slightly businesssalesandprofits,vacancyrates from their level four quarters earlier; a turned up in the first quarter (the latest nearly 20 percent rise in receipts from available data). Moreover, the financing foreign subsidiaries was not sufficient environment has remained difficult; to offset a 21⁄ 2 percent fall in domestibank lending officers have reported a callygeneratedprofits.Althoughprofits significanttighteningoftermsandstan- as a share of output in the nonfinancial dards for commercial real estate loans, corporate sector have declined in recent
Monetary Policy Report of July 2008 69 quarters, they remain well above previ- securities climbed in January and then ous cyclical lows. For companies in the surged in March. After narrowing in S&P 500, operating earnings per share April and May, bond spreads jumped fell 17 percent over the year ending in again in late June. Outstanding comthe first quarter. This decline was more mercial paper (CP) for nonfinancial thanaccountedforbyplummetingearn- firms has been little changed, on net, ings at financial firms, which reported this year. Yields on nonfinancial CP large write-downs on leveraged loans have moved down since the beginning and mortgage-related assets.6 For non- of the year, roughly in line with other financial firms in the S&P 500, earn- short-term interest rates, although ings rose nearly 11 percent over the spreads between yields on lower-rated four quarters ending in the first quarter and higher-rated nonfinancial CP reof 2008; energy-sector firms had a main well above the levels prevailing strong 31 percent increase in earnings, before the onset of the financial diffiwhereas earnings at other nonfinancial culties last summer. firms rose 41⁄ 2 percent. Commercial and industrial (C&I) Although credit has remained avail- loans at banks expanded briskly in the able to the business sector, yields on first quarter and then slowed markedly corporate bonds increased significantly in the second quarter. In the Senior overthefirsthalfoftheyear,andbanks Loan Officer Opinion Survey taken in reported tighter terms and standards on January and April, considerable net commercial and industrial loans and on fractions of banks reported that they commercial real estate loans. All told, had tightened credit standards and the growth rate of the debt of nonfinan- boosted spreads on C&I loans. Accordcialbusinessesfellfrom113⁄ 4 percentin ing to the respondent banks, the move 2007 to 91⁄ 4 percent in the first quarter to a more stringent lending posture of 2008; the available data point to a mainly reflected a less favorable or further deceleration in the second quar- more uncertain economic outlook and a ter of this year. reduced tolerance for risk; a significant On balance, the composition of bor- fraction also noted concerns about the rowing by nonfinancial businesses has capital position of their own bank as a shifted this year toward longer-maturity reason for tightening standards. The debt.Netbondissuancebynonfinancial secondary market for syndicated leverfirms has been strong. Speculative- aged loans remained relatively weak, grade issuance, which dropped sharply but loans associated with some promilate last year and was practically nil in nent buyouts were sold, albeit at a the first quarter, rebounded markedly in discount. the second quarter, while investment- Gross equity issuance by nonfinangrade issuance has continued to be cialfirmsdippedinthefirstquarterand robust.Spreadsbetweenyieldsoninvest- rebounded in the second quarter. A ment- and speculative-grade bonds and sharp decline in share repurchases and those on comparable-maturity Treasury cash mergers led to a notable reduction of net equity retirement in the first quarter. 6. Asset write-downs and capital losses are The credit quality of nonfinancial generally excluded from the calculation of ecocorporations generally has remained nomic profits but are included as an expense in solid. The six-month trailing bond dethe operating earnings per share of financial firms. fault rate was very low despite a small
70 95th Annual Report, 2008 tickupinJune.Thedelinquencyrateon The Government Sector C&I loans at commercial banks continued the mild increase that began last Federal Government year, but it remained subdued by historical standards. Ratings downgrades Thedeficitinthefederalunifiedbudget inthefirstfivemonthsofthisyearwere has widened during the current fiscal modest, only slightly exceeding up- year after having narrowed in the pregrades. Balance sheet liquidity at non- ceding few years. A substantial portion financial corporations remained high of the rebates authorized by the Ecothrough the first quarter of 2008, and nomic Stimulus Act of 2008 was disleverage stayed very low. tributedinMayandJune,whichcaused In the April 2008 Senior Loan Offi- a significant widening of the deficit. In cer Opinion Survey, a large fraction of addition, the growth of receipts has slowed in response to the weaker pace banks reported having tightened credit of economic activity, and the growth of standards on commercial real estate outlays has stepped up. Over the first loans.Delinquencyratesoncommercial nine months of fiscal year 2008—from real estate loans for construction and October through June—the unified land development projects extended by budgetrecordedadeficitthatwas$148 commercial banks moved sharply billion greater than during the compahigher in the first quarter of 2008 after rable period ending in June 2007. rising noticeably last year. In contrast, When measured relative to nominal delinquency rates on bank loans that GDP, the deficit moved up from finance existing commercial properties moved up only slightly. Delinquency 11⁄ 4 percent in fiscal 2007 to 21⁄ 4 percent during the 12 months ending in rates on commercial mortgages held by June 2008; a continued slow pace of life insurance companies and those in economic activity and additional rev- CMBS pools, which mostly finance enue losses associated with the Stimuexisting commercial properties, relus Act are expected to widen the defimained low. cit further in the final three months of Despite the generally solid perforfiscal 2008. mance of commercial mortgages in The Economic Stimulus Act is estisecuritized pools, spreads of yields on mated to result in about $115 billion of CMBS over comparable-maturity swap rebates being sent to households in rates soared to unprecedented levels 2008and2009.Therebatesbegantobe early in 2008. In recent months, these distributedinthelastfewdaysofApril, spreads have narrowed somewhat, but and by the end of June, approximately they remain well above levels seen $80 billion worth of rebates had been before this year. The widening of disbursed, accounting for more than spreads reportedly reflected heightened half of the widening of the budget deficoncerns regarding standards for under- cit in the first nine months of fiscal writing commercial mortgages over the 2008 relative to the same period in fispastfewyearsandlikelyalsoinvestors’ cal 2007. wariness of structured finance products Theslowerpaceofeconomicactivity more generally. After hitting a record has cut into receipts. Excluding the level in early 2007, issuance of CMBS budgetary effects of stimulus rebates, dropped sharply late last year and federalrevenuesinthefirstninemonths slowed to a trickle so far this year. of fiscal 2008 were only 2 percent
Monetary Policy Report of July 2008 71 higher than in the same period in fiscal Federal Borrowing 2007, down from a rise of 63⁄ 4 percent Federal debt rose at an annual rate of in fiscal 2007 and considerably smaller than the double-digit gains recorded in 71⁄ 2 percent in the first two quarters of fiscal year 2008—from October fiscal 2005 and fiscal 2006. The slowthrough March—a notable step-up from downinfederalrevenueshasbeenmost pronounced for corporate receipts, the 41⁄ 4 percent pace in fiscal 2007. As oftheendofMarch,theratiooffederal reflecting the decline in corporate profdebtheldbythepublictonominalGDP its since the middle of 2007. Individual was about 37 percent, slightly higher income and payroll tax receipts—exthan in recent years. cluding the stimulus rebates—also have The deterioration in the budget posislowed, likely because of the smaller tion of the federal government led the gains in personal income during the Treasury to reintroduce the one-year current fiscal year. Treasury bill, which was last issued in Nominal federal outlays in the first 2001. The initial auction on June 3 was nine months of fiscal 2008 were very well received, with a bid-to-cover 61⁄ 2 percent above their level in the ratio above 3. Issuance also increased comparable period in fiscal 2007, a for both shorter- and longer-maturity faster pace of increase than was re- Treasury securities. The proportion of corded in fiscal 2007 but generally nominal coupon securities purchased at below the rapid increases seen in fiscal Treasury auctions by foreign investors 2002 through 2006. So far this fiscal changedlittleoverthefirsthalfof2008 year, the growth of outlays for defense and remains in the range of 10 percent has stepped up relative to fiscal 2006 to 25 percent observed over the past and 2007, and spending has continued several years. However, holdings of to rise apace in most major nondefense Treasury securities by foreign official categories.Inthemonthsahead,outlays institutionsattheFederalReserveBank willbebumpedupfurtherbytheexten- of New York increased more rapidly in sion of eligibility for unemployment the first half of 2008 than over any of insurance benefits to individuals who the previous three years. have exhausted their benefits. State and Local Government As measured in the national income and product accounts (NIPA), real fed- The fiscal positions of state and local eral expenditures on consumption and governments began to weaken last year gross investment—the part of federal and have continued to deteriorate in spending that is a direct component of 2008. After having improved signifi- GDP—increased at an annual rate of cantlyfrom2003to2006,netsavingby 41⁄ 4 percent in the first quarter, a contri- the sector—which is broadly similar to bution of 0.3 percentage point to real the surplus in an operating budget— GDP growth. Real defense spending turned slightly negative in 2007, and accounted for almost the entire rise, as this measure moved further into neganondefense outlays only edged up. In tiveterritoryinthefirstquarterof2008. the second quarter, defense spending The deterioration in budget conditions appears to have posted another sizable has occurred as increases in revenues increase, and given currently enacted have slowed while nominal expendiappropriations,itislikelytorisefurther tures have risen at a brisk pace. The in coming quarters. slowdown in state income tax revenues
72 95th Annual Report, 2008 hasfollowedapatternsimilartotheone investorapprehensionsalsoledtowidethat has emerged at the federal level. spreadfailuresofrate-resettingauctions Corporate receipts have declined, and for auction rate securities (ARS) issued the rise in individual income taxes has by state and local governments.8 Presbecome more subdued. At the same sures in the municipal securities market time, state receipts from sales taxes eased somewhat in the second quarter, have softened markedly. At the local along with the broader relaxation of level, the decline in house prices has financialmarketstrains.Inaddition,ratnot yet begun to curb local property tax ings upgrades of municipalities greatly revenues appreciably, but increases in exceeded downgrades in the second local receipts from this source seem quarter. Since March, municipal bond likely to slow more noticeably in the issuance has rebounded, and a signifinext few years. cantfractionoffailingARSissueshave On the outlays side of the accounts, been paid down with the proceeds of nominal spending has continued to rise, standard bond issues. particularly for expenditures on health care and energy items. In real terms, National Saving expenditures on consumption and gross Total net national saving—that is, the investment by state and local governsaving of households, businesses, and ments (as measured in the NIPA) rose governments excluding depreciation only a bit in the first quarter, as incharges—dipped below zero in the first creases in expenditures on current opquarter of 2008. After having stood at erationswerelargelyoffsetbyadecline in outlays on structures. However, conan already low rate of 13⁄ 4 percent of nominal GDP in the second quarter of struction expenditures are volatile from 2007, the national saving rate declined quarter to quarter, and the data through steadily over the subsequent three quar- May suggest that real state and local ters, as the federal budget deficit widexpenditures for structures picked up in ened, the fiscal positions of state and the second quarter. Meanwhile, state and local hiring remained elevated through June. occuruntilearlythisyear.InJune,Moody’sand Standard & Poor’s downgraded MBIA and State and Local Government Ambac,twoofthelargestguarantors,fromAAA Borrowing toAAorlower.Newbondinsurancebusinesshas shifted to guarantors that are viewed as finan- Bond issuance by state and local gov- cially stronger, and some municipalities have ernments slowed moderately in the first stated their intention to dispense with guarantors quarterof2008asthecostofborrowing andissueonthestrengthoftheirownratings. 8. ARSarelong-termsecuritieswhoseinterest rose. Investors demanded higher rerates are reset through regularly scheduled aucturns, in part because of concerns about tions,typicallyevery7,28,or35days.Asofthe the strength of financial guarantors that end of 2007, the size of the ARS market in the insure many municipal bonds and in United States was about $330 billion, about half ofwhichwasaccountedforbymunicipalsecuripart because of concerns about the ties. A resetting auction fails when investors do effect of a potential economic slownot bid for the entire issue at an interest rate down on state and local government belowthecontractmaximum.Uponauctionfailrevenues.7 Beginning in February, these ure, the asset holders from before the auction retain ownership of the securities and receive a specified ceiling interest rate, which is usually, 7. Concerns about the financial guarantors but not necessarily, equal to the maximum bid arosein2007,butsignificantdowngradesdidnot rate.
Monetary Policy Report of July 2008 73 local governments deteriorated, and The positive contribution of net exbusinesssavingdecreased.Accordingly, ports in the first quarter reflected, in totalnationalsavingasashareofnomi- part,a3⁄ 4 percentdeclineinrealimports nal GDP, which has been declining, on of goods and services. Imports of autobalance, since the late 1990s, has fallen motive products and consumer goods to a historic low (apart from the third fell in line with slowing U.S. domestic quarter of 2005, which was marked by demand, more than offsetting higher sizable hurricane-related property los- real imports of oil and a slight increase ses).Ifnotreversedoverthelongerrun, in imports of capital goods. Imports persistent low levels of saving will be from China and Mexico declined (in associated with either slower capital current dollars), whereas imports from formation or continued heavy borrow- Canada,Japan,andOPECcountriesexing from abroad, either of which would panded. After falling sharply in March, retard the rise in the standard of living importsrebounded,onaverage,inApril of U.S. residents over time and hamper and May, as imports of capital equipthe ability of the nation to meet the ment and consumer goods increased retirement needs of its aging popula- strongly. tion. In the first quarter of 2008, the U.S. current account deficit was $706 billion at an annual rate, or 5 percent of GDP, The External Sector $25 billion narrower than its level in International Trade 2007; the narrowing largely reflects higher net investment income. A large Foreign demand has continued to be an improvementinthenon-oiltradedeficit important source of strength for the wasoffsetbyasharpincreaseinthebill U.S. economy. Net exports contributed for imported oil, which resulted from 3⁄ 4 percentage point to the growth of the jump in oil prices. real GDP in the first quarter of 2008 Compared with 2007, prices for imafter adding a similar amount to growth portsofbothmaterial-intensiveandfinin 2007. The growth of real exports of ished goods are increasing at much goods and services expanded at a faster rates so far this year. Although 51⁄ 2 percent pace in the first quarter, import price increases also reflect the moderating from the 121⁄ 2 percent surge depreciation of the dollar, rising comrecorded in the second half of 2007. modity prices (discussed in more de- Export growth in the first quarter was tail in the box entitled “Commodity supported by higher exports of agricul- Prices”) have significantly boosted the tural products, consumer goods, indus- rateofimportpriceinflation.Inthefirst trial supplies, and services. In contrast, quarter, prices of imported goods exexportsofbothaircraftandautomobiles cluding oil and natural gas rose at an moved down after rising rapidly in the annual rate of about 71⁄ 2 percent, a pace second half of 2007. Exports to Europe more than twice that of the previous and Latin America rose robustly (in year. Available data suggest that import current dollars), while exports to Can- priceinflationwassharplyhigherinthe ada and to OPEC countries fell back. second quarter. Data for April and May suggest that The Financial Account exports continued to expand in the second quarter, with exports of industrial In late 2007 and the first quarter of supplies showing particular strength. 2008, the U.S. current account deficit
74 95th Annual Report, 2008 Commodity Prices Prices forcrudeoilandmanyothercom- far-dated NYMEX oil futures contract modities continued to soar through the (currently for delivery in 2016) has also firsthalfof2008.Aftershootingupabout risen to about $140 per barrel and sug- 60 percent last year, the spot price of gests that the balance of supply and West Texas intermediate crude oil has demand is expected to remain tight for increased an additional 50 percent thus sometimetocome. farin2008,climbingfrom$92perbarrel Nearer-term market pressures have inDecember2007toabout$140recently. beenreflectedindomesticinventoriesof While weaker economic growth and the both crude oil and refined oil products, highlevelofpricesappeartobedamping which have declined notably in recent oil demand in industrialized nations, monthsandstandwellbelowyear-earlier demand from emerging market countries levels.Inventoriesalsoappeartobetight remainsrobust.Thecontinuedstrengthin inothercountries(althoughdataareless emergingmarketdemandreflects,inpart, complete for emerging market coungovernment subsidies that limit the pass- tries). Lean inventories increase the vulthrough of higher crude prices to retail nerability of petroleum markets to any products and thus mute the response to disruptions in production, transportation, higher prices. Furthermore, on the supply and refining, which is of particular conside, incoming information since the cern during hurricane season. The tightbeginning of the year has been decidedly ness of inventories suggests that the downbeat, with non-OPEC production recentincreasesinoilpricesreflectnearcontinuing to fall short of expectations. term demand and supply pressures, Despiteadditionalinvestment,oilproduc- ratherthanspeculativehoarding. tioncapacityhasnotrisenatapacecom- Prices of nonfuel commodities were mensurate with the growth of global quite volatile in the first half of 2008. demand. The lack of spare capacity has Through early March, prices of many led, in turn, to heightened sensitivity of commodities rose sharply, including oil prices to political developments, such those for some foods (such as corn and as ongoing tensions in the Middle East wheat) and metals (in particular, copper andinstabilityinNigeria.Thepriceofthe and aluminum). This broad-based price was financed primarily by foreign pur- contributed to foreign official inflows, chases of U.S. securities, as has been likely reflecting sovereign wealth fund the norm in recent years. The global activity. financial turmoil has continued to leave Foreign private demand appeared to an imprint on both the sources and remain robust for the safest U.S. investcomposition of cross-border financial ments—net private purchases of U.S. flows,includinganetprivateoutflowin Treasury securities, which surged in the the first quarter. Meanwhile, foreign third quarter of 2007 when the turmoil official inflows provided all of the began, remained at near-record levels financing from abroad during the first through April 2008. In contrast, corpoquarter, driven by net purchases of U.S. rate bond purchases by foreign private Treasury and agency securities by investors have been weaker in each Asian institutions. Unusually large net quarteroftheturmoilthaninanyprevipurchases of corporate securities also ous quarter since 2002. Corporate eq-
Monetary Policy Report of July 2008 75 increase appears to have been driven including depreciation of the dollar and mainly by growth in global demand. lowerinterestrates.Allelsebeingequal, Morerecently,however,pricemovements a lower value of the dollar implies a havebeenlessuniform,andcommodities higher dollar price of commodities, but suchaswheatandnickelhaveseensharp the causal relationships between the price declines. Nevertheless, some other exchange value of the dollar and comfoodcommoditypriceshavecontinuedto modity prices are complex and run in soar,particularlythepriceofcorn,which bothdirections.Thefactthatcommodity hasbeenaffectedbyweather-relatedcon- priceshaverisensignificantlyintermsof cerns, including the recent floods in the allmajorcurrenciessuggeststhatfactors Midwest. The price of rice has also in- other than the depreciation of the dollar creasedsharplythisyear,whichhasleda havebeenimportantcausesoftherisein number of rice-producing countries to prices. Similarly, the relationship beenactexportbans,addingtoupwardpres- tween interest rates and commodity sureonglobalprices.Throughfeedcosts, prices may depend on what is driving increased grain prices also have been changesininterestrates.Forexample,to reflected in higher prices for meat and theextentthatlowerinterestratesreflect dairyproducts. a relatively weak economy and thus The supply response of farm crops to softer demand for commodities, interest price increases typically has had a rela- rates and commodity prices may tend to tively short time lag, usually through move in the same direction. And irreincreasing land under cultivation. Al- spective of their cause, lower interest though increases in acreage devoted to rates might also lead to a buildup in one crop have recently come at the commodity inventories—as a result of expense of other crops, yields have risen reduced financing costs of holding inand should continue to do so as more- ventories—potentially putting upward advanced seed varieties and cultivation pressure on prices. However, inventory techniquesareemployed. levelsofkeycommoditieshavenotrisen In addition to supply and demand con- thisyear,afactthatisatoddswithsuch ditionsinthephysicalmarkets,otherfac- explanations of price increases that emtorshavebeencitedascontributingtothe phasizetheroleofinterestrates. rise in commodity prices in recent years, uity purchases have also been very what surprisingly given the global fiweak in 2008 through April after a nancial turmoil, the strength seen in strong rebound in the fourth quarter of U.S. direct investment abroad in 2007 2007. Overall, total inflows from for- persisted through the fourth quarter and eign private acquisitions of U.S. securi- into the first quarter of 2008. In additieswerewellbelowaverageinthefirst tion, net lending abroad by U.S.-resquarter of 2008 but slightly above the ident banks, which tends to be quite nine-year low set in the third quarter of volatile,hasincreasedwithunusualcon- 2007 as the turmoil began. sistency since the turmoil began; these Inflows from private purchases of outflows,primarilyfromforeign-owned U.S. securities in the first quarter of banks to their European affiliates, were 2008 were offset by strong outflows particularly large in March as condiassociated with U.S. direct investment tions in U.S. and European interbank abroad and by interbank flows. Some- funding markets re-intensified.
76 95th Annual Report, 2008 The Labor Market part time for economic reasons increased sharply. Thus far, the labor Employment and Unemployment force participation rate, which typically falls during periods of labor market The demand for labor has been con- weakness, has remained steady and tracting this year. After having in- stood at 66.1 percent in June, near the creased 54,000 per month, on average, middle of the range that has prevailed in the second half of 2007, private pay- since early 2007. roll employment declined at an average Other indicators also point to further monthly pace of 94,000 in the first half deterioration in labor market conditions of 2008. Over the same period, the this year: Private surveys of businesses civilian unemployment rate moved up suggest that firms plan to continue cutmore than 1⁄ 2 percentage point, to ting back on hiring in the near term. At 51⁄ 2 percent. the same time, according to surveys of Job losses in the first half of 2008 consumers,assessmentsoflabormarket were concentrated in the construction prospects in the year ahead, which had and manufacturing sectors. Although worsened late last year, slipped further businessesintheseindustrieshavebeen in the first half of 2008. trimming payrolls for more than two years, the downsizing has intensified Productivity and Labor Compensation during the past several months. In addition, job losses have begun to mount Gains in labor productivity have moved this year in the wholesale and retail up significantly of late. According to tradesectorsandintheprofessionaland the latest available published data, outbusinessservicescategory.Evenamong put per hour in the nonfarm business themanysectorsinwhichpayrollshave sector rose 31⁄ 4 percent during the year continued to expand, such as technical ending in the first quarter of 2008, up servicesprovidersandeatinganddrink- from the 1⁄ 2 percent increase recorded ing establishments, job gains have been over the preceding four quarters. On lessrobustsofarthisyearthanin2007. average, the rise in productivity over A notable exception has been hiring by the past two years, although less than providers of health and education ser- the outsized increases posted earlier in vices, which has remained strong. the decade, suggest that the fundamen- The unemployment rate, which rose tal forces that in recent years have sup- 1⁄ 2 percentage point in 2007, increased ported a solid uptrend in underlying another 1⁄ 2 percentage point in the first productivity remain in place. Those half of this year. Initial claims for un- forces include the rapid pace of technoemployment insurance and the number logical change and the ongoing efforts of individuals receiving unemployment by firms to use information technology insurance benefits moved up consider- toimprovetheefficiencyoftheiroperaably over the six months ending in tions. Increases in the amount of capi- June; accordingly, the share of unem- tal, especially high-tech capital, availployed workers who lost their last jobs able to each worker also appear to be (as opposed to those who voluntarily providing considerable impetus to proleft their jobs or were new entrants to ductivity growth. thelaborforce)rose,onnet,thisspring. Broadmeasuresofhourlylaborcom- In addition, the percentage of persons pensation have not kept pace with the who reported that they were working rapid increases in both overall con-
Monetary Policy Report of July 2008 77 sumer prices and labor productivity, December 2007 and May 2008, about despite a labor market that, until re- the same as the brisk pace registered cently, had been generally tight. The over the 12 months of 2007. Excluding employment cost index (ECI) for pri- food and energy items, the PCE price vate industry workers, which measures index rose at an annual rate of 1.9 perbothwagesandthecosttoemployersof cent over the first 5 months of the year, providing benefits, rose 31⁄ 4 percent in down from the 2.2 percent increase nominaltermsbetweenMarch2007and over the 12 months of 2007. March 2008 (the latest available data), Energy prices, which jumped 20 perthe same gain as was recorded over the cent over 2007, continued to soar in the preceding 12 months. Although the first five months of this year. Spurred increase in the wage and salary compo- by rising crude oil costs, motor fuel nent of the ECI edged down, the rise in prices continued to move up through benefits costs picked up markedly. May, and increases in prices of heating Benefits costs were pushed up by a fuel and natural gas also jumped appresharp rise in employer contributions to ciably.Furthermore,thepass-throughof retirement plans, which likely reflected, the record-high levels of crude oil in part, the weak performance of the prices into retail gasoline prices was stock market and an atypically small only partial, and wholesale and retail increase in employer contributions in margins were unusually compressed in the preceding year. May. As these margins return to more According to preliminary data, com- typical levels, retail prices are likely to pensation per hour in the nonfarm busi- rise further. Indeed, survey evidence ness (NFB) sector—an alternative mea- suggeststhatpricesatthepumpjumped sure of hourly compensation derived again in June and early July. The recent from the data in the NIPA—rose 4 per- pickup in natural gas prices apparently cent over the year ending in the first reflected substitution by utilities and quarter of 2008, down from a 5 percent other users away from relatively expengain in the previous year. Because of sive crude oil as well as the unexpected the slower growth in NFB hourly com- shutdown of some production in the pensation and the faster growth in pro- Gulf of Mexico during the spring. ductivity over the period, unit labor Food prices have also picked up furcosts rose just 3⁄ 4 percent over the year ther this year. After climbing 43⁄ 4 perending in the first quarter of 2008 after cent in 2007, the PCE price index for having increased 41⁄ 4 percent over the food and beverages increased at an preceding year. On average, the rise in annual rate of more than 6 percent beunit labor costs over the past two years tween December 2007 and May 2008. is about on par with the increases High grain prices and strong export recorded in the preceding two years. demand have been primarily responsible for sizable increases in the retail prices of poultry, fish, eggs, cereal and Prices bakery items, fats and oils, and a vari- Headline inflation remained elevated in etyofotherpreparedfoods.Inaddition, the first half of 2008, as prices for both the index for fruits and vegetables rose food and energy continued to surge. atanannualrateof71⁄ 4 percentoverthe The chain-type price index for personal first five months of the year, likely consumption expenditures increased at reflecting, in part, higher input costs. an annual rate of 3.4 percent between Although world grain production im-
78 95th Annual Report, 2008 proved this spring, excessively wet pared with the readings in the range of weather and flooding in the Midwest 3 percent to 31⁄ 4 percent that had preboosted spot prices for corn and soy- vailed for the preceding few years. beans in June. Similarly, estimates of 10-year inflation The small decline in core PCE price compensation, as measured by the inflation this year masked some sub- spreads of yields on nominal Treasury stantial—but largely offsetting—cross- securities over those on their inflationcurrents. Shelter costs have continued protected counterparts, have moved up to decelerate as housing markets have about 20 basis points, on balance, since softened further. In addition, a modera- the turn of the year. However, most of tion in the pace of medical care price that increase reflected higher inflation increases has also held down core price compensation over the next 5 years; inflation this year. In contrast, prices of estimatesofinflationcompensation5to core services besides medical and shel- 10 years ahead were up only 10 basis ter costs have increased more rapidly. points by early July. According to the Similarly, prices of core goods, which Survey of Professional Forecasters condeclined some in 2007, were about flat, ducted by the Federal Reserve Bank of onnet,overthefirstfivemonthsofthis Philadelphia, expectations of inflation year. over the next 10 years ticked up in the More fundamentally, increased slack first half of 2008, though they remain in labor and product markets is likely essentially unchanged since 1998. dampingpriceincreasesthisyear.How- Broader, NIPA-based measures of ever, a number of other factors are put- inflation, which are available only ting upward pressure on core inflation. through the first quarter of this year, Higher prices for energy and other slowed relative to the pace of the past industrial commodities continue to add couple of years. The latest data show a to the cost of producing a wide variety of goods, and increases in the prices of AlternativeMeasuresofPriceChange, non-oil imports have picked up appre- 2007−08 ciably. Moreover, inflation expecta- Percent tions, especially for the near term, have moved up since the turn of the year. Pricemeasure 2007 2008 Probablyreflectingtheelevatedlevelof Chain-type(Q1toQ1) actual headline inflation, the median Grossdomesticproduct(GDP) . 2.9 2.2 expectation for year-ahead inflation Excludingfoodandenergy .. 2.9 1.9 Grossdomesticpurchases ...... 2.6 3.2 in the Reuters/University of Michigan Personalconsumption Surveys of Consumers moved up to expenditures(PCE) ....... 2.3 3.4 Excludingfoodandenergy .. 2.4 2.0 about 31⁄ 2 percent at the end of 2007 Market-basedPCEexcluding foodandenergy .......... 2.2 1.8 and then continued to rise in 2008; it reached 5.3 percent in the preliminary Fixed-weight(Q2toQ2) Consumerpriceindex.......... 4.0 3.8 July estimate. However, the upward Excludingfoodandenergy .. 2.3 2.2 movement in longer-run inflation ex- Note: Changes are based on quarterly averages of pectations has been much less pro- seasonallyadjusteddata.Fortheconsumerpriceindex, nounced. According to the preliminary the2008:Q2valueiscalculatedastheaverageforApril andMaycomparedwiththeaverageforthesecondquar- July result in the Reuters/University of terof2007andisexpressedatanannualrate. Michigan survey, median 5- to 10-year Source: For chain-type measures, Department of inflation expectations were 3.4 percent Commerce, Bureau of Economic Analysis; for fixedweightmeasures,DepartmentofLabor,BureauofLabor for a third consecutive month, com- Statistics.
Monetary Policy Report of July 2008 79 rise in the price index for GDP less thesecondquarter.(Seetheboxentitled foodandenergyofabout2percentover “The Federal Reserve’s Liquidity Opthe year ending in the first quarter, erations.”) Nevertheless, conditions in a downabout1percentagepointfromthe broad range of domestic and interfigure for the year ending in the first national financial markets remained quarter of 2007. In addition to a lower strained relative to previous years. This reading for core PCE inflation over the week, the Board of Governors anpastfourquarters,pricesforsomeother nounced a temporary arrangement that components of final demand, especially allows the Federal Reserve to extend construction, decelerated. credit to Fannie Mae and Freddie Mac, if necessary. Financial Markets Market Functioning The elevated risk spreads, high volatiland Financial Stability ity, and impaired functioning that characterized domestic and international The deteriorating performance of subfinancial markets in the second half of prime mortgages in the United States 2007 continued through the first half of prompted widespread strains and turbu- 2008.SpilloversfromtheslumpingU.S. lence in domestic and international housing market were the largest direct financial markets in the second half of sourceofthesepressures,butageneral- 2007. Substantial losses on even the ized flight from riskier assets—parhighest-rated structured products based ticularly structured credit products— on subprime mortgages caused market and worries about a global economic participants to reassess the risks associslowdown also contributed to financial ated with other structured financial strains.9 The Federal Reserve lowered instruments and raised concerns about the target federal funds rate an additheexposuresofmajorfinancialinstitutional 225 basis points over the first tions to these assets. As liquidity in four months of 2008 in response to markets for structured products evapoa deteriorating outlook for economic rated, banks were forced, at least temactivity. porarily, to hold more assets on their Financial strains increased signifibalance sheets than they anticipated. In cantly during the first quarter, leading addition, banks’ losses on mortgageto a liquidity crisis in March at The related securities and other assets Bear Stearns Companies, Inc., a major prompted credit concerns among couninvestment bank, and to its subsequent terparties. Both of these factors contribacquisition by JPMorgan Chase & Co. uted to strains in bank funding markets. Additional actions taken by the Federal The resulting deleveraging in the finan- Reserve to improve market functioning cial sector reduced the availability of and liquidity, including the introduction credit to the overall economy. By late of liquidity facilities for primary deal- 2007, U.S. house prices had begun to ers, appeared to have an ameliorative fall, residential investment was coneffect, and tensions eased somewhat in tracting sharply, and indicators of overall economic activity had softened noticeably. These developments induced 9. Inastructuredcreditproduct,thecreditrisk investors to pull back from a broader of a portfolio of underlying exposures is segrange of financial assets, leading to mentedintotranchesofvaryingseniorityandrisk exposure. impaired liquidity conditions in many
80 95th Annual Report, 2008 The Federal Reserve’s Liquidity Operations In response to serious financial strains, designed to meet urgent funding needs. the Federal Reserve has taken a number Indeed, a large number of banks— of steps since August 2007 to enhance ranging at various points in time from liquidity and foster the improved func- around 50 to more than 90—have partioning of financial markets and thereby ticipated in each of the 16 auctions held promote its dual objectives of maximum thusfar.ThesizeofindividualTAFaucemploymentandpricestability. tionswasraisedinseveralstepsfroman TheFederalReserveeasedthetermsof initial level of $20 billion at inception access for borrowing by depository insti- last December to $75 billion most tutions under the regular primary credit recently; the amount of TAF credit curprogram,ordiscountwindow.Thespread rentlyoutstandingis$150billion. of the primary credit rate over the target Inconjunctionwiththeintroductionof federalfundsratewasnarrowedfrom100 the TAF, the Federal Reserve also estabbasis points to 50 basis points in August lished swap lines with the European 2007andto25basispointsinMarch.The Central Bank and the Swiss National maximum loan term was extended to 30 Banktoprovidedollarfundstofacilitate days in August 2007 and to 90 days in dollar lending by those central banks to March; institutions have the option to banks in their jurisdictions. These swap renew term loans so long as they remain lines have been enlarged over time and in sound financial condition. Over time, currently stand at $50 billion with the more institutions have used the discount European Central Bank and $12 billion window, and the more accommodative withtheSwissNationalBank. terms for borrowing at the window have Inresponsetotheunprecedentedpresreportedlyimprovedconfidencebyassur- suresinshort-termrepurchaseagreement ing depository institutions that backstop (repo) markets earlier this year, the Fedliquidity will be available should they eral Reserve initiated a special program needit. of 28-day term repurchase agreements; InDecember2007,theFederalReserve $80 billion of such agreements are curintroduced the Term Auction Facility rently outstanding. These agreements (TAF), through which predetermined were designed to enhance the ability of amounts of discount window credit are primary dealers to obtain term funding auctioned every two weeks to eligible for any assets that are eligible as collatborrowers for terms of about one month. eral in conventional open market opera- Ineffect,TAFauctionsaresimilartoopen tions. Also, on March 11, the Federal market operations but are conducted with Reserve announced plans to create the depositoryinstitutionsratherthanprimary Term Securities Lending Facility dealersandagainstamuchbroaderrange (TSLF), in which the Federal Reserve of collateral than is accepted in standard lendsTreasurysecuritiesheldinitsportopenmarketoperations.TheTAFappears folio at auction against the collateral of to have overcome the reluctance to bor- high-grade securities held by dealers. In row associated with standard discount addition to conventional open market window lending because of its competi- operationcollateral—Treasurysecurities, tive auction format, the certainty that a agency securities, and agency-sponsored large amount of credit would be made mortgage-backed securities (MBS)—the available, and the fact that it is not FederalReservenowacceptsAAA-rated
Monetary Policy Report of July 2008 81 residential MBS, commercial MBS, and Stearnsandassumethecompany’sfinanother asset-backed securities as collateral cial obligations. The Federal Reserve, at the TSLF. The Federal Reserve sets a againincloseconsultationwiththeTreaminimumbidrateforeachTSLFauction. sury, agreed to supply term funding, Bids submitted at most TSLF auctions secured by $30 billion in Bear Stearns have fallen short of the announced auc- assets, to facilitate the purchase. JPMortion quantities. Nevertheless, market par- gan Chase completed the acquisition of ticipantshaveindicatedthattheTSLFhas BearStearnsonJune26,andtheFederal contributed to improved functioning in Reserveextendedapproximately$29bilrepomarkets. lionoffundingonthatdate. Pressures in short-term funding mar- Inafurtherefforttopreventapossible kets worsened sharply in mid-March. On downwardspiralinfinancialmarkets,the March 13, The Bear Stearns Companies, Federal Reserve also used its emergency Inc., a prominent investment bank and authorities to create the Primary Dealer primary dealer, advised the Federal Credit Facility (PDCF) in mid-March. Reserve and other government agencies The PDCF allows primary dealers to that its liquidity position had deteriorated borrow at the discount window against significantly and that it would be forced collateral that includes a broad range of tofileforbankruptcythenextdayunless investment-gradesecurities.Ineffect,the alternativesourcesoffundsbecameavail- PDCF provides primary dealers with a able. A bankruptcy filing would have liquiditybackstopsimilartothediscount forced the secured creditors and counter- window that is available to depository parties of Bear Stearns to liquidate the institutions. underlying collateral, and given the illi- These liquidity measures appear to quidity of markets, those creditors and have contributed to some improvement counterparties might well have sustained infinancialmarketssincelateMarch. substantial losses. If they had responded Over recent days, the share prices of to losses or the unexpected illiquidity of Fannie Mae and Freddie Mac dropped their holdings by pulling back from pro- sharply on investor concerns about their viding secured financing to other firms financial condition and capital position. andbydumpinglargevolumesofilliquid The Treasury announced a legislative assets on the market, a much broader initiative to bolster the capital, access to financial crisis likely would have ensued liquidity, and regulatory oversight of the withconsequentharmtotheoverallecon- government-sponsored enterprises omy. In such circumstances, the Federal (GSEs). As a supplement to the Trea- Reserve Board judged that it was appro- sury’s existing authority to lend to the priate to use its emergency lending GSEs, the Board of Governors estabauthoritiesundertheFederalReserveAct lished a temporary arrangement that to avoid a disorderly closure of Bear allows the Federal Reserve to extend Stearns. Accordingly, the Federal credittoFannieMaeandFreddieMac,if Reserve, after discussions with the Secu- necessary. In establishing this arrangerities and Exchange Commission and in ment, the Board exercised its authority close consultation with the Treasury, under section 13(13) of the Federal agreed to provide short-term funding to Reserve Act. Credit under this arrange- Bear Stearns through JPMorgan Chase & ment will be extended at the primary Co.Overthefollowingweekend,JPMor- credit rate and secured by government gan Chase agreed to purchase Bear andfederalagencysecurities.
82 95th Annual Report, 2008 markets, with widened risk spreads and ties jumped to multiyear highs. Ratios elevated volatilities. of yields on municipal bonds to yields This market turbulence continued on Treasury securities spiked, and failinto early 2008, as liquidity in many ureswerewidespreadintheauctionrate financial markets continued to be im- securities markets for municipal securipaired and risk spreads remained wide. ties, student loans, and other assets. After declining sharply late last year, Prices fell in the secondary market for issuanceofnon-agency-sponsoredmort- leveragedloans,andimpliedspreadson gage-backed securities essentially came indexes of loan-only credit default to a halt by the beginning of 2008, and swaps, or LCDX, reached record levels secondary-market trades of these assets in February. Liquidity was strained in were rare. Price indexes of non-agency- many markets; for example, in the marsponsored subprime MBS based on ket for Treasury coupon securities, bidderivatives markets declined further. asked spreads and spreads between However,theunusualpressuresthathad yields on off-the-run and on-the-run been apparent in short-term investment- securities reached multiyear highs. Bidgrade funding markets in December asked spreads in the leveraged loan eased considerably in January, owing to market also widened noticeably. The a combination of the passing of year- orderly resolution of the Bear Stearns endbalancesheetconcernsandthepro- situation along with the implementation vision of additional liquidity by the of the Primary Dealer Credit Facility Federal Reserve and foreign central and the Term Securities Lending Facilbanks. ity in March appeared to reduce strains In February and March, short- and in short-term funding markets and to long-term funding markets came under relieve liquidity pressures more broadly renewedpressureafterreportsoffurther across fixed-income markets (see the losses and write-downs at major banks, box entitled “The Federal Reserve’s broker-dealers, and the government- Liquidity Operations.”) sponsored enterprises. Fears of a weak- Even though conditions in several ening economy exacerbated a general- markets improved somewhat after midizedflightfromallbutthesafestassets. March, pressures in some short-term Repurchase agreement (repo) market funding markets continued to intensify investors exhibited a marked preference into April. Yield spreads rose in April for Treasury collateral and pushed rates on unsecured financial, asset-backed, on Treasury general collateral repos to and lower-rated nonfinancial commerhistoricallowsthatwerewellbelowthe cial paper. Interbank term funding prestarget federal funds rate. As liquidity sures, as measured by spreads of term for MBS not sponsored by the GSEs London interbank offered rates over and for other private-label asset-backed comparable-maturity overnight index securities dried up, the heightened swap rates, peaked in April but have uncertainty regarding values of these since moved somewhat lower, at least instruments led to an unprecedented for terms of three months and less. The increase in the margin, or “haircut,” expansion in May of the Federal Rerequired on repos based on such collat- serve’s Term Auction Facility and of eral; the interest rate spread on these theassociatedswaplineswiththeEurorepos also rose. Spreads of corporate pean Central Bank and the Swiss Naand GSE bond yields over yields on tional Bank appears to have contributed comparable-maturity Treasury securi- tothiseasingofpressures.However,for
Monetary Policy Report of July 2008 83 interbank funding at terms greater than 2007.10 Commercial and industrial three months, transaction volumes are loans decelerated sharply after growing reportedly low, and spreads remain at an annual rate of more than 25 perhigh. cent in the fourth quarter of 2007. The In longer-term financial markets, surgeinC&Iloanslatelastyearreportpressures generally eased in April and edly reflected, in part, the difficulties May. Spreads of conforming mortgage that banks faced in selling syndicated rates and corporate bond yields over loans to nonbank investors; as a result, yieldsoncomparable-maturityTreasury banks had to fund a number of previsecurities narrowed, and prices and ously committed large syndicated deals liquidity in the secondary market for ontheirbalancesheets.Inthefirstquarleveraged loans increased. However, ter of 2008, C&I loans grew at a lower yield spreads for corporate bonds and but still quite fast rate of 161⁄ 4 percent, with part of the strength reportedly due mortgages moved higher in June. Eqtoincreasedutilizationofexistingcredit uity prices of financial intermediaries, lines,thepricingofwhichreflectedpreincluding the housing-related GSEs, vious lending practices. In the second Fannie Mae and Freddie Mac, dropped quarter, C&I lending moderated signifisharply in June and early July as concantly further, a pattern consistent with cerns mounted both about their losses reports from the April Senior Loan and longer-term profitability and about Officer Opinion Survey, which indithe prospects for earnings dilution cated a further tightening of credit stangiven the considerable new capital that dards and terms and weakening of may need to be raised. Overall, indicademand for C&I loans. Commercial tors of financial market strains remain real estate loans grew at an annual rate elevated compared with their levels in of about 93⁄ 4 percent in the first half of previous years. 2008, only slightly slower than their pace in 2007. Debt and Financial Intermediation After contracting sharply in the final quarter of 2007, the outstanding stock Thetotaldebtofthedomesticnonfinan- of residential mortgages at commercial cialsectorexpandedatanannualrateof banks rose 31⁄ 2 percent in the first quar- 61⁄ 2 percent in the first quarter of 2008, ter,inpartbecauseofasluggishpaceof a somewhat slower pace than in 2007. securitization. In the second quarter, The moderation in borrowing was however, banks’ holdings of residential mainly accounted for by a slowdown in mortgage loans fell again, a pattern the growth of household debt, particu- consistentwiththeongoingweaknessin larlymortgagedebt.Borrowingbynon- the housing market and the reduced financial businesses also decelerated, availability of mortgage credit. Growth but at a 91⁄ 4 percent pace, it was still ofhomeequitylinesofcreditpickedup high by historical standards. Prelimi- significantly in the first half of 2008, nary data suggest that overall debt likely because of the decline in shortgrowth slowed further in the second term market rates to which such loans quarter. Commercial bank credit increased at 10. Thegrowthrateofbankcreditin2007has anannualrateof43⁄ 4 percentinthefirst beenadjustedtoremovetheeffectsoftheconverhalf of 2008, down significantly from sionofalargecommercialbanktoathriftinstithe101⁄ 4 percentexpansionregisteredin tution.
84 95th Annual Report, 2008 are generally tied. However, commer- ableworseninginconstructionandland cialbankshavetakenstepstolimittheir development loans, but performance of exposure to these loans; according to most other types of loans also weakthe April Senior Loan Officer Opinion ened. To bolster equity positions dimin- Survey, a significant portion of respon- ished by asset write-downs and loandents indicated that they had tightened loss provisions, commercial banks theircreditstandardsforapprovingnew raised a substantial volume of capital in applications for home equity lines of the first half of 2008; some banks credit, and a notable proportion re- reduced dividends to further shore up portedthattheyhadalsofirmedlending their capital. terms on existing lines, mainly in response to declines in property values. Equity Markets Despitethereportedtighteningofcredit Overall, share prices have dropped conditions in the household sector, conabout 15 percent from the end of 2007. sumer loans grew at a moderate pace in The declines were led by the financial the first half of 2008. sector, especially depository institutions Profitability of the commercial bankand broker-dealers, which fell 37 pering sector improved somewhat in the centand41percent,onaverage,respecfirst quarter of 2008 but remained well tively. The energy and basic materials below the levels seen before the sumsectorsavoidedthedowntrendandhave mer of 2007. Many large banks rechanged little on net. ceived a significant boost to their first- Actual and implied volatilities of quarter profits as a result of their stakes broad equity price indexes shot up last in Visa—the initial public offering of year with the onset of financial strains. which occurred in March. However, The partial easing of financial strains in continued write-downs of mortgagethe second quarter was associated with related assets and leveraged loans, modest declines in the actual and imalong with increasing loan-loss proviplied volatilities of equity prices to levsions, held profits down in the first els still above those of the past few quarter. Concerns about recent and years. The 12-month-forward expected potential losses have weighed heavily earnings-price ratio for S&P 500 firms on bank stock prices this year. The jumped in the first half of 2008, while median spread on credit default swaps the long-term real Treasury yield rose on the senior debt of major banks only slightly. The difference between climbed from 50 basis points at the end these two values—a rough measure of of 2007 to more than 100 basis points the premium that investors require for in mid-March. After declining noticeholding equity shares—has reached the ably in April and May, it returned close high end of its range over the past 20 to the March peak in late June. years. Theoveralldelinquencyrateonloans held by commercial banks rose in the Policy Expectations and Interest Rates firstquartertoitshighestlevelsincethe early 1990s, and the charge-off rate The current target for the federal funds increased to the upper end of its range rate, at 2 percent, is substantially below since 2000. The deterioration in credit the level that investors expected as of quality was accounted for primarily by late December 2007. According to continuederosionintheperformanceof futures quotes at that time, market parresidential mortgages and a consider- ticipants expected that the federal funds
Monetary Policy Report of July 2008 85 rate would be around 31⁄ 2 percent by a lag in the indexation of inflation- July. Looking forward, however, inves- protected securities, near-term inflation tors now expect that the next policy compensation can be strongly affected move will be up, and a small degree of by the latest movements in energy and tighteninghasbeenpricedinbytheend food prices; these prices have risen of 2008. Measures of uncertainty about sharply in recent months. thepathofpolicyrosewiththeonsetof financial turbulence last year and are Money and Reserves currently near the high end of their range over the past 10 years. M2 is estimated to have expanded at an Treasury yields fell sharply from the annual rate of 73⁄ 4 percent over the first end of 2007 through March amid con- half of 2008, notably faster than the cerns about the health of financial likely growth rate of nominal GDP. firms, severe strains in financial mar- Demand for money balances was supkets, a weakening economic outlook, ported by declines in the opportunity andlowerexpectationsforfuturepolicy cost of holding money relative to other rates. Since late March, yields have financial assets and by strong demand risenacrossthecurveasfearsofadeep forsafeandliquidassetsamidvolatility economic contraction have receded and and strains in financial markets. Money concerns about the inflation outlook market mutual fund shares grew parhave increased. On net, 2-year yields ticularly rapidly in the first quarter. are down 65 basis points, and 10-year However, growth of money market yields are down 20 basis points since mutual funds dropped considerably in the start of the year. the second quarter, and small time Yields on Treasury inflation-pro- deposits contracted; M2 slowed accordtected securities largely moved in line ingly. Demand for currency continued with nominal yields—that is, they fell to be lackluster for the most of the first through mid-March and then rose—but half-year, but it picked up noticeably therisesinceMarchhasbeensomewhat late in the second quarter as domestic lessthanthatofnominalyields.Inaddi- demand grew and foreign demand was tion, shifting liquidity conditions in the estimated to be less weak. markets for nominal and indexed Trea- The strains in bank funding markets sury securities at times affected the over recent months have posed chalspreads between nominal and indexed lenges for the implementation of moneyields, also known as inflation compen- tary policy. Banks generally have sation. On net, 10-year inflation com- seemed more cautious in their activity pensation has risen about 20 basis in the federal funds market and less pointssincetheendof2007,suggesting willing to take advantage of potential some increase in investors’ concerns arbitrage opportunities in that market about the inflation outlook. Inflation over the course of a day and across the compensation rose over both the near days of a reserve maintenance period. term and the longer term, but the In this environment, the Open Market increase was larger over the near term, Desk’s decisions regarding the approas compensation over the next 5 years priate quantity of reserves to be suprose about 30 basis points whereas plied each day through open market compensation over the period from operations have been complicated, and 5 years ahead to 10 years ahead rose volatility in the federal funds rate has only 10 basis points. In part because of been elevated. The authority to pay
86 95th Annual Report, 2008 interest on reserves could be helpful to also continued to offer longer-term the Federal Reserve in limiting the funding in euros, auctioning threevolatility in the federal funds rate. The monthfundstotaling€270billioninthe abilitytopayinterestonreserveswould firstquarterand€250billioninthesecalso allow the Federal Reserve to man- ondquarterandaddinganewlong-term age its balance sheet more efficiently in refinancing operation with a six-month circumstances in which promoting maturity. financialstabilityrequiredtheprovision Market volatility has persisted in of substantial amounts of discount win- recent months, with ongoing concerns dow credit to the financial sector. In about the balance sheets of financial light of these considerations, the Fed- institutions. Since the middle of last eral Reserve has asked the Congress to year, European banks have announced accelerate the effective date of statutory about $200 billion in write-downs— authority to pay interest on reserve ballargely as a result of indirect exposure ances, which is currently October 2011. to U.S. credit markets through both sponsorshipofandinvestmentsinstruc- International Developments tured credit products—and further losses may be recognized in second- International Financial Markets quarter financial statements. In addition, mortgage lenders in the United Global financial markets remained dis- Kingdom have been affected by weaktressed over the first half of 2008, priness in property prices there and by marilybecauseofconcernsaboutweakreduced access to capital market fundness in real estate and slowing global ing.Ingeneral,theinstitutionsthathave economic growth. Amid heightened recognizedsignificantlosseshavetaken market turbulence in March, the Europrompt steps to replenish capital from a pean Central Bank (ECB), Bank of variety of sources; more than $140 bil- England, Bank of Canada, and Swiss lionhadbeenraisedbytheendofJune. National Bank (SNB) announced a fur- On net, most major equity indexes in thersetofjointactionswiththeFederal the advanced foreign economies stand Reservetohelpimprovethefunctioning 12 percent to 25 percent lower in local of short-term funding markets. The currency terms compared with the end Federal Open Market Committee increased its temporary swap line to the of 2007. European stock indexes were ECB in March from $20 billion to led lower by the stock prices of finan- $30billionanditslinetotheSNBfrom cial firms, which declined 34 percent $4 billion to $6 billion. In May, these (measured in euros); Japanese financial amounts were increased further to $50 stocks are down 9 percent on the year. billion and $12 billion, respectively, The financial turbulence has had less and the lines were extended through impact on Latin American stock prices. January 2009. Meanwhile, the Bank of Equity indexes in Mexico and Brazil England and the Bank of Canada each were virtually unchanged, on balance, introduced new term funding arrange- over the first half of 2008. However, ments in their domestic currencies, and Chinese stock prices have tumbled the Bank of England also established a 44 percent since the end of 2007, virtufacility to swap government bonds for ally erasing last year’s gains, and other banks’ mortgage-backed securities for a major emerging Asian equity indexes termofonetothreeyears.TheECBhas are also down, but to a lesser extent.
Monetary Policy Report of July 2008 87 Liquidity in European government ter, and first-quarter real GDP even bond markets was impaired in March contracted slightly in Canada, where but seems to have improved in recent trade and financial ties to the United months. Long-term bond yields in the States are strong. Surveys of banks in advanced foreign economies fell in the Europe show a further tightening of first quarter but have more than re- credit standards in the first half of 2008 versed these declines as investors no for both households and businesses. longer expect the ECB and the Bank of Lending to businesses appears to have Englandtoeasetheirpolicyrates.Since remained solid, but household borrowthe end of 2007, long-term rates have ing has slowed. Housing markets in a risen, on net, 11 basis points in Ger- number of countries—including Iremany, 38 basis points in the United land, Spain, and the United Kingdom— Kingdom, and 12 basis points in Japan, have continued to soften. and nominal yield curves have flat- Since the beginning of the year, tened. Meanwhile, implied long-term headline rates of inflation have contininflation compensation has increased ued to move up, on balance, in most 10 basis points in Japan and nearly economies, mainly because of increas- 30 basis points in Germany and Can- ing prices for food and energy. The ada. 12-month change in consumer prices in The Federal Reserve’s broadest mea- boththeeuroareaandtheUnitedKingsure of the nominal trade-weighted for- dom increased further from January to eign exchange value of the dollar has mid-2008, while core inflation rates declined about 3 percent, on net, since (which exclude the changes in the the end of last year. Over the same prices of energy and unprocessed food) period, the major currencies index of have increased much less. In Canada, thedollarhasalsodeclinedabout3per- where food price increases have been cent. The dollar depreciated sharply muted, inflation is little changed, on againsttheeuroandtheyeninFebruary balance, since the beginning of the year and March but has recovered some in but has risen in the past couple of recentmonths.Onnetthusfarthisyear, months. Japanese consumer prices are the dollar is down about 4 percent roughlyunchangedona12-monthbasis against the yen and 7 percent against when both food and energy prices are the euro. The dollar is 2 percent higher excluded. against the Canadian dollar and slightly Over the first half of this year, the higher against sterling. The dollar has focusofthemajorforeigncentralbanks declined 6 percent against the Chinese appears to have shifted somewhat from renminbi since the end of 2007. the impact of financial market strains on growth to the effect of higher com- Advanced Foreign Economies modity prices on inflation. After initiallyloweringofficialinterestrates,the Economic growth in the major ad- Bank of Canada and the Bank of vanced foreign economies appears to England have held their target rates have slowed somewhat this year. Al- steady since April, and the Bank of though both the euro area and Japan Japanhaskeptitspolicyrateunchanged posted strong first-quarter GDP growth at 0.5 percent all year. Recent inflation rates, recent monthly indicators have rates and statements from all of these been more subdued. In other countries, central banks have led market particigrowth rates declined in the first quar- pants to expect policy rates to increase
88 95th Annual Report, 2008 slightlyortoremainonhold.OnJuly3, economies, 12-month headline inflation the ECB raised its policy rate 25 basis in a number of countries continued to points,to4.25percent,butithintedthat rise in recent months, thereby promptfurtherratehikeswerenotintheoffing. ing many central banks to tighten monetary policy. In some cases, govern- Emerging Market Economies ments also instituted export restrictions or reduced import duties for some food Recent data suggest that real GDP products.Therisingcostofenergysubgrowth in China remained strong in the sidies has led governments in China, first half of this year. Although export India, Malaysia, Indonesia, and Taiwan growth slowed, domestic demand ap- to raise administered gasoline prices pears to have accelerated. roughly 10 percent to 40 percent in Elsewhere in emerging Asia, recent recent months. performancehasvariedbut,onbalance, indicators suggest that activity has Part 3 remainedsolidintheregion.Inthefirst Monetary Policy quarter, real GDP growth moderated in over the First Half of 2008 Korea, Malaysia, and Thailand but was strong in Hong Kong and Singapore. Aftereasingthestanceofmonetarypol- Exports of the region have generally icy 100 basis points over the second slowed along with the deceleration in half of 2007, the Federal Open Market global economic activity; however, do- Committee (FOMC) lowered the target mestic demand strengthened in a num- federal funds rate 225 basis points furber of countries. therinthefirsthalfof2008.11TheFed- Economic activity has decelerated in eral Reserve also took a number of Latin America. In Mexico, output additional actions to increase liquidity growthslowedtoabout2percentinthe andtoimprovethefunctioningoffinanfirst quarter, in line with the step-down cial markets. in the pace of activity in the United InaconferencecallonJanuary9,the States that began toward the end of last Committee reviewed recent economic year.InotherLatinAmericancountries, data and financial market developnotably Brazil and Venezuela, growth ments.Theinformation,whichincluded also moderated. weaker-than-expected data on home Higher prices for food and energy sales and employment for December as have continued to exert upward pres- well as a sharp decline in equity prices sures on inflation across emerging mar- since the beginning of the year, sugket economies. In China, headline in- gestedthatthedownsideriskstogrowth flation has risen, reaching roughly had increased significantly since the 8 percent in recent months. In response time of the December FOMC meeting. to the inflationary pressures, the Chi- Participants cited concerns that the nese authorities have allowed the renminbi to appreciate at a more rapid 11. MembersoftheFOMCin2008consistof pace, and the People’s Bank of China members of the Board of Governors of the Fedhas further tightened monetary policy. eral Reserve System plus the presidents of the The Bank has raised the required FederalReserveBanksofCleveland,Dallas,Minneapolis, New York, and Philadelphia. Particireserve ratio five times this year by a pants at FOMC meetings consist of members of total of 300 basis points, to 171⁄ 2 perthe Board of Governors and all Reserve Bank cent. Elsewhere in emerging market presidents.
Monetary Policy Report of July 2008 89 slowing of economic growth could lead tightening of financial conditions. With to a further tightening of financial con- the contraction in the housing sector ditions, which in turn could reinforce intensifying and a range of financial theeconomicslowdown.However,core markets remaining under pressure, ecoinflation had edged up in recent nomic growth was expected to stay soft months, and considerable uncertainty in the first half of 2008 before picking surrounded the inflation outlook. On up strength in the second half. Howbalance, participants were generally of ever, the ongoing weaknesses in home the view that substantial additional pol- sales and house prices, as well as the icy easing might well be necessary to tightening of credit conditions for support economic activity and reduce households and businesses, were seen the downside risks to growth, and they as posing downside risks to the neardiscussed the possible timing of such term outlook for economic growth. actions. Moreover, the potential for adverse On January 21, the Committee held feedback between the financial markets anotherconferencecall.Strainsinsome and the economy was a significant risk. financial markets had intensified, and Participants expressed some concern incoming evidence had reinforced the about the disappointing inflation data view that the outlook for economic received over the latter part of 2007. activity was weak. Participants ob- Although many expected that a levserved that investors apparently were eling-out of prices for energy and other becoming increasingly concerned about commodities, such as that embedded in the economic outlook and downside futures markets, and a period of belowrisks to activity and that these develop- trend growth would contribute to some ments could lead to an excessive pull- moderation in inflation pressures over back in credit availability. In light of time, the Committee believed that it these developments, all members remained necessary to monitor inflation judged that a substantial easing in pol- developments carefully. Against that icy was appropriate to foster moderate backdrop, the FOMC decided to lower economic growth and reduce the down- the target for the federal funds rate side risks to economic activity. The 50 basis points, to 3 percent. The Com- Committee decided to lower the target mittee believed that this policy action, for the federal funds rate 75 basis combined with those taken earlier, points, to 31⁄ 2 percent, and judged that would help promote moderate growth appreciable downside risks to growth over time and mitigate the risks to ecoremained. Although inflation was ex- nomic activity. However, members pected to edge lower over the course of judged that downside risks to growth 2008, participants underscored their remained. view that this assessment was condi- InaconferencecallonMarch10,the tioned upon inflation expectations re- Committee reviewed financial market mainingwellanchoredandstressedthat developments and considered proposals the inflation situation should continue aimed at supporting the liquidity and to be monitored carefully. orderly functioning of those markets. In The data reviewed at the regularly light of the sharp deterioration of some scheduled FOMC meeting on January key money and credit markets, the 29 and 30 confirmed a sharp decelera- Committee approved the establishment tion in economic growth during the of the Term Securities Lending Facility, fourth quarter of 2007 and a continued under which primary dealers would be
90 95th Annual Report, 2008 able to borrow Treasury securities from MBS had become more difficult amid the System Open Market Account for a reports of increased margin, or “hairterm of approximately one month cuts,” being required by lenders. Yields against any collateral eligible for open on Treasury bills and repurchase agreemarket operations and the highest- ments backed by Treasury securities quality private residential mortgage- had plummeted, reflecting investors’ backed securities (MBS).12 The new heighteneddemandforthesafestassets. facility was designed to alleviate pres- Participants at the March 18 FOMC sures in the financing markets for secu- meeting noted that prospects for both rities. In addition, the Committee economic activity and near-term inflaagreedtoexpandtheexistingreciprocal tion had deteriorated since January, and currency agreements with the European many thought that some contraction in Central Bank and the Swiss National economic activity in the first half of Bank to $30 billion and $6 billion, 2008 was likely. Although the economy respectively, and to extend the terms of was expected to recover in the second these agreements through September half and to grow further in 2009, con- 2008. Over the next few days, financial siderable uncertainty surrounded this market strains intensified further. On forecast. Some participants expressed March 16, the Federal Reserve an- concern that falling house prices and nounced emergency measures to bolster financial market stress might lead to a liquidity and promote orderly function- more severe and protracted downturn ing in financial markets, including the than anticipated. Recent readings on approval of the financing arrangement inflation had been elevated, and some associated with the acquisition of The indicators of inflation expectations had Bear Stearns Companies, Inc., by risen. However, a flattening-out of JPMorgan Chase & Co. and the estab- prices for oil and other commodlishment of the Primary Dealer Credit ities—as implied by futures prices— Facility to improve the ability of pri- andtheprojectedeasingofpressureson mary dealers to provide financing to resourceswereexpectedtocontributeto participantsinsecuritizationmarkets.In some moderation in inflation. All in all, addition, the primary credit rate was most members judged that a 75 basis lowered 25 basis points, and the maxi- point reduction in the target federal mum term of primary credit loans was fundsrate,to21⁄ 4 percent,wasappropriextended to 90 days. ate to address the combination of risks When the Committee met on March of slowing economic growth, inflation- 18, financial markets continued to be ary pressures, and financial market disunder great stress, particularly the mar- ruptions. In its statement, the Commitkets for short-term collateralized and teehighlightedthefurtherweakeningin uncollateralized funding. Spreads on the outlook for economic activity, but it interbank loans and lower-rated com- also emphasized the importance of mercial paper had widened over the monitoringinflationdevelopmentscareintermeeting period, and obtaining fully. credit through repurchase agreements The data reviewed at the meeting on backed by agency and private-label April29and30indicatedthateconomic growth had been weak in the first three months of 2008 and that core consumer 12. By notation vote completed on March 20, price inflation had slowed, but that AAA-rated commercial MBS were added to the listofacceptablecollateral. overall inflation had remained elevated.
Monetary Policy Report of July 2008 91 FOMC participants indicated that these arrangements that had been put in place developments had been broadly consis- in previous months. The reciprocal curtent with their expectations. Conditions rency agreements with the European across a number of financial markets Central Bank and Swiss National Bank werejudgedtohaveimprovedsincethe were increased to $50 billion and $12 March meeting, but financial markets billion, respectively, and both were remained under considerable stress. extended through January 2009. The Although the likelihood that economic collateral accepted by the Term Securiactivity would be severely disrupted by ties Lending Facility was expanded to a sharp deterioration in financial mar- include all AAA-rated asset-backed kets had apparently receded, most par- securities. In addition, Chairman ticipants thought that the risks to eco- Bernanke announced his intention to nomic growth were still skewed to the expand the Term Auction Facility to downside. All participants expressed $150 billion under authority previously concern about upside risks to inflation delegated by the Board of Governors. posed by rising commodity prices and At the time of the meeting held June the depreciation of the dollar, but some 24 and 25, the available indicators sugparticipants noted that the downside gestedthateconomicactivityinthefirst risks to economic activity also implied halfoftheyearhadnotbeenasweakas that there were downside risks to price had been expected in April. Neverthepressures as well. Participants ex- less, several factors were viewed as pressed significant uncertainty concern- likely to restrain activity in the near ing the appropriate stance of monetary term, including the contraction in the policy in these circumstances. Some housing sector, sharply higher energy participants noted that the level of the prices, and continued tight credit condifederal funds target, especially when tions. Although financial market concompared with the current rate of infla- ditions generally appeared to have tion, was relatively low by historical improved modestly since the April standards. Others noted that financial meeting, participants noted that the market strains and elevated risk spreads potential for adverse financial market had offset much of the effects of policy developments still posed significant easing on the cost of credit to borrow- downside risks to economic activity. ers. On balance, most members agreed The further large increase in energy that the target for the federal funds rate prices also prompted an upward revishould be lowered 25 basis points, to sion of projections for overall inflation 2percent.TheCommitteeexpectedthat inthesecondhalfof2008.Mostparticithe policy easing would help to foster pants expected that a leveling-out of moderate growth over time without energy prices and continued slack in impedingamoderationininflation.The resource utilization would lead inflation Committee agreed that, in light of the to moderate in 2009 and 2010, but the substantialpolicyeasingtodateandthe persistent tendency in recent years for ongoing measures to foster financial commodity prices to exceed the trajecmarket liquidity, the risks to growth tory implied by futures market prices were now more closely balanced by the engendered considerable uncertainty risks to inflation. around the projected moderation of In view of persisting strains in fund- inflation. Members generally agreed ing markets, the FOMC also approved that the downside risks to growth had proposals to expand the liquidity eased somewhat since the previous
92 95th Annual Report, 2008 FOMC meeting while the upside risks nomic outlook. Nonetheless, policyto inflation had intensified. Against this makers recognized that circumstances backdrop, most members judged that could change quickly and noted that maintaining the current stance of policy they might need to respond promptly to at this meeting represented an appropri- incoming information about the evoluate balancing of the risks to the eco- tion of risks. Á
Federal Reserve Operations
95 Banking Supervision and Regulation The Federal Reserve has supervisory State member banks faced challenges and regulatory authority over a variety similar to those faced by bank holding of financial institutions and activities. It companies in 2008. As a group, they plays an important role as umbrella suffered net losses of $3.2 billion, supervisor of bank holding companies, reflecting asset write-downs and higher including financial holding companies. loan-loss provisions. Credit quality And it is the primary federal supervisor indicators worsened further during the of state banks that are members of the year, with additional increases in non- Federal Reserve System. performing loans and delinquencies. U.S. bank holding companies and Charge-off ratios reached their highest state member banks continued to face levelinoveradecade.Risk-basedcapisubstantial challenges in 2008, exac- tal ratios increased somewhat over the erbated by problems in funding and year; at year-end more than 98 percent capital markets as well as the ongoing of all state member banks continued to economic slowdown. Bank holding report capital ratios consistent with a company asset quality and earnings “well capitalized” designation under continued their deterioration over the promptcorrectiveactionstandards.One course of the year, in part due to ongo- state member bank, with assets of ing problems linked to the residential $237.5 million, failed. housing market. The effects of the sub- During 2008, the Federal Reserve stantial challenges facing the banking undertook a range of activities to idenindustry were revealed in bank hold- tify and correct some of the risking companies’ reported net losses of management weaknesses revealed by $27 billion for the full year. Nonper- the financial crisis that began in midforming assets increased notably as the 2007. These supervisory activities covquality of various types of assets de- ered a number of areas, including firmclined,andoverallloandelinquenciesin- wide risk identification and senior creased. As in 2007, several institutions management oversight. Liquidity risk recognized significant valuation write- management and capital adequacy were downs on assets affected by market given special attention. Where instituconditions.Liquidityandcapitalcontin- tionsdidnotmakeappropriateprogress, ued to be strained. Some institutions supervisors downgraded supervisory received federal government assistance ratings and used enforcement tools to in the form of capital injections via the bring about corrective action. In addi- Treasury’s Troubled Asset Relief Pro- tion, the Federal Reserve undertook a gram,andmanyothersdrewonFederal Systemwide effort to identify lessons Reserve liquidity facilities to a consid- learned for supervisors and to begin erable degree. While regulatory capital developing recommendations for potenratios suffered some erosion over 2008, tial improvements to supervisory pracbankholdingcompaniesingeneralcon- tices. The objective of the lessonstinued to maintain ratios in excess of learned process is to improve all aspects minimum regulatory requirements. of the supervisory process, including
96 95th Annual Report, 2008 oversight of individual institutions and tionsmaybegintransitioningtothenew promotion of overall financial stability. rules after they adopt an implementa- The lessons-learned process, which will tionplanandhaveinplacesystemsthat continue into 2009, has drawn on staff comply with the final rule’s qualificafromaroundtheFederalReserveSystem, tion requirements. In January 2008, the including presidents and members of the agencies published final reporting boardsofdirectorsoftheReserveBanks. requirements and reporting templates In 2008, banking supervisors contin- for institutions that will be adopting the ued to focus on the adequacy of banks’ Basel II advanced approaches. In light credit-risk management practices and of identified supervisory lessons the important role banks play in credit learned, the Federal Reserve plans to intermediation. The Federal Reserve augment its processes for conducting issued two statements emphasizing the examinations and inspections as critical role that banking organizations needed, as well as its processes for have in U.S. credit markets and encour- ensuring that there is appropriate aging those organizations to pursue follow-up with institutions about issues responsible lending activities as they identified during examinations and meetthecreditneedsofhouseholdsand inspections. businesses. Also, the Federal Reserve, Federal Deposit Insurance Corporation Scope of Responsibilities for (FDIC), and Office of the Comptroller Supervision and Regulation of the Currency (OCC) jointly issued revisions to the Guide to the Inter- The Federal Reserve is the federal agency Country Exposure Review supervisor and regulator of all U.S. Committee Process to reflect improve- bank holding companies, including mentsinregulatedinstitutions’analyses financial holding companies formed of cross-border-exposure and country- undertheauthorityofthe1999Grammrisk management programs and the in- Leach-Bliley Act, and state-chartered creased availability of information on commercial banks that are members of country and transfer risk. In addition, theFederalReserveSystem.Inoverseethe Federal Reserve, FDIC, OCC, Of- ing these organizations, the Federal fice of Thrift Supervision (OTS), and Reserve seeks primarily to promote National Credit Union Administration their safe and sound operation, includ- (NCUA)jointlyissuedforcommentpro- ing their compliance with laws and posed Interagency Appraisal and Evalu- regulations. ation Guidelines to reaffirm supervisory TheFederalReservealsohasresponexpectations for sound practices in sibilityforsupervisingtheoperationsof appraising and evaluating real estate. all Edge Act and agreement corpora- Federal Reserve staff continued to tions, the international operations of work with the other federal banking agenciestoimplementtheadvancedap- Standards: A Revised Framework,” was develproaches of the Basel II Capital Accord opedbytheBaselCommitteeonBankingSuperin the United States, with the final rule vision,whichismadeupofrepresentativesofthe taking effect on April 1, 2008.1 Institu- central banks or other supervisory authorities of 19countries.Theoriginaldocumentwasissuedin 2004;theoriginalversionandanupdatedversion 1. The Basel II Capital Accord, an interna- issued in November 2005 are available on the tional agreement formally titled “International websiteoftheBankforInternationalSettlements ConvergenceofCapitalMeasurementandCapital (www.bis.org).
Banking Supervision and Regulation 97 statememberbanksandU.S.bankhold- provided by the board and senior maning companies, and the U.S. operations agement, including an assessment of of foreign banking organizations. internal policies, procedures, controls, The Federal Reserve exercises im- andoperations;(2)anassessmentofthe portant regulatory influence over entry quality of the risk-management and into the U.S. banking system, and the internal control processes in place to structure of the system, through its identify, measure, monitor, and control administration of the Bank Holding risks; (3) an assessment of the key Company Act, the Bank Merger Act financialfactorsofcapital,assetquality, (with regard to state member banks), earnings,andliquidity;and(4)areview the Change in Bank Control Act (with for compliance with applicable laws regard to bank holding companies and and regulations. The table provides state member banks), and the Interna- information on examinations and intional Banking Act. The Federal Re- spections conducted by the Federal serve is also responsible for imposing Reserve during the past five years. marginrequirementsonsecuritiestrans- Inspections of bank holding compaactions. In carrying out these responsi- nies, including financial holding combilities,theFederalReservecoordinates panies, are built around a rating system its supervisory activities with the other introducedin2005thatreflectstheshift federal banking agencies, state agen- in supervisory practices away from a cies,functionalregulators(thatis,regu- historicalanalysisoffinancialcondition lators for insurance, securities, and toward a more dynamic, forward lookcommodities firms), and the bank regu- ing assessment of risk-management latory agencies of other nations. practices and financial factors. Under the system, known as RFI but more Supervision for fully termed RFI/C(D), holding compa- Safety and Soundness niesareassignedacompositerating(C) that is based on assessments of three To promote the safety and soundness of components: Risk Management (R), banking organizations, the Federal Re- Financial Condition (F), and the potenserve conducts on-site examinations tial Impact (I) of the parent company andinspectionsandoff-sitesurveillance and its nondepository subsidiaries on and monitoring. It also takes enforcethe subsidiary depository institution.2 ment and other supervisory actions as The fourth component, Depository Innecessary. stitution (D), is intended to mirror the primary supervisor’s rating of the sub- Examinations and Inspections sidiary depository institution. TheFederalReserveconductsexamina- The Federal Reserve uses a risktions of state member banks, the U.S. focused approach to supervision, with branchesandagenciesofforeignbanks, activities focused on identifying the and Edge Act and agreement corpora- areas of greatest risk to banking organitions. In a process distinct from examinations, it conducts inspections of bank 2. Each of the first two components has four holding companies and their nonbank subcomponents: Risk Management—Board and subsidiaries.Whetheranexaminationor Senior Management Oversight; Policies, Procedures,andLimits;RiskMonitoringandManagean inspection is being conducted, the mentInformationSystems;andInternalControls. reviewofoperationsentails(1)aneval- Financial Condition—Capital; Asset Quality; uation of the adequacy of governance Earnings;andLiquidity.
98 95th Annual Report, 2008 StateMemberBanksandBankHoldingCompanies,2004–2008 Entity/Item 2008 2007 2006 2005 2004 Statememberbanks Totalnumber ........................... 862 878 901 907 919 Totalassets(billionsofdollars) ......... 1,854 1,519 1,405 1,318 1,275 Numberofexaminations ................ 717 694 761 783 809 ByFederalReserveSystem .......... 486 479 500 563 581 Bystatebankingagency ............. 231 215 261 220 228 Top-tierbankholdingcompanies Large(assetsofmorethan$1billion) Totalnumber ........................ 485 459 448 394 355 Totalassets(billionsofdollars)....... 14,138 13,281 12,179 10,261 8,429 Numberofinspections ............... 519 492 566 501 500 ByFederalReserveSystem1 ....... 500 476 557 496 491 Onsite ......................... 445 438 500 457 440 Offsite ......................... 55 38 57 39 51 Bystatebankingagency 19 16 9 5 9 Small(assetsof$1billionorless) Totalnumber ........................ 4,545 4,611 4,654 4,760 4,796 Totalassets(billionsofdollars)....... 1,008 974 947 890 852 Numberofinspections ............... 3,192 3,186 3,449 3,420 3,703 ByFederalReserveSystem ........ 3,048 3,007 3,257 3,233 3,526 Onsite ......................... 107 120 112 170 186 Offsite ......................... 2,941 2,887 3,145 3,063 3,340 Bystatebankingagency ........... 144 179 192 187 177 Financialholdingcompanies Domestic .............................. 557 597 599 591 600 Foreign ................................ 45 43 44 38 36 1. Forlargebankholdingcompaniessubjecttocontinuous risk-focused supervision, includes multiple targetedreviews. zations and assessing the ability of the including through meetings with bankorganizations’ management processes ing organization management and for identifying, measuring, monitoring, analysis of internal and external inand controlling those risks. Key aspects formation—so that the Federal Reof the risk-focused approach to consoli- serve’s understanding and assessment dated supervision of large complex of each organization’s condition rebanking organizations (LCBOs) include mains current; (4) assigning to each (1)developinganunderstandingofeach LCBO a supervisory team composed of LCBO’s legal and operating structure, Reserve Bank staff members who have and its primary strategies, business skills appropriate for the organization’s lines,andrisk-managementandinternal risk profile (the team leader is the Fedcontrol functions; (2) developing and eral Reserve System’s central point of executing a tailored supervisory plan contactfortheorganization,hasresponoutlining the work required to maintain sibility for only one LCBO, and is a comprehensive understanding and supported by specialists capable of assessment of each LCBO, incorporat- evaluating the risks of LCBO business ing reliance to the fullest extent pos- activities and functions and assessing sible on assessments and information the LCBO’s consolidated financial condeveloped by other relevant domestic dition); and (5) promoting Systemwide and foreign supervisors and functional and interagency information-sharing regulators; (3) maintaining continual through automated systems and other supervision of these organizations— mechanisms (see box ‘‘Enhanced Guid-
Banking Supervision and Regulation 99 ance for the Consolidated Supervision ducted 486 exams of state member of Bank Holding Companies and the banks in 2008. Combined U.S. Operations of Foreign Banking Organizations). Bank Holding Companies For other banking organizations, the risk-focused consolidated supervision At year-end 2008, a total of 5,757 U.S. program provides that examination and bank holding companies were in operainspection procedures are tailored to tion, of which 5,030 were top-tier bank each banking organization’s size, com- holdingcompanies.Theseorganizations plexity, risk profile, and condition. As controlled 5,893 insured commercial with the LCBOs, these supervisory pro- banks and held approximately 97 pergrams entail both off-site and on- cent of all insured commercial bank site work, including planning, pre- assets in the United States. examination visits, detailed documenta- Federal Reserve guidelines call for tion,andexaminationreportstailoredto annual inspections of large bank holdthe scope and findings of the examina- ing companies and complex smaller tion. companies. In judging the financial condition of the subsidiary banks State Member Banks owned by holding companies, Federal Reserve examiners consult examination At the end of 2008, 862 state-chartered reportspreparedbythefederalandstate banks (excluding nondepository trust banking authorities that have primary companies and private banks) were responsibility for the supervision of members of the Federal Reserve Systhose banks, thereby minimizing duplitem. These banks represented approxication of effort and reducing the supermately 12 percent of all insured U.S. visoryburdenonbankingorganizations. commercial banks and held approx- Noncomplex bank holding companies imately 15 percent of all insured comwithconsolidatedassetsof$1billionor mercial bank assets in the United States. less are subject to a special supervisory The guidelines for Federal Reserve program that permits a more flexible examinationsofstatememberbanksare approach.4In2008,theFederalReserve fully consistent with section 10 of the conducted500inspectionsoflargebank Federal Deposit Insurance Act, as holding companies and 3,048 inspecamended by section 111 of the Federal tions of small, noncomplex bank hold- Deposit Insurance Corporation Iming companies. provement Act of 1991 and by the Riegle Community Development and Regulatory Improvement Act of 1994. A full-scope, on-site examination of these banks is required at least once a 2006, authorized the federal banking agencies to year, although certain well-capitalized, raisethethresholdfrom$250millionto$500milwell-managed organizations having lion,andfinalrulesincorporatingthechangeinto total assets of less than $500 mil- existingregulationswereissuedonSeptember21, lion may be examined once every 2007. 18 months.3 The Federal Reserve con- 4. Thespecialsupervisoryprogramwasimplemented in 1997 and modified in 2002. See SR letter 02-01 for a discussion of the factors considered in determining whether a bank hold- 3. The Financial Services Regulatory Relief ing company is complex or noncomplex Act of 2006, which became effective in October (www.federalreserve.gov/boarddocs/srletters/).
100 95th Annual Report, 2008 Enhanced Guidance for the Consolidated Supervision of Bank Holding Companies and the Combined U.S. Operations of Foreign Banking Organizations This guidance should not only provide greater clarity regarding our longstanding responsibilities as a consolidated supervisor, but is also responsive to ongoing developments in the financial sector. The objectives of fostering financialstabilityanddeterringormanagingfinancialcriseswillbefurtheredbythe FederalReservehavingamorecompleteviewoffirmwiderisksandcontrols. RandallS.Kroszner,Member,BoardofGovernors October2008 Thecontinuinggrowthandincreasedcom- structure, activities, resources, and risks plexity of many banking organizations and to address any deficiencies before exposes these firms to a wide array of theyposeadangertotheholdingcompapotentialrisks,andfinancialtroubleinone ny’s subsidiary depository institutions. In part of an organization can spread rapidly addition to its role as consolidated superto other parts of the organization. More- visor, the Federal Reserve is responsible over, because large banking organizations for the overall supervision of the U.S. increasingly operate with multiple domes- operations of foreign banking organizatic and foreign banking and nonbanking tions.Fundamentaltotheeffectivenessof entities,butoperateandmanagetheirbusi- the Federal Reserve as consolidated nesses on an integrated basis, a single supervisor is coordination with, and relisupervisor of a particular legal entity is ance on, the work of other relevant unlikely to have a complete view of firm- domestic and foreign bank supervisors widerisksandcontrols. and functional regulators (that is, a fed- Inresponsetothesetrends,andtobetter eral or state regulator of a functionally fulfill both its supervisory responsibilities regulated nondepository subsidiary of a and its other central bank objectives such bankholdingcompanyorforeignbanking as fostering financial stability and deter- organization, such as the Securities and ringormanagingfinancialcrises,theFed- ExchangeCommission). eral Reserve on October 16, 2008, issued While the effort to enhance and clarify guidance refining and clarifying its pro- the Federal Reserve’s approach to congrams for the consolidated supervision of solidated supervision began well before bank holding companies (including finan- therecentperiodofconsiderablestrainin cialholdingcompanies)andthecombined financial markets, the enhanced approach U.S.operationsofforeignbankingorgani- set forth in the guidance emphasizes sevzations.1 eral elements that should support a more The Federal Reserve has a long- resilient financial system. These include, standingresponsibilityfortheconsolidated amongotherthings,greaterfocusoncorsupervision of U.S. bank holding compa- porate governance, capital adequacy, nies (including financial holding compa- funding and liquidity management, and nies). Consolidated supervision, which thesupervisionofnonbanksubsidiaries. encompasses the parent holding company The guidance specifies principal areas and its subsidiaries, enables the Federal of focus for consolidated supervision Reserve to understand the organization’s activities and provides for moreconsistent Federal Reserve supervisory practices and assessments across institu- 1. SeeSRletter08-9/CAletter08-12,“ConsolidatedSupervisionofBankHoldingCompa- tionshavingsimilaractivitiesandrisks.It niesandtheCombinedU.S.OperationsofFor- sets forth specific expectations for supereignBankingOrganizations.” visors to use when assessing primary
Banking Supervision and Regulation 101 governance functions, risk controls, and zation, its subsidiary depository institubusiness lines; nonbank operations; and tions,orkeyfinancialmarkets.Forexamotherkeyactivitiesandrisks,withaddedem- ple, additional supervisory activities may phasis on risk-management systems and beconductediftherearegapsininformainternal controls used by bank holding tion relating to significant risks or activicompanies and foreign banking organiza- ties, indications of weaknesses in risktions that provide core clearing and settle- management systems or internal controls, ment services or have a significant pres- or indications of violations of consumer ence in critical financial markets. In protection or other laws, or if a consoliaddition, the guidance discusses unique dated organization or subsidiary deposiaspects of supervising the combined U.S. tory institution is in less-than-satisfactory operations of foreign banking organiza- condition. tions. An important aspect of the Federal For each bank holding company and Reserve’s consolidated supervision proforeign banking organization, the Federal grams for bank holding companies and Reserve(1)maintainsanunderstandingof foreign banking organizations is the askey elements of the organization’s strat- sessment and evaluation of practices egy, structure, business lines, framework across groups of organizations having for governance and internal control, pres- similar characteristics and risk profiles. enceinthefinancialmarkets,andprimary This “portfolio approach” facilitates consources of revenue and risk, and (2) sistency of supervisory practices and asassesses the effectiveness of the organiza- sessments across comparable organization’s risk-management systems and con- tions and improves the Federal Reserve’s trols in accounting for the main risks ability to identify outlier organizations inherentintheorganization’sactivities,its among established peer groups. Because financialcondition,andthepotentialnega- the Federal Reserve’s supervisory activitive impact of nonbank operations on ties are tailored to specific institutions and affiliated depository institutions. The Fed- portfolios, separate guidance documents eral Reserve takes a systematic approach were issued for different supervisory portto developing these assessments, as folios to promote appropriate and consisreflected in the RFI (Risk management, tentsupervisionoforganizations. Financial condition, and Impact) rating The nature and scope of the indepenassigned to bank holding companies and dent Federal Reserve supervisory work the combined U.S. operations rating required to develop and maintain this assigned to foreign banking organizations understanding and assessment depends havingmultipleU.S.operations. largelyontheextenttowhichtheFederal WhiletheFederalReserve’ssupervisory Reserve can draw on information or objectives are the same for all bank hold- assessments from other bank supervisors ingcompaniesandforeignbankingorgani- or functional regulators. Understanding zations, the amount and nature of the and assessing some areas—such as the supervisory and examination work neces- risk management and financial condition sarytounderstand,supervise,anddevelop of significant nonbank subsidiaries that an assessment of an individual organiza- are not functionally regulated—will, by tion varies. Supervisory activities are tai- their nature, typically require more inloredforeachorganizationonthebasisof dependent Federal Reserve supervia variety of factors, including the nature sory work. Understanding and assessing anddegreeofinvolvementbyothersuper- other areas—such as firmwide riskvisors and regulators; the risks posed by management and control functions— the organization’s specific activities and typically will require a greater degree of systems; and the potential effect of weak- coordination with other bank supervisors nesses in control functions on the organi- orfunctionalregulators.
102 95th Annual Report, 2008 Financial Holding Companies Foreign Operations of U.S. Banking Organizations Under the Gramm-Leach-Bliley Act, bank holding companies that meet cer- In supervising the international operatain capital, managerial, and other re- tions of state member banks, Edge Act quirements may elect to become finan- and agreement corporations, and bank cial holding companies and thereby holdingcompanies,theFederalReserve engage in a wider range of financial generally conducts its examinations or activities,includingfull-scopesecurities inspections at the U.S. head offices of underwriting, merchant banking, and these organizations, where the ultimate insurance underwriting and sales. The responsibility for the foreign offices statute streamlines the Federal Re- lies. Examiners also visit the overseas serve’s supervision of all bank holding offices of U.S. banks to obtain financial companies, including financial holding and operating information and, in some companies, and sets forth parameters instances, to evaluate the organizations’ forthesupervisoryrelationshipbetween efforts to implement corrective meathe Federal Reserve and other regula- sures or to test their adherence to safe tors. The statute also differentiates and sound banking practices. Examinabetween the Federal Reserve’s relations tions abroad are conducted with the with regulators of depository institu- cooperation of the supervisory authoritions and its relations with functional ties of the countries in which they take regulators. place; for national banks, the examina- As of year-end 2008, 557 domestic tions are coordinated with the OCC. bank holding companies and 45 foreign Attheendof2008,53memberbanks banking organizations had financial were operating 545 branches in foreign holding company status. Of the domes- countries and overseas areas of the tic financial holding companies, 33 had United States; 32 national banks were consolidated assets of $15 billion or operating495ofthesebranches,and21 more; 128, between $1 billion and state member banks were operating the $15 billion; 87, between $500 million remaining 50. In addition, 20 nonmemand $1 billion; and 309, less than ber banks were operating 26 branches $500 million. in foreign countries and overseas areas of the United States. International Activities Edge Act and Agreement Corporations The Federal Reserve supervises the for- Edge Act corporations are international eign branches and overseas investments banking organizations chartered by the of member banks, Edge Act and agree- Board to provide all segments of the ment corporations, and bank holding U.S. economy with a means of financcompanies and also the investments by ing international business, especially bank holding companies in export trad- exports. Agreement corporations are ingcompanies.Inaddition,itsupervises similar organizations, state chartered or the activities that foreign banking orga- federally chartered, that enter into an nizations conduct through entities in agreement with the Board to refrain the United States, including branches, from exercising any power that is not agencies, representative offices, and permissible for an Edge Act corporasubsidiaries. tion.
Banking Supervision and Regulation 103 Sections 25 and 25A of the Federal 175 foreign banks also operated 95 rep- Reserve Act grant Edge Act and agree- resentativeoffices;anadditional54forment corporations permission to engage eignbanksoperatedintheUnitedStates in international banking and foreign through a representative office. financial transactions. These corpora- State-licensed and federally licensed tions, most of which are subsidiaries of branches and agencies of foreign banks member banks, may (1) conduct a de- areexaminedon-siteatleastonceevery posit and loan business in states other 18 months, either by the Federal Rethanthatoftheparent,providedthatthe serveorbyastateorotherfederalregubusiness is strictly related to interna- lator. In most cases, on-site examinational transactions, and (2) make for- tions are conducted at least once every eign investments that are broader than 12 months, but the period may be those permissible for member banks. extended to 18 months if the branch or Atyear-end2008,60bankingorgani- agency meets certain criteria. zations, operating 11 branches, were In cooperation with the other federal chartered as Edge Act or agreement and state banking agencies, the Federal corporations. These corporations are Reserve conducts a joint program for examined annually. supervising the U.S. operations of foreign banking organizations. The program has two main parts. One part U.S. Activities of Foreign Banks involves examination of those foreign The Federal Reserve has broad author- banking organizations that have mulity to supervise and regulate the U.S. tiple U.S. operations and is intended to activities of foreign banks that engage ensure coordination among the various in banking and related activities in the U.S. supervisory agencies. The other United States through branches, agen- part is a review of the financial and cies, representative offices, commercial operational profile of each organization lending companies, Edge Act corpora- to assess its general ability to support tions, commercial banks, bank holding its U.S. operations and to determine companies, and certain nonbanking what risks, if any, the organization companies. Foreign banks continue to poses through its U.S. operations. Tobe significant participants in the U.S. gether, these two processes provide banking system. critical information to U.S. supervisors As of year-end 2008, 175 foreign in a logical, uniform, and timely manbanks from 53 countries were operating ner. The Federal Reserve conducted or 208 state-licensed branches and agen- participated with state and federal regucies, of which 6 were insured by the latory authorities in 487 examinations FDIC, and 45 OCC-licensed branches in 2008. and agencies, of which 4 were insured by the FDIC. These foreign banks also Compliance with owned 12 Edge Act and agreement cor- Regulatory Requirements porations and 2 commercial lending companies;inaddition,theyheldacon- The Federal Reserve examines supertrolling interest in 61 U.S. commercial vised institutions for compliance with a banks. Altogether, the U.S. offices of broad range of legal requirements, inthese foreign banks at the end of 2008 cludinganti-money-launderingandconcontrolled approximately 18 percent of sumer protection laws and regulations, U.S. commercial banking assets. These and other laws pertaining to certain
104 95th Annual Report, 2008 banking and financial activities. Most Specialized Examinations compliance supervision is conducted undertheoversightoftheBoard’sDivi- The Federal Reserve conducts specialsion of Banking Supervision and Regu- ized examinations of banking organizalation, but consumer compliance super- tions in the areas of information techvision is conducted under the oversight nology, fiduciary activities, transfer oftheDivisionofCommunityandCon- agent activities, and government and sumer Affairs. The two divisions coor- municipalsecuritiesdealingandbrokerdinate their efforts with each other and ing. The Federal Reserve also conducts also with the Board’s Legal Division to specialized examinations of certain ensure consistent and comprehensive entities, other than banks, brokers, or FederalReservesupervisionforcompli- dealers, that extend credit subject to the ance with legal requirements. Board’s margin regulations. Anti-Money-Laundering Examinations Information Technology Activities U.S.DepartmentoftheTreasuryregula- In recognition of the importance of tions implementing the Bank Secrecy information technology to safe and Act (BSA) generally require banks and sound operations in the financial indusother types of financial institutions to try, the Federal Reserve reviews the file certain reports and maintain certain information technology activities of records that are useful in criminal or supervised banking organizations as regulatory proceedings. The BSA and well as certain independent data centers separate Board regulations require that provide information technology bankingorganizationssupervisedbythe services to these organizations. All Board to file reports on suspicious safety and soundness examinations activity related to possible violations of include a risk-focused review of inforfederal law, including money launder- mation technology risk-management ing, terrorism financing, and other activities. During 2008, the Federal financial crimes. In addition, BSA and Reservecontinuedastheleadagencyin Board regulations require that banks two interagency examinations of large, develop written BSA compliance pro- multiregional data processing servicers grams and that the programs be for- and assumed leadership in two addimally approved by bank boards of tional such examinations. directors. The Federal Reserve is responsible for examining its supervised Fiduciary Activities institutions for compliance with applicable anti-money-laundering laws and The Federal Reserve has supervisory regulations and conducts such examina- responsibility for state member comtions in accordance with the Federal mercialbanksanddepositorytrustcom- Financial Institutions Examination panies that together reported, at the end Council (FFIEC) Bank Secrecy Act/ Anti–Money Laundering Examination Manual.5 financial institutions. The Council has six voting members:theBoardofGovernorsoftheFederal Reserve System, the Federal Deposit Insurance 5. TheFFIECisaninteragencybodyoffinan- Corporation,theNationalCreditUnionAdminiscial regulatory agencies established to prescribe tration,theOfficeoftheComptrolleroftheCuruniform principles, standards, and report forms rency, the Office of Thrift Supervision, and the and to promote uniformity in the supervision of chairoftheStateLiaisonCommittee.
Banking Supervision and Regulation 105 of2008,$39trillionofassetsinvarious securities. Twelve state member banks fiduciary or custodial capacities. Addi- and 5 state branches of foreign banks tionally, state member nondepository have notified the Board that they are trust companies supervised by the Fed- government securities dealers or broeral Reserve reported $28 trillion of kers not exempt from Treasury’s reguassets held in a fiduciary or custodial lations. During 2008, the Federal Recapacity. During on-site examinations serve conducted 2 examinations of of fiduciary activities, an organization’s broker-dealer activities in government compliance with laws, regulations, and securities at these organizations. These general fiduciary principles and its examinations are generally conducted potential conflicts of interest are re- concurrently with the Federal Reserve’s viewed; its management and opera- examination of the state member bank tions, including its asset- and account- or branch. management, risk-management, and The Federal Reserve is also responaudit and control procedures, are also sible for ensuring that state member evaluated. In 2008, Federal Reserve banks and bank holding companies that examiners conducted 116 on-site fidu- act as municipal securities dealers comciary examinations. ply with the Securities Act Amendments of 1975. Municipal securities Transfer Agents dealers are examined pursuant to the Municipal Securities Rulemaking As directed by the Securities Exchange Board’s rule G-16 at least once every Act of 1934, the Federal Reserve contwo calendar years. Of the 12 entities ducts specialized examinations of those that dealt in municipal securities during state member banks and bank holding 2008, 5 were examined during the year. companies that are registered with the Board as transfer agents. Among other things, transfer agents countersign and Securities Credit Lenders monitor the issuance of securities, reg- Under the Securities Exchange Act of ister the transfer of securities, and 1934,theBoardisresponsibleforreguexchange or convert securities. On-site lating credit in certain transactions examinations focus on the effectiveness involving the purchase or carrying of of an organization’s operations and its securities. As part of its general examicompliance with relevant securities nation program, the Federal Reserve regulations. During 2008, the Federal examines the banks under its jurisdic- Reserveconductedon-siteexaminations tion for compliance with the Board’s at 14 of the 62 state member banks and RegulationU(CreditbyBanksandPerbank holding companies that were regsons other than Brokers or Dealers for istered as transfer agents. the Purpose of Purchasing or Carrying Margin Stock). In addition, the Federal Government and Municipal Securities Reserve maintains a registry of persons Dealers and Brokers other than banks, brokers, and dealers The Federal Reserve is responsible for who extend credit subject to Regulation examining state member banks and for- U. The Federal Reserve may conduct eign banks for compliance with the specialized examinations of these lend- Government Securities Act of 1986 and ers if they are not already subject to with Treasury regulations governing supervision by the Farm Credit Admindealing and brokering in government istration (FCA) or the NCUA.
106 95th Annual Report, 2008 Attheendof2008,580lendersother The Federal Reserve and the other than banks, brokers, or dealers were FFIEC agencies continued in 2008 to registered with the Federal Reserve. coordinate their efforts to ensure a con- Other federal regulators supervised 191 sistent supervisory approach in the area of these lenders, and the remaining 389 of business continuity practices. In were subject to limited Federal Reserve March, the agencies published an supervision. The Federal Reserve ex- update to the FFIEC Business Continuempted 180 lenders from its on-site ity Planning Booklet, which provides inspection program on the basis of their guidance to both examiners and the regulatory status and annual reports. industry. The revised booklet expands Nonexempt lenders are subject to either discussions of business impact analysis biennial or triennial inspection. Sixty- andtesting;discusseslessonslearnedin four inspections were conducted during recent years, for example, lessons from the year. Hurricanes Katrina and Rita; and provides a framework for financial institu- Business Continuity tions to develop or update their pandemic plans to address the unique In 2008, the Federal Reserve continued business continuity challenges associits efforts to strengthen the resilience of ated with a pandemic influenza outtheU.S.financialsystemintheeventof break. The booklet also stresses the unexpected disruptions. The Federal responsibilities of each institution’s Reserve,togetherwithotherfederaland board and management to address busstate financial regulators, are members iness continuity planning with an oftheFinancialBankingInformationIn- enterprise-wide perspective by considfrastructure Committee (FBIIC), which ering technology, business operations, was formed to improve coordination communications, and testing strategies and communication among financial for the entire institution. regulators, enhance the resilience of the U.S. financial sector, and promote the Enforcement Actions public/private partnership. The FBIIC has established emergency communica- The Federal Reserve has enforcement tion protocols to maintain effective authority over the banking organizacommunication among members in the tions it supervises and their affiliated event of an emergency. The FBIIC pro- parties. Enforcement actions may be tocols were activated in 2008 at the taken to address unsafe and unsound time of the flooding in the Midwest, practices or violations of any law or each time a significant hurricane made regulation. Formal enforcement actions landfall in the United States, and at the include cease-and-desist orders, written time of the white powder HazMat agreements, removal and prohibition incident.6 orders, and civil money penalties. In 2008, the Federal Reserve completed 54 formal enforcement actions. Civil 6. In October 2008, the FBI, U.S. Postal Inspectors, and state and local authorities began money penalties totaling $32,790 were investigatingmorethan30threateninglettersthat assessed, and an order of restitution were received at financial institutions in New totaling $203,923 was issued. As di- York, New Jersey, Washington, D.C., Ohio, Illirected by statute, all civil money penalnois, Colorado, Oklahoma, Georgia, California, ties are remitted to either the Treasury andTexas.Mostoftheletterscontainedapowder substancewithathreateningcommunication. or the Federal Emergency Management
Banking Supervision and Regulation 107 Agency. Enforcement orders, which are of expected default frequency, to gauge issued by the Board, and written agree- market perceptions of the risk in bankments, which are executed by the ing organizations. In addition, the Fed- Reserve Banks, are made public and eral Reserve prepares quarterly Bank are posted on the Board’s website HoldingCompanyPerformanceReports (www.federalreserve.gov/boarddocs/ (BHCPRs) for use in monitoring and enforcement/). inspectingsupervisedbankingorganiza- In addition to taking these formal tions. The BHCPRs, which are comenforcementactions,theReserveBanks piled from data provided by large bank completed 216 informal enforcement holding companies in quarterly regulaactions in 2008. Informal enforcement tory reports (FR Y-9C and FR Y-9LP), actions include memoranda of under- contain, for individual companies, fistanding and board of directors resolu- nancial statistics and comparisons with tions.Informationabouttheseactionsis peer companies. BHCPRs are made not available to the public. available to the public on the National Information Center (NIC) website, which can be accessed at www.ffiec. Surveillance and gov. Off-Site Monitoring During 2008, four major upgrades to the web-based Performance Report The Federal Reserve uses automated Information and Surveillance Monitorscreening systems to monitor the finaning (PRISM) application were comcial condition and performance of state pleted. PRISM is a querying tool used member banks and bank holding comby Federal Reserve analysts to access panies between on-site examinations. and display financial, surveillance, and Such monitoring and analysis helps examination data. In the analytical direct examination resources to institumodule, users can customize the pretions that have higher risk profiles. sentation of institutional financial infor- Screening systems also assist in the mation drawn from Call Reports, Uniplanningofexaminationsbyidentifying form Bank Performance Reports, companies that are engaging in new or FR Y-9 statements, BHCPRs, and other complex activities. regulatory reports. In the surveillance The primary off-site monitoring tool used by the Federal Reserve is the module,userscangeneratereportssum- Supervision and Regulation Statistical marizing the results of surveillance Assessment of Bank Risk model (SR- screening for banks and bank holding SABR). Drawing mainly on the finan- companies. The upgrades made more cial data that banks report on their regulatory data available for querying, Reports of Condition and Income (Call gave users the ability to display more Reports), SR-SABR uses econometric data on commercial real estate contechniques to identify banks that report centration ratios, and provided a way financial characteristics weaker than to access SEC Focus Report (Part II) those of other banks assigned similar data. supervisory ratings. To supplement the The Federal Reserve works through SR-SABR screening, the Federal Re- the FFIEC Task Force on Surveillance serve also monitors various market Systems to coordinate surveillance data, including equity prices, debt activities with the other federal banking spreads, agency ratings, and measures agencies.
108 95th Annual Report, 2008 International Training and gion, with the help of national banking Technical Assistance supervisors and international agencies; and aims to help members develop In 2008, the Federal Reserve continued banking laws, regulations, and supervito provide technical assistance on bank sory practices that conform to insupervisory matters to foreign central ternational best practices. The Fedbanksandsupervisoryauthorities.Tech- eral Reserve contributes significantly to nical assistance involves visits by Fed- ASBA’s organizational management eral Reserve staff members to foreign and to its training and technical assisauthorities as well as consultations with tance activities. foreign supervisors who visit the Board or the Reserve Banks. Technical assis- Initiatives for Minority-Owned and tancein2008wasconcentratedinLatin De Novo Depository Institutions America, Asia, and former Soviet bloc countries. The Federal Reserve, along The Federal Reserve is committed to with the OCC, the FDIC, and the Trea- fostering the strength and vitality of the sury, was also an active participant in nation’s minority and de novo dethe Middle East and North Africa pository institutions. In furtherance of (MENA)FinancialRegulators’Training this objective, during 2008 the Fed- Initiative, which is part of the U.S. gov- eral Reserve launched Partnership for ernment’s Middle East Partnership Progress, a training and technical assis- Initiative. The Federal Reserve also tance program designed specifically for contributes to the regional training pro- these institutions. The program seeks to vision under the Asia Pacific Economic help these institutions compete effec- Cooperation (APEC) Financial Regula- tively in today’s marketplace by offertors’ Training Initiative. ing them a combination of one-on-one During the year, the Federal Reserve guidance and targeted workshops on offered a number of training courses topics of particular relevance to starting exclusively for foreign supervisory au- andgrowingabankinasafeandsound thorities, both in the United States and manner. In addition, training and inforin a number of foreign jurisdictions. mationonresourcesareprovidedviaan System staff also took part in technical extensive web-based program center assistance and training missions led by (www.fedpartnership.gov). Designated the International Monetary Fund, the Partnership for Progress contacts in World Bank, the Asian Development each of the twelve Reserve Bank Dis- Bank, the Basel Committee on Banking trictsandattheBoardanswerquestions Supervision(BaselCommittee),andthe and coordinate assistance for institu- Financial Stability Institute. tions requesting guidance. These con- The Federal Reserve is also an asso- tacts also host regional conferences and ciate member of the Association of conduct other outreach activities within Supervisors of Banks of the Americas their Districts in support of minority (ASBA), an umbrella group of bank and de novo institutions. The Reserve supervisors from countries in the West- Banks hosted 14 such regional training ern Hemisphere. The group, headquar- sessions and conferences during the tered in Mexico, promotes communica- year. tion and cooperation among bank The Federal Reserve has coordinated supervisors in the region; coordinates its efforts with those of the other agentraining programs throughout the re- cies through participation in an annual
Banking Supervision and Regulation 109 interagency conference for minority work are required to meet certain pubdepository institutions. For the federal lic disclosure requirements designed to bank regulatory agencies, the confer- foster transparency and market discience provides an opportunity to meet pline. with senior managers from minority- Institutions may begin transitioning owned institutions and gain a bet- to the new advanced approaches after ter understanding of the institutions’ they adopt an implementation plan and unique challenges and opportunities. In have in place systems that comply with addition, the agencies offer training the rule’s qualification requirements. classesandbreakoutsessionsonemerg- Finalreportingrequirementsandreporting banking issues. ing templates for institutions that will be adopting the Basel II advanced approaches were also published in Supervisory Policy 2008. In June, the agencies issued a notice of proposed rulemaking to adopt Capital Adequacy Standards the standardized approaches of the Basel II Capital Accord. The agencies Risk-Based Capital Standards for are currently reviewing and considering Certain Internationally Active the comments received. In addition, in Banking Organizations July the U.S. banking agencies issued During the year, the Federal Reserve, supervisory guidance relating to an OCC, FDIC, and OTS issued a final aspect of the Basel II framework, rule, effective April 1, 2008, imple- knownasPillar2,thatrequiresbanksto menting the advanced approaches of have a robust internal capital adequacy Basel II. The advanced approaches assessment process (ICAAP) that preframework is broadly consistent with scribes capital levels commensurate theadvancedapproachesoftheBaselII with their full risk profiles—levels Capital Accord. It also includes a num- above those prescribed by minimum ber of prudential safeguards—such as regulatory measures. the requirement that banking organiza- The recent market turmoil has hightions satisfactorily complete a four- lighted areas in which the Basel II quarter parallel run before operating Capital Accord must be strengthened, under the advanced approaches frame- and efforts are under way to address work—and transitional capital floors those areas. Among the changes under that limit maximum cumulative reduc- consideration are higher capital requiretions of a banking organization’s risk- ments for re-securitizations, such as based capital requirements over three collateralized debt obligations backed transitional periods. It retains the long- by asset-backed securities. The capital standing minimum risk-based capital treatment of liquidity facilities that suprequirement of 4 percent tier 1 capital port asset-backed commercial paper and 8 percent total qualifying capital conduits is also under review. In addirelative to risk-weighted assets.7 Bank- tion, the current market risk capital ing organizations subject to the frame- frameworkfortradingactivitiesisbeing reexamined to better reflect potential exposures arising from the complex, 7. Tier1capitalcomprisescommonstockholdless-liquid credit products that instituers’ equity and qualifying forms of preferred tions hold in their trading portfolios. stock, less required deductions such as goodwill andcertainintangibleassets. These changes, which are being devel-
110 95th Annual Report, 2008 oped by the Basel Committee, will be • The Board approved an interim final considered for implementation in the rule to provide state member banks United States through the agencies’ and bank holding companies particinotice and comment process. pating in the Board’s newly estab- Also during the year, the federal lished Asset-Backed Commercial banking and thrift regulatory agencies Paper Money Market Mutual Fund issued a final rule that permits a bank- Liquidity Facility with an exemption ing organization to reduce the amount from the Board’s leverage and riskof goodwill it must deduct from tier 1 based capital guidelines for assetcapital by any associated deferred tax backed commercial paper held as a liability. Under the rule, the regulatory result of participation in the facility. capital deduction for goodwill is equal The exemption is subject to safety to the maximum capital reduction that and soundness conditions. could occur as a result of a complete • The Board approved an interim final write-off of the goodwill under gener- ruletoallowbankholdingcompanies ally accepted accounting principles toincludeintheirtier1capital,with- (GAAP). out restriction, the senior perpetual In response to the recent market tur- preferred stock issued to the Departmoil, the Federal Reserve, in some ment of the Treasury under its newly instances together with the other bank- established Capital Purchase Proing agencies, issued several rulemak- gram. ings and guidance. Other Capital Issues • The agencies issued an interagency In 2008, Board staff conducted supervistatement allowing banking organizasory analyses of innovative capital tionstorecognizetheeffectofthetax instruments and novel transactions to change enacted in the Economic determine whether the instruments Emergency Stabilization Act of 2008 qualify for inclusion in regulatory capiin their third quarter 2008 regulatory tal.Muchoftheworkinvolvedevaluatcapital calculations. The change pro- ing enhanced forms of trust preferred vided relief to banking organizations securities, mandatory convertible secuin recognizing their losses on certain rities, perpetual preferred stock, and holdings of Federal National Mort- convertible perpetual preferred stock gage Association (Fannie Mae) and (mandatory and optionally convertible). Federal Home Loan Mortgage Cor- Also, later in 2008 significant staff efporation (Freddie Mac) preferred fort was devoted to working with Treastock by changing the character of sury staff to develop the Capital Purthelossesfromcapitaltoordinaryfor chase Program as part of the Troubled federal income tax purposes. Asset Restructuring Program. Staff members also identified and • The agencies published a Notice of addressed supervisory concerns related Proposed Rulemaking that proposed to banking organizations’ capital issuamending the agencies’ risk-based ances and worked with the Reserve capitalrulestochangetheriskweight Banks to evaluate the overall composionFannieMaeandFreddieMacdebt tion of banking organizations’ capital. and guaranteed securities from 20 As part of this process, the staff often percent to 10 percent. must review the funding strategies pro-
Banking Supervision and Regulation 111 posed in applications for acquisitions proposed standards and in formulating and other transactions submitted to the appropriate policy responses based on Federal Reserve by banking organ- the potential impact of changes in stanizations. dards or guidance, or other events, on financialinstitutions.Asaconsequence, Other Policy Issues Federal Reserve staff routinely provide informal input to standard-setters, as Equity Investments in Banks and well as formal input through public Bank Holding Companies comment letters on proposals, to ensure Alsoin2008,theBoardapprovedapol- appropriate and transparent financial icy statement that explains some of the statement reporting. Supervisory guidmost significant factors and principles ance is also issued to financial instituconsidered when determining whether tions and supervisory staff by the Fedminority equity investments in a bank- eralReserveasappropriate.Inaddition, ing organization are “controlling” for Federal Reserve policy staff support the purposes of the BHC Act. In assessing efforts of the System and Reserve whetheraminorityequityinvestorhasa Banks in financial institution supercontrolling influence over the manage- visory activities related to financial ment or policies of the banking organi- accounting, auditing, reporting, and zation, all the facts and circumstances disclosure. surrounding the investor’s investment in, and relationship with, the banking Domestic Accounting organization will be considered, as well During 2008, economic conditions reasthepercentageoftotalequityowned. sulted in accounting and reporting challenges for financial institutions. Ad- Accounting Policy dressing these challenges was a priority The Federal Reserve strongly endorses for Federal Reserve staff members. Sigsound corporate governance and effec- nificant issues arising from stressed tive accounting and auditing practices market conditions included accounting for all regulated financial institutions. for financial instruments at fair value, Accordingly, the supervisory policy accounting for impairment in securities function is responsible for monitoring and other financial instruments, and major domestic and international pro- analyzing proposals for modifying acposals, standards, and other develop- counting for off-balance-sheet strucments affecting the banking industry in tures. Staff members participated in a the areas of accounting, auditing, inter- number of discussions with accounting nal controls over financial reporting, and auditing standard-setters and profinancial disclosure, and supervisory vided commentary on a number of profinancial reporting. posals relevant to the banking industry. Federal Reserve staff members inter- For example, they provided comment actwithkeyconstituentsintheaccount- letters to the Financial Accounting ing and auditing professions, including Standards Board (FASB) on proposals standard-setters,accountingfirms,other related to accounting for transfers of financial sector regulators, accounting financial assets, reducing complexity and banking industry trade groups, and in reporting financial instruments, acthe banking industry. These efforts help countingforhedgingactivities,andimin understanding current practice and pairment of certain beneficial interests.
112 95th Annual Report, 2008 Federal Reserve staff also partici- latory agencies, law enforcement, and pated in FASB and Securities and the financial services industry and cov- Exchange Commission (SEC) efforts to ers all aspects of the BSA. improve financial reporting and to con- The Federal Reserve and other fedsider accounting issues that have arisen eral banking agencies continued during during the global crisis, such as public 2008 to regularly share examination roundtable discussions. A senior Fed- findings and enforcement proceedings eral Reserve representative was an offi- with the Financial Crimes Enforcement cial observer on the SEC Advisory Network (FinCEN) under the inter- Committee on Improvements to Finan- agency memorandum of understanding cial Reporting, which was established (MOU) that was finalized in 2004, and to examine the U.S. financial reporting with the Treasury’s Office of Foreign system with the goals of reducing Assets Control (OFAC) under the interunnecessary complexity and making agency MOU that was finalized in information more useful and under- 2006. standable for investors. In this role, senior staff participated in efforts that International Coordination on led to the issuance of the Final Report Sanctions, Anti–Money Laundering, of the Advisory Committee on Improveand Counter-Terrorism Financing ments to Financial Reporting provided totheSECinAugust2008.Inaddition, The Federal Reserve participates in a theSECconsultedwithFederalReserve number of international coordination staff, as required under section 133 of initiatives related to sanctions, money the Emergency Economic Stabilization laundering,andterrorismfinancing.For Act, when preparing its Report on example, the Federal Reserve has a Mark-to-Market Accounting. long-standing role in the U.S. delegation to the intergovernmental Financial Action Task Force and its working Compliance Risk Management groups, contributing a banking supervisoryperspectivetoformulationofinter- Bank Secrecy Act and national standards on these matters. Anti-Money-Laundering Compliance The Federal Reserve also continues In 2008, the Federal Reserve provided to contribute to international efforts to training for staff on risk-focusing and promote transparency and address risks the use of the FFIEC minimum Bank faced by financial institutions involved Secrecy Act/Anti–Money Laundering in international funds transfers. The (BSA/AML) examination procedures in Federal Reserve participates in a subconjunction with broader efforts to committee of the Basel Committee that increase consistency and address indus- focuses on AML/counter-terrorism fitry concerns about regulatory burden. nancingissues.In2008,theBaselCom- The Federal Reserve participates in the mittee released for public comment a FFIEC BSA/AML working group, consultative document titled Due Diliwhich is a forum for the discussion of gence and Transparency regarding all pending BSA policy and regulatory Cover Payment Messages Related to matters, as well as the Treasury-led Cross-Border Wire Transfers and Bank Secrecy Act Advisory Group, assisted in the review of comments in which includes representatives of regu- preparation for finalizing the paper.
Banking Supervision and Regulation 113 Corporate Compliance management practices.8 Three of these were In October 2008, the Federal Reserve issued guidance clarifying supervisory • Principles for Sound Liquidity Risk expectations with respect to compliance Management and Supervision, pubrisk management. The guidance en- lished in September dorses principles applicable to all bank- • Proposed Revisions to the Basel II ing organizations set forth by the Basel Market Risk Framework and Guide- CommitteeinitsApril2005papertitled lines for Computing Capital for Compliance and the Compliance Incremental Risk in the Trading Function in Banks. It also clarifies the Book, published in July Federal Reserve’s supervisory views relating to firmwide compliance-risk • Liquidity Risk: Management and management programs and oversight at Supervisory Challenges, published in large banking organizations having February complex compliance profiles. Joint Forum In 2008, the Federal Reserve continued International Guidance on to participate in the Joint Forum—a Supervisory Policies group established under the aegis of the Basel Committee to address issues As a member of the Basel Committee, related to the banking, securities, and the Federal Reserve participates in insurance sectors, including the regulaefforts to advance sound supervisory tion of financial conglomerates. The policies for internationally active bank- Joint Forum is made up of representaing organizations and to improve the tives of the Basel Committee, the Interstability of the international banking national Organization of Securities system. In 2008, the Federal Reserve Commissions, and the International participated in ongoing cooperative Association of Insurance Supervisors. work on strategic responses to the The Federal Reserve contributed to the financial markets crisis, initiatives to development of supervisory policy enhance Basel II, implementation of papers, reports, and recommendations Basel II, and development of interna- issuedbytheJointForumduring2008.9 tional supervisory risk-management TheFederalReservealsoparticipatedin guidance, particularly in the areas of Joint Forum–sponsored informationfunding liquidity risk management, sharingonpandemicplanningandother counterparty credit risk, and stress- business continuity initiatives. In 2008, testing practices. work of the Joint Forum published by the Basel Committee included Risk Management The Federal Reserve contributed to supervisory policy papers, reports, and 8. Papers issued by the Basel Committee can recommendations issued by the Basel beaccessedviatheBankforInternationalSettlementswebsite(www.bis.org). Committee during 2008 that were gen- 9. Papers issued by the Joint Forum can be erally aimed at improving the superviaccessed via the Bank for International Settlesion of banking organizations’ risk- mentswebsite(www.bis.org).
114 95th Annual Report, 2008 • Credit Risk Transfer Developments initialfindingsandlessonslearnedfrom from 2005 to 2007, published in the current financial crisis and were July incorporated in Report of the FinancialStabilityForumonEnhancingMar- • Cross-Sectoral Review of Groupket and Institutional Resilience, issued wide Identification and Management in April. of Risk Concentrations, published in April Credit Risk Management • Customer Suitability in the Retail Sale of Financial Products and Ser- The Federal Reserve works with the vices, published in April other federal banking agencies to develop guidance on the management of credit risk, to coordinate the assess- International Accounting ment of regulated institutions’ credit The Federal Reserve participates in the risk, and to ensure that institutions Basel Committee’s Accounting Task properly identify, measure, and manage Force (ATF), which represents the credit risk. Basel Committee at international meetings on accounting, auditing, and dis- Working with Mortgage Borrowers closure issues affecting global banking organizations. During 2008, Federal The ongoing financial and economic Reserve staff participated in activities stress has highlighted the crucial role arising from global market conditions thatprudentbanklendingpracticesplay and in support of efforts related to in promoting the nation’s economic financial stability. In particular, staff welfare. In 2008, the Federal Reserve members contributed to the develop- issued two statements to emphasize the ment of numerous Basel Committee important role of banking organizations comment letters related to accounting in U.S. credit markets and to encourage and auditing matters that were submit- these organizations to pursue responted to the International Accounting sible lending activities as they meet the Standards Board and the International credit needs of American households Auditing and Assurance Standards and businesses. In March, the Federal Board (IAASB). Reserveissuedastatementemphasizing The Basel Committee in November the need for regulated institutions to be 2008 issued for public comment a transparent in their residential mortgage consultative paper titled Supervisory modification activities and to support Guidance for Assessing Banks’ Finan- industry efforts to improve the colleccial Instrument Fair Value Practices. tion of data on the type and volume of The paper describes supervisory expec- mortgage modifications. In November, tations regarding bank practices and the the Federal Reserve, FDIC, OCC, and supervisory assessment of valuation OTS issued a statement emphasizing practices. It evolved from work related the need for banking organizations and to the development of the paper Fair their regulators to work together in Value Measurement and Modeling: An meeting the credit needs of consumers Assessment of Challenges and Lessons and businesses. In this statement, the Learned from the Market Stress, agencies encouraged banking organizawhich was issued in June 2008. The tions to pursue economically viable and two papers were prepared as a result of appropriate lending opportunities and
Banking Supervision and Regulation 115 stressedtheimportanceofprudentlend- the2007review.Withinthe“criticized” ing practices, a strong capital position, category, “special mention” (potentially prudentdividendpolicies,andappropri- weak) credits increased $167.9 billion, ate employee compensation practices. accounting for 7.5 percent of the SNC portfolio compared with 1.9 percent in Shared National Credit the 2007 review, and “classified” cred- Program its (credits having well-defined weaknesses) increased $91.5 billion, ac- In October, the Federal Reserve, FDIC, counting for 5.8 percent of the SNC OCC, and OTS released summary portfolio compared with 3.1 percent in resultsofthe2008annualreviewofthe the 2007 review. The criticized credits Shared National Credit Program. The and related ratios do not include the agencies established the program in effects of hedging or other techniques 1977topromoteanefficientandconsis- that organizations often use to mitigate tent review and classification of shared risk. national credits. A shared national The 2008 SNC review also included credit (SNC) is any loan or formal loan a supervisory assessment of underwritcommitment—and any asset, such as ing standards. Examiners found an inother real estate, stocks, notes, bonds, ordinate volume of syndicated loans and debentures taken as debts previ- having structurally weak underwriting ously contracted—extended to borrow- characteristics, particularly in noners by a supervised institution, its sub- investment-grade or leveraged transacsidiaries and affiliates. A SNC must tions. The most commonly cited weakhave an original loan amount that ag- nesses were liberal repayment terms, gregates to $20 million or more and repayment dependent on refinancing either (1) is shared by three or more or recapitalization, and nonexistent or unaffiliated supervised institutions un- weak loan covenants. Examiners also der a formal lending agreement or (2) a found that an excessive number of loan portion of which is sold to two or more agreements did not provide adequate unaffiliatedsupervisedinstitutions,with warnings or allow for proactive control the purchasing institutions assuming over the credit. their pro rata share of the credit risk. The 2008 SNC review was based on Revisions to the Guide to the analyses of credit data as of December Interagency Country Exposure Review 31, 2007, provided by federally super- Committee Process vised institutions. The 2008 review found that the volume of shared na- In November, the Federal Reserve, tional credits rose 22.6 percent over the FDIC,andOCCjointlyissuedrevisions 2007review,to$2.8trillion.Therecord to the Guide to the Interagency Country growth in credit volume was concen- Exposure Review Committee (ICERC) trated in large syndicated loans under- Process to reflect improvements in written in late 2006 and the first half of regulated institutions’ cross-border ex- 2007, led by the media and telecom, posure analyses and country risk manutilities, finance and insurance, and oil agement programs, as well as increased and gas sectors. “Criticized” credits availability of information on country rose $259.3 billion, to $373.4 billion, and transfer risk (see SR letter 08-12). accounting for 13.4 percent of the SNC The agencies will now assign an portfolio compared with 5.0 percent in ICERC rating to only those countries in
116 95th Annual Report, 2008 default and, accordingly, have elimi- Pandemic Planning nated the rating categories Other Transfer Risk Problems (OTRP), Weak, In January, the FBIIC and the Financial Moderately Strong, and Strong. They Services Sector Coordinating Council will continue to closely monitor regu- (FSSCC), an organization made up of lated institutions’ cross-border expo- financial services trade associations and sures. The revised guide sets forth individual firms, published an aftersupervisory expectations for an institu- actionreportonapandemicfluexercise tion’s country risk assessment process heldinSeptemberandOctober2007for and rating systems. It also emphasizes the financial services sector in the that an institution is expected to have United States. A total of 2,775 organiappropriate limits on exposure to each zations participated in the exercise, of sovereign entity, to perform financial which approximately 62 percent were banks, thrifts, and credit unions. The analyses of its exposures, and to apply exercise revealed several key themes robust risk management to all country that are important to pandemic exposures, not just to the countries planning: communications plans, rated by the agencies. infrastructure-dependency plans, crosstrained employees, telecommuting, Proposed Interagency Appraisal and human resources issues, and plans for a Evaluation Guidelines second wave of the pandemic. Throughout 2008, the Federal Re- In November, the Federal Reserve, serve and the other FFIEC agencies FDIC, NCUA, OCC, and OTS jointly were engaged in several projects deissued for comment proposed In- signed to help the agencies prepare for teragency Appraisal and Evaluation a pandemic event. The agencies spon- Guidelines to reaffirm supervisory ex- sored a Roundtable on Pandemic Planpectations for sound real estate ap- ning attended by approximately 170 inpraisal and evaluation practices. The dustry representatives, including some proposed guidance would replace the international participants. The FFIEC’s 1994 Interagency Appraisal and Evalu- Business Continuity Planning Booklet ation Guidelines to reflect changes in was updated in March to include guidindustry practice, uniform appraisal ance on identifying the continuity planstandards, and technology. It incorpo- ningthatshouldbeinplacetominimize ratessupervisoryguidanceissuedbythe adverse effects of a pandemic event. agencies since 1994 and clarifies their Theagenciesalsodiscussedwithindusexpectationsforaregulatedinstitution’s tryrepresentativesthepotentialindustry risk-managementprinciplesandinternal needforregulatoryreliefintheeventof controls for its real estate collateral apandemic.AmeetingofFFIECmemvaluation function. The proposed guid- bers and industry trade group represenance also includes a discussion of the tatives focusing on emergency preuse of automated valuation models in paredness, response, and recovery was the development of an evaluation of held in March, and a second meeting real estate collateral for real estate was held in September. transactions below the appraisal thresh- In January, the Federal Reserve Bank old set forth in the agencies’ appraisal of New York began a series of reviews regulation. The comment period for the to assess the progress made by the top proposal closed on January 20, 2009. 15 banking organizations in the country
Banking Supervision and Regulation 117 with respect to pandemic preparedness. Bank Holding Company A white paper was published that high- Regulatory Reports lights the practices of firms as well as The Federal Reserve requires that U.S. conclusionsandthemesastheyrelateto bank holding companies periodically the current state of pandemic preparedsubmit reports providing financial and nessplanningatsystemicbankingorganizations.10 structure information. The information is essential in supervising the companies and in formulating regulations and Banks’ Securities Activities supervisory policies. It is also used in In August, the Federal Reserve released responding to requests from Congress the Small Entity Compliance Guide for and the public for information about Regulation R. Regulation R, adopted bank holding companies and their nonjointly by the Board and the Securities bank subsidiaries. Foreign banking and Exchange Commission in Septem- organizations also are required to periber 2007, implemented certain key odically submit reports to the Federal exceptionsforbanksfromthedefinition Reserve. of the term “broker” under section ReportsintheFRY-9series—FRY- 3(a)(4) of the Securities Exchange Act 9C, FR Y-9LP, and FR Y-9SP— of 1934, as amended by the Gramm- provide standardized financial state- Leach-Bliley Act. The guide provides a ments for bank holding companies on general description of the regulation both a consolidated and a parent-only and contact information for small enti- basis. The reports are used to detect ties having questions regarding compli- emerging financial problems, to review ance. performanceandconductpre-inspection analysis, to monitor and evaluate risk Regulatory Reports profiles and capital adequacy, to evaluateproposalsforbankholdingcompany The Federal Reserve’s supervisory pol- mergers and acquisitions, and to anaicy function is responsible for develop- lyzeaholdingcompany’soverallfinaning, coordinating, and implementing cial condition. Nonbank subsidiary regulatory reporting requirements for reports—FRY-11,FR2314,andFRYvarious financial reporting forms filed 7N—help the Federal Reserve deterby domestic and foreign financial insti- mine the condition of bank holding tutions subject to Federal Reserve companies that are engaged in nonbank supervision.FederalReservestaffmem- activities and also aid in monitoring the bers interact with relevant federal and number, nature, and condition of the state supervisors, including foreign companies’ nonbank subsidiaries. The bank supervisors as needed, to recom- FR Y-8 report provides information on mend and implement appropriate and transactions between an insured depositimely revisions to the reporting forms tory institution and its affiliates that are and the attendant instructions. subject to section 23A of the Federal Reserve Act; it is used to monitor bank exposures to affiliates and to ensure 10. Thepopulationunderreviewincludedcore banks’ compliance with section 23A of clearing and settlement organizations and firms the Federal Reserve Act. The FR Y-10 that play a critical role in financial markets and reportprovidesdataonchangesinorgaaresubjecttoresiliencyguidelinesissuedinApril 2003,alsocalledthe“SoundPracticesPaper.” nization structure at domestic and for-
118 95th Annual Report, 2008 eignbankingorganizations(FBOs).The pense in the income statement; and FR Y-6 and FR Y-7 reports gather ad- (9) revision of the instructions for reditional information on organization porting fully insured brokered deposits structure and shareholders from domes- in the deposit liabilities schedule to tic banking organizations and FBOs, conformtotheinstructionsforreporting respectively; the information is used to time deposits in the schedule. monitor structure so as to determine Effective March 2008, the requirecompliancewithprovisionsoftheBank ment that subsidiaries created for the Holding Company Act and Regulation purpose of issuing trust preferred secu- YandtoassesstheabilityofanFBOto rities (trust preferred securities subsidicontinue as a source of strength to its aries) file the FR Y-11, FR 2314, and U.S. operations. FRY-7Nwasdropped.Inaddition,new In February, a number of revisions to items were added to the reports to colthe FR Y-9C report were approved for lect (1) certain data from all institutions implementationduring2008:(1)report- that choose, under generally accepted ing of interest and fee income on one- accounting principles, to apply a fair to four-family residential mortgages value option to one or more financial and all other real estate loans separ- instruments and one or more classes ately from income on all other loans; of servicing assets and liabilities and (2) reporting of the quarterly average (2) data on income from annuity sales. forone-tofour-familyresidentialmort- AlsoaddedontheFRY-7Nwereanew gages and all other real estate loans item for reporting the amount of partseparately from the quarterly average nership interests and a new section, for all other loans; (3) addition of data Notes to the Financial Statements. Efitems for restructured troubled mort- fectiveDecember,aquestionwasadded gagesandmortgageloansintheprocess totheFRY-11S,FR2314S,andFRYof foreclosure; (4) expansion of the 7NS to determine whether the subsidischedule for closed-end one- to four- ary has adopted a fair value option. family residential mortgage banking Also effective December 2008, the activity to include originations, pur- FR Y-10 report was updated to include chases, and sales of open-end mort- collection of the tax ID number for all gages as well as closed-end and open- reportable banking and nonbanking end mortgage loan repurchases and entities located in the United States. In indemnifications during the quarter; addition, cover pages and instructions (5) modification of the definition of for the FR Y-6 and FR Y-7 were modi- “trading account” and collection of fied to highlight, for reporting entities, additional information about instru- issues surrounding the submission of ments accounted for under the fair information on individuals. value option on the loan schedule and In November, the Federal Reserve the fair value measurements schedule; proposed a number of revisions to the (6) revision of the schedule on trading FR Y-9C for implementation in 2009 assets and liabilities; (7) clarification of comparable to those proposed for the the instructions for reporting credit bank Call Report, as described in the derivative data in the risk-based capital next section. In addition, the Fedschedule, and corresponding change to eral Reserve proposed to revise the the report; (8) modification of the FR Y-9C to (1) add new data items and threshold for reporting sub-categories revise existing data items on trading of other non-interest income and ex- assets and liabilities; (2) collect infor-
Banking Supervision and Regulation 119 mation associated with the Treasury’s tionsforreportingdailyaveragedeposit Capital Purchase Program; and (3) add data by newly insured institutions to new data items and revise existing data conform with the FDIC’s assessment items on regulatory capital require- regulations; clarification of the instrucments. Also in November, the Federal tions for reporting credit derivatives Reserve proposed to revise the FR Y- data on the risk-based capital schedule; 11, FR 2314, and FR Y-7N in March and collection of information necessary 2009 to collect new information on to calculate assessments for participants assets held in trading accounts and to in the FDIC’s Transaction Account require that respondents submit all FR Guarantee Program. Y-8 reports electronically, effective In September, the FFIEC proposed a with the June 30, 2009, report date. number of revisions to the Call Report for implementation in 2009. The proposed revisions include new items on Commercial Bank (1)held-for-investmentloansandleases Regulatory Financial Reports acquired in business combinations; As the federal supervisor of state mem- (2) the date on which the bank’s fiscal ber banks, the Federal Reserve, along year ends; (3) real estate construction withtheotherbankingagenciesthrough and development loans on which interthe FFIEC, requires banks to submit est is capitalized; (4) holdings of comquarterly Call Reports. Call Reports are mercialmortgage–backedsecuritiesand the primary source of data for the su- structured financial products, such as pervision and regulation of banks and collateralized debt obligations; (5) fair the ongoing assessment of the overall value measurements for assets and soundness of the nation’s banking sys- liabilities reported at fair value on a tem. Call Report data, which also serve recurring basis; (6) pledged loans and as benchmarks for the financial infor- pledged trading assets; (7) collateral mation required by many other Federal andcounterpartiesassociatedwithover- Reserveregulatoryfinancialreports,are the-counter derivatives exposures; (8) widely used by state and local govern- creditderivatives;(9)remainingmaturiments, state banking supervisors, the ties of unsecured other borrowings and banking industry, securities analysts, subordinated notes and debentures; and the academic community. (10) unused short-term commitments to During 2008, the FFIEC imple- asset-backed commercial paper conmented revisions to the Call Report to duits; (11) past due and nonaccrual address new safety and soundness con- trading assets; (12) investments in real siderations and to facilitate supervision. estate ventures; and (13) held-to- Among these revisions were collection maturity and available-for-sale securiofadditionalinformationrelatedtoone- ties in domestic offices. In addition, to four-family residential mortgage revisions were proposed to (1) modify loans; modification of the definition of several data items relating to noncon- “trading account” in response to the trolling (minority) interests in consolicreation of a fair value option under dated subsidiaries; (2) provide for generally accepted accounting prin- exemptions from reporting certain exciples; revision of certain schedules to isting items by banks having less than collect additional information about $1 billion in total assets; (3) clarify the instrumentsaccountedforunderthefair definition of the term “loan secured by value option; revision of the instruc- real estate”; (4) provide guidance in the
120 95th Annual Report, 2008 reporting instructions on quantifying National Information Center misstatements in the Call Report; (5) eliminate the confidential treatment The National Information Center (NIC) of data collected from trust institutions is the Federal Reserve’s comprehensive on fiduciary income, expenses, and repository for supervisory, financial, losses; and (6) expand information col- andbanking-structuredata.Itisalsothe lected on trust department activities. main repository for many supervisory documents. NIC includes (1) data on bankingstructurethroughouttheUnited Supervisory Information States as well as foreign banking con- Technology cerns; (2) the National Examination InformationtechnologysupportingFed- Database (NED), which enables supereral Reserve supervisory activities is visory personnel as well as federal and managed within the System supervisory state banking authorities to access NIC information technology (SSIT) function data; (3) the Banking Organization in the Board’s Division of Banking Su- National Desktop (BOND), an applicapervision and Regulation. SSIT works tion that facilitates secure, real-time through assigned staff at the Board and electronic information-sharing and colthe Reserve Banks, as well as through laboration among federal and state System committees, to ensure that key banking regulators for the supervision staff members throughout the System of banking organizations; and (4) the participate in identifying requirements Central Document and Text Repository, and setting priorities for information which contains documents supporting technology initiatives. the supervisory processes. In 2008, the SSIT function worked Within the NIC, the supporting syson several strategic projects and in- tems have been modified over time to itiatives: (1) alignment of technol- extend their useful lives and improve ogy investments with business needs; business workflow efficiency. During (2)identificationandimplementationof 2008, work continued on upgrading the improvements to make technology and entire NIC infrastructure to provide data more accessible to staff working in easier access to information, a consisthe field; (3) strengthening of compli- tent Federal Reserve enterprise inforance with data-privacy regulations; mation data repository, a comprehen- (4) implementation of new software to sive metadata repository, and uniform improvetheprocessingofbankapplica- security across the Federal Reserve tions; and (5) implementation of col- System. An initial model was provided laboration and analysis technologies to a representative group of Federal (such as communities of practice and Reserveusersandstakeholders.Signifibusiness intelligence tools) to integrate cant design changes resulted from the supervisory and management informa- feedback of that group. Implementation tion systems that support both office- is expected to be phased in beginning based and field staff. With the other mid-year 2009 and to be completed by federal regulatory agencies, the SSIT year-end 2010. Also during the year, also implemented the first phase of the several programming changes were modernization of the Shared National made to NIC applications in support of Creditsystem.Anditbeganaprojectto business needs, primarily for the credit developacomprehensivetoolfortrack- risk and discount window functions to ing exam findings Systemwide. monitor new Federal Reserve programs
Banking Supervision and Regulation 121 TrainingforBankingSupervisionandRegulation,2008 Numberofparticipants Instructionaltime Coursesponsor Numberof (trainingdaysunless ortype FederalReserve State otherwisenoted) courseofferings personnel personnel FederalReserveSystem.... 3,217 359 11,998 128 FFIEC .................... 508 275 2,006 55 TheOptionsInstitute1...... 6 4 18 1 Rapidresponse ............ 1,745 0 10one-hour 10 conferencecalls 1. The Options Institute, an educational arm of the ChicagoBoardOptionsExchange,providesathree-day seminarontheuseofoptionsinriskmanagement. created to assist the financial and bank- 22 weeks of instruction. Individuals ing markets. move through a combination of class- The Federal Reserve continued in room offerings, self-paced assignments, 2008 to work with other federal regula- and on-the-job training over a period of tory agencies to modernize the collec- two to five years. Achievement is meation of SNC information by creating a sured by two professionally validated common collection facility. Implemen- proficiency examinations: the first protation of the initial phase was effective ficiency exam is required of all ECP year-end 2008, for fourth-quarter data. participants; the second proficiency SNC data will begin being reported on examisofferedintwospecialtyareas— a quarterly basis. safety and soundness, and consumer Finally, the Federal Reserve partici- affairs. A third specialty, in information patedinanumberoftechnology-related technology, requires that individuals initiatives supporting the supervision earn the Certified Information Systems function as part of FFIEC task forces Auditor certification offered by the and subgroups. Information Systems Audit Control Association. In 2008, 147 examiners Staff Development passed the first proficiency exam and 93 passed the second proficiency exam Training and staff development focuses (63 in safety and soundness, and 30 in on recruiting, deploying, developing, consumer affairs). andretainingstaffhavingtheskillsnecessary to meet supervisory responsibilities today and in the future. The staff Continuing Professional development program is responsible for Development the ongoing development of nearly Other formal and informal learning 2,300 professional supervisory staff. opportunities are available to examin- Training for banking supervision and ers, including other schools and proregulation in 2008 is summarized in the grams offered within the System and table. FFIEC-sponsored schools. System programs are also available to state agen- Examiner Commissioning Program cies. In 2008, “rapid response” sessions The Examiner Commissioning Pro- were instituted in response to emerging gram (ECP) involves approximately or urgent training needs associated with
122 95th Annual Report, 2008 implementation or issuance of new Act. Depending on the circumstances, laws, regulations, or guidance. these activities may or may not require Federal Reserve approval in advance of their commencement.11 Regulation of the Whenreviewingabankholdingcom- U.S. Banking Structure pany application or notice that requires The Federal Reserve administers five priorapproval,theFederalReservemay federal statutes that apply to bank hold- consider the financial and managerial ing companies, financial holding com- resources of the applicant, the future panies, member banks, and foreign prospects of both the applicant and the banking organizations—the Bank Hold- firm to be acquired, the convenience ing Company Act, the Bank Merger and needs of the community to be Act, the Change in Bank Control Act, served,thepotentialpublicbenefits,the the Federal Reserve Act, and the Inter- competitive effects of the proposal, and national Banking Act. In administering theapplicant’sabilitytomakeavailable these statutes, the Federal Reserve acts to the Federal Reserve information onavarietyofproposalsthatdirectlyor deemed necessary to ensure compliance indirectlyaffectthestructureoftheU.S. with applicable law. In the case of a banking system at the local, regional, foreign banking organization seeking to and national levels; the international acquire control of a U.S. bank, the Fedoperations of domestic banking organi- eral Reserve also considers whether the zations; or the U.S. banking operations foreign bank is subject to comprehenofforeignbanks.Theproposalsconcern sive supervision or regulation on a conbank holding company formations and solidated basis by its home-country acquisitions, bank mergers, and other supervisor.In2008,theFederalReserve transactions involving bank or nonbank acted on 495 applications and notices firms. In 2008, the Federal Reserve filed by bank holding companies to acted on 1,057 proposals representing acquire a bank or a nonbank firm, or to 1,910 individual applications filed otherwise expand their activities. under the five statutes. A bank holding company may repurchaseitsownsharesfromitsshareholders. When the company borrows money Bank Holding Company Act to buy the shares, the transaction in- Under the Bank Holding Company Act, creases the company’s debt and dea corporation or similar legal entity creases its equity. The Federal Reserve must obtain the Federal Reserve’s may object to stock repurchases by approvalbeforeformingabankholding holdingcompaniesthatfailtomeetcercompany through the acquisition of one tain standards, including the Board’s or more banks in the United States. capital adequacy guidelines. In 2008, Once formed, a bank holding company must receive Federal Reserve approval 11. Since1996,theacthasprovidedanexpebefore acquiring or establishing addidited prior notice procedure for certain permistional banks. Also, bank holding com- sible nonbank activities and for acquisitions of panies generally may engage in only smallbanksandnonbankentities.Sincethattime those nonbanking activities that the the act has also permitted well-run bank holding companies that satisfy certain criteria to com- Board has previously determined to be mence certain other nonbank activities on a de closely related to banking under section novobasiswithoutfirstobtainingFederalReserve 4(c)(8) of the Bank Holding Company approval.
Banking Supervision and Regulation 123 theFederalReservereviewed7stockre- approval from the relevant federal purchase proposals by bank holding banking agency before completing the companies. transaction. The Federal Reserve is The Federal Reserve also reviews responsible for reviewing changes in elections submitted by bank holding the control of state member banks and companies seeking financial holding bank holding companies. In its review, company status under the authority theFederalReserveconsidersthefinangranted by the Gramm-Leach-Bliley cial position, competence, experience, Act. Bank holding companies seeking and integrity of the acquiring person; financial holding company status must theeffectoftheproposedchangeonthe file a written declaration with the Fed- financial condition of the bank or bank eral Reserve. In 2008, 29 domestic holding company being acquired; the financial holding company declarations future prospects of the institution to be and 5 foreign bank declarations were acquired; the effect of the proposed approved. change on competition in any relevant market; the completeness of the information submitted by the acquiring per- Bank Merger Act son; and whether the proposed change The Bank Merger Act requires that all would have an adverse effect on the proposals involving the merger of Deposit Insurance Fund. A proposed insured depository institutions be acted transaction should not jeopardize the on by the relevant federal banking stability of the institution or the interagency. The Federal Reserve has pri- ests of depositors. During its review of mary jurisdiction if the institution sur- a proposed transaction, the Federal viving the merger is a state member Reservemaycontactotherregulatoryor bank. Before acting on a merger pro- law enforcement agencies for inforposal,theFederalReserveconsidersthe mation about relevant individuals. In financial and managerial resources of 2008, the Federal Reserve approved theapplicant,thefutureprospectsofthe 124 changes in control of state member existing and combined organizations, banks and bank holding companies. the convenience and needs of the community(ies) to be served, and the com- Federal Reserve Act petitive effects of the proposed merger. TheFederalReservealsomustconsider UndertheFederalReserveAct,amemthe views of the U.S. Department of ber bank may be required to seek Fed- Justice regarding the competitive as- eral Reserve approval before expanding pects of any proposed bank merger its operations domestically or internainvolving unaffiliated insured deposi- tionally. State member banks must tory institutions. In 2008, the Federal obtain Federal Reserve approval to Reserve approved 71 merger applica- establish domestic branches, and all tions under the act. member banks (including national banks) must obtain Federal Reserve approval to establish foreign branches. Change in Bank Control Act When reviewing proposals to establish The Change in Bank Control Act domestic branches, the Federal Reserve requires individuals and certain other considers, among other things, the parties that seek control of a U.S. bank scope and nature of the banking activior bank holding company to obtain ties to be conducted. When reviewing
124 95th Annual Report, 2008 proposalsforforeignbranches,theFed- subsidiaries, or representative offices in eral Reserve considers, among other the United States. things,theconditionofthebankandthe In reviewing proposals, the Federal bank’sexperienceininternationalbank- Reserve generally considers whether ing. In 2008, the Federal Reserve acted the foreign bank is subject to compreon new and merger-related branch pro- hensive supervision or regulation on a posals for 890 domestic branches and consolidated basis by its home-country granted prior approval for the establish- supervisor.Italsoconsiderswhetherthe ment of 6 new foreign branches. home-country supervisor has consented State member banks must also obtain to the establishment of the U.S. office; Federal Reserve approval to establish the financial condition and resources of financial subsidiaries. These subsidi- the foreign bank and its existing U.S. aries may engage in activities that are operations; the managerial resources of financial in nature or incidental to the foreign bank; whether the homefinancial activities, including securities- country supervisor shares information related and insurance agency–related regarding the operations of the foreign activities. In 2008, 4 financial subsidi- bank with other supervisory authorities; ary applications were approved. whether the foreign bank has provided adequate assurances that information concerning its operations and activities Overseas Investments by will be made available to the Federal U.S. Banking Organizations Reserve, if deemed necessary to determine and enforce compliance with ap- U.S. banking organizations may engage plicable law; whether the foreign bank in a broad range of activities overseas. has adopted and implemented proce- Many of the activities are conducted dures to combat money laundering and indirectly through Edge Act and agreewhether the home country of the formentcorporationsubsidiaries.Although eign bank is developing a legal regime most foreign investments are made to address money laundering or is parunder general consent procedures that ticipating in multilateral efforts to cominvolve only after-the-fact notification batmoneylaundering;andtherecordof to the Federal Reserve, large and other theforeignbankwithrespecttocomplisignificant investments require prior ancewithU.S.law.In2008,theFederal approval. In 2008, the Federal Reserve Reserve approved 19 applications by approved 67 proposals for overseas foreign banks to establish branches, investments by U.S. banking organizaagencies,orrepresentativeofficesinthe tions, many of which represented in- United States. vestments through an Edge Act or agreement corporation. Public Notice of Federal Reserve Decisions International Banking Act Certain decisions by the Federal Re- The International Banking Act, as serve that involve an acquisition by a amended by the Foreign Bank Supervi- bank holding company, a bank merger, sionEnhancementActof1991,requires a change in control, or the establishforeignbankstoobtainFederalReserve mentofanewU.S.bankingpresenceby approval before establishing branches, a foreign bank are made known to the agencies, commercial lending company publicbyanorderoranannouncement.
Banking Supervision and Regulation 125 Orders state the decision, the essential Securities Credit facts of the application or notice, and Under the Securities Exchange Act, the the basis for the decision; announce- Board is responsible for regulating mentsstateonlythedecision.Allorders credit in certain transactions involving and announcements are made public the purchase or carrying of securities. immediately; they are subsequently The Board’s Regulation T limits the reported in the Board’s weekly H.2 staamount of credit that may be provided tistical release. The H.2 release also by securities brokers and dealers when contains announcements of applications the credit is used to purchase debt and and notices received by the Federal equity securities. The Board’s Regula- Reserve upon which action has not yet tion U limits the amount of credit that been taken. For each pending applicamay be provided by lenders other than tion and notice, the related H.2 gives brokers and dealers when the credit is thedeadlineforcomments.TheBoard’s used to purchase or carry publicly held website (www.federalreserve.gov) proequity securities if the loan is secured vides information on orders and by those or other publicly held equity announcements as well as a guide for securities. The Board’s Regulation X U.S. and foreign banking organizations applies these credit limitations, or marthat wish to submit applications or gin requirements, to certain borrowers notices to the Federal Reserve. and to certain credit extensions, such as credit obtained from foreign lenders by U.S. citizens. Enforcement of Other Laws Several regulatory agencies enforce and Regulations theBoard’ssecuritiescreditregulations. The SEC, the Financial Industry Regu- The Federal Reserve’s enforcement latory Authority (formed through the responsibilities also extend to the dis- combination of the National Associaclosureoffinancialinformationbystate tion of Securities Dealers and the regumember banks and the use of credit to lation, enforcement, and arbitration purchase and carry securities. functions of the New York Stock Exchange), and the Chicago Board Options Exchange examine brokers and Financial Disclosures by dealers for compliance with Regulation State Member Banks T. With respect to compliance with RegulationU,thefederalbankingagen- Statememberbanksthatissuesecurities cies examine banks under their respecregistered under the Securities Extive jurisdictions; the Farm Credit change Act of 1934 must disclose cer- Administration and the National Credit tain information of interest to investors, Union Administration examine lenders including annual and quarterly financial under their respective jurisdictions; and reports and proxy statements. By statthe Federal Reserve examines other ute, the Board’s financial disclosure Regulation U lenders. rules must be substantially similar to those of the Securities and Exchange Commission. At the end of 2008, 12 Federal Reserve Membership state member banks were registered with the Board under the Securities At the end of 2008, 2,378 banks were Exchange Act. membersoftheFederalReserveSystem
126 95th Annual Report, 2008 and were operating 55,892 branches. States and for 70 percent of all com- These banks accounted for 34 percent mercial banking offices. Á of all commercial banks in the United
127 Consumer and Community Affairs Among the Federal Reserve’s responsi- Federal Reserve Board advanced conbilities in the areas of consumer and sumer protection in financial services community affairs are by finalizing regulations that set new rules for fairness and transparency in • writing and interpreting regulations the high-cost mortgage and credit card to implement federal laws that pro- markets. In addition, the Board contintect and inform consumers, ued to commit significant resources in the areas of supervision, research, com- • supervising state member banks to munity development, and consumer ensure compliance with the regulaeducation to increase understanding of tions, the issues and impacts of the credit • investigating complaints from the crisis on consumers and communities. public about state member banks’ compliance with regulations, Mortgage Credit • promoting community development Throughout 2008, concerns over conin historically underserved markets, sumer protection and access to credit in and the mortgage market continued to escalate, prompting the Federal Reserve to • conducting research and promoting continue to pursue a range of efforts to consumer education. support both consumers and industry through its regulatory and supervisory Theseresponsibilitiesarecarriedoutby activities. the members of the Board of Governors,theBoard’sDivisionofConsumer Regulatory Actions and Community Affairs (DCCA), and the consumer and community affairs Expansion of Consumer Protections staffs at Federal Reserve Banks. under Regulation Z The Federal Reserve System’s various consumer protection and commu- Concerns about the mortgage credit nity development roles continued to be markets continued into 2008 as many areasofinterestin2008.Amidthecon- lenders and borrowers suffered signifisequences of a deteriorating financial cant losses and as property values marketplace, consumer protection was declinedinmuchofthecountry.Analyamong the issues of concern, particu- ses of these developments revealed a larly in the mortgage and credit card range of lender practices that contribmarkets. Throughout the year, lawmak- uted to the crises, including lax underers, regulators, the media, and consum- writing standards and inadequate aners scrutinized various practices used in alyses of borrowers’ ability to repay the financial services marketplace, ex- their mortgages. Many of these pracpressing concern at the complexity of tices were common among nonbank, products and characterizing some prac- subprime mortgage creditors offering ticesasunfairordeceptive.In2008,the higher-priced mortgage loans. These
128 95th Annual Report, 2008 lenders were not subject to the same practices in mortgage lending, while level of supervision as insured deposi- keeping credit available to qualified tory institutions. borrowers and supporting sustainable The Board had taken action to homeownership.” The new rules apply address some of these concerns in late to “higher-priced mortgage loans”— 2007, when it issued proposed amend- defined to capture virtually all loans ments to Regulation Z to strengthen originated in the subprime market—but consumer protection and underwriting generally exclude loans in the prime standards. The proposed rules ad- market.Inaddition,therulesalsoestabdressed, in particular, certain creditor lish new consumer protections that practices as they relate to higher-priced apply to all mortgage loans secured by mortgageloans,underauthoritygranted a borrower’s principal dwelling. by the Home Ownership and Equity For higher-priced mortgage loans Protection Act (HOEPA). The proposal secured by a consumer’s principal received more than 4,500 comment let- dwelling, the final regulation adds four ters from the mortgage industry, con- key protections: sumer and community organizations, • It prohibits a lender from making a individual consumers, and policyloan without regard to a borrower’s makers. ability to repay the loan from income InJuly2008,theBoardapprovedand and assets other than the home’s published the final rules for mortgage value. loans under Regulation Z to improve consumer protections and facilitate • It requires creditors to verify the responsible lending. The new rules income and assets they rely upon to apply to all mortgage lenders, not just determine a borrower’s ability to insured depository institutions, to pro- repay a loan. vide broader protection to consumers • It bans any prepayment penalty if the and a uniform set of rules for the mortpaymentcanchangeintheinitialfour gage industry. The regulation prohibits years. For other higher-priced loans, unfair, abusive, or deceptive home a prepayment penalty period cannot mortgage lending practices, and relast for more than two years. This stricts certain other mortgage practices. restriction on prepayment penalties The final rules also establish advertisis substantially more limiting than ing standards, and require lenders to originally proposed. provide certain mortgage disclosures • It requires creditors to establish esto consumers earlier in the lending crow accounts for property taxes and process.1 homeowner’s insurance for all first- The regulation was approved at a lien mortgage loans. public meeting held by the Board, where Federal Reserve Chairman Ben For all mortgage loans secured by a S.Bernankestated,“Theproposedfinal borrower’s principal dwelling, the final rules are intended to protect consumers rules establish several requirements: from unfair or deceptive acts and • Creditors and mortgage brokers are prohibited from coercing a real estate 1. Seepressrelease,“BoardIssuesFinalRule appraiser to misstate a home’s value. AmendingHomeMortgageProvisionsofRegula- • Companies that service mortgage tionZ”(July14,2008),www.federalreserve.gov/ newsevents/press/bcreg/20080714a.htm. loansareprohibitedfromengagingin
Consumer and Community Affairs 129 certain practices, such as pyramiding the Board committed to considering late fees. In addition, servicers are alternative approaches as part of its required to credit consumers’ loan ongoingreviewofmortgagerulesunder payments as of the date of receipt Regulation Z. and to provide a payoff statement within a reasonable time following a Illustrations to Improve Consumers’ request. Understanding of Adjustable-Rate • Creditors must provide a good-faith Mortgage Products estimateofaloan’scosts,includinga With the expansion of mortgage credit schedule of payments, within three markets over the last several years, the daysafteraconsumerappliesforany rangeandcomplexityofloantypesalso mortgage loan secured by the con- increased, particularly in the subprime sumer’s principal dwelling, such as a market. Here, various adjustable-rate home improvement or a straight refimortgage (ARM) loan products became nance loan. more prevalent as a means to make The final rules also set additional homeownership more affordable standards that apply to all mortgage throughlowerratesandpaymentsinthe advertising, requiring additional infor- early years of a loan. mation about rates, monthly payments, While beneficial to some borrowers, and other loan features. In addition, the ARMs also can be very complex and final rules ban seven deceptive or mis- can present repayment challenges to leading advertising practices, including borrowers whose circumstances prove representing that a rate or payment is unsuitable for loans with significant “fixed” when it can change. The new paymentincreases.Becauseofconcerns rules take effect on October 1, 2009, that consumers were not fully aware of except for the escrow requirement, the implications presented by these which will be phased in during 2010 to products, the Federal Reserve and allow lenders to establish new systems other federal financial regulatory agenas needed. cies in May 2008 issued guidance After extensive consumer testing, the containing illustrations that mortgage Board withdrew one element of the lenders can use to help consumers unoriginal proposal relating to “yield- derstand certain hybrid ARMs.3 These spread premiums”—a common com- illustrations are designed to assist instipensationmethodusedbylendersorigi- tutionsincomplyingwithrecommendanating loans through mortgage brokers. tions set forth in the agencies’ 2007 The testing, conducted to ascertain the “Statement on Subprime Mortgage effectivenessofavarietyofstrategiesto Lending,” which called on institutions disclose this practice and its impact on to provide clear, balanced, and timely the cost of the loan to borrowers, information to consumers about the revealed that the proposed disclosures relative benefits, costs, and risks of were inadequate in conveying this information to consumers.2 As a result, 3. Seepressrelease,“FederalFinancialRegu- 2. See Summary of Findings, Consumer Test- latorsIssueFinalIllustrationsofConsumerInforing of Mortgage Broker Disclosures (July 10, mation for Hybrid Adjustable-Rate Mortgage 2008),www.federalreserve.gov/newsevents/press/ Products”(May22,2008),www.federalreserve.gov/ bcreg/20080714regzconstest.pdf. newsevents/press/bcreg/20080522a.htm.
130 95th Annual Report, 2008 Foreclosures: Responding to Consumers and Communities in Crisis through the Federal Reserve’s Home Mortgage Initiative With continued deterioration of the sub- topreventnegativespilloversattheneighprime mortgage market and the overall borhood level. The HMI coordinated the economy,2008wasmarkedbyanincrease activitiesofthevariousfunctionalareasof in the rate of foreclosure throughout the the System, including research, public country.Asforeclosuresmountedandpro- affairs, and community affairs, to improve jections worsened throughout the year, access to data and information and to nonprofit organizations, governments, develop policies relating to foreclosure. lenders, and servicers mobilized to re- This strategy capitalized on the following spondtotheneedsofborrowersandcom- areasofexpertise: munities confronting defaulting mortgages • outreach to strengthen existing collaboand foreclosures. The Federal Reserve rations with other regulators, commu- System actively engaged in national and nitygroups,policyorganizations,finanregionalpartnershipstohelpinformpolicy cial institutions, and public officials to and practices around foreclosure preven- identify solutions to prevent unnecestion and neighborhood stabilization in sary foreclosures and their negative communitieshardhitbyforeclosures. effects The Federal Reserve System has a sig- • regulation to foster an environment that nificant presence throughout the country supports the homeownership goals of through its 12 regional banks and their creditworthyborrowerswithappropriate branchofficesandtheBoardofGovernors consumer protection and responsible in Washington, D.C. Each of these localendingpractices tions offers important research, supervision, and community development exper- • research and analysis to provide comtiseandinsightsthathelpinformlocaland munity groups, counseling agencies, regionalresponsestoeconomicconditions. regulators, financial institutions, and Asthemortgagemarketcontinuedtodete- others with detailed analysis to support riorate in 2008, the System worked to efforts to help troubled borrowers and coordinateitsresourcesthroughtheHome- communities ownership and Mortgage Initiative (HMI), • financial education to help consumers acomprehensivestrategytoprovideinfor- make informed personal financial decimation and outreach to stem unnecessary sions, including those about home foreclosures,tostabilizecommunities,and ownership hybrid ARM products.4 The illustra- ucts or publish illustrations of the contions were developed in response to sumer information. requests by some industry groups, in Although the illustrations are not commenting on the proposed Subprime mandatory, institutions may use them, Statement, that the agencies either pro- provide information based on them, or videuniformdisclosuresfortheseprod- provide consumers with information described in the guidance in an alternate format. The illustrations provide 4. Seepressrelease,“FederalFinancialRegulatory Agencies Issue Final Statement on • an explanation of some of the key Subprime Mortgage Lending” (June 29, 2007), features of certain ARM loans that www.federalreserve.gov/newsevents/press/bcreg/ 20070629a.htm. are identified in the Subprime State-
Consumer and Community Affairs 131 With respect to outreach, the Federal examining best practices, creative solu- Reserve provided community coalitions, tions, and innovative ways to prepare for counseling agencies, fellow regulators, thefuture. financial institutions, and others with de- The Federal Reserve also forged a parttailed analyses identifying neighborhoods nership with NeighborWorks America, a athighriskofforeclosures.Byunderstand- national nonprofit organization, to address ingthoseareaswithhighconcentrationsof issues related to neighborhood stabilizasubprime mortgages, delinquencies, and tion and, in particular, the disposition of foreclosures,communityleaderscanbetter real estate owned (REO) properties. As target their scarce resources to borrowers part of the collaboration, a website, www. in need of counseling and other interven- stablecommunities.org, was developed to tionsthatmayhelpforestallforeclosure. provide a one-stop source of information Toexploretheimpactoftheforeclosure for homeowners, community development crisis on different real estate markets, the organizations,andlocalgovernmentsdeal- Federal Reserve hosted a series of confer- ing with foreclosure-related vacant and ences entitled, “Recovery, Renewal, Re- abandonedproperties. building: A Federal Reserve Foreclosure In addition, the Community Affairs Series,” in five cities.1 These conferences, offices at each of the 12 Reserve Banks held in Atlanta, Los Angeles, Columbus launched online Foreclosure Resource (Ohio), St. Louis, and Washington, D.C., Centers that provide information for lookedatstrategiestoaddressthenegative homeowners, prospective homebuyers, impact of foreclosures in high-cost mar- and community groups to prevent foreclokets, as well as the difficulty of dealing sures and lessen their negative influence with foreclosures in neighborhoods in onneighborhoods.ACommunityForecloweak-marketcommunities.Theseriesalso sure Mitigation Toolkit was also develhighlighted research on foreclosure and oped.2 The Board also developed inforthe resulting problems of vacancy and mation for consumers on how to protect abandonment. Through this series, confer- their homes from foreclosure and upenceattendeesworkedtoclarifytheissues dated other mortgage publications, includand identify the strategies and best prac- ing A Consumer’s Guide to Mortgage tices for moving toward solutions by Settlement Costs and What You Should Know about Home Equity Lines of Credit. 1. Seeadditionalinformationontheconferencesat stlouisfed.org/RRRseries/ and www.clevelandfed.org/ Our_Region/Community_Development/Events/ 2. SeeForeclosureResourcesatwww.federalreserve. Seminars/2008/20080827/Overview_4Forums.pdf. gov/consumerinfo/foreclosure.htm. ment, including payment shock, re- for the first two years and then subsponsibility for taxes and insurance, ject to increase. prepayment penalties, balloon payments, and increased costs associated Supervisory Actions with stated-income or reduced-documentation loans, and The Board applied its supervisory authority in an effort to address the • a chart, with numerical examples, aggressive credit tightening that gave that depicts in a concrete, readily cause for concern in 2008 and to urge understandable manner the potential mortgage lenders to work with troubled payment shock for a loan structured mortgage borrowers. Joining with other with a discounted interest rate good financial regulatory agencies, the Board
132 95th Annual Report, 2008 Staff also revised A Consumer’s Guide to community groups, policymakers, and Mortgage Refinancings, providing a link local governments as they prioritize the to a mortgage refinancing calculator.3 For use of their resources for these consumers with questions about banking foreclosure-related efforts. In addition, a procedures and rules, or who feel they System workgroup, consisting of some of may have been treated unfairly by their the Federal Reserve System’s top econobanks, the Federal Reserve Consumer mists and community development ex- Help Center feeds queries directly to the perts, prepared overviews that summarize various regulatory agencies so that con- thecurrentstateofknowledgeabouthoussumershaveonlyonestoptomaketoask ing and mortgage markets, as well as questionsorfilecomplaints.4 about foreclosures. The System continues In the regulatory realm, the Federal to conduct research on a wide range of Reserve issued new rules to improve con- topics to fill analytical gaps and better sumer protections and disclosures relating understand the effects of foreclosure on to loans secured by a borrower’s home neighborhoods, the economy, and the (seethe“MortgageCredit”discussionear- housingandmortgagemarkets. lierinthischapter). Intheinterestofsupportingborrowersex- To support needed research and analy- periencingdifficultyinmeetingtheirmortsis, the Federal Reserve System launched gage obligations, the Board has provided several initiatives to provide studies, data, outlets for mortgage-related consumer and other foreclosure-related resources to financial education materials. In addition, communities grappling with foreclosures. through the HMI, the Federal Reserve has The System provided, on the website of posted internal and external resources on the Federal Reserve Bank of New York, each of the System’s 13 websites to help dataconcerningsubprimelendingpatterns improve staff and consumers’ access to and performance.5 These dynamic maps information that can assist them as they and data illustrate subprime and alt-A worktoaddresschallengesinthemortgage mortgage loan conditions that may assist market.6 As the mortgage and foreclosure issues and their implications evolve, the 3. See“5TipsforProtectingyourHomefromFore- FederalReservewillcontinuetocoordinate closure, www.federalreserve.gov/pubs/foreclosuretips/ default.htmandwww.federalreserve.gov/consumerinfo/ its resources and expertise to assist conmortgages.htm.” sumers and communities during the crisis. 4. Seewww.federalreserveconsumerhelp.gov. 5. See “Dynamic Maps of Nonprime Mortgage ConditionsintheUnitedStates,”www.newyorkfed.org/ 6. SeeResourcesforConsumers,www.federalreserve. mortgagemaps/. gov/consumerinfo/foreclosure_consumers.htm. issuedaninteragencystatementonboth diariesthatprovidecredittobusinesses, topics in November 2008.5 consumers, and other creditworthy bor- With respect to the credit tightening, rowers. The statement emphasizes the the supervisory statement noted the essential nature of providing credit in a agencies’ expectation that all banking manner consistent with prudent lending organizations should fulfill their funda- practices and continuing to ensure the mental role in the economy as interme- pursuit of new lending opportunities on the basis of realistic asset valuations andbalancedassessmentsofborrowers’ repayment capacities. 5. Seepressrelease,“InteragencyStatementon Inlightoftheescalatingrateofmort- Meeting the Needs of Creditworthy Borrowers” gage foreclosures in 2008, the supervi- (November 12, 2008), www.federalreserve.gov/ newsevents/press/bcreg/20081112a.htm. sorystatementalsoarticulatedtheagen-
Consumer and Community Affairs 133 cies’ expectation that financial insti- amendments to Regulation Z (Truth in tutions work with existing borrowers Lending) in May 2007 that were toavoidpreventableforeclosures,which intended to increase consumer proteccan prove costly to both the institu- tions and improve disclosures for credit tionsandtothecommunitiestheyserve, cards.6 Throughout 2008, Board staff and to help mitigate other potential conducted consumer testing and colmortgage-related losses. The agencies’ lected input from consumer advocates, statementurgesalllendersandservicers lenders, and policymakers to gain into adopt systematic, proactive, and sight into the effect the proposed rules streamlined mortgage loan modification would have on consumers’ access to protocols and to review troubled loans credit and their understanding of inforusing these protocols. The goal of such mation they need to make informed efforts is to help achieve modifications decisions about the myriad credit card that result in mortgages that borrowers options in the market (see the “Advice can better manage. from the Consumer Advisory Council” discussion later in this chapter). Based on this information, the Board issued Credit Cards additional proposed amendments to Credit cards are the most common con- Regulation Z as well as proposed sumer financial services credit product, amendments to Regulation AA (Unfair and represent an important tool for or Deceptive Acts or Practices) in May facilitating transactions for both con- 2008.7 The public response to these sumers and businesses. Advances in proposals was unprecedented, with technology (such as credit scoring) and Board staff carefully considering inforthe expansion of the financial services mation obtained through extensive conmarketplace have contributed to a sig- sumer testing and review of more than nificant increase in competition in the 60,000 comment letters received during credit card market over the last decade. the comment period.8 During this time, lenders have em- Final rules regarding credit cards ployed aggressive marketing and prod- were issued in December 2008, with an uct development strategies and have applied billing practices to generate more fee-based income. (Previously, lenders had relied almost solely on 6. See press release (May 23, 2007), interest from their customers’ account www.federalreserve.gov/newsevents/press/bcreg/ balances for revenue.) These industry 20070523a.htm. 7. See press release (May 2, 2008), developments have elevated concerns www.federalreserve.gov/newsevents/press/bcreg/ about consumer protection, the trans- 20080502a.htm. parency of credit card pricing, and the 8. SeeDesignandTestingofEffectiveTruthin adequacy of consumer disclosures in Lending Disclosures: Findings from Qualitative credit card marketing materials, con- Consumer Testing Research, submitted to the Federal Reserve Board of Governors by Macro tracts, and periodic statements. International, Inc. (December 15, 2008), With the significant presence and www.federalreserve.gov/newsevents/press/bcreg/ increased consumer use of credit cards bcreg20081218a7.pdf,andDesignandTestingof in the marketplace, concerns about cer- EffectiveTruthinLendingDisclosures:Findings from Experimental Study, submitted to the Fedtain practices have been the topic of eral Reserve Board by Macro International, Inc. public discussion and debate. In (December 15, 2008), www.federalreserve.gov/ response, the Board issued proposed newsevents/press/bcreg/bcreg20081218a8.pdf.
134 95th Annual Report, 2008 effective date of July 1, 2010.9 These • forbid banks from imposing interest rules were designed to address areas of charges using the “two-cycle” billing concern by prohibiting certain unfair method; acts or practices and by improving the disclosures consumers receive in con- • require that consumers receive a reanection with credit card accounts and sonableamountoftimetomaketheir other revolving credit plans. credit card payments; The final rules prohibit certain credit card practices that the Board found • prohibit the use of payment allocamost concerning. At the Board meeting tion methods that unfairly maximize where the rules were approved, Chair- interest charges; and man Bernanke remarked, “The revised • addresssubprimecreditcardsbylimrules represent the most comprehensive iting the fees that reduce the amount and sweeping reforms ever adopted by of available credit. the Board for credit card accounts. These protections will allow consumers ThefinalruleamendingRegulationZ to access credit on terms that are fair improves the effectiveness of the disand more easily understood.”10 The closures consumers receive in connecrules seek to promote the responsible tion with credit card accounts and ceruse of credit cards through greater tain other revolving credit plans. These transparency in credit card pricing, revisions are designed to ensure that including the abolition of unfair pracinformationisprovidedtoconsumersin tices.Greatertransparencywillenhance a timely manner and in a readily undercompetition in the marketplace and improve consumers’ ability to find standable form. Specifically, the final products that meet their needs. In addi- rule will tion, reduced reliance on penalty rate • increase the amount of advance noincreases should spur industry efforts to tice consumers receive from 15 to improve upfront underwriting. 45 days before an increased rate or a The final rule amending Regulation newcontracttermcanbeimposed(in AA prohibits specific unfair acts or order to better allow consumers to practices by banks in connection with obtainalternativefinancingorchange credit card accounts. Specifically, the their account usage); final rule will • protect consumers from unexpected • apply the advance notice requirement interest charges, including increases when the lender increases a rate due in the interest rate during the first to the consumer’s delinquency or year after account opening and in- default; creases in the rate charged on pre- • prohibitadvertisementsthatrefertoa existing credit card balances; rateas“fixed”unlesstherate(1)will not increase for any reason while the 9. See press release (December 18, 2008), plan is open or a period is specified www.federalreserve.gov/newsevents/press/bcreg/ and (2) will not increase for any rea- 20081218a.htm. son during that period; and 10. See statement by Chairman Ben S. Bernanke(December18,2008),www.federalreserve. • requirechangestotheformat,timing, gov/newsevents/press/bcreg/bernanke20081218a. htm. and content requirements for credit
Consumer and Community Affairs 135 card applications and solicitations the transaction. Thus, concerns have and for the disclosures that consum- been raised regarding the potentially ers receive throughout the life of an substantial costs associated with a seropen-end account. vice that consumers may not be aware of or did not request. As Governor Randall Kroszner noted In December 2008, the Board when the rules were approved, “Our addressed concerns regarding overdraft intent is to increase transparency and servicesbyadoptingafinalruleamendfairness in how credit card and deposit ing Regulation DD (Truth in Savings) accounts operate, thereby enhancing and a proposed rule amending Regulacompetition and empowering consumtion E (Electronic Fund Transfers).12 ers to better manage their accounts and ThefinalruleamendingRegulationDD avoid unnecessary costs. The rules rep- (effective January 1, 2010) addresses resent a significant step forward in condepository institutions’ disclosure pracsumer protection.”11 tices related to overdrafts. This rule is intended to ensure that consumers receive accurate information regarding Overdraft Services the available funds in their deposit Overdraft services are sometimes of- accounts so that they can make infered by depository institutions as an formed decisions about the costs of alternative to traditional ways of cover- engaging in transactions that overdraw ing transactions that overdraw a deposit those accounts. Specifically, the final account (for example, overdraft lines of rule will credit or linked accounts). Coverage is • require all institutions to disclose on generally provided “automatically” to periodic statements the aggregate consumers who meet a depository instidollar amounts charged for overdraft tution’s criteria (for example, the acfees and for returned-item fees (for count has been open a certain number the statement period and the year-toof days or deposits are made regularly). date); and If an overdraft is paid, the consumer is chargedaflatfeeforeachitem.Adaily • require institutions that provide acfee also may apply for each day the countbalanceinformationthroughan account remains overdrawn. automated system to provide a bal- Inthepast,institutionsgenerallypro- ance that does not include additional videdoverdraftcoverageonlyforcheck funds that may be made available to transactions. In recent years, however, cover overdrafts. the service has been extended to cover Inaddition,theproposedruleamendoverdrafts resulting from other types of ing Regulation E would, if adopted, transactions, including automated teller provide consumers with certain protecmachine (ATM) withdrawals and debit tions relating to the assessment of overcard transactions at the point of sale. draft fees. The proposed rule would For debit card transactions in particular, the fee may far exceed the amount of • generally prohibit institutions from imposing an overdraft fee when the 11. See statement by Governor Randall S. Kroszner (December 18, 2008), 12. See press release (December 18, 2008), www.federalreserve.gov/newsevents/press/bcreg/ www.federalreserve.gov/newsevents/press/bcreg/ kroszner20081218a.htm. 20081218a.htm.
136 95th Annual Report, 2008 account is overdrawn because of a that negative information in consumer hold placed on funds in the consum- reports can play in determining the cost er’s account that exceeds the actual of credit. transaction amount; and To help address this issue, Congress enacted the Fair and Accurate Credit • provide consumers with a choice Transactions Act (FACT Act), which regarding their institutions’ overdraft directed the Federal Reserve Board and coverageforATMandone-timedebit theFederalTradeCommission(FTC)to card transactions, but solicits comissue joint regulations requiring crediment on two different approaches: tors to provide consumers with risk- — underoneapproach,aninstitution based pricing notices when, based in would be prohibited from impos- whole or in part on information in coninganoverdraftfeeunless(1)the sumer reports, a creditor offers or proconsumer is given an initial no- videscredittoaconsumerontermsless tice and a reasonable opportunity favorable than it offers or provides to to opt out of the institution’s other consumers.13 overdraft service and (2) the con- The Board and the FTC issued prosumer does not opt out; or posed regulations in May 2008.14 The proposed regulations would apply, with — under an alternative approach, an certain exceptions, to all creditors that institution would be prohibited engage in risk-based pricing. Under from imposing an overdraft fee these regulations, a risk-based pricing for paying such overdrafts unless notice would generally be provided to the consumer affirmatively conthe consumer after the terms of credit sents (or opts in) to the instituhave been set, but before the consumer tion’s overdraft service. becomes contractually obligated with regard to the credit transaction. The proposed regulations reflect the agen- Other Regulatory Actions: cies’ judgments as to the best ap- Proposed Rules on Risk-Based proaches identified through extensive Pricing Notices outreach efforts to consumer groups, Consumer reports are a primary tool financialinstitutions,mortgagebankers, used by creditors to evaluate consumer andconsumerreportingagencies.Based creditworthiness and establish appropri- on this outreach, the proposal provides ate credit terms, including pricing, creditors with a number of acceptable based on the risk level a loan applicant approaches to use in identifying conrepresents. Risk-based pricing refers to sumers to whom they must provide the practice of using consumer reports risk-based pricing notices. The notices (whichreflectaconsumer’sriskofnonpayment) in setting or adjusting the price and other terms of credit offered 13. Ingeneral,theFACTActamendedtheFair CreditReportingAct(FCRA)toenhancetheabilor extended to an individual. Many ityofconsumerstocombatidentitytheft,increase creditors offer more favorable terms to theaccuracyofconsumerreports,andallowconconsumers with better credit histories. sumers to exercise greater control regarding the In recent years, concerns have been typeandamountofsolicitationstheyreceive. 14. See press release, “Agencies Issue Proraised that consumers may not be proposed Rules on Risk-Based Pricing Notices” vided with adequate information re- (May 8, 2008), www.federalreserve.gov/ garding risk-based pricing and the role newsevents/press/bcreg/20080508a.htm.
Consumer and Community Affairs 137 serve to alert consumers to the exist- aminations: 263 of state member banks ence of negative information on their and five of foreign banking organconsumer reports so that they may izations.16 check their reports for accuracy and correct any inaccurate information. Fair Lending In addition, the proposed regulations The Federal Reserve is committed to include certain exceptions to the notice ensuring that the institutions it superrequirement.Themostsignificantofthe vises comply fully with the federal fair exceptions permits creditors, in lieu of lending laws—the Equal Credit Opporproviding a risk-based pricing notice to tunity Act (ECOA) and the Fair Housthose consumers who receive less faving Act. The Federal Reserve enforces orableterms,toprovidealloftheircon- ECOA and the provisions of the Fair sumers with their credit scores and ex- HousingActthatapplytoitssupervised planatoryinformationabouttheirscores. lending institutions. The Federal Re- Theproposedregulationsincludemodel serve conducts fair lending reviews notices to facilitate compliance. regularly within the supervisory cycle. Additionally, examiners may conduct Other Supervisory Activities fairlendingreviewsoutsideoftheusual Related to Compliance with supervisory cycle, if warranted by fair Consumer Protection and lending risk. When examiners find evi- Community Reinvestment Laws dence of potential discrimination, they work closely with the division’s Fair DCCAsupportsandoverseesthesuper- Lending Enforcement Section, which visory efforts of the Federal Reserve brings additional legal and statistical Banks to ensure that consumer protecexpertise to the examination and ention laws and regulations are fully and suresthatfairlendinglawsareenforced fairly enforced. Division staff members rigorously and consistently throughout provide guidance and expertise to the the Federal Reserve System. Reserve Banks on consumer protection ECOA prohibits creditors from disregulations, examination and enforcecriminating against any applicant, in menttechniques,examinertraining,and anyaspectofacredittransaction,onthe emerging issues. Routinely, staff membasis of race, color, religion, national bers develop and update examination origin, sex, marital status, or age. In policies, procedures, and guidelines; addition, creditors may not discriminate review Reserve Bank supervisory reagainst an applicant because the appliportsandworkproducts;andparticipate cant receives income from a public in interagency activities that promote assistance program or has exercised, in uniformity in examination principles and standards. Examinations are the Federal Reserve System’s primary means for en- 16. The foreign banking organizations examinedbytheFederalReserveareorganizationsthat forcing compliance with consumer operate under section 25 or 25A of the Federal protection laws. During the 2008 re- Reserve Act (Edge Act and agreement corporaporting period,15 Reserve Banks con- tions) and state-chartered commercial lending ducted 268 consumer compliance ex- companiesownedorcontrolledbyforeignbanks. TheseinstitutionsarenotsubjecttotheCommunity Reinvestment Act and typically engage in 15. The2008reportingperiodforexamination relatively few activities covered by consumer datawasJuly1,2007,throughJune30,2008. protectionlaws.
138 95th Annual Report, 2008 good faith, any right under the Con- If a fair lending violation does not sumer Credit Protection Act. The Fair constituteapatternorpractice,theFed- Housing Act prohibits discrimination in eral Reserve takes action to ensure that residential real estate-related transac- itisremediedbythebank.Mostlenders tions, including the making and pur- readilyagreetocorrectfairlendingviochasing of mortgage loans, on the basis lations. In fact, lenders often take corof race, color, religion, national origin, rective steps as soon as they become handicap, familial status, or sex. aware of a problem. Thus, the Federal Pursuant to ECOA, if the Board has Reserve generally uses informal superreason to believe that a creditor has visory tools (such as memoranda of engaged in a pattern or practice of dis- understanding between the bank’s crimination in violation of ECOA, the board of directors and the Reserve matter will be referred to the Depart- Bank) or board resolutions to ensure ment of Justice (DOJ). The DOJ re- that violations are corrected. If necesviews the referral and decides if further sary to protect consumers, however, the investigation is warranted. A DOJ in- Board can and does bring public vestigation may result in a public civil enforcement actions. enforcement action or settlement. The DOJ may decide instead to return Evaluating Pricing Discrimination Risk the matter to the Federal Reserve for with HMDA Data and Other administrative enforcement. When a Information matter is returned to the Federal Re- When Home Mortgage Disclosure Act serve, staff ensures that the institu- (HMDA) pricing data first became tion takes all appropriate corrective available in 2005, Board staff deaction. veloped—and presently continues to During 2008, the Board referred the refine—HMDA screens that identify following three matters to the DOJ: institutions warranting further review • One referral involved an institution’s based on an analysis of HMDA pricing policy of automatically discounting data. Because HMDA data lack many child support income, in violation of factors that lenders routinely use to Regulation B, ECOA’s implementing make credit decisions and set loan regulation. As this policy primarily prices, such as information about a boraffected female applicants, the policy rower’s creditworthiness and loan-tovalue ratios, HMDA data alone cannot also constituted discrimination on the be used to determine whether a lender basis of gender in violation of Regudiscriminates. Thus, the Federal Relation B and ECOA. servestaffanalyzesHMDAdataincon- • Two referrals involved improper junction with other available supervispousal guarantees. One referral in- sory information to evaluate a lender’s volved a bank’s policy and practice risk for engaging in discrimination. of obtaining spousal signatures on all For the 2007 HMDA pricing data— automobile loans secured by jointly the most recent year for which the data held collateral, in violation of Regu- arepubliclyavailable—FederalReserve lationB.Inanothermatter,aninstitu- examiners performed a pricing distion obtained spousal guarantees for crimination risk assessment for each all of its agricultural and commercial institution that was identified through loans, in violation of Regulation B. the HMDA screening process. These
Consumer and Community Affairs 139 risk assessments considered not just the offerings and the increased use of riskinstitution’s HMDA data, but also the basedpricing—haveincreasedthecomstrength of the institution’s fair lending plexity of fair lending reviews. To compliance program; past supervisory effectively detect discrimination by experience with the institution; con- lenders offering an expanding range of sumer complaints against the institu- products and credit-risk categories, the tion; and the presence of fair lending Federal Reserve increasingly uses starisk factors, such as discretionary pric- tistical techniques. When performing a ing. On the basis of these comprehen- pricing review, staff typically obtain sive assessments, Federal Reserve staff extensive proprietary loan-level data on determined which institutions would all mortgage loans originated by the receive a targeted pricing review. De- lender, including prime loans (that is, pending on the examination schedule, notjustthehigher-pricedloansreported the targeted pricing review could occur under HMDA). To determine how to as part of the institution’s next examianalyze these data, the Federal Reserve nation or outside the usual supervisory studies the lender’s specific business cycle. model,itspricingpolicies,anditsprod- Evenifaninstitutionisnotidentified uctofferings.Onthebasisofthereview through HMDA screening, examiners of the lender’s policies, staff determine may still conclude that it is at risk for which factors from the lender’s data engaging in pricing discrimination and should be considered. A statistical may elect to perform a pricing review. model is then developed that takes The Federal Reserve supervises many those factors into account and is then institutions that are not required to tailored to that specific lender. Typireport data under HMDA. Also, many cally, a test for discrimination in parof the HMDA-reporting institutions ticular geographic markets, such as supervised by the Federal Reserve metropolitanstatisticalareas(MSAs),is originate few higher-priced loans and, performed. Analyzing specific markets therefore, report very little pricing data. is important, as relatively small un- For these institutions, examiners anaexplained pricing disparities at the lyze other available information to national level can mask much larger assess pricing-discrimination risk and, disparities in individual markets. when appropriate, perform a pricing review. During a targeted pricing review, Monitoring Emerging staff analyze additional information, Fair Lending Issues including potential pricing factors not available in the HMDA data, to deter- During this period of financial turbumine whether any pricing disparity by lence in credit markets, many institurace or ethnicity is fully attributable to tions have been reevaluating and tightlegitimate factors, or whether any por- ening credit standards. Some consumer tion of the pricing disparity may be advocateshavevoicedconcernthatcerattributable to illegal discrimination. To tain policies implemented by lenders to performthesereviews,staffuseanalyti- tightencreditstandardsmayfalldisprocal techniques that account for the portionately on minorities. For examincreasing complexity of the mortgage ple, some lenders have implemented market. Two industry changes in tighter credit standards in specific geoparticular—the proliferation of product graphic markets.
140 95th Annual Report, 2008 The Federal Reserve evaluates lend- Federal Financial Institutions Examinaers’policiestoensurethatlenderscom- tion Council (FFIEC) released the 2007 plywiththefederalfairlendinglawsas HMDA data to the public in September they adjust their lending practices. It 2008. conducts reviews to evaluate whether AnalysisoftheHMDAdatafor2004 lender policies may violate the fair through 2007 found that the approach lendinglawsbyhavinganillegaldispar- used to identify higher-priced loans ate impact on minorities, and to identify could be improved in a way that could steering, redlining, reverse redlining, make the identification of higher-priced and other fair lending violations. loans less sensitive to changes in the term-structureofinterestratesandmore consistentwiththewaymortgageprices Reporting on HMDA Data are established. Consequently, Regula- HMDA, enacted by Congress in 1975, tion C was modified in 2008 (effective requires most mortgage lenders located for loan applications taken as of Octoin metropolitan areas to collect data ber 1, 2009) to define higher-priced about their housing-related lending loans as closed-end mortgages where activity, report the data annually to the the spread between the loan’s APR and federal government, and make the data a survey-based estimate of rates curpublicly available. In 1989, Congress rently offered on prime mortgage loans expanded the data required by HMDA of a comparable type meets or exceeds toincludeinformationaboutloanappli- 1.5 percentage points for a first-lien cations that did not result in a loan loan (or 3.5 percentage points for a origination, as well as information subordinate-lienloan).Thereviseddefiabout the race, sex, and income of nition of higher-priced loans under applicants and borrowers. Regulation C is the same as the defini- In response to the growth of tion of “higher-priced mortgage loan” the subprime loan market, the Fed- adopted by the Federal Reserve Board eral Reserve updated Regulation C under Regulation Z (Truth in Lending) (HMDA’s implementing regulation) in in July 2008, when it modified this 2002. The revisions, which became regulation to address unfair and decepeffectivein2004,requirelenderstocol- tivepracticesintheclosed-endsegment lect price information for loans they of the mortgage market. originatedinthehigher-pricedloanseg- An article published in December ment of the home mortgage market. 2008 by Federal Reserve staff in the When applicable, lenders report the Federal Reserve Bulletin uses the 2007 numberofpercentagepointsbywhicha HMDA data to describe the market for loan’s annual percentage rate exceeds higher-priced loans and patterns of the threshold that defines “higher- lending across loan products, geopriced loans.” The threshold is 3 per- graphic markets, and borrowers and centage points or more above the yield neighborhoods of different races and on comparable Treasury securities for incomes.17 The article focuses attention first-lien loans, and 5 percentage points or more above that yield for junior-lien loans. The HMDA data, collected in 17. RobertB.Avery,KennethP.Brevoort,and GlennB.Canner,“The2007HMDAData,”Fed- 2004andreleasedtothepublicin2005, eral Reserve Bulletin vol. 94 (December 2008) provided the first publicly available www.federalreserve.gov/pubs/bulletin/2008/pdf/ loan-level data about loan prices. The hmda07final.pdf.
Consumer and Community Affairs 141 on the effects of the mortgage market States and in U.S. metropolitan areas turmoil on the 2007 HMDA data, that experienced greater recent declines including a detailed assessment of the in home values and greater increases in effects on the data of the unusually mortgage delinquencies. largenumberofinstitutionsthatdiscon- Loan pricing is a complex process tinued operations in 2008. that may reflect a wide variety of fac- As with the 2004−2006 HMDA data, tors about the level of risk a particular the 2007 HMDA data show that most loan or borrower presents to the lender. reporting institutions originated few if As a result, the prevalence of higheranyhigher-pricedloansin2007:56per- priced lending varies widely. cent of the lenders originated less than First, the incidence of higher-priced 10 higher-priced loans that year, and 33 lending varies by product type. For percent originated no higher-priced example, manufactured-home loans loans. The data also indicate that relashow the greatest incidence of highertively few lenders accounted for most priced lending (more than half of these ofthehigher-pricedloanoriginationsin loans are higher priced), because these 2007. Of the 8,610 mortgage lenders loans are considered higher risk. In reportingHMDAdata,987made100or addition, first-lien mortgages are genermore higher-priced loans. The 10 mortally less risky than comparable juniorgage lenders with the largest volume of lien loans: 14.0 percent of first-lien higher-priced loans accounted for about conventional home purchase loans were 31 percent of all such loans in 2007. reported as higher-priced in 2007, com- As in earlier years, the HMDA data pared with 21.6 percent of comparable show that the majority of all loan origijunior-lien loans. nations were not higher priced; in fact, Second, higher-priced lending varies owing in large part to the mortgage widely by U.S. geographic region, remarket turmoil in 2007, the incidence flecting among other things differences of higher-priced lending fell from 28.7 in regional housing and economic conpercentin2006to18.3percentin2007. ditions and differences in the credit-risk Some of the decrease reflects the fact profiles of borrowers by region. As in that (1) 169 lenders reporting HMDA 2004,2005,and2006,manyofthemetdata for 2006 data closed operations in ropolitan areas reporting the greatest 2007 and (2) although these lenders incidence of higher-priced lending in extended higher-priced loans in 2007, they did not report this lending activity. 2007 were in the southern region of the The effect of these 169 institutions on country, including a number of areas in the 2007 data is explored in-depth in Texas. Several West Coast metropolitan the Federal Reserve Bulletin article. areas also reported elevated incidences The analysis shows that these lenders of higher-priced lending in 2007. Overwere heavily involved in the higher- all, in many metropolitan areas in the priced segment of the mortgage market, South, Southwest, and West, 25 percent buttheydidnotaccountformostofthe to 40 percent of the homebuyers who decline in the share of loans that were obtained conventional loans in 2007 higher-priced. The 169 lenders that received higher-priced loans. closed operations also tended to extend Third, the incidence of higher-priced larger loans than did other lenders, and lending varies greatly among borrowers these lenders were more likely to lend of different races and ethnicities. In in the western region of the United 2007—as in 2004, 2005, and 2006—
142 95th Annual Report, 2008 African-Americans and Hispanics were • analyzesapplicationsformergersand much more likely than non-Hispanic acquisitions by state member banks whites and Asians to receive higher- and bank holding companies in relapriced loans. For example, in the sec- tion to performance under CRA, and ond half of 2007, 29.5 percent of • disseminates information on commu- African-American borrowers and 24.3 nitydevelopmenttechniquestobankpercent of Hispanic borrowers received ers and the public through commuhigher-priced, first-lien conventional nity affairs offices at the Reserve home purchase loans, compared with Banks. 9.2 percent of non-Hispanic white and 5.6 percent of Asian borrowers.18 The Federal Reserve assesses and Because HMDA data lack information rates the performance of state member about credit risk and other legitimate banks under CRA in the course of pricing factors, it is not possible to examinations conducted by staff at the determine from HMDA data alone 12 Reserve Banks. During the 2008 whether the observed pricing disparities reporting period, the Reserve Banks and market segmentation reflect dis- conducted 243 CRA examinations: 35 crimination.Whenanalyzedinconjunc- of the banks were rated Outstanding, tion with other fair lending risk factors 204 were rated Satisfactory, 4 were and supervisory information, however, rated Needs to Improve, and none was the HMDA data can facilitate fair lend- rated Substantial Noncompliance.20 ing supervision and enforcement (see the “Fair Lending” discussion earlier in Annual Release of CRA Distressed or this chapter). Underserved List In May 2008, the Federal Reserve and Examinations and Activities other federal bank and thrift regulatory Related to the Community agencies21 released the 2008 list of Reinvestment Act “distressed” or “underserved” nonmet- The Community Reinvestment Act ropolitan, middle-income geographies (CRA)requiresthattheFederalReserve where bank revitalization or stabilizaand other banking agencies encourage tion activities will receive consideration financial institutions to help meet the as “community development” under creditneedsofthelocalcommunitiesin CRA. “Distressed” or “underserved” which they do business, consistent with geographiesaredesignatedbytheagensafe and sound operations. To carry out ciesinaccordancewiththeirCRAreguthis mandate, the Federal Reserve lations. In accordance with 2005 CRA regulatory changes, the agencies annu- • examines state member banks to ally designate “distressed” and “underassess their compliance with CRA,19 served” geographies, and post the list 18. Because the 169 lenders that discontinued operationsin2008extendedanunknownquantity gov/newsevents/testimony/braunstein20080213a. ofloansinthefirstpartof2007butwereallout htm. ofbusinessbythesecondhalfof2007,focusing 20. The2008reportingperiodforexamination ondataforthesecondhalfof2007providesthe datawasJuly1,2007,throughJune30,2008. mostreliableassessmentoflendingpatterns. 21. BoardofGovernorsoftheFederalReserve 19. See testimony by Sandra F. Braunstein, System, Federal Deposit Insurance Corporation, director, Division of Consumer and Community Office of the Comptroller of the Currency, and Affairs(February13,2008),www.federalreserve. OfficeofThriftSupervision.
Consumer and Community Affairs 143 of these geographies on the FFIEC depositoryinstitutions,toacquireCounwebsite. trywide Financial Corporation, Calabasas, California. Public meetings were Supervisory Practices regarding heldinChicago,Illinois,andLosAnge- Banking Organizations Affected by les, California, to allow interested per- Hurricanes sons the opportunity to present oral testimony on the factors the Board must InSeptember2008,theFederalReserve review under the Bank Holding Comreleased a joint supervision and regulapany Act. tion (SR) and consumer affairs (CA) Several other significant applications letter reaffirming a longstanding policy to use available regulatory flexibility to were facilitatetherecoveryeffortsofbanking • an application by PNC Financial Serorganizations affected by hurricanes. vices Group, Inc., Pittsburgh, Penn- Banking organizations supervised by sylvania, to acquire Sterling FitheFederalReservewereencouragedto nancial Corporation, Lancaster, work with Reserve Bank supervisory Pennsylvania,whichwasapprovedin and operations staff to resolve any January; operational issues resulting from Hurricane Gustav or any subsequent storms. • an application by Toronto-Dominion The letter encouraged banking organi- Bank, Toronto, Canada, to acquire zations to work with borrowers and Commerce Bancorp, Inc., Cherry other customers in affected areas, and Hill, New Jersey, which was aprecognized that banking organizations proved in March; may have to take prudent steps to • an application by Fifth Third Banmodify, extend, or restructure existing corp, Cincinnati, Ohio, to acquire loans in areas affected by 2008 hurri- First Charter Corporation, Charlotte, canes. North Carolina, which was approved A separate CA letter, issued in October 2008, extended for an additional 36 in April; months the period for examiners to rec- • an application by Wells Fargo & ognize community development activi- Company, San Francisco, California, ties related to revitalization or stabilizato acquire Wachovia Corporation, tion activities in the Gulf Coast areas Charlotte, North Carolina, which was affected by Hurricanes Rita and Katapproved in October; rina. The extension was based on the continued need for long-term recovery • an application by Bank of America effortsinthosecommunitiesaffectedby Corporation to acquire Merrill Lynch these hurricanes. & Co., New York, New York, and its subsidiaries, Merrill Lynch Bank & Analysis of Applications for Mergers Trust Co., FSB, New York, New and Acquisitions in relation to CRA York, and Merrill Lynch Bank USA, Salt Lake City, Utah, and Merrill Throughout 2008, the Board considered Lynch Yatirim Bank A.S., Istanbul, applications for several significant Turkey, which was approved in banking mergers. In June, the Board November; and approved the application by Bank of America Corporation, Charlotte, North • an application by PNC Financial Ser- Carolina, one of the nation’s largest vices Group, Inc., Pittsburgh, Penn-
144 95th Annual Report, 2008 sylvania, to acquire National City Group, Inc., in New York, New York. Corporation, Cincinnati, Ohio, which These entities were required to become was approved in December. bankholdingcompaniesinordertoparticipate in the TARP program adminis- The public submitted comments retered by the Department of the Trealated to concerns about consumer comsury. CRA and consumer compliance pliance or CRA issues on nine apperformance records of those banking plications. Many of the commenters affiliates were factors considered by the referenced pricing information on resi- Board in approving the applications. dential mortgage loans and concerns that minority applicants were more Bank Examiner Training likely than nonminority applicants to and Guidance receive higher-priced mortgages. These concerns were largely based on obser- Ensuringthatfinancialinstitutionscomvations of lenders’ 2006 and 2007 ply with the laws that protect consum- HMDApricingdata.Otherissuesraised ers and encourage community reinvestby commenters included incidents mentisanimportantpartoftheFederal where minority applicants were alleg- Reserve’s bank examination and superedly denied mortgage loans more fre- vision process. As the number and quently than nonminority applicants, complexity of consumer financial transwherepotentiallypredatorylendingwas actions have grown, training for expracticedbysubprimeandpaydaylend- aminers of the organizations under the ers, where branch closings created Federal Reserve’s supervisory responsipotentially adverse effects, and where bility has become even more crucial. lenders allegedly failed to effect- The Board’s consumer compliance ivelyaddresstheneedsoflow-andmod- examiner training curriculum consists erate-income communities. In addition, of six courses, focused on various conthe Board also received comments sumer protection laws, regulations, and about the adverse effects of increased examination concepts. In 2008, these foreclosures, especially in low- and courses were offered in 12 sessions moderate-income communities. where nearly 200 consumer compliance The Board considered an additional examiners and System staff members 59 expansionary applications by bank participated. holding companies or state member Board and Reserve Bank staff regubanks with outstanding issues involving larly review the core curriculum for compliance with consumer protection examiner training, updating subject statutes and regulations, including sev- matter and adding new elements as eralrelatedtoCRAorfairlendinglaws. appropriate. During 2008, staff con- Of those applications, 55 were ap- ducted a curriculum review of the Conproved, three were withdrawn (includ- sumer Compliance Examinations II ing one with an adverse CRA rating), (CA II) course in order to incorporate and one was returned due to an adverse recent technical changes in policy and consumer compliance rating. laws, along with changes in instruc- The Board also considered several- tional delivery techniques. This course, nontraditional bank holding company renamed Real Estate Lending Examapplications from commercial entities ination Techniques, enables assistant withbankingaffiliates,includingGMAC, examiners to focus on the fundamental LLC, in Detroit, Michigan, and CIT skills necessary to determine a
Consumer and Community Affairs 145 bank’s compliance with consumer laws much longer and more traditional trainand regulations as they apply to real ing development and delivery model, estate products. Examiners also learn technical and instructional content on about the Federal Reserve System poli- time-sensitive or emerging topics are ciesandregulatoryrequirementsassoci- being designed, developed, and preated with the residential real estate sented to System staff within days or lending examination, including annual weeks of any perceived need. percentage rate calculations. In addition,BoardandReserveBankstaffcon- Statement to Financial Institutions ducted an interim curriculum review of Servicing Residential Mortgages on the Consumer Affairs Risk-focused Reporting Loss Mitigation of Examination Techniques course to Subprime Mortgages update and realign technical content with the risk-focused examination InMarch2008,DCCAandtheDivision procedures. of Banking Supervision and Regulation The consumer compliance examiner jointlyreleasedastatementthatencourtraining curriculum was included in the ages financial institutions that service System’s content mapping initiative. subprime mortgage loans to report their These content maps provide stake- loss-mitigationactivitiesconsistentwith holders—staff development experts uniform standards.22 The statement throughout the Federal Reserve—a encourages financial institutions to con- “bird’s eye view” of individual instruc- sider utilizing loan modification reporttional learning objectives and topics for ing standards provided by the HOPE all of the courses included in the Fed- NOW alliance, and emphasizes that eral Reserve’s examiner commissioning standardreportingwillhelpinvestorsin program. The goal of the mapping ini- securitized mortgages, including finantiative is to facilitate modularization of cial institutions, monitor foreclosure course content for “just-in-time train- prevention efforts.23 It also notes that ing” and periodic sourcing of course consistent loan modification reporting content for core proficiency exam- will foster transparency in the securitiinations. zation market and provide standardized When appropriate, courses are deliv- data across the mortgage industry. The ered by methods alternative to class- latest statement follows previous stateroom training, such as via the Internet ments, issued by the Federal Reserve or other distance-learning technologies. and the other federal banking agencies, Several courses use a combination of that encourage financial institutions to instructional methods: (1) classroom instruction focused on case studies, and (2) specially developed computer-based 22. For purposes of this statement, the term instructionthatincludesinteractiveself- “financial institutions” refers to state-chartered check exercises. banks and their subsidiaries and bank holding companiesandtheirnonbanksubsidiaries. Inadditiontoprovidingcoretraining, 23. HOPE NOW is an alliance between mortthe examiner curriculum emphasizes gage counselors, market participants, and servicthe importance of continuing profes- ers to create a unified, coordinated plan to reach sional development. In 2008, the Sys- andhelpasmanyhomeownersindistressaspossible. The Department of the Treasury and the tem initiated a powerful training deliv- Department of Housing and Urban Development erymethod,entitledRapidResponse,to encouraged the formation of this alliance. For better meet this need. In contrast to a moreinformation,visitwww.hopenow.com.
146 95th Annual Report, 2008 work constructively with residential Interagency Examinations Concerning borrowerswhoarefinanciallyunableto Affiliate Marketing Standards make contractual payment obligations In August 2008, DCCA issued interon their home loans.24 agency examination procedures associated with establishing compliance with Interagency Examination Procedures a regulation implementing Section 624 for the Department of Defense’s Final of the Fair Credit Reporting Act Rule on Limitations on Consumer (FCRA), as amended by the FACT Act. Credit Extended to Service Members This “affiliate marketing regulation” and Dependents (Talent Amendment) generally prohibits a financial institution from using certain information In July 2008, DCCA issued interagency received from an affiliate to make a examination procedures associated with solicitation to a consumer unless the establishing compliance with a Departconsumer is given notice and a reasonment of Defense (DoD) rule limiting able opportunity to opt out of such the extension of consumer credit to sersolicitations,andtheconsumerdoesnot vice members and their dependents opt out. The final rule applies to infor- (the Talent Amendment). The examinamation obtained from the consumer’s tion procedures are intended to help transactions or account relationships determine a service provider’s compliwith an institution’s affiliate, from any ance with regulations issued by the application the consumer submitted DoD regarding limitations on the to an affiliate, and from third-party amount of consumer credit that may be sources, such as credit reports, if the extended to service members and deinformation will be used to send marpendents for payday loans, motor vehiketing solicitations. cle title loans, and tax refund anticipation loans. The rule applies to all persons engaged in the business of Interagency Examinations concerning extending such credit and their assign- Identity-Theft Red Flags and Other ees, and limits the amount that a credi- Regulations under the Fair Credit tor can charge service members and Reporting Act their dependents in connection with these transactions. Total charges must In October 2008, DCCA and the be expressed as a total dollar amount Board’s Division of Banking Superviand as an annualized rate referred to as sion and Regulation jointly released the “Military Annual Percentage Rate” interagency25 examination procedures or“MAPR,”andwhichmaynotexceed associated with establishing compliance 36 percent. with regulations implementing several sections of the FCRA, as amended by the FACT Act. The procedures estab- 24. SeeSR07-16/CA07-4,StatementonLoss MitigationStrategiesforServicersofResidential Mortgages (September 4, 2007), www. 25. The Board of Governors of the Federal federalreserve.gov/newsevents/press/bcreg/ Reserve System, the Conference of State Bank 20070904a.htm, and SR 07-6/CA 07-1, Working Supervisors, the Federal Deposit Insurance Corwith Mortgage Borrowers (April 17, 2007), poration, the National Credit Union Administrawww.federalreserve.gov/boarddocs/srletters/2007/ tion, the Office of the Comptroller of the Cur- SR0706.htm. rency,andtheOfficeofThriftSupervision.
Consumer and Community Affairs 147 lished the agencies’ expectations for The updated procedures incorporate financial institutions and examination recommendations made by the Governstaff with respect to the final rules and ment Accountability Office (GAO) in a guidelines regarding identity-theft red report issued in March 2008 entitled flags as well as for other regulations Bank Fees: Federal Banking Regulaunder FCRA. The regulatory provisions tors Could Better Ensure That Consumfocused on the duties of users of con- ers Have Required Disclosure Docusumer reports regarding address dis- ments Prior to Opening Checking or crepancies; the duties of financial in- Savings Accounts (GAO-08-281). The stitutions and creditors in detecting, study suggests that, despite regulatory preventing, and mitigating identity disclosure requirements, consumers theft; the duties of card issuers regard- may find it difficult to obtain informaing changes of address; and the duties tion about checking and savings acof financial institutions regarding affili- count fees. As a result of the study, the ate marketing practices. GAO recommended that federal bank- A new identity-theft red-flags rule ingregulatorsassesstheextenttowhich requires a financial institution to peri- customers receive disclosures on fees, odically determine whether it offers or terms, and conditions prior to opening maintains consumer accounts suscep- an account. It also recommended that tible to identity theft. For accounts cov- the agencies incorporate appropriate ered under the new rule, an institution steps into their oversight programs to must develop and implement a written ensure that disclosures continue to be identity-theft prevention program that made available. detects, prevents, and mitigates identity The Board’s updated Regulation DD theft involving new or existing covered examination procedures emphasize the accounts. The program must be appro- existing requirement to provide full priate to the size and complexity of the account disclosure (e.g., fees, terms, financial institution and the nature and and conditions) to a consumer, upon scope of its activities. A new card- request, whether or not the consumer is issuerrulerequirescreditanddebitcard an existing or a prospective customer. issuers to develop reasonable policies Therevisionsalsohighlightthatthedisand procedures to assess the validity of closures should be provided at the time requests for changes of address fol- of the request if the consumer makes lowedcloselybyrequestsforadditional the request in person, or within 10 days orreplacementcards.Insuchsituations, if the consumer is not present when the card issuer must not issue an addi- makingtherequest.Therevisionstothe tional or replacement card until it procedures also remind examiners that assesses the validity of the change of institutions must maintain evidence of address in accordance with its policies compliance with Regulation DD, inand procedures. cluding the requirement to provide consumer disclosures upon request. Examinations Concerning Truth in Savings Disclosures Interagency Examinations Concerning Electronic Fund Transfers In July 2008, DCCA issued updated interagency examination procedures In August 2008, DCCA issued apassociated with establishing compliance proved interagency examination prowith Regulation DD (Truth in Savings). cedures associated with establishing
148 95th Annual Report, 2008 compliance with Regulation E (Elec- agencies will fully support banking tronic Fund Transfers). The updated organizations as they work to impleprocedures incorporate all amendments ment effective and sound loan modifito Regulation E (and the Federal cation programs. Reserve’s Official Staff Commentary) since a prior version was released in 1998. Among other changes, the proce- Flood Insurance dures clarify the responsibilities of parties involved in electronic check The National Flood Insurance Act conversion transactions, include a re- imposes certain requirements on loans quirement that consumers receive writ- secured by buildings or mobile homes ten notification in advance of these located in, or to be located in, areas transactions, and revise the Official determined to have special flood haz- Staff Commentary to provide guidance ards.UnderRegulationH,whichimpleon preauthorized transfers from con- ments the act, state member banks are sumers’ accounts, error resolution, generally prohibited from making, and disclosures at automated teller extending, increasing, or renewing any machines. such loan unless the building or mobile home—and any personal property securingtheloan—arecoveredbyflood Interagency Statement on Lending to insurance for the term of the loan. Creditworthy Borrowers Moreover, the act requires the Board In November 2008, the agencies issued and other federal financial institution an Interagency Statement on Meeting regulatory agencies to impose civil the Needs of Creditworthy Borrowers. money penalties when it finds a pattern In implementing this statement, institu- or practice of violations of the regulationswereencouragedtolendprudently tion.Thecivilmoneypenaltiesarepayand responsibly to creditworthy bor- abletotheFederalEmergencyManagerowers, work with borrowers to pre- ment Agency for deposit into the serve homeownership and avoid pre- National Flood Mitigation Fund. ventable foreclosures, adjust dividend In March 2008, the agencies, along policies to preserve capital and lending with the National Credit Union Admincapacity, and employ compensation istration (NCUA) and Farm Credit Sysstructures that encourage prudent lend- tem, requested public comment on new ing. The statement emphasized that the and revised interagency questions and agencies expect banking organizations answers regarding flood insurance. The to work with existing borrowers to agencies proposed substantive as well avoid preventable foreclosures, which as technical revisions to existing guidcan be costly to both the organizations ance to help financial institutions meet and to the communities they serve, and theirresponsibilitiesunderfederalflood to mitigate other potential mortgage- insurance legislation and increase pubrelated losses. The agencies urged that lic understanding of the flood insurance all lenders and servicers seek modifica- regulations. Final action on these protions that result in mortgages that bor- posed revisions is expected in 2009. rowers will be able to sustain over the During 2008, the Board imposed remaining maturity of their loans. The civil money penalties against four state statement also emphasized that the memberbanksthatviolatedtheact.The
Consumer and Community Affairs 149 penalties, which were assessed via con- creditworthiness for the amount and sent orders, totaled $17,790. terms of the credit requested; and • the failure to provide a credit appli- Agency Reports on Compliance cantwithawrittennoticeofdenialor with Consumer Protection Laws other adverse action that contains the The Board reports annually on compli- specificreasonfortheadverseaction, ance with consumer protection laws by along with other required informaentities supervised by federal agencies. tion. This discussion summarizes data col- The FFIEC agencies did not issue lected from the 12 Federal Reserve any public enforcement actions specific Banks and the FFIEC member agencies to Regulation B during the reporting (collectively, the FFIEC agencies), as period. well as other federal enforcement agen- The Farm Credit Administration, the cies.26 Department of Transportation, the Regulation B Securities and Exchange Commission, (Equal Credit Opportunity) the Small Business Administration, and the Grain Inspection, Packers and The FFIEC agencies reported that 85 Stockyards Administration of the percent of institutions examined during United States Department of Agriculthe 2008 reporting period were in com- ture reported substantial compliance pliance with Regulation B, which among the entities they supervise. equals the level of compliance for the 2007 reporting period. The most fre- Regulation E quently cited violations involved (Electronic Fund Transfers) • the failure to properly collect infor- The FFIEC agencies reported that mation for government monitoring approximately 94 percent of the institupurposes, including data on race, eth- tions examined during the 2008 reportnicity, sex, marital status, and age of ing period complied with Regulation E, applicants seeking credit primarily which equals the level of compliance for the purchase or refinancing of a for the 2007 reporting period. The most principal residence; frequently cited violations involved the failure to take one or more of the fol- • the improper collection of informalowing actions: tiononapplicantrace,color,religion, national origin, or sex when not per- • determining whether an error ocmitted by regulation; curred within 10 business days of receiving a notice of error from a • the improper requirement of the sigconsumer; nature of an applicant’s spouse or other person, other than a joint appli- • giving a consumer provisional credit cant, when the applicant qualified for the amount of an alleged error under the creditor’s standards of when an investigation into the alleged error could not be completed within 10 business days; 26. Becausetheagenciesusedifferentmethods to compile the data, the information presented • providing initial disclosures that conheresupportsonlygeneralconclusions.The2008 tain required information, including reporting period was July 1, 2007, through June 30,2008. limitations on the types of transfers
150 95th Annual Report, 2008 permitted and error-resolution proce- that accurately reflects the institudures, at the time a consumer con- tion’s privacy policies and practices, tracted for an electronic fund transfer notlaterthanwhenthecustomerrelaservice; and tionship is established. • providing a written explanation not- The FFIEC agencies did not issue ing the consumer’s right to request any formal enforcement actions relating documentationthatsupportstheinsti- to Regulation P during the reporting tution’s findings when a determin- period. ation is made that no error has occurred. Regulation Z (Truth in Lending) The FFIEC agencies did not issue The FFIEC agencies reported that anyformalenforcementactionsspecific 81 percent of the institutions examined to Regulation E during the period. during the 2008 reporting period were in compliance with Regulation Z, com- Regulation M (Consumer Leasing) pared with 82 percent in 2007. The The FFIEC agencies reported that more most frequently cited violations inthan99percentofinstitutionsexamined volved the failure to accurately disclose during the 2008 reporting period com- one or more of the following: plied with Regulation M, which equals • the finance charge in closed-end the level of compliance for the 2007 credit transactions; reporting period. The FFIEC agencies did not issue any formal enforcement • the amount financed by subtracting actions relating to Regulation M during any prepaid finance charges; the period. • the payment schedule, including the number, amounts, and timing of pay- Regulation P (Privacy of Consumer ments scheduled to repay the obliga- Financial Information) tions; and The FFIEC agencies reported that 97 percent of the institutions examined • the annual percentage rate in closedduring the 2008 reporting period com- end credit transactions. plied with Regulation P, which equals In addition, 146 banks supervised by the level of compliance for the 2007 the Federal Reserve, FDIC, OCC, and reporting period. The most frequently OTS were required, under the Intercited violations involved the failure to agency Enforcement Policy in Regulatake one or more of the following tion Z, to reimburse a total of approxiactions: mately $2.77 million to consumers for • providing a clear and conspicuous understating annual percentage rates or annual privacy notice to customers; finance charges in their consumer loan disclosures. • disclosing the institution’s infor- The FFIEC agencies did not issue mation-sharing practices in initial, any public enforcement actions specific annual, and revised privacy notices; to Regulation Z during the reporting and period. The Department of Transporta- • providing customers with a clear and tion continued to prosecute one air carconspicuous initial privacy notice rier for its improper handling of credit
Consumer and Community Affairs 151 card refund requests and other Federal Regulation DD (Truth in Savings) Aviation Act violations. The FFIEC agencies reported that 86 percent of institutions examined during Regulation AA (Unfair or Deceptive the 2008 reporting period were in com- Acts or Practices) pliance with Regulation DD, compared The FFIEC agencies reported that more with 88 percent for the 2007 reporting than 99 percent of the institutions period. The most frequently cited violaexamined during the 2008 reporting tions involved the failure to take one or periodwereincompliancewithRegula- more of the following actions: tionAA,whichequalsthelevelofcom- • providing additional required lanpliance for the 2007 reporting period. guage in advertisements that contain No formal enforcement actions relating the term “annual percentage yield”; to Regulation AA were issued during the reporting period. • using the term “annual percentage yield” if advertisements state rates of Regulation CC (Availability of Funds return; and Collection of Checks) • providing initial account disclosures The FFIEC agencies reported that 89 containing all required information; percent of institutions examined during and the 2008 reporting period were in com- • providingaccountdisclosuresinwritpliance with Regulation CC, compared ing and in a form consumers may with 90 percent for the 2007 reporting keep. period. The most frequently cited violations involved the failure to take one or The FFIEC agencies did not issue more of the following actions: any public enforcement actions specific to Regulation DD during the reporting • making available on the next busiperiod. ness day the lesser of $100 or the aggregate amount of checks depos- Consumer Complaints and Inquiries ited that are not subject to next-day availability; The Federal Reserve investigates com- • following procedures when invoking plaints against state member banks, and forwards complaints against other the exception for large-dollar deposcreditorsandbusinessestotheappropriits; ate enforcement agency. Each Reserve • providing required information when Bank investigates complaints against placing exception holds on accounts; state member banks in its District. The and Federal Reserve also responds to con- • making funds from local and certain sumer inquiries on a broad range of banking topics, including consumer other checks available for withdrawprotection questions. als within the times prescribed by The Federal Reserve centralized proregulation. cessing of consumer complaints and The FFIEC agencies did not issue inquiries in late 2007, with the estabany public enforcement actions specific lishment of Federal Reserve Consumer to Regulation CC during the reporting Help(FRCH).In2008,itsfirstfullyear period. of operation, FRCH processed 36,996
152 95th Annual Report, 2008 cases. Of these cases, 19,515 (53 per- ComplaintsagainstStateMemberBanks cent)wereinquiriesand17,481(47per- ThatInvolveRegulatedPractices,by Classification,2008 cent) were complaints, with most cases received directly from consumers. Approximately six percent were referred Classification Number from other agencies. RegulationAA(UnfairorDeceptive While consumers can contact FRCH ActsorPractices) ...................... 117 by phone, fax, mail, e-mail, or online RegulationB(EqualCreditOpportunity)..... 30 RegulationC(HomeMortgage (www.federalreserveconsumerhelp.gov/), DisclosureAct) ........................ 8 most FRCH consumer contacts oc- RegulationE(ElectronicFundsTransfers) ... 116 RegulationM(ConsumerLeasing)........... 3 curred by telephone. Nevertheless, RegulationP(PrivacyofConsumer FinancialInformation).................. 41 online complaints submissions totaled RegulationQ(PaymentofInterest) .......... 0 5,147 (29 percent) of all complaints RegulationZ(TruthinLending)............. 247 RegulationBB(CommunityReinvestment)... 0 received in 2008, and the online form RegulationCC(ExpeditedFunds received over 300,000 visits during the Availability) ........................... 122 RegulationDD(TruthinSavings) ........... 71 year. RegulationV(FairandAccurateCredit Transactions) .......................... 9 FairCreditReportingAct ................... 72 Consumer Complaints FairDebtCollectionPracticesAct........... 62 FairHousingAct ........................... 3 NationalFloodInsuranceAct/ Complaints against state member banks InsuranceSales ........................ 6 totaled 5,520 in 2008. Most of these HomeOwnershipCounseling................ 1 HOPA(HomeownersProtectionAct) ........ 0 complaints, 2,411 (44 percent) were RealEstateSettlementProceduresAct ....... 18 closed without investigation pending RighttoFinancialPrivacyAct .............. 10 the receipt of additional information Total....................................... 936 from consumers. Of the remaining 3,109 complaints, 2,173 (70 percent) common credit card complaints coninvolved unregulated practices and cerned billing error resolutions (14 per- 936 (30 percent) involved regulated cent), “other rates, terms and fees” practices. (12 percent) and debt-collection prac- The Federal Reserve forwarded tices (9 percent). 11,966 complaints against other banks Real estate-related complaints27 and creditors to the appropriate regula- made up 18 percent of total complaints. toryagenciesforinvestigation.Tomini- Of those, 48 percent related to homemize the time required to re-route com- purchase loans, 32 percent to home plaints to these agencies, referrals were equitycreditlines,andonlyonepercent transmitted electronically. (or two complaints) concerned adjustable rate mortgages. The most common Complaints against State Member complaints related to real estate-related Banks about Regulated Practices payment errors and delays (14 percent), Themajorityofregulated-practicecom- “other rates, terms, and fees” (10 perplaints concerned checking account cent), and escrow account problems (28 percent) and credit card (26 per- (9 percent). cent)activity.Themostcommonchecking account complaints related to insufficient funds or overdraft charges and 27. Includes adjustable-rate mortgages; residentialconstructionloans;open-endhomeequity procedures (33 percent), funds availlines of credit; home improvement loans; home ability (13 percent), and disputed withpurchaseloans;homerefinance/closed-endloans; drawalsoffunds(15percent).Themost andreversemortgages.
Consumer and Community Affairs 153 ComplaintsagainstStateMemberBanksThatInvolveRegulatedPractices,2008 Allcomplaints Complaintsinvolvingviolations Subjectofcomplaint Number Percent Number Percent Total...................................... 936 100 44 5 Discriminationalleged Realestateloans ........................ 10 1 1 0.1 Creditcards............................. 1 0.1 0 0 Otherloans ............................. 6 1 0 0 Nondiscriminationcomplaints1 Creditcards............................. 245 26 6 1 Checkingaccounts....................... 264 28 16 2 Realestateloans ........................ 156 18 7 1 1. Onlythetopthreeproductcategoriesofnondiscriminationcomplaintsarelistedhere. Seventeen complaints (2 percent) plaints against state member banks that alleged discrimination on the basis of involved these unregulated practices. prohibited borrower traits or rights Most complaints concerned credit card (race, color, religion, national origin, and checking account activity. More sex,maritalstatus,handicap,age,appli- specifically, consumers most frequently cant income deriving from public assis- complained about issues involving intanceprograms,orapplicantrelianceon sufficient funds or overdraft charges Consumer Credit Protection Act provi- and procedures (386), deposit forgery, sions). Sixty-five percent of discrimina- fraud, embezzlement or theft (91), contion complaints were related to the race cerns about credit card interest rates, or national origin of the applicant or terms, and fees (87), and concerns borrower. about opening and closing deposit In the substantial majority (80 per- accounts (80). cent) of investigated complaints against Complaint Referrals to HUD state member banks, gathered evidence revealed that banks correctly handled In 2008, the Federal Reserve forwarded the situation. Of the remaining 20 per- three complaints to the Department of cent, 5 percent were deemed law vio- Housing and Urban Development that lations, 3 percent were general er- alleged violations of the Fair Housing rors,andtheremaindermainlyinvolved Act.28 The Federal Reserve’s investigafactualdisputesorlitigatedmatters.The tionofthesecomplaintsrevealednoevimost common violations involved dence of illegal credit discrimination. checking accounts and credit cards. Consumer Inquiries Unregulated Practices In 2008, the Federal Reserve received Asrequiredbysection18(f)oftheFed- 19,515 inquiries from consumers reeral Trade Commission Act, the Board continued to monitor complaints about bankingpracticesnotsubjecttoexisting 28. In accordance with a memorandum of understandingbetweenHUDandthefederalbank regulations,withafocusoninstancesof regulatory agencies requiring that complaints potential unfair or deceptive practices. alleging a violation of the Fair Housing Act be In2008,theBoardreceived2,119com- forwardedtoHUD.
154 95th Annual Report, 2008 lated to a wide range of topics. Of In 2008, the Board’s regulatory and these, 4,488 (23 percent) fell into the supervisory actions were augmented by “other” category, with several inquiries the System’s Community Affairs staff related to personal and national eco- activitiestoaddressthenegativeimpact nomic conditions and several inquiries of foreclosures on individuals and comrelatedtoregulatorychangesorpropos- munities. Community Affairs staff als under consideration. The top three developed online Foreclosure Resource consumer protection issues documented CentersonthewebsitesofeachReserve with specific codes were the following: Bank and the Board. These centers proadverse action notices received pursu- vide up-to-date information regarding ant to the Equal Credit Opportunity Act resources available to distressed bor- (13 percent), consumer protection rowers, local governments, and lenders. regulations (7 percent), and pre- Community Affairs analysts and outapproved credit solicitations (7 per- reach specialists continued to use their cent). Consumers were typically di- longstanding networks of industry and rected to other resources, including community relationships to convene other federal agencies or written mate- meetings and provide information to rials, to address their inquiries. local community and business leaders, government officials, consumer and community groups, and others engaged Outreach and Response to in addressing the foreclosure issue Community Development Needs locally. To complement these efforts, in Historically Underserved Systemresearchstaffcollectedandana- Communities and Markets lyzed data on real estate and subprime The mission of the community affairs mortgage conditions, and provided function within the Federal Reserve regional foreclosure projections and System is to promote community eco- in-depth analysis of the incidence of nomic development and fair access to defaults within particular areas to supcredit for low- and moderate-income port state and local government efforts communities and populations. A decen- to develop action plans under the tralized function, the Community Neighborhood Stabilization Program Affairs Offices (CAOs) are maintained (NSP). In addition, visiting scholar at each of the 12 Reserve Banks, where Alan Mallach, of the Federal Reserve CAO staffs design activities in response Bank of Philadelphia, published a disto the needs of communities in the Dis- cussion paper, How to Spend $3.92 Biltricts they serve, with oversight of lion: Stabilizing Neighborhoods by operations provided by Board staff. The Addressing Foreclosed and Abandoned CAOs focus on providing information Properties. The paper serves to assist and promoting awareness of investment states, counties, and cities in determinopportunities to financial institutions, ing the best use of funds distributed governmentagencies,andorganizations under the Housing and Economic that serve low- and moderate-income Recovery Act of 2008 (HERA). people and communities. Similarly, the Federal Reserve Community Affairs Board’s CAO promotes and coordinates staff also hosted a number of events, Systemwide community development conferences, and meetings on the topic efforts; in particular, Board community of foreclosure in 2008. The System affairs staff focus on issues that have developed a conference series, Republic policy implications. newal,Recovery,Rebuilding:AFederal
Consumer and Community Affairs 155 Reserve System Foreclosure Series, to foreclosures and real-estate-owned highlight issues and best practices in (REO) properties. The partnership, weak as well as strong housing markets begun in May 2008, not only builds on (see Foreclosures: Responding to Con- an existing relationship with Neighborsumers and Communities in Crisis Works (Federal Reserve staff serve on through the Federal Reserve’s Home its Board of Directors), but also lever- Mortgage Initiative in the “Mortgage ages the System’s ability to conduct Credit” discussion earlier in this chap- data analysis, research, and outreach to ter). The culmination of the series, held address issues related to neighborhood at the Board’s offices in Washington, stabilization. As part of the partnership, D.C., were presentations on the chal- theBoardsupportedthedevelopmentof lenges of valuing foreclosed properties, a new website,29 and new courses for on the NSP program, and on the issu- the NeighborWorks Training Institute, ance of best practices for dealing with which helps ensure effective managelarge numbers of foreclosures devel- ment of REO properties. In addition to oped in communities such as Flint, being offered as part of the Training Michigan and Youngstown, Ohio. Institute, these courses are designed to The System also continued to work be portable so that they can be brought with the HOPE NOW alliance, a col- directly to communities in 2009. laboration of counselors, servicers, Finally, the Community Affairs proinvestors, and other mortgage market grams at all 12 Reserve Banks and the participants. Many Reserve Banks Board of Governors collaborated to co-sponsored “foreclosure mitigation” publish The Enduring Challenge of events, bringing distressed borrowers Concentrated Poverty: Case Studies together with counselors and mortgage from Communities Across the U.S., a servicers to discuss and, where pos- project undertaken by Community sible, to implement loan compromises Affairs in partnership with the Brookbetween borrowers and lenders. The ings Institution. The report was underlargest such event drew more than takentodevelopadeeperunderstanding 2,000 borrowers to Gillette Stadium in of the relationship between “poverty, Foxboro, Massachusetts. The Federal people, and place.” The Board hosted a Reserve Bank of Boston is working to policy forum to highlight issues raised track the success of the loan modifica- in the case studies and to discuss placetions that were arranged at that event based and people-based policy soluand to better understand any limitations tions, such as workforce development of the current modification structure. and education, to address problems Similar events have either been held or prevalent in communities experiencing are planned in other Reserve Bank concentrated poverty. districts. The Board and System worked with NeighborWorks America on a unique Advice from the partnership to (1) address the impact of ConsumerAdvisory Council foreclosures on neighborhoods by The Board’s Consumer Advisory jointly developing the tools and train- Council—whose members represent ing necessary to help local governconsumer and community organizaments and nonprofit organizations, and (2) evaluate approaches and tailor responses to address the increase in 29. Seewww.stablecommunities.org.
156 95th Annual Report, 2008 tions, the financial services indus- Some industry representatives entry, academic institutions, and state dorsed the Board’s approach to define agencies—advises the Board of Gover- subprimeloansbasedontheannualpernors on matters of Board-administered centage rate (APR) charged rather than laws and regulations as well as other on other loan features, but they exconsumer-related financial services pressedtheviewthattheproposeddefiissues. Council meetings, open to the nition would be too broad and would public, were held in March, June, and cover many prime loans. One member October. For a list of members of the recommended using a mortgage-rate Council, see the “Federal Reserve Sys- (instead of Treasury-securities) index to temOrganization”sectioninthisreport; set the threshold and apply a different also, visit the Board’s website for tran- spread for first-lien loans. Another scripts of Council meetings.30 member commented that any APR Three significant topics of discussion threshold or other definitional trigger for the Council in 2008 were for higher-priced loans would be, at times, under-inclusive or over-in- • theBoard’sproposaltoestablishnew clusive, and expressed a preference for protections for consumers in the resierring on the side of over-inclusion. dential mortgage market through Several consumer representatives amendments to Regulation Z, which expressed support for the Board’s proimplements the Truth in Lending Act posal under which a creditor would be (TILA)andtheHomeOwnershipand prohibited from engaging in a “pattern Equity Protection Act; orpractice”oflendingbasedonthecol- • the Board’s proposal, under the Fed- lateralwithoutregardtotheconsumer’s eral Trade Commission Act (FTC ability to make scheduled payments. Act), to prohibit unfair or deceptive They emphasized the importance of acts or practices by banks in connec- establishing rules for prudent undertion with credit card accounts and writing. Offering the perspective of overdraft services for deposit ac- communitybanks,anindustryrepresencounts; and tative commented that such institutions generally follow rigorous underwriting • issues related to home foreclosures, standards, but noted that they someincluding loss-mitigation strategies, times need flexibility to adjust their counseling initiatives, and commupracticestomeettheneedsofparticular nity stabilization efforts. customers. Regarding the proposal’s “pattern or practice” provision, mem- Proposed Rules for bers expressed concern about the diffi- Home Mortgage Loans culty of establishing proof of a pattern In its March meeting, the Council or practice in litigation, and urged the addressed various issues related to con- Board to clarify what constitutes a patsumer protections proposed under tern or practice. Some members noted Regulation Z (see the “Mortgage that the “pattern or practice” provision Credit” discussion earlier in this setsupsignificanthurdlesforindividual chapter). consumers to bring cases against lenders. Members presented a variety of views about the idea of designating a 30. SeetheFederalReserveBoard’sConsumer bright-line presumption of a violation, Advisory Council webpage, www.federalreserve. gov/aboutthefed/cac.htm. orasafeharbor,forrepaymentabilityat
Consumer and Community Affairs 157 a 50 percent debt-to-income (DTI) would be too short, especially for more ratio. Several members cautioned financially vulnerable borrowers or against using the 50 percent DTI ratio first-timehomeowners.Severalindustry or another specific number in the regu- representatives noted the potential lation. impacts of mandatory escrow accounts Several members endorsed the use of on financial institutions’ business third-party documentation to verify processes. income and assets, noting that such In the discussion of yield-spread preflexibility would help address the needs miums, some members expressed supofdifferentborrowers.Aconsumerrep- port for requiring the same compensaresentative urged the Board to clarify tion disclosures for all loan originators whether nontraditional forms of doc- in order to facilitate better comparisons umentation from small- or micro- among products and services as well as business owners would be acceptable to better ensure fair lending. Other under the regulation. members supported applying the pro- Various members endorsed a com- posed disclosure rules only to brokers. plete ban on prepayment penalties for Some members spoke against the idea higher-priced loans. They expressed of establishing an agreement characterconcern that prepayment penalties are ized by a specific compensation figure not balanced by lower interest rates for before the loan application is received. subprime borrowers, who are often the Intheabsenceofkeyinformationabout least financially sophisticated consum- the borrower or the loan product, the ers and for whom there is no well- broker would have to disclose the highknown interest-rate benchmark for est possible fee, which would not be negotiating better loan terms. Several useful to the particular borrower. One industry representatives expressed the member noted that, in the subprime view that, although there have been market, loan applications and fees are problems with prepayment penalties in often taken at closing, and recomthesubprimemarket,theycanbeuseful mendedthattheBoardconsideranother tools and yield lower interest rates for trigger for the written agreement that consumers. Industry representatives would more likely occur earlier. suggestedthatprepaymentpenaltiescan Consumer representatives generally be effectively regulated, such as supported the proposal’s advertising through better disclosure and limits on restrictions. They specifically endorsed duration or amount. Both consumer and a “bright-line” rule for use of the word industry representatives agreed that the “fixed” in advertisements, permitting it five-year duration permitted in the pro- only if the rate or payment would not posal for penalties would be too long, change for the entire length of the loan. and considered it not reflective of cur- Members expressed support for the rent best practices in the industry. proposed rules regarding servicing There was general support among practices. An industry member noted Council members for proposed manda- that most of the rules, such as crediting tory escrow accounts as a way to help payments as of the date of receipt and ensure the successful performance of not pyramiding late fees, are consistent higher-priced loans. In considering the with current best practices in the indusoption to cancel escrow accounts 12 try. Other members expressed concern months after consummation, one mem- about the difficulty of accurately disber expressed the view that 12 months closing third-party fees, which may
158 95th Annual Report, 2008 change without notice, and potential issuing the rules under the FTC Act compliancechallengesifare-disclosure rather than TILA. They expressed the is required whenever a third-party fee view that institutions would face little changes. new litigation risk from the proposal, There was general consensus regard- especially if the regulations have clear ing the provisions prohibiting coercion safe harbors. of appraisers, with one member noting In the discussion of payment allocathat the rule should highlight the more tion, consumer representatives encoursubtle ways of unduly influencing the agedtheBoardtorequirethatpayments appraisal process. be allocated first to balances with the Under the proposal, creditors would highest APR. Several members combe required to provide transaction- mented that a single allocation method specific cost disclosures earlier. Some would make credit pricing more transmembers cautioned that providing dis- parent to consumers and would provide closures earlier would not clarify loan alevelplayingfieldforcreditors.Some terms for consumers, who could end up consumer representatives emphasized with several sets of disclosures as vari- the benefit to less sophisticated conousdetailschangedduringtheloanpro- sumers of allocating payments first to cess. One member expressed concern the highest APR balance. about the proposed rule regarding what Industry representatives supported fees can be collected before early dis- the current industry practice of allocatclosures are provided. Another member ing payments to the lowest APR balstated that providing the cost disclo- ance first, expressing the view that the sures early in the application process proposed pro rata and equal portion would not address a key issue, which is allocation methods would be confusing that estimates generally change by the to consumers. They also cautioned that time loans close. switching to the proposed allocation methods likely would lead to higher Proposed Rules for Credit Cards credit costs and reduced access to and Overdraft Services credit as institutions seek to offset lossesinrevenue.Somemembersurged In its June and October meetings, the the Board, in applying the approved Council’s discussions focused on varipayment-allocation methods, to treat ous aspects of the Board’s proposed promotional rate balances and deferred rulestoprohibitunfairordeceptiveacts interest balances in the same way as or practices in connection with credit other balances. cardaccountsandoverdraftservicesfor Several members supported the prodepositaccounts(seethe“CreditCards” posal to restrict creditors’ ability to discussion earlier in this chapter). increase rates on existing balances, emphasizing that it would provide safe- Credit Card Accounts guards for both consumers and lenders. Some industry representatives ex- They noted that consumers may not be pressed concern about labeling certain able to prevent risk-based repricing practices that are used widely among solely through their behavior because financial institutions as unfair or decep- often they lack information about how tive, and urged the Board to consider credit scores are determined and can issuing many of the credit card rules change. Industry representatives opunder TILA. Other members supported posed the proposal, saying it would
Consumer and Community Affairs 159 eliminate a key risk-management tool paymentandtheconsumerhasnotdone for creditors. They stated that, due to so. Industry representatives recomlost revenues, overall pricing for credit mended issuing the rules under Regulamay increase and credit availability tion E (Electronic Fund Transfer Act) may decline if creditors cannot apply rather than the FTC Act, expressing the risk-based pricing to their riskiest cus- view that overdraft services do not contomers. Industry representatives also stitute an unfair or deceptive practice urged the Board to consider expanding because they provide important benefits the circumstances where existing bal- to consumers. Industry representatives ances can be repriced to include other supported the proposed right to opt out consumer behavior that raises concerns of the payment of overdrafts and about a borrower’s risk. described potential operational difficul- Therewasgeneralsupportamongthe ties with an opt-in. They also suggested Council members for restricting the additionalexceptionsunderwhichoverpractice of financing security deposits drafts should be paid and a fee charged and initial fees that use up most of a even if the consumer has opted out. borrower’s credit limit. Several mem- Several other members urged the bersexpressedconcernthatthepercent- Board to require institutions to gain ages in the proposed rule would be too consumers’ affirmative consent for high, and they cautioned that those overdraft payments with an opt-in, thresholds could become the standard. commenting that banks would be more One member recommended that the likely to provide clear information financing of security deposits and fees about overdraft services to their cusshould be spread out beyond the protomers. They expressed concern that posed 12 months. consumersarecurrentlyenrolledinover- Members disagreed about the approdraft programs automatically, which priateness of the proposed safe harbor they described as an expensive form of for mailing periodic statements 21 days credit that often poses more harm than before a payment’s due date, particubenefits for low- and moderate-income larly given the trend toward electronic consumers, especially college-age stupayments.Therewasgeneralagreement dents and the elderly. Some members amongthemembersabouttheproposed supported the proposed rule requiring provisions regarding cut-off times and institutions to allow consumers to opt due dates for mailed payments. Several outofoverdraftsforATMandpoint-ofmembers recommended that the rule sale transactions without opting out of apply to all types of payments. Conoverdraft services for checks. Industry sumer representatives endorsed the ban representatives opposed the partial opton two-cycle billing, and expressed out, and urged the Board to treat all support for the proposed provision transactionsinthesameway.Therewas regarding firm offers of credit. general support for requiring notice of the opt-out at least once for each peri- Overdraft Services odic statement cycle in which an over- TheBoard’soverdraftservicesproposal draft fee or charge occurs. would prohibit banks from imposing a Industry representatives commented fee for paying an overdraft unless the on the operational challenges and the bank provides the consumer with an potentialimpactonconsumersofaproopportunity to opt out of the overdraft vision that would prohibit banks from
160 95th Annual Report, 2008 imposing a fee when an account is some recent improvements, servicers overdrawn solely because a hold was generally are overwhelmed. Members placed on funds in the consumer’s pointed to other areas of concern deposit account. Consumer representa- regarding servicers, such as the lack of tives supported the provision, express- coordination between servicers’ foreing the view that institutions should be closure and loss-mitigation departments able to readily address any operational aswellaspressureforrepaymentworkissues. There was general consensus on outs rather than modifications of loan the importance of faster settlement of rates or principal amounts. The efauthorized transactions so that debit forts of the HOPE NOW alliance— holds can be released more quickly. coordinating servicer and lender work Several members also expressed the with borrowers and collecting and sharviewthatconsumersshouldreceivebet- ing data—were also highlighted. ternoticeofdebitholdsfrommerchants In October, there was general agreeat the point of sale so they can choose ment that the results of loss-mitigation whether and how to proceed with the efforts by servicers have been mixed, transaction. with some improvement in responsive- In a discussion of disclosures related ness but also continued backlogs and to overdraft services, several members capacity issues. Several members also emphasized the importance of disclos- expressed concern about the voluntary ing, on the opt-out notice, any alterna- nature of the HOPE for Homeowners tives for the payment of overdrafts that Program for lenders, though industry the institution offers. Consumer repre- representatives noted that the program sentatives expressed support for dis- is only one tool among various lossclosing on periodic statements the mitigation strategies. aggregate dollar amounts charged for Several members expressed support overdraft fees and returned-item fees. for a more comprehensive plan to stem Some members also stated that institu- the increasing wave of foreclosures, tions, when they provide account- including a moratorium on foreclosures balance information, should not be per- and more systematic loan modificamitted to include funds that would be tions. They urged the Board to use its available through overdrafts. influence with lenders and servicers to encourage them to pursue sustainable loan modifications. One member ex- Foreclosure Issues pressed support for court-ordered modi- In its March and October meetings, the fications of mortgages for principal Council also addressed various issues residences. Several consumer represenrelated to the surge in foreclosures, tatives suggested that institutions parincluding loss-mitigation strategies, ticipating in the Troubled Assets Relief counseling initiatives, and community Program (TARP) should be required to stabilization efforts. The October dis- modify loans. cussion focused on two initiatives in Industry representatives expressed HERA: the HOPE for Homeowners the view that servicers and lenders Program and the NSP. increasingly recognize the importance In March, consumer representatives of doing loan modifications that are expressedconcernaboutthecapacityof sustainableforthelongterm,butaconservicerstoengageinlossmitigationon sumer advocate stated that many modia large scale. They stated that, despite ficationsstillhavetooshort-termatime
Consumer and Community Affairs 161 frame. Several consumer representa- on initiatives related to foreclosures. tives endorsed a focus on principal Another member suggested that banks write-downs as a key way to achieve could get favorable CRA credit for sustainable modifications. Industry rep- foreclosure efforts that fall outside their resentativespointedtothedifficultiesin assessment area, similar to what was doing principal write-downs, and noted permitted after Hurricane Katrina. that focusing on affordability in loss There was general support for the mitigation can preserve homeowner- wide array of activities permitted under ship even if the loss of equity is not the NSP, which will give communities addressed. various strategies to address their There was a consensus that timely, specific challenges. One member emaccurate,comprehensive,andaccessible phasized the need to pay attention to information about the scope of delin- fair-housing issues amid the NSP imquencies and defaults and the outcomes plementation. Another member comof loss-mitigation efforts are critical to mended the intent of the NSP but cauan effective analysis of foreclosure tioned that its goals cannot be met if issues and proposed policies or solu- financial institutions do not resume tions. Noting that some key data on lending for community development these issues are privately held, several projects. He expressed the view that memberssupportedtheideaofasurvey suchlendingcouldbetiedtothereceipt conducted by the Federal Reserve to of TARP funds or could be accomensure the credibility and comprehen- plished through the network of the siveness of the data collected. Community Development Financial Several members expressed concerns Institutions Fund. The members generabout the proliferation of firms that ally agreed on the need for comprehenoffer loan-modification or foreclosure- sive and accurate data on real-estaterescueservicesathighupfrontfees,and owned properties, so that communities consumer representatives described the canmoreeffectivelydevelopandevaluneed for greater support for counseling ate their stabilization strategies. agencies. Variousmembersdescribedthenega- Other Discussion Topics tive impact of the rising number of foreclosures in their communities, and At the Council’s June meeting, memexpressed concern about the effects of bers provided feedback on proposed foreclosure concentrations in low- and regulationsfromtheBoardandtheFedmoderate-income neighborhoods. They eral Trade Commission to implement a also described various local efforts provision of the Fair and Accurate to respond to foreclosures, such as Credit Transactions Act of 2003 (which programs to provide counseling to amends the Fair Credit Reporting Act) struggling borrowers and initiatives to that addresses risk-based pricing. An reclaim and rehabilitate foreclosed industry representative commended the properties. Some consumer representa- Board for its attention to the goal of tives recommended giving favorable operational feasibility in implementing Community Reinvestment Act (CRA) the proposal. Some members expressed credit to institutions to address fore- support for defining “material terms” closure-related issues, which could primarily with reference to the annual prompt banks to go beyond their usual percentage rate because the bright-line work in low-income areas and take test would make it easier for creditors
162 95th Annual Report, 2008 toidentifyconsumerswhomustreceive kets, and the recently launched TARP. risk-based pricing notices. In consider- In the discussion of the challenges and ing the proposed tests for identifying opportunities presented by the current which consumers should receive no- financial crisis, several members cited tices, one member urged the Board to theneedtoencouragetheflowofcredit setforthatesttoidentifythoseconsum- to communities, especially to lowersreceivingless-favorabletermsacross income communities. They also highthe spectrum of creditors. Several lighted the opportunity for Community members expressed concern about the Development Fund Institutions, comvagueness of the proposed definition of munity development banks, minority “materially less favorable.” banks, and credit unions to continue One member commented that while their responsible lending activities, therisk-basedpricingnoticeswouldaid particularly in distressed communities. consumers by encouraging them to Members also commented on the imcheck their consumer reports, they portance of maintaining access to would benefit further if the notices credit for small businesses. Both conadvisedthatotherfactorsalsocanaffect sumer and industry representatives emthe credit terms and if the notices gave phasized the need for greater accountexamples of those factors. Members ability from institutions that receive expressed divergent views about the TARP funds to ensure that there are Board’s interpretation that the statute benefits for low- and moderate-income gives a consumer the right to request a areas. free consumer report upon receipt of a Another October discussion topic risk-based pricing notice. An industry was the Board’s analysis of the representative commended the Board 2007 Home Mortgage Disclosure Act for providing alternative approaches by (HMDA) data (see the “Evaluating which creditors could determine which Pricing Discrimination Risk with consumersmustreceiverisk-basedpric- HMDA Data and Other Information” ing notices. Several members expressed discussion earlier in this chapter). Sevsupport for the proposal’s exceptions eral consumer representatives pointed for prescreened credit solicitations and to the HMDA statistics (about highercredit-score disclosures. One member priced loan originations by independent urged the Board to require a notice for mortgagecompaniesandthepercentage consumers who lack credit files, so that of higher-priced loans made to CRAthey might become aware of their lack eligible customers) as evidence that of credit records and receive informa- CRA did not cause the subprime morttion on how to establish traditional gage crisis. Various members urged the credit files. Board to use its data and analysis to At the Council’s October meeting, rebut misperceptions about CRA, espemembers discussed recent financial cially in connection with the subprime developments, including the challenges crisis, and to highlight the positive outfaced by banks and nonbank financial comes of CRA for low- and moderateinstitutions, disruptions in credit mar- income individuals and communities. Á
163 Federal Reserve Banks The Federal Reserve Banks provide sector adjustment factor (PSAF).2 Over payment services to depository and cer- the past 10 years, Reserve Banks have tain other institutions, distribute the recovered 98.7 percent of their priced nation’scurrencyandcoin,andserveas services costs, including the PSAF (see fiscal agents and depositories for the table, next page).3 United States. The Reserve Banks also In 2008, Reserve Banks recovered contribute to setting national monetary 98.5 percent of total priced services policyandsupervisionandregulationof costs of $886.9 million, including the banks and other financial entities (dis- PSAF.4 Revenue from priced services cussed in the preceding chapters of this amounted to $773.4 million, other report). income was $100.4 million, and costs were $820.4 million, resulting in Developments in net income from priced services of Federal Reserve Priced Services $53.4 million.5 Federal Reserve Banks provide a range of payment and related services to 2. In addition to income taxes and the return depository institutions, including col- onequity,thePSAFincludesthreeotherimputed lecting checks, operating an automated costs:interestondebt,salestaxes,andanassessclearinghouse (ACH) service, transfer- mentfordepositinsurancebytheFederalDeposit Insurance Corporation (FDIC). Board of Goverring funds and securities, and providing nors assets and costs that are related to priced a multilateral settlement service. The services are also allocated to priced services; in Reserve Banks charge fees for provid- the pro forma financial statements at the end of ing these “priced services.” this chapter, Board assets are part of long-term The Monetary Control Act of 1980 assets,andBoardexpensesareincludedinoperatingexpenses. requires that the Federal Reserve estab- 3. Effective December 31, 2006, the Reserve lish fees for priced services provided to Banks implemented the Financial Accounting depository institutions so as to recover, Standards Board’s Statement of Financial overthelongrun,alldirectandindirect Accounting Standards (SFAS) No. 158, Employers’Accounting for Defined Benefit Pension and costs actually incurred as well as the OtherPostretirementPlans,whichhasresultedin imputed costs that would have been the recognition of a $690.6 million reduction in incurred, including financing costs, equityrelatedtothepricedservices’benefitplans taxes, and certain other expenses, and through 2008. Including this reduction in equity, the return on equity (profit) that would which represents a decline in economic value, results in cost recovery of 92.0 percent for the have been earned if a private business 10-yearperiod.Fordetailsonhowimplementing firm had provided the services.1 The SFAS No. 158 affected the pro forma financial imputed costs and imputed profit are statements,refertonotes3and5attheendofthis collectively referred to as the private- chapter. 4. Totalcostisthesumofoperatingexpenses, imputed costs (interest on debt, interest on float, 1. Financial data reported throughout this sales taxes, and the FDIC assessment), imputed chapter—including revenue, other income, costs, incometaxes,andthetargetedreturnonequity. income before taxes, and net income—can be 5. Otherincomeisrevenuefrominvestmentof linkedtotheproformafinancialstatementsatthe clearing balances net of earnings credits, an endofthischapter. amount termed net income on clearing balances.
164 95th Annual Report, 2008 PricedServicesCostRecovery,1999–2008 Millionsofdollarsexceptasnoted Operating Revenuefrom Targetedreturn Total Costrecovery Year services1 expensesand onequity costs (percent)3,4 imputedcosts2 1999 ...................... 867.6 775.7 57.2 832.9 104.2 2000 ...................... 922.8 818.2 98.4 916.6 100.7 2001 ...................... 960.4 901.9 109.2 1,011.1 95.0 2002 ...................... 918.3 891.7 92.5 984.3 93.3 2003 ...................... 881.7 931.3 104.7 1,036.1 85.1 2004 ...................... 914.6 842.6 112.4 955.0 95.8 2005 ...................... 994.7 834.7 103.0 937.7 106.1 2006 ...................... 1,031.2 875.5 72.0 947.5 108.8 2007 ...................... 1,012.3 913.3 80.4 993.7 101.9 2008 ...................... 873.8 820.4 66.5 886.9 98.5 1999−2008 ................ 9,377.4 8,605.3 896.3 9,501.7 98.7 Note: Here and elsewhere in this chapter, compo- 2. Forthe10-yearperiod,includesoperatingexpenses nentsmaynotsumtototalsoryieldpercentagesshown of$8,092.7million,imputedcostsof$171.3million,and becauseofrounding. imputedincometaxesof$341.3million. 1. Forthe10-yearperiod,includesrevenuefromser- 3. Revenuefromservicesdividedbytotalcosts. vicesof$8,774.1millionandotherincomeandexpense 4. Forthe10-yearperiod,costrecoveryis92.0per- (net)of$603.3million. cent,includingthenetreductioninequityrelatedtoFAS 158reportedbythepricedservicesin2008. Commercial Check-Collection wide trends away from the use of Service checks and toward greater use of electronic payment methods.6 Of all the In 2008, Reserve Banks recovered checks presented by Reserve Banks to 97.8 percent of the total costs of their paying banks in 2008, 75.9 percent commercial check-collection service, were deposited and 53.9 percent were including the PSAF. Reserve Banks’ presented using Check 21 products, operating expenses and imputed costs compared with 42.2 percent and totaled $647.1 million, of which 24.6 percent, respectively, in 2007.7 By $14.1 million was attributable to the year-end 2008, this growth resulted in transportation of commercial checks 91.1 percent of Reserve Bank check between Reserve Bank check-prodeposits and 70.5 percent of Reserve cessing offices. Revenue amounted to $605.2 million, of which $11.0 million was attributable to estimated revenues derived from the transportation of com- 6. The Federal Reserve System’s retail paymercial checks between Reserve Bank ments research suggests that the number of check-processing offices, and other checks written in the United States has been income was $78.4 million. The result- declining since the mid-1990s. For details, see ing net income was $36.5 million. Federal Reserve System, “The 2007 Federal Reserve Payments Study: Noncash Payment Check-service fee revenue in 2008 de- Trends in the United States, 2003-2006” creased $99.8 million from 2007. (December 2007), www.frbservices.org/files/ Reserve Banks handled 9.5 billion communications/pdf/research/2007_payments_ checks in 2008, a decrease of 4.6 per- study.pdf. 7. TheReserveBanksalsooffernon-Check21 cent from 2007 (see table, opposite electronic-presentmentproducts.In2008,8.4perpage). The decline in Reserve Bank cent of Reserve Banks’ deposit volume was precheck volume is consistent with nation- sentedtopayingbanksusingtheseproducts.
Federal Reserve Banks 165 ActivityinFederalReservePricedServices,2006–2008 Thousandsofitems Percentchange Service 2008 2007 2006 2007to2008 2006to2007 Commercialcheck ................. 9,545,424 10,001,289 11,083,122 −4.6 –9.8 CommercialACH.................. 10,040,388 9,363,429 8,230,782 7.2 13.8 Fedwirefundstransfer ............. 134,220 137,555 135,227 –2.4 0.9 Nationalsettlement ................ 469 505 470 7.2 7.4 Fedwiresecuritiestransfer.......... 11,717 10,110 9,053 15.9 11.7 Note: Activityincommercialcheckisthetotalnum- transfer and securities transfer, the number of transacberofcommercialcheckscollected,includingprocessed tionsoriginatedonlineandoffline;andinnationalsettleandfine-sortitems;incommercialACH,thetotalnum- ment,thenumberofsettlemententriesprocessed. ber of commercial items processed; in Fedwire funds Bank check presentments being made commercial ACH services, including through Check 21 products. the PSAF. Reserve Bank operating In November 2008, the Federal expenses and imputed costs totaled Reserve Banks announced that the Sys- $88.8 million. Revenue from ACH tem would consolidate to a sole site for operations totaled $86.6 million and paper-check-processing and check- other income totaled $11.3 million, adjustments operations. These an- resulting in net income of $9.0 million. nouncements are part of the Reserve The Banks processed 10.0 billion com- Banks’ multiyear initiative, begun in mercial ACH transactions, an increase 2003,toreducethenumberofofficesat of 7.2 percent from 2007. which Banks process checks and in In 2008, nationwide ACH volumes order to meet their long-run cost- continued to grow, but at a slower rate, recovery requirement under the Mone- as volume increases associated with tary Control Act of 1980. Because of electronic check-conversion applithe rapid adoption of electronic check cations—including checks converted at processing, the Reserve Banks were lockbox locations or at the point of able to reduce their check-processing purchase—decelerated. infrastructure more quickly than originally expected. The consolidations made it possible for Reserve Banks, in December 2008, to discontinue their Fedwire Funds and dedicated check-transportation routes National Settlement Services betweenReserveBankoffices.Remaining paper checks that must be shipped In 2008, Reserve Banks recovered between Reserve Banks are transported 100.4 percent of the costs of their Fedby the U.S. Postal Service or air freight wire Funds and National Settlement services. Services, including the PSAF. Reserve Bank operating expenses and imputed costs totaled $62.3 million in 2008. Commercial Automated Revenue from these operations totaled Clearinghouse Services $59.9 million, and other income In 2008, the Reserve Banks recovered amounted to $7.9 million, resulting in 101.5 percent of the total costs of their net income of $5.5 million.
166 95th Annual Report, 2008 Fedwire Funds Service totaled $21.6 million, and other income totaled $2.9 million, resulting in net The Fedwire Funds Service allows parincome of $2.3 million. ticipants to use their balances at Re- The Fedwire Securities Service serve Banks to transfer funds to other allows participants to transfer electroniparticipants. In 2008, the number of cally to other participants in the service Fedwire funds transfers originated certain securities issued by the U.S. by depository institutions decreased Treasury, federal government agencies, 2.4 percent from 2007, to approxigovernment-sponsored enterprises, and mately134.2million.Theaveragedaily certain international organizations.8 In value of Fedwire funds transfers in 2008,thenumberofnon-Treasurysecu- 2008 was $3.0 trillion. rities transfers processed via the service In 2008, the Reserve Banks anincreased 15.9 percent from 2007, to nounced plans to implement enhanced approximately 11.7 million. Fedwire Funds Service message formats for cover payments and for pay- Float ments containing remittance information by November 2009 and late 2010, The Federal Reserve had daily average respectively. These changes are in- credit float of $1,193.4 million in 2008, tended to improve payment transpar- compared with credit float of $604.9 ency and efficiency, and provide addi- million in 2007.9 tional value-added services to Fedwire Funds Service participants. Developments in National Settlement Service Currency and Coin The National Settlement Service is a The Federal Reserve Banks issue the multilateral settlement system that nation’s currency (in the form of Fedallows participants in private-sector eral Reserve notes) and distribute coin clearing arrangements to settle transac- through depository institutions. The tionsusingFederalReservebalances.In Reserve Banks also receive currency 2008, the service processed settlement and coin from circulation through files for 47 local and national private- these institutions. The Reserve Banks sector arrangements, primarily check received 36.7 billion Federal Reserve clearinghouseassociations.TheReserve notes from circulation in 2008, a Banks processed slightly more than 15,000 files that contained almost 8. The expenses, revenues, volumes, and fees 469,000 settlement entries for these reportedherearefortransfersofsecuritiesissued arrangements in 2008. by federal government agencies, governmentsponsored enterprises, and certain international organizations. Reserve Banks provide Treasury Fedwire Securities Service securities services in their role as the U.S. Treasury’sfiscalagent.Theseservicesarenotconsid- In 2008, the Reserve Banks recovered ered priced services. For details, see the section 102.5 percent of the total costs of their “DebtServices”laterinthischapter. Fedwire Securities Service, including 9. CreditfloatoccurswhentheReserveBanks the PSAF. The Reserve Banks’ operat- present items for collection to the paying bank prior to providing credit to the depositing bank, ingexpensesandimputedcostsforproand debit float occurs when the Reserve Banks viding this service totaled $22.2 million credit the depositing bank prior to presenting in 2008. Revenue from the service itemsforcollectiontothepayingbank.
Federal Reserve Banks 167 3.4 percent decrease from 2007, and Office to address other coin distribution made payments of 37.7 billion notes and management issues, including into circulation in 2008, a 2.1 percent increased coin inventories, resulting decrease from 2007. They received partially from the United States Mint’s 64.4 billion coins from circulation in commemorative circulating coin pro- 2008, a 1.9 percent increase from 2007, grams. and made payments of 72.3 billion Reserve Banks continued implementcoins into circulation, a 4.5 percent ing a program to extend the useful life decrease from 2007. of the System’s BPS 3000 high-speed Since mid-September, the crisis in currency-processingmachines.Theprofinancial markets has heightened gram will replace the operating systems demand for $100 notes among both of the current equipment, which will international and domestic users.10 In help improve processing efficiency. 2008, payments exceeded receipts by ReserveBanksareintheearlystagesof 1.0billionnotes,mostofwhichwereof adopting a new cash automation platthe $100 denomination. For this reason, form, known as the currency and coin the value of currency in circulation, as handling environment, or CACHE. The of December 31, increased 7.8 percent new system will facilitate control and fromDecember31,2007,to$853.2bil- improve efficiency in cash operations, lion.11 provide an expansive and responsive BoardstaffworkedwiththeTreasury management information reporting sys- Department, the U.S. Secret Service, tem with superior and flexible report andtheReserveBanks’CurrencyTech- tools, facilitate business continuity and nology Office to develop more-secure contingency planning, and enhance the designs for the $5 and $100 Federal supportprovidedtocustomersandbusi- Reserve notes. Reserve Banks issued ness partners. the redesigned $5 note in March 2008. TheTreasuryiscontinuingtodevelopa Developments in new design for the $100 note. Fiscal Agency and Consistent with the requirements of Government Depository Services the Presidential $1 Coin Act, the Federal Reserve and the Mint conducted Asfiscalagentsanddepositoriesforthe additional outreach to depository insti- federal government, the Federal Retutions and coin users to gauge demand serve Banks provide services related to for the coins and to anticipate and the federal debt, help the Treasury coleliminate obstacles to the efficient cir- lect funds owed to the federal governculationof$1coins.Boardstaffworked ment,processelectronicandcheckpaywith the Reserve Banks’ Cash Product ments for the Treasury, maintain the Treasury’s bank account, and invest Treasury balances. Reserve Banks also 10. TheFederalReservemeasuresdemandfor provide certain fiscal agency and de- U.S.currencyintermsofgrowthinnetpayments pository services to other entities. (paymentstocirculationminusreceiptsfromcirculation).InternationaldemandforU.S.currency The total cost of providing fiscal isinfluencedprimarilybypoliticalandeconomic agency and depository services to the uncertainties associated with certain foreign cur- Treasury and other entities in 2008 rencies,whichcontrastwiththeU.S.dollar’srelaamounted to $461.1 million, compared tivelyhighdegreeofstability. with $458.2 million in 2007 (see 11. This increase is double the 3.9 percent averageannualincreaseoverthelastfiveyears. table, next page). Treasury-related costs
168 95th Annual Report, 2008 ExpensesoftheFederalReserveBanksforFiscalAgencyandDepositoryServices, 2006–2008 Thousandsofdollars Agencyandservice 2008 2007 2006 DepartmentoftheTreasury BureauofthePublicDebt Treasuryretailsecurities 72,373.7 74,149.2 73,931.4 Treasurysecuritiessafekeepingandtransfer 9,304.7 8,687.7 7,535.2 Treasuryauction 37,071.6 41,372.0 23,594.9 Computerinfrastructuredevelopmentandsupport 4,463.7 3,558.7 3,853.1 Otherservices 909.9 724.5 1,578.7 Total 124,123.7 128,492.1 110,493.2 FinancialManagementService Paymentservices Governmentcheckprocessing 16,366.9 17,522.7 20,918.6 Automatedclearinghouse 6,530.5 6,050.3 5,823.1 Fedwirefundstransfers 108.3 116.8 123.1 Otherpaymentprograms 85,212.8 81,636.9 69,696.8 Collectionservices Taxandotherrevenuecollections 37,412.1 38,254.5 37,095.5 Othercollectionprograms 11,767.6 12,483.6 14,122.6 Cash-managementservices 51,620.6 46,093.6 48,320.2 Computerinfrastructuredevelopmentandsupport 65,058.6 70,999.9 67,046.4 Otherservices 7,577.4 7,245.7 7,414.8 Total 281,654.8 280,404.2 270,561.2 OtherTreasury Total 24,073.1 18,258.6 16,786.3 Total,Treasury 429,851.5 427,154.9 397,840.7 OtherFederalAgencies DepartmentofAgriculture Foodcoupons 2,676.3 2,706.0 2,929.8 UnitedStatesPostalService Postalmoneyorders 8,257.7 8,913.2 9,334.4 Otheragencies Otherservices 20,358.4 19,412.0 15,977.1 Total,otheragencies 31,292.3 31,031.1 28,241.4 Totalreimbursableexpenses 461,143.9 458,186.0 426,082.1 Note: Numbersinboldreflectrestatementsduetorecategorization. were $429.9 million in 2008, com- rities. Reserve Bank operating expenses pared with $427.2 million in 2007, an for these activities totaled $46.4 milincrease of 0.6 percent. The cost of lion in 2008, compared with $50.1 milproviding services to other entities lion in 2007. To improve support of was $31.3 million, compared with Treasury-securities auction activities, $31.0 million in 2007. In 2008, as in the Reserve Banks implemented a new 2007, the Treasury and other entities Treasury-securities auction application reimbursed Reserve Banks for the costs and infrastructure in April 2008. The of providing these services. Banks conducted 263 Treasury securities auctions in 2008, compared with Debt Services 220in2007.Inaddition,theBankspro- The Reserve Banks support Treasury’s cessed 12.8 million transfers of Treawholesale securities services by auc- surysecuritiesin2008throughtheFedtioning, providing book-entry safekeep- wire Securities Service, compared with ing for, and transferring Treasury secu- 13.7 million transfers in 2007.
Federal Reserve Banks 169 ReserveBanksalsosupporttheTrea- image form. Of all the government sury’s retail securities program that pri- checks processed by the Reserve Banks marily serves individual investors. in 2008, 23 percent were presented in Reserve Bank operating expenses for paper form and 77 percent in image these activities were $72.4 million in form, compared with 54 percent and 2008, compared with $74.1 million in 46 percent, respectively, in 2007. 2007. Reserve Banks operate the ReserveBanksalsosupporttheTrea- Legacy Treasury Direct system, which sury’s initiative to convert check beneallows investors to purchase and hold fit payments to direct deposit. In 2008, marketable Treasury securities directly more than 577,000 check payments with the Treasury instead of through a were converted to direct deposit. financial institution. The Legacy Treasury Direct system held $63.4 billion Collection Services (par value) of Treasury securities as of December 31. The Banks also issue, ReserveBankssupportseveralTreasury service,andredeemnonmarketablesav- programs that serve to collect funds ings bonds. The Banks printed and owed the federal government. Reserve mailed more than 22.6 million savings Bank operating expenses related to bonds in 2008, a 9.7 percent decrease these programs totaled $49.2 million in from2007.Overall,thevolumeofretail 2008, compared with $50.7 million in securities transactions processed by the 2007. For example, the Banks operate Reserve Banks has declined for several the Federal Reserve Electronic Tax years and, consequently, the Banks Application (FR-ETA), which provides have reduced expenses and staffing taxpayers a same-day electronic federal levels. tax payment alternative. FR-ETA collected$505.0billionfortheTreasuryin 2008, compared with $519.8 billion in Payments Services 2007. Reserve Banks process both electronic In addition, the Reserve Banks operand check payments for the Treasury. ate Pay.gov, a Treasury program that Reserve Bank operating expenses for allows the public to use the Internet to processing government payments and initiate and authorize payment for fedfor payments-related programs totaled eral government goods and services. $108.2 million in 2008, compared with TheyalsooperatedtheTreasury’sPaper $105.3 million in 2007. In 2008, the Check Conversion and Electronic Banks processed 1,132 million ACH Check Processing programs, whereby payments for the Treasury, an increase checks written to government agencies of 10.2 percent from 2007. They also are converted into ACH transactions at processed 269.4 million government thepointofsaleoratlockboxlocations. checks, an increase of 26.1 percent In 2008, Reserve Banks originated from 2007. The increase in ACH and 35.6 million ACH transactions through check payments is largely attributable these three programs, compared with to economic stimulus payments issued 15.3 million in 2007. At the Treasury’s in 2008. direction, Reserve Banks worked to Theproportionofgovernmentchecks ensure a smooth transition of the Paper processed in paper form continues to Check Conversion and Electronic decline, as an increasing number of Check Processing programs to a comdepositoryinstitutionspresentchecksin mercial bank effective in early 2009.
170 95th Annual Report, 2008 Treasury Cash-Management Services Provided to Other Entities Services When permitted by federal statute or when required by the Secretary of the The Treasury maintains an operating Treasury, Reserve Banks provide fiscal cash account at the Reserve Banks, and agency and depository services to other invests the funds it does not need for a domestic and international entities. The given day’s payments with qualified majority of the work performed for depository institutions through several these entities is securities-related. investment programs supported by the ReserveBanks.ReserveBankoperating Electronic Access to expenses related to these programs and Reserve Bank Services other cash management initiatives totaled$51.6millionin2008,compared In 2008, the Federal Reserve Banks with$46.1millionin2007.IntheTrea- substantially completed the migration sury Tax and Loan (TT&L) program, ofcomputerinterfacecustomerstoFedqualified depository institutions collect Line Direct and FedLine Command.12 tax payments and may retain these This migration, typically for highfunds as investments for the Treasury. volume depository institutions, and the The Treasury also invests funds at cer- FedLineAdvantagemigration,typically tain TT&L depositories through direct forlow-tomoderate-volumedepository deposits. These fully collateralized institutions, complete the Reserve investments are either callable on Banks’ initiative to migrate electronic demand or set for a term. In 2008, accesstoReserveBankservicestointer- Reserve Banks placed a total of net-protocol-based electronic access.13 $783.1 billion in immediately callable investments—including funds invested Information Technology through retained tax deposits and direct investments—and $1,217.8 billion in In 2008, the Federal Reserve continued term investments. In addition, the Trea- to develop and implement the Reserve sury may invest a portion of its op- Banks’ IT strategy, further strengthened erating funds directly with TT&L IT governance, managed information depositories through its repurchase security risk, and analyzed and coordiagreements program. In 2008, the nated the System’s IT investments. Reserve Banks placed a total of In2008,FederalReserveInformation Technology (FRIT) continued to lead $225.8 billion of investments through Reserve Bank efforts to transition to this program. In 2008, the Reserve Banks and TreasurycontinuedworkontheCollec- 12. FedLine Direct is a computer-to-computer tions and Cash Management Modern- electronic access channel used to access critical ization (CCMM) initiative, which is a payment services, such as Fedwire Funds, Fedwire Securities, National Settlement, and multiyear effort to streamline, modern- FedACHServices.FedLineCommandisalowerize, and improve the services, systems, cost internet-protocol-based computer-toandprocessessupportingtheTreasury’s computerelectronicaccesschannelforfiledelivcollections and cash management pro- eryservices,includingtheFedACHService. 13. FedLine Advantage is a web-based elecgrams. Several Reserve Banks have tronicaccesschannelusedtoaccesscriticalpaybeen selected to work on aspects of the mentservices.TheReserveBankscompletedthe CCMM initiative. FedLineAdvantagemigrationin2006.
Federal Reserve Banks 171 a more-robust information security use the framework established by the model.TheInformationSecurityArchi- Committee of Sponsoring Organizatecture Framework (ISAF), a three-year tions of the Treadway Commission program, was successfully completed. (COSO) to assess their internal controls ISAF was developed to respond to the over financial reporting, including the continuing and increasingly sophisti- safeguarding of assets. The Reserve cated security threats facing informa- Banks have further enhanced their astiontechnologysystemsandtoimprove sessments under the COSO framework information security at all points in the to strengthen the key control assertion Federal Reserve. Through ISAF, the process and, in 2008, again met the System was able to implement projects requirementsoftheSarbanes-OxleyAct that enhanced user authentication, sepa- of 2002. Within this framework, the rated sensitive applications and infra- managementofeachReserveBankprostructure from low- and moderate-risk vides an assertion letter to its board of systems, and strengthened compliance directors annually that confirms adherand patch management. FRIT will conence to COSO standards, and a public tinue working to address residual inforaccounting firm issues an attestation mation security risks. reporttoeachBank’sboardofdirectors To enable certain functionalities and, and to the Board of Governors. secondly, to help address the business In 2008, the Board engaged Deloitte implications of reduced demand for & Touche LLP (D&T) for the audits of mainframe services, Reserve Banks are the individual and combined financial engaged in a multiyear effort to move statements of the Reserve Banks and major business applications off the those of the consolidated LLC entimainframe and to a distributed environties. Fees for D&T’s services totaled ment. In 2008, the new Treasury auto- $9.5million.Ofthetotalfees,$2.3milmated auction processing system belion were for the audits of the consolicame one of the first major business dated LLC entities that are associated applications to be migrated. with recent Federal Reserve actions to addressthefinancialcrisis,andarecon- Examinations of the solidated in the financial statements of Federal Reserve Banks the Federal Reserve Bank of New York (the New York Reserve Bank).14 To Section 21 of the Federal Reserve Act ensure auditor independence, the Board requires the Board of Governors to requiresthatD&Tbeindependentinall order an examination of each Federal matters relating to the audit. Specifi- Reserve Bank at least once a year. The cally, D&T may not perform services Board performs its own reviews and for the Reserve Banks or others that engages a public accounting firm. The would place it in a position of auditing public accounting firm performs an its own work, making management annual audit of the combined financial decisions on behalf of the Reserve statements of the Reserve Banks (see Banks, or in any other way impairing the “Federal Reserve Banks Combined Financial Statements” section of this report) as well as the annual financial 14. Each LLC will reimburse the Board of statements of each of the 12 Banks and Governors for the fees related to the audit of its the consolidated limited liability comfinancial statements from the entity’s available pany(LLC)entities.TheReserveBanks netassets.
172 95th Annual Report, 2008 its audit independence. In 2008, one Expenses totaled $5,723 million Reserve Bank engaged D&T for ($3,232 million in operating expenses, nonaudit consulting services for which $901 million in interest paid to deposithe fees were immaterial. toryinstitutionsonreservebalancesand The Board’s annual examination of earnings credits granted to depository the Reserve Banks and the consoli- institutions, $737 million in interest dated LLC entities includes a wide expense on securities sold under agreerange of off-site and on-site oversight ments to repurchase, $352 million in activities, conducted primarily by the assessments for Board of Governors Division of Reserve Bank Operations expenditures, and $500 million for curand Payment Systems. Division person- rency costs).15 Net additions to and nel monitor the activities of each deductions from current net income Reserve Bank on an ongoing basis and showed a net profit of $3,341 million, conductacomprehensiveon-sitereview which consists of $3,769 million in of each Reserve Bank at least once realized gains on sales of U.S. governevery three years. The reviews also ment securities and $1,266 million in include an assessment of the internal unrealized gains on investments deaudit function’s conformance to Inter- nominated in foreign currencies revalnational Standards for the Professional ued to reflect current market exchange Practice of Internal Auditing, conform- rates, reduced by $1,693 million in net ance to applicable policies and proce- losses associated with consolidated dures, and the audit department’s variable interest entities (VIEs). Diviefficiency. dends paid to member banks, set at To assess compliance with the 6 percent of paid-in capital by section policies established by the Federal 7(1) of the Federal Reserve Act, totaled Reserve’s Federal Open Market Com- $1,190 million, $198 million more than mittee (FOMC), the division also in 2007; the increase reflects an inreviews the accounts and holdings of crease in the capital and surplus of the System Open Market Account member banks and a consequent in- (SOMA) at the New York Reserve creaseinthepaid-incapitalstockofthe Bank and the foreign currency opera- Reserve Banks. tions conducted by that Bank. In addi- Payments to the U.S. Treasury in the tion, D&T audits the schedule of par- form of interest on Federal Reserve ticipatedassetandliabilityaccountsand notes totaled $31,689 million in 2008, the related schedule of participated downfrom$34,598millionin2007;the income accounts at year-end. The payments equal net income after the FOMC receives the external audit re- deduction of dividends paid and of the ports and the report on the division’s amountnecessarytoequatetheReserve examination. Banks’ surplus to paid-in capital. In the “Statistical Tables” section of this report, table 10 details the income Income and Expenses and expenses of each Reserve Bank for The table opposite summarizes the income, expenses, and distributions of net earnings of the Federal Reserve 15. Effective October 9, 2008, the Reserve Banks began paying explicit interest on reserve Banks for 2008 and 2007. Income in balances held by depository institutions at the 2008 was $41,046 million, compared Reserve Banks as authorized by the Emergency with $42,576 million in 2007. EconomicStabilizationActof2008.
Federal Reserve Banks 173 Income,Expenses,andDistributionofNetEarnings oftheFederalReserveBanks,2008and2007 Millionsofdollars Item 2008 2007 Currentincome ............................................................ 41,046 42,576 Currentexpenses .......................................................... 4,870 5,198 Operatingexpenses1 ..................................................... 3,232 3,270 Interestpaidtodepositoryinstitutionsandearningscreditsgranted2........ 901 240 Interestexpenseonsecuritiessoldunderagreementstorepurchase......... 737 1,688 Currentnetincome ........................................................ 36,175 37,378 Netadditionsto(deductionsfrom,−)currentnetincome .................... 3,341 1,886 ProfitsonsalesofU.S.governmentsecurities............................. 3,769 ... Profitsonforeignexchangetransactions .................................. 1,266 1,886 NetlossfromconsolidatedVIEs3 ........................................ −1,693 ... AssessmentsbytheBoardofGovernors .................................... 853 872 ForBoardexpenditures .................................................. 352 296 Forcurrencycosts....................................................... 500 576 Changeinfundedstatusofbenefitplans4 ................................... –3,159 324 ComprehensiveincomebeforepaymentstoTreasury ........................ 35,504 38,716 Dividendspaid ............................................................ 1,190 992 Transferredtosurplusandchangeinaccumulatedother comprehensiveincome ................................................ 2,626 3,126 PaymentstoU.S.Treasury5 ................................................ 31,689 34,598 Note: Numbers in bold reflect reclassification of 4. SubsequenttotheadoptionofSFAS158in2006, amountstomaintaincomparabilityfortheyearspresented. the Reserve Banks began to recognize the change in 1. Includes a net periodic pension expense of $160 funded status of benefit plans as an element of other millionin2008and$110millionin2007. comprehensiveincomeintheirStatementsofIncomeand 2. InOctober2008,theReserveBanksbegantopay ComprehensiveIncome. interesttodepositoryinstitutionsonqualifyingbalances. 5. InterestonFederalReservenotes. 3. Includes$961millionofinterestearningsonloans ... Notapplicable. extendedbytheNewYorkReserveBankin2008. 2008, and table 11 shows a condensed SOMA Securities Holdings statement for each Bank for the years TheaveragedailyholdingsofU.S.gov- 1914 through 2008; table 9 is a stateernment, federal agency, and government of condition for each Bank, and ment-sponsored enterprise (GSE) secutable 13 gives the number and annual rities decreased by $235,014 million, to salaries of officers and employees for an average daily level of $547,165 mileach Bank. A detailed account of the lion. The decrease is due to the sale of assessments and expenditures of the securities during 2008 and maturing Board of Governors appears in the secsecurities that were not replaced, offset tion “Board of Governors Financial by the purchase of federal agency and Statements.” GSE securities beginning in 2008. Average daily holdings of securities purchased under agreements to resell in SOMA Holdings and Loans 2008 were $86,130 million, an increase The Federal Reserve Banks’ aver- of$54,447millionfrom2007,whilethe age net daily holdings of securities average daily balance of securities sold and loans during 2008 amounted to under agreements to repurchase was $1,035,700 million, an increase of $55,034 million, an increase of $20,486 $233,072 million from 2007 (see table, million from 2007. Average daily holdnext page). ingsofinvestmentsdenominatedinfor-
174 95th Annual Report, 2008 SOMAHoldingsandLoansoftheFederalReserveBanks,2008and20071 Millionsofdollarsexceptasnoted Averagedaily Current Averageinterest assets(+)/ income(+)/ Item liabilities(−)2 expense(−) rate(percent) 2008 2007 2008 2007 2008 2007 U.S.governmentsecurities3 ...................... 547,165 782,179 25,631 38,707 4.68 4.95 Securitiespurchasedunderagreementstoresell ... 86,130 31,683 1,891 1,591 2.20 5.02 Securitiessoldunderagreeementstorepurchase... −55,034 −34,548 −737 −1,688 1.34 4.89 Investmentsdenominatedinforeigncurrencies4 ... 24,212 21,325 623 546 2.57 2.56 Centralbankliquidityswaps5 .................... 160,331 532 3,606 28 2.25 5.34 Primary,secondary,andseasonalcredit6 .......... 32,022 636 512 33 1.60 5.20 Termauctioncredit .............................. 172,905 822 3,305 38 1.91 4.66 Otherloans Primarydealerandotherbroker-dealercredit7 .. 28,298 ... 511 ... 1.81 ... AMLF ........................................ 21,036 ... 470 ... 2.24 ... CreditextendedtoAIG8 ....................... 18,636 ... 2,367 ... 12.70 ... Total ............................................ 1,035,700 802,628 38,179 39,256 3.69 4.89 Note: Amounts in bold reflect restatements due to the foreign currency is returned to the foreign central changesinpreviouslyreporteddataandrecategorization. bank. This exchange rate equals the market exchange 1. DoesnotincludeloanstoconsolidatedVIEs. rateusedwhentheforeigncurrencywasacquiredfrom 2. Basedonholdingsatopeningofbusiness. theforeigncentralbank. 3. Includes federal agency and GSE obligations 6. Excludes indebtedness assumed by the Federal beginningin2008. DepositInsuranceCorporation. 4. Excludes accrued interest. Investments denomi- 7. Includes credit extended through the PDCF and natedinforeigncurrenciesarerevalueddailyatmarket creditextendedtocertainotherbroker-dealers. exchangerates. 8. ExcludescreditextendedtoconsolidatedLLCsand 5. Dollarvalueofforeigncurrencyheldunderthese undrawnamounts. agreementsvaluedattheexchangeratetobeusedwhen ... Notapplicable. eign securities in 2008 were $24,212 2.57 percent and 2.25 percent, respecmillion,comparedwith$21,325million tively, in 2008. in 2007. During 2008, the Federal Reserve authorized increases in the Lending amount of central bank liquidity swaps In 2008, average daily primary, secondand in the number of eligible foreign ary, and seasonal credit extended incentral banks. The average daily bal- creased$31,386millionto$32,022milance of central bank liquidity swap lion and term auction credit extended drawings was $160,331 million in 2008 under the Term Auction Facility inand $532 million in 2007. creased $172,083 million to $172,905 The average rate of interest earned million. The average rate of interest on the Reserve Banks’ holdings of earned on primary, secondary, and seagovernment securities decreased to sonalcreditdecreasedto1.60percentin 4.68percent,from4.95percentin2007. 2008, from 5.20 percent in 2007, while The average interest rates for securities theaverageinterestrateontermauction purchased under agreements to resell credit decreased to 1.91 percent in and securities sold under agreements 2008, from 4.66 percent in 2007. to repurchase were 2.20 percent and During 2008, the Federal Reserve 1.34 percent, respectively, in 2008. established several lending facilities Investments denominated in foreign under authority of section 13(3) of the currencies and central bank liquidity Federal Reserve Act. These included swapsearnedinterestataverageratesof the Primary Dealer Credit Facility
Federal Reserve Banks 175 (PDCF), the Asset-Backed Commercial tent with generally accepted accounting Paper Money Market Mutual Fund principles, the assets and liabilities of Liquidity Facility (AMLF), and the theseVIEshavebeenconsolidatedwith American International Group, Inc. the assets and liabilities of the New (AIG) credit line. Amounts funded by York Reserve Bank in the preparation the Reserve Banks under these pro- of the statements of condition included grams are recorded as loans by the in this report.18 The proceeds at the Reserve Banks. During 2008, the aver- maturity or the liquidation of the VIEs’ age daily holdings under the PDCF assets will be used to repay the loans and AMLF were $28,298 million and extended by the New York Reserve $21,036 million, respectively, with Bank. Information regarding the Reaverage rates of interest earned of serve Banks’ lending to the VIEs and 1.81 percent and 2.24 percent, respec- the asset portfolios of each VIE is as tively. The average daily balance of described in the table, next page. credit extended to AIG in 2008 was $18,636 million, which earned interest Reserve Bank Branch Closure at an average rate of 12.70 percent. TheBoardapprovedthediscontinuation oftheNewYorkReserveBank’sBuffalo Investments of Consolidated Branch effective October 31.19 At the Variable Interest Entities time of the discontinuation, the Branch consisted of a small research and com- Additional lending facilities established munity outreach staff and the Branch during 2008 under authority of section board of directors, which provided eco- 13(3) of the Federal Reserve Act innomic and financial intelligence to the volved creating and lending to special Bank. The Branch had not performed purpose vehicles (SPVs).16 The SPVs financial services since 2004. The were funded by the New York Reserve Branch board of directors was replaced Bank and acquired financial assets and by an upstate New York regional advifinancial liabilities pursuant to the polsory board, which provides economic icy objectives. The SPVs were deterand financial intelligence. mined to be VIEs, and the New York Reserve Bank is considered to be the Federal Reserve Bank Premises primary beneficiary of each.17 Consis- AnumberofReserveBankstookaction in 2008 to upgrade and refurbish their 16. For further information on the establishmentandpolicyobjectivesoftheseSPVs,seethe “Monetary Policy Report” section of this report. 18. Asaconsequenceoftheconsolidation,the 17. A VIE is an entity for which the value of extensions of credit from the New York Reserve the beneficiaries’ financial interests in the entity BanktotheVIEsareeliminated,thenetassetsof changes with changes in the fair value of its net theVIEsappearasassetsintable9inthe“Statisassets. A VIE is consolidated by the financial ticalTables”sectionofthisreport,andtheliabiliinterest holder that is determined to be the pri- ties of the VIEs to entities other than the New marybeneficiaryoftheVIEbecausetheprimary YorkReserveBank,includingthosewithrecourse beneficiary will absorb a majority of the VIE’s only to the portfolio holdings of the VIEs, are expected losses, receive a majority of the VIE’s includedinotherliabilitiesinstatisticaltable9. expected residual gains, or both. To determine 19. Before the Buffalo Branch closure, the whetheritistheprimarybeneficiaryofaVIE,the only discontinued Branch in the history of the ReserveBankevaluatestheVIE’sdesign,capital System was the Federal Reserve Bank of San structure, and the relationships among the vari- Francisco’s Spokane Branch, which was disconableinterestholders. tinuedin1938.
176 95th Annual Report, 2008 KeyFinancialDataforConsolidatedVariableInterestEntitiesasofDecember31,2008 Millionsofdollars CommercialPaper Maiden Maiden Maiden Funding Item Lane LaneII LaneIII Total Facility LLC1 LLC1 LLC1 LLC (CPFF) Netportfolioassets2 ................................. 334,910 30,635 19,195 27,256 411,996 LiabilitiesofconsolidatedVIEs ...................... −812 −4,951 −2 −48 −5,813 Netportfolioassetsavailable3 ........................ 334,098 25,684 19,193 27,208 406,183 LoansextendedbytheNewYorkReserveBank4...... 333,020 29,087 19,522 24,384 406,013 Otherbeneficialinterests4,5........................... ... 1,188 1,003 5,022 7,213 Totalloansandotherbeneficialinterests .............. 333,020 30,275 20,525 29,406 413,226 Allocationofexcess/(deficiency)ofnetportfolio assetsavailableoverloansandother beneficialinterests6 LoansextendedbytheNewYorkReserveBank .... 1,078 −3,403 −329 0 −2,654 Otherbeneficialinterests........................... ... −1,188 −1,003 −2,198 −4,389 Total.............................................. 1,078 −4,591 −1,332 −2,198 −7,043 1. Maiden Lane LLC was formed to acquire certain 4. Bookvalue.Includesaccruedinterest. assetsofBearStearns;MaidenLaneIILLCandMaiden 5. The“otherbeneficiary”forMaidenLaneisJPMor- LaneIIILLCwereformedtoacquirecertainassetsof ganChase&Co.,andAIGisthe“otherbeneficiary”for AIGanditssubsidiaries. MaidenLaneIIandMaidenLaneIII. 2. MaidenLane,MaidenLaneII,andMaidenLaneIII 6. Representstheallocationofthechangeinnetassets holdingsarerecordedatfairvalue.Fairvaluereflectsan and liabilities of the consolidated VIEs available for estimateofthepricethatwouldbereceiveduponselling repayment of the loans extended by the New York an asset if the transaction were to be conducted in an ReserveBankandotherbeneficiariesoftheconsolidated orderlymarketonthemeasurementdate.CPFFholdings VIEs.Thedifferencesbetweenthefairvalueofthenet are recorded at book value, which includes amortized assetsavailableandthefacevalueoftheloans(includcostandrelatedfees. ingaccruedinterest)areindicativeofgainsorlossesthat 3. Representsthenetassetsavailableforrepaymentof wouldbeincurredbythebeneficiariesiftheassetshad loansextendedbytheNewYorkReserveBankandother beenfullyliquidatedatpricesequaltothefairvalueas beneficiaries of the consolidated VIEs as of December ofDecember31,2008. 31,2008. ... Notapplicable. facilitiesandstreamlineoperations.The Security-enhancement programs con- Kansas City Bank moved into its new tinued at several facilities, including building, and the Seattle Branch of the construction of security improvements San Francisco Bank dedicated its new to the Richmond Bank’s headquarters building. The multiyear renovation pro- buildingandthedevelopmentofremote gram at the New York Bank’s head- vehicle-screening facility designs for quarters building also continued, while the Philadelphia and Dallas Banks. the St. Louis Bank continued a long- Additionally, the St. Louis Bank sold term facility redevelopment program its Little Rock Branch building, and the that includes the construction of an San Francisco Bank continued its addition to the Bank’s headquarters efforts to sell the former Seattle Branch building. The New York Bank made building. progress on a program to enhance the For more information, see Table 14 business resiliency of its information inthe“StatisticalTables”sectionofthis technology systems and to upgrade report, which details the acquisition facility support for the Bank’s open costs and net book value of the Federal market operations, central bank ser- Reserve Banks and Branches. vices, and data center operations.
Federal Reserve Banks 177 Pro Forma Financial Statements for Federal Reserve Priced Services ProFormaBalanceSheetforFederalReservePricedServices,December31,2008and2007 Millionsofdollars Item 2008 2007 Short-termassets(Note1) Imputedreserverequirementson clearingbalances................ 418.8 755.7 Imputedinvestments ................. 4,292.7 6,465.7 Receivables ......................... 60.0 66.7 Materialsandsupplies ............... 2.1 1.8 Prepaidexpenses .................... 29.2 28.5 Itemsinprocessofcollection......... 983.1 1,769.6 Totalshort-termassets ........ 5,786.0 9,088.0 Long-termassets(Note2) Premises ............................ 441.1 453.5 Furnitureandequipment ............. 113.0 130.2 Leases,leaseholdimprovements,and long-termprepayments .......... 76.7 64.2 Prepaidpensioncosts ................ 0.0 484.6 Deferredtaxasset.................... 313.2 109.4 Totallong-termassets......... 944.0 1,242.0 Totalassets.......................... 6,729.9 10,330.0 Short-termliabilities Clearingbalancesandbalances arisingfromearlycredit ofuncollecteditems............. 2,391.8 7,641.1 Deferred-availabilityitems ........... 2,779.8 1,685.1 Short-termdebt...................... 0.0 0.0 Short-termpayables.................. 573.5 102.4 Totalshort-termliabilities ..... 5,745.1 9,428.5 Long-termliabilities Long-termdebt ...................... 0.0 0.0 Accruedbenefitcosts ................ 605.6 385.0 Totallong-termliabilities...... 605.6 385.0 Totalliabilities ...................... 6,350.7 9,813.5 Equity(includingaccumulatedother comprehensivelossof $690.6millionand $237.9millionat December31,2008and2007, respectively) .................... 379.2 516.5 Totalliabilitiesandequity(Note3) ... 6,729.9 10,330.0 Note: Componentsmaynotsumtototalsbecauseof Theaccompanyingnotesareanintegralpartofthese rounding. proformapricedservicesfinancialstatements.
178 95th Annual Report, 2008 ProFormaIncomeStatementforFederalReservePricedServices,2008and2007 Millionsofdollars Item 2008 2007 Revenuefromservicesprovidedto depositoryinstitutions(Note4) ........ 773.4 878.4 Operatingexpenses(Note5) ............... 808.7 888.2 Incomefromoperations .................... –35.3 –9.8 Imputedcosts(Note6) Interestonfloat ......................... –22.4 –32.0 Interestondebt.......................... 0.0 0.0 Salestaxes .............................. 9.4 11.6 FDICInsurance ......................... 0.5 –12.5 0.0 –20.4 Incomefromoperationsafter imputedcosts ......................... –22.8 10.6 Otherincomeandexpenses(Note7) Investmentincome ...................... 181.2 362.3 Earningscredits ......................... –80.7 100.4 –228.5 133.8 Incomebeforeincometaxes................ 77.6 144.5 Imputedincometaxes(Note6) ............. 24.2 45.5 Netincome................................ 53.4 98.9 Memo:Targetedreturnonequity(Note6) .. 66.5 80.4 Note: Componentsmaynotsumtototalsbecauseof Theaccompanyingnotesareanintegralpartofthese rounding. proformapricedservicesfinancialstatements. ProFormaIncomeStatementforFederalReservePricedServices,byService,2008 Millionsofdollars Commercial Commercial Fedwire Fedwire Item Total check ACH funds securities collection Revenuefromservices(Note4) ........ 773.4 605.2 86.6 59.9 21.6 Operatingexpenses(Note5) ........... 808.7 644.4 84.4 59.0 20.9 Incomefromoperations ................ −35.3 −39.2 2.2 0.9 0.7 Imputedcosts(Note6)................. −12.5 −13.8 0.3 0.8 0.3 Incomefromoperationsafter imputedcosts ..................... −22.8 −25.3 1.9 0.2 0.5 Otherincomeandexpenses, net(Note7) ...................... 100.4 78.4 11.3 7.9 2.9 Incomebeforeincometaxes............ 77.6 53.0 13.1 8.1 3.3 Imputedincometaxes(Note6) ......... 24.2 16.5 4.1 2.5 1.0 Netincome............................ 53.4 36.5 9.0 5.5 2.3 Memo:Targetedreturnon equity(Note6) ................... 66.5 51.9 7.6 5.3 1.7 Memo:Costrecovery(percent) (Note8) .......................... 98.5 97.8 101.5 100.4 102.5 Note: Componentsmaynotsumtototalsbecauseof Theaccompanyingnotesareanintegralpartofthese rounding. proformapricedservicesfinancialstatements.
Federal Reserve Banks 179 FEDERALRESERVEBANKS NotestoProFormaFinancialStatementsforPricedServices (1) Short-TermAssets Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit The imputed reserve requirement on clearing balances PensionandOtherPostretirementPlans,whichrequires heldatReserveBanksbydepositoryinstitutionsreflects an employer to record the funded status of its benefit atreatmentcomparabletothatofcompensatingbalances plansonitsbalancesheet.Inordertoreflectthefunded held at correspondent banks by respondent institutions. statusofitsbenefitplans,theReserveBanksrecognized Thereserverequirementimposedonrespondentbalances thedeferreditemsrelatedtotheseplans,whichinclude mustbeheldasvaultcashorasbalancesmaintainedat priorservicecostsandactuarialgainsorlosses,onthe aReserveBank;thus,aportionofpricedservicesclearbalancesheet.ThisresultedinanadjustmenttothepeningbalancesheldwiththeFederalReserveisshownas sionandbenefitplansrelatedtopricedservicesandthe requiredreservesontheassetsideofthebalancesheet. Another portion of the clearing balances is used to recognition of an associated deferred tax asset with an financeshort-termandlong-termassets.Theremainder offsetting adjustment, net of tax, to accumulated other ofclearingbalancesisassumedtobeinvestedinaport- comprehensive income (AOCI), which is included in folioofinvestments,shownasimputedinvestments. equity. The Reserve Bank priced services recognized a Receivables are comprised of fees due the Reserve netpensionliabilityin2008andanetpensionassetin Banks for providing priced services and the share of 2007. The reduction in the System Retirement Plan’s suspense-accountanddifference-accountbalancesrelated funded status in 2008 was due to reduced asset values topricedservices. andanincreaseintheprojectedbenefitobligation.This Materials and supplies are the inventory value of reductioninthefundedstatusresultedinacorresponding short-termassets. changeinAOCIof$452.7millionin2008. Prepaid expenses include salary advances and travel To satisfy the FDIC requirements for a welladvancesforpriced-servicepersonnel. capitalizedinstitution,equityisimputedat10percentof Items in process of collection are gross Federal totalrisk-weightedassets. Reserve cash items in process of collection (CIPC), (4) Revenue stated on a basis comparable to that of a commercial bank. They reflect adjustments for intra-System items Revenue represents fees charged to depository instituthat would otherwise be double-counted on a consoli- tionsforpricedservices,andisrealizedfromeachinstidated Federal Reserve balance sheet; adjustments for tutionthroughoneoftwomethods:directchargestoan itemsassociatedwithnonpriceditems(suchasthosecol- institution’saccountorchargesagainstitsaccumulated lected for government agencies); and adjustments for earningscredits(seeNote7). items associated with providing fixed availability or (5) OperatingExpenses creditbeforeitemsarereceivedandprocessed.Among thecoststoberecoveredundertheMonetaryControlAct Operating expenses consist of the direct, indirect, and isthecostoffloat,ornetCIPCduringtheperiod(the other general administrative expenses of the Reserve differencebetweengrossCIPCanddeferred-availability BanksforpricedservicesplustheexpensesoftheBoard items,whichistheportionofgrossCIPCthatinvolvesa ofGovernorsrelatedtothedevelopmentofpricedserfinancingcost),valuedatthefederalfundsrate. vices. Board expenses were $7.2 million in 2008 and $6.7millionin2007. (2) Long-TermAssets EffectiveJanuary1,1987,theReserveBanksimple- Long-term assets consist of long-term assets used mentedSFASNo.87,Employers’AccountingforPensolely in priced services, the priced-service portion of sions. Accordingly, the Reserve Bank priced services long-termassetssharedwithnonpricedservices,anesti- recognizedqualifiedpension-planoperatingexpensesof mateoftheassetsoftheBoardofGovernorsusedinthe $28.8millionin2008and$21.3millionin2007.Operdevelopmentofpricedservices,andadeferredtaxasset ating expenses also include the nonqualified pension relatedtothepricedservicespensionandpostretirement expense of $5.4 million in 2008 and $3.1 million in benefitsobligation(seeNote3). 2007. The implementation of SFAS No. 158 does not change the systematic approach required by generally (3) LiabilitiesandEquity acceptedaccountingprinciplestorecognizetheexpenses Under the matched-book capital structure for assets, associatedwiththeReserveBanks’benefitplansinthe short-termassetsarefinancedwithshort-termpayables income statement. As a result, these expenses do not and clearing balances. Long-term assets are financed includeamountsrelatedtochangesinthefundedstatus withlong-termliabilitiesandcoreclearingbalances.As oftheReserveBanks’benefitplans,whicharereflected a result, no short- or long-term debt is imputed. Other inAOCI(seeNote3). short-term liabilities include clearing balances main- The income statement by service reflects revenue, tained at Reserve Banks and deposit balances arising operating expenses, imputed costs, other income and fromfloat.Otherlong-termliabilitiesconsistofaccrued expenses,andcostrecovery.Certaincorporateoverhead postemployment,postretirement,andqualifiedandnon- costsnotcloselyrelatedtoanyparticularpricedservice qualifiedpensionbenefitscostsandobligationsoncapi- areallocatedtopricedservicesbasedonanexpense-ratio talleases. method. Corporate overhead was allocated among the Effective December 31, 2006, the Reserve Banks priced services during 2008 and 2007 as follows implementedtheFinancialAccountingStandardBoard’s (inmillionsofdollars):
180 95th Annual Report, 2008 Unrecoveredfloatincludesfloatgeneratedbyservices 2008 2007 to government agencies and by other central bank ser- Check ..................... 31.0 34.7 vices. Float recovered through income on clearing bal- ACH ...................... 4.6 4.3 ancesistheresultoftheincreaseininvestableclearing FedwireFunds ............. 3.5 3.0 balances; the increase is produced by a deduction for FedwireSecurities.......... 1.9 1.7 floatforCIPC,whichreducesimputedreserverequirements.Theincomeonclearingbalancesreducesthefloat Total ...................... 41.2 43.7 toberecoveredthroughothermeans.As-ofadjustments anddirectchargesrefertofloatthatiscreatedbyintert- (6) ImputedCosts erritorychecktransportationandtheobservanceofnon- Imputed costs consist of income taxes, return on standardholidaysbysomedepositoryinstitutions.Such equity,interestondebt,salestaxes,anFDICassessment, floatmayberecoveredfromthedepositoryinstitutions and interest on float. Many imputed costs are derived throughadjustmentstoinstitutionreserveorclearingbalfromtheprivate-sectoradjustmentfactor(PSAF)model. ancesorbybillinginstitutionsdirectly.Floatrecovered The cost of debt and the effective tax rate are derived throughdirectchargesandper-itemfeesisvaluedatthe from bank holding company data, which serves as the federal funds rate; credit float recovered through perproxyforthefinancialdataofarepresentativeprivate- itemfeeshasbeensubtractedfromthecostbasesubject sector firm, and are used to impute debt and income torecoveryin2008. taxesinthePSAFmodel.Theafter-taxrateofreturnon equityisbasedonthereturnsoftheequitymarketasa (7) OtherIncomeandExpenses whole,andisusedtoimputetheprofitthatwouldhave Other income and expenses consist of investment and beenearnedhadtheservicesbeenprovidedbyaprivateinterestincomeonclearingbalancesandthecostofearnsectorfirm. ingscredits.Investmentincomeonclearingbalancesfor Interestisimputedonthedebtassumednecessaryto 2008and2007representstheaveragecoupon-equivalent finance priced-service assets; however, no debt was yield on three-month Treasury bills plus a constant imputedin2008or2007. spread,basedonthereturnonaportfolioofinvestments. Effective in 2007, the Reserve Bank priced services Before October 9, 2008, the return was applied to the imputedaone-timeFDICassessmentcredit.In2008,the totalclearingbalancemaintained,adjustedfortheeffect credit offset $4.6 million of the imputed $5.1 million ofreserverequirementsonclearingbalances.OnOctober assessment,resultinginaremainingcreditof$8.0mil- 9, 2008, the Federal Reserve began paying interest on lion. The remaining credit can be used to offset up to requiredreserveandexcessbalancesheldbydepository 90percentoftheassessmentinthefuture. institutionsatReserveBanksasauthorizedbytheEmer- Interestonfloatisderivedfromthevalueoffloatto gencyEconomicStabilizationActof2008.Asaresultof berecovered,eitherexplicitlyorthroughper-itemfees, thischange,theinvestmentreturnisappliedonlytothe during the period. Float costs include costs for the required portion of the clearing balance. Other income Check, Fedwire Funds, National Settlement Service, alsoincludesimputedinterestontheportionofclearing ACH,andFedwireSecuritiesservices. balances set aside as required reserves. Expenses for Float cost or income is based on the actual float earnings credits granted to depository institutions on incurredforeachpricedservice.Otherimputedcostsare theirclearingbalancesarebasedonadiscountedaverage allocatedamongpricedservicesaccordingtotheratioof coupon-equivalentyieldonthree-monthTreasurybills. operatingexpenses,lessshippingexpenses,foreachservice to the total expenses, less the total shipping (8) CostRecovery expenses,forallservices. The following shows the daily average recovery of Annualcostrecoveryistheratioofrevenue,including actualfloatbytheReserveBanksfor2008inmillionsof otherincome,tothesumofoperatingexpenses,imputed dollars: costs, imputed income taxes, and targeted return on Totalfloat –1,191.8 equity. Unrecoveredfloat −42.1 Floatsubjecttorecovery –1,149.7 Sourcesofrecoveryoffloat Incomeonclearingbalances –89.3 As-ofadjustments 1.6 Directcharges 111.8 Per-itemfees –1,173.8
181 The Board of Governors and the Government Performance and Results Act The Government Performance and goals. The most recent performance Results Act (GPRA) of 1993 requires report covers the period 2006–07. that federal agencies, in consultation The strategic plan, performance plan, withCongressandoutsidestakeholders, and performance report are availprepareastrategicplancoveringamulti- able on the Board’s website, at year period and submit an annual per- www.federalreserve.gov/boarddocs/ formance plan and performance report. rptcongress. The Board’s mission state- Although the Federal Reserve is not ment and a summary of the Federal covered by the GPRA, the Board of Reserve’s goals and objectives, as set Governors voluntarily complies with forth in the most recently released strathe spirit of the act. tegic and performance plans, are listed below. Updated documents will be posted on the website as they are completed. Strategic Plan, Performance Plan, and Performance Report Mission The Board’s strategic plan articulates the Board’s mission, sets forth major The mission of the Board is to foster goals, outlines strategies for achieving the stability, integrity, and efficiency of those goals, and discusses the environthe nation’s monetary, financial, and ment and other factors that could affect payment systems to promote optimal their achievement. It also addresses macroeconomic performance. issues that cross agency jurisdictional lines, identifies key quantitative measures of performance, and discusses the Goals and Objectives evaluation of performance. The most The Federal Reserve has six primary recent strategic plan covers the period goals with interrelated and mutually 2008–2011. reinforcing elements. Both the performance plan and the performance report are prepared every two years. The performance plan in- Goal cludes specific targets for some of the Conduct monetary policy that promotes performance measures identified in the the achievement of the statutory objecstrategic plan and describes the operatives of maximum employment and tional processes and resources needed stable prices to meet those targets. It also discusses validation of data and verification of Objectives results. The most recent performance plan covers the period 2008–09. v Stay abreast of recent developments The performance report discusses the inandprospectsfortheU.S.economy Board’s performance in relation to its and financial markets, and in those
182 95th Annual Report, 2008 abroad, so that monetary policy deci- procedures,technology,resourceallosions will be well informed. cation, and staffing issues. v Enhance our knowledge of the struc- v Promote compliance by domestic and tural and behavioral relationships in foreign banking organizations superthe macroeconomic and financial vised by the Federal Reserve with markets, and improve the quality of applicable laws, rules, regulations, the data used to gauge economic per- policies, and guidelines through a formance, through developmental re- comprehensive and effective supervisearch activities. sion program. v Implement monetary policy effectively in rapidly changing economic Goal circumstances and in an evolving fi- Develop regulations, policies, and pronancial market structure. grams designed to inform and protect v ContributetothedevelopmentofU.S. consumers, to enforce federal consumer international policies and procedures, protection laws, to strengthen market in cooperation with the U.S. Departcompetition, and to promote access to ment of the Treasury and other agenbanking services in historically undercies, with respect to global financial served markets markets and international institutions. v Promote understanding of Federal Objectives Reserve policy among other governv Be a leader in, and help shape the ment policy officials and the general national dialogue on, consumer propublic. tection in financial services. Goal v Promote, develop, and strengthen effective communications and col- Promoteasafe,sound,competitive,and laborationswithintheBoard,theFedaccessible banking system and stable eral Reserve Banks, and other agenfinancial markets cies and organizations. Objectives Goal v Promote overall financial stability, manage and contain systemic risk, Provide high-quality professional overand identify emerging financial prob- sight of Reserve Banks lems early so that crises can be Objective averted. v Provide a safe, sound, competitive, v Produce high-quality assessments and and accessible banking system oversight of Federal Reserve System through comprehensive and effective strategies, projects, and operations, supervision of U.S. banks, bank and including adoption of technology to financial holding companies, foreign meet the business and operational banking organizations, and related needs of the Federal Reserve. The entities. At the same time, remain oversight process and outputs should sensitive to the burden on supervised help Federal Reserve management institutions. foster and strengthen sound internal v Enhance efficiency and effectiveness, control systems, efficient and reliable while remaining sensitive to the bur- operations, effective performance, den on supervised institutions, by and sound project management and addressing the supervision function’s should assist the Board in the effec-
Government Performance and Results Act 183 tive discharge of its oversight respon- Objectives sibilities. v Develop appropriate policies, over- Goal sight mechanisms, and measurement criteria to ensure that the recruiting, Foster the integrity, efficiency, and training, and retention of staff meet accessibilityofU.S.paymentandsettle- Board needs. ment systems v Establish, encourage, and enforce a Objectives climateoffairandequitabletreatment for all employees regardless of race, v Develop sound, effective policies and creed, color, national origin, age, or regulations that foster payment syssex. tem integrity, efficiency, and accessi- v Provide strategic planning and finanbility. Support and assist the Board in cial management support needed for overseeing U.S. dollar payment and sound business decisions. securities settlement systems by as- v Provide cost-effective and secure sessing their risks and risk manageinformation resource management ment approaches against relevant polservices to Board divisions, support icy objectives and standards. divisional distributed-processing rev Conduct research and analysis that quirements, and provide analysis on contributes to policy development information technology issues to the and increases the Board’s and others’ Board,ReserveBanks,otherfinancial understanding of payment system regulatory institutions, and central dynamics and risk. banks. v Efficiently provide safe, modern, se- Goal cure facilities and necessary support Foster the integrity, efficiency, and for activities conducive to efficient effectiveness of Board programs and effective Board operations. Á
185 Federal Legislative Developments The Federal Reserve played an impor- the Federal Housing Finance Agency tant role in the public debates leading (FHFA) to succeed to (i) the superviup to enactment of the Housing and sory and regulatory responsibilities of Economic Recovery Act of 2008 the Office of Federal Housing Enter- (HERA) and the Emergency Economic prise Oversight (OFHEO) with respect StabilizationActof2008(EESA).Each toFannieMaeandFreddieMac(collecof these laws provided the U.S. govern- tively, the enterprises) and of the Fedment with important new tools— eral Housing Finance Board with reutilized during 2008—to help address spect to the FHLBs, and (ii) the the causes and consequences of the authorityoftheSecretaryoftheDepartrecentandongoingturmoilinthefinan- ment of Housing and Urban Developcial markets. ment (HUD) with respect to housing Although the following summaries goals and new program approval are not comprehensive reviews of these requirements for the enterprises. laws, they highlight some of the key To help stabilize and maintain confiprovisions, including those that affect dence in the enterprises, the Act also Federal Reserve System functions. provides the Department of Treasury This report also describes the Higher with temporary authority to acquire Education Opportunity Act of 2008 obligations of the GSEs, as well as (HEOA), legislation that modified the other securities of the enterprises. In disclosure requirements for private edu- addition, HERA includes provisions to cational loans under the Truth in Lend- • modernize the mortgage insurance ing Act, which is administered by the programs of the Federal Housing Board. Administration (FHA); • create a new HOPE for Homeowners program within FHA to assist dis- Housing and Economic Recovery tressed homeowners attempting to Act of 2008 refinance into more sustainable mortgages; On July 30, 2008, President Bush • establish a nationwide mortgage signed into law the Housing and Ecooriginator licensing and registration nomic Recovery Act of 2008 (HERA) system; and (Pub. L. No. 110-289), which substan- • improve the disclosures provided tially revises the supervisory and reguconsumers in connection with mortlatory framework for housing-related gage transactions. government-sponsored enterprises (GSEs), specifically, the Federal National Mortgage Association (Fannie Treasury Authorization to Provide Mae), the Federal Home Loan Mort- Financial Support to GSEs gage Corporation (Freddie Mac), and the Federal Home Loan Banks As strains in financial markets intensi- (FHLBs). Among other things, HERA fied in 2008, investors became increasestablishes a new, independent agency, ingly worried that the capital of Fannie
186 95th Annual Report, 2008 Mae and Freddie Mac would be insuffi- enterprise maintains a positive net cient to absorb current and expected worth.Inconnectionwiththeseactions, losses on their mortgage portfolios. In Treasury also established a temporary lightoftheimportantrolethattheGSEs secured lending credit facility for Fanplayinthehousingfinancemarketsand nie Mae, Freddie Mac, and the FHLBs, thefinancialsystem,Treasuryrequested and initiated a temporary program to and Congress passed changes as part of purchase mortgage-backed securities HERA that granted temporary authority guaranteed as to principal and interest to Treasury to purchase obligations of by Fannie Mae and Freddie Mac. The theGSEsandothersecurities(including actions taken by FHFA and Treasury equity capital) issued by Fannie Mae helped to stabilize the GSEs, as invesand Freddie Mac, on such terms and in tors became more confident of the govsuch amounts as the Treasury deter- ernment’s support for the GSEs. mines. The statute requires that the Treasury secretary determine that any GSE Regulation and Supervision suchpurchasesarenecessarytoprovide stability to the financial markets, pre- Title I of HERA significantly reforms vent disruptions in the availability of the supervisory and regulatory framemortgage finance, and protect the tax- work for the GSEs, representing the payer. The Treasury’s authority to pur- culmination of almost a decade of work chase such obligations or securities by Congress and other relevant parties. expires on December 31, 2009; how- For several years prior to the enactment ever, the statute expressly permits the ofHERA,theBoardhadsupportedleg- Treasury, after December 31, 2009, to islativechangestoimprovethesuperviretain (and exercise any rights associ- sory and regulatory framework of the ated with) any obligations or securities GSEs and to address the systemic risks acquired by such date. posed by the retained mortgage port- On September 7, 2008, FHFA, after folios of Fannie Mae and Freddie Mac. consulting with Treasury Secretary For example, the Board had urged the Henry M. Paulson and Federal Reserve Congress to Board Chairman Ben S. Bernanke, • provide the supervisor of Fannie Mae appointed itself conservator for Fannie andFreddieMacwiththeauthorityto Mae and Freddie Mac in accordance set and adjust the capital requirewith the conservatorship and consultaments for the enterprises in a manner tion provisions of HERA (described in comparable to the capital authority ‘‘PromptCorrectiveActionandConseravailable to the federal banking agenvatorship and Receivership’’ and cies with respect to insured banks; ‘‘Required Consultations’’ later in this • establish a clear and credible receivsection).Inconjunctionwiththisaction, ershipprocessfortheenterprises;and theTreasury,utilizingthenewpurchase • limit the size of the retained portauthority granted under HERA, entered folios of the enterprises by anchoring into stock purchase agreements with them to a well-understood public Fannie Mae and Freddie Mac pursuant purpose. to which Treasury acquired preferred shares of each enterprise. Pursuant to The supervisory and regulatory these stock purchase agreements, Trea- changes enacted under HERA include sury agreed to provide up to $100 bil- provisions that address each of these liontoeachenterprisetoensurethatthe elements. As a general matter, HERA
Federal Legislative Developments 187 allowstheFHFAdirectortooverseethe capital levels, and may increase, by prudential operations of the GSEs and order, the minimum capital levels for to ensure that each GSE operates in a the enterprises or FHLBs on a temposafeandsoundmannerby,amongother rary basis, if necessary, and consistent means, maintaining adequate capital with the prudential regulation and the and establishing adequate internal safe and sound operation of the GSE. controls. Portfolio Limits Capital HERA requires that the FHFA director establish,byregulation,criteriagovern- Importantly, HERA grants the FHFA ing the portfolio holdings of Fannie director broad new authority to set and MaeandFreddieMactoensurethatthe adjust the capital requirements for the holdings are backed by sufficient capi- GSEs. For example, HERA provides tal and consistent with the mission and the director a free hand to establish, by the safe and sound operations of the regulation, risk-based capital requireenterprises.Inestablishingsuchcriteria, ments for the enterprises to ensure that the director must consider (i) the ability the enterprises operate in a safe and of the enterprises to provide a liquid sound manner and maintain sufficient secondarymarketthroughsecuritization capital and reserves to support the risks activities, (ii) the portfolio holdings of thatariseintheoperationsandmanagethe enterprises in relation to the overall mentoftheenterprises.Previously,fedmortgage market, and (iii) the entererallawspecified,inmanyrespects,the prise’sadherencetotheprudentialmantype of risk-based capital standards that agement and operation standards estabhadtobeappliedtotheenterprises,thus lished by the director under HERA and greatly constraining the ability of the described below (see ‘‘Prudential Mansupervisor of the enterprises to alter or agement and Operation Standards’’). modify these standards to improve their Additionally, the director is authorized, risksensitivityortakeaccountoffinanby order, to make temporary adjustcial developments or improvements in mentstotheseportfoliocriteria,suchas methodologies for assessing regulatory during times of economic distress or capital adequacy. market disruption, and to make an HERA also authorizes the FHFA enterprise dispose of or acquire any director to raise, by regulation, the assetifthedirectordeterminesthatsuch minimum capital level for Fannie Mae actionisconsistentwiththepurposesof and Freddie Mac under statute (generthe Federal Housing Enterprises Finanally, core capital equal to at least cial Safety and Soundness Act of 1992, 2.5 percent of on-balance-sheet assets as amended, or consistent with the plus 0.45 percent of mortgage-backed authorizing statutes for the enterprises. securities guaranteed by the enterprise and other off-balance-sheet obligations) Prompt Corrective Action and or by the FHLBs (generally, total capi- Conservatorship and Receivership tal equal to at least 5 percent of total assets). Specifically, the director is per- HERA significantly alters the statutory mitted to raise a GSE’s minimum capi- provisions governing the supervisory tal level to the extent needed to ensure actions that may or must be taken its safe and sound operation. The direc- against a GSE as its regulatory capital tor also must periodically review GSE levels decline, and addresses the man-
188 95th Annual Report, 2008 nerinwhichatroubledorfailingGSE’s than 180 days before the enterprise conditionmayberesolved.Asageneral became significantly undercapitalmatter, HERA modifies the prompt cor- ized; and rectiveactionframeworkapplicabletoa • allow the FHFA director to appoint troubled GSE in a manner more closely the FHFA as receiver for a critically tracking a similar regime used with a undercapitalized enterprise. troubled insured depository institution HERA also applied the prompt corunder the Federal Deposit Insurance rective action regime governing the Act (FDIA). In addition, HERA estabenterprises (as modified) to FHLBs. lishes a process for placing a troubled HERA also allows, or requires, the GSE into conservatorship or receiver- FHFAdirectortoplaceaGSEintoconship and for managing such a conservaservatorship or receivership for reasons torship or receivership broadly similar other than critical undercapitalization. in nature to those used with insured Specifically, HERA authorizes the depository institutions under the FDIA. director to establish a conservatorship However, because GSEs, unlike insured orareceivershipforaGSEifthedirecdepository institutions, do not offer fedtor finds that any of 11 other separate erally insured deposits, the provisions conditions are met. These conditions under FDIA related to insured deposits include, among others, that (e.g., depositor preferences) and the FDIC’s deposit insurance fund (e.g., • the GSE’s obligations exceed its least-costresolutionandrelatedrequire- assets; ments) do not apply in the case of the • the GSE is in an unsafe or unsound resolution of a GSE. condition to transact business; For example, HERA modifies the • the GSE is likely to be unable to pay existing prompt corrective action its obligations or meet the demands regime for Fannie Mae and Freddie of its creditors in the normal course Mac to of business; • the GSE has incurred or is likely to • require the FHFA director to closely monitor the condition of an under- incur losses that will deplete all or capitalized enterprise and its compli- substantially all of its capital and ance with the mandatory capital res- there is no reasonable prospect that toration plan and other restrictions thefirmwillbecomeadequatelycapiapplicable to an undercapitalized talized; and entity; • the board of directors, shareholders, • restrict the ability of an undercapital- or members of the GSE have conized enterprise to grow in asset size, sented to the appointment. acquire additional companies, or en- HERA also requires that the FHFA gage in new activities; director place a GSE (even one then • allow the FHFA director to order a operating in a conservatorship) into a new election for the board of direcreceivership if the director determines tors of a significantly undercapitalin writing that ized enterprise, require a significantly undercapitalized enterprise to employ • the assets of the GSE are, and during qualified executive officers, or re- the preceding 60 calendar days have quire the dismissal of any director or been, less than the obligations of the officer who held office for more GSE to its creditors or others; or
Federal Legislative Developments 189 • the GSE is not, and during the pre- dance with the enterprises’ governing ceding60calendardayshasnotbeen, charter. generally paying its debts as they become due (other than debts subject Required Consultations to a bona fide dispute). Title I of HERA requires the FHFA If a GSE is placed into either conserdirector to consult with, and consider vatorship or receivership, HERA authotheviewsof,theChairmanoftheBoard rizes the FHFA to take over the busiof Governors of the Federal Reserve nessandoperationsofthetroubledGSE System with respect to the risks posed andchangemanagementoftheGSE.In by the GSEs to the financial system thecaseofaconservatorship,theFHFA prior to issuing any proposed or final is directed to seek to rehabilitate the regulations, orders, or guidelines retroubled entity for the benefit of its garding prudential management and shareholders and creditors by preservoperations standards, safe and sound ing the entity’s assets and improving its operations of, and capital requirements business operations in order to restore and portfolio standards applicable to, the entity to a sound and solvent condithe GSEs. The Act also requires the tion.Incontrast,inthecaseofareceivdirector to consult with the chairman ership, the FHFA must place the GSE regarding any decision to place a GSE into liquidation, and it has the ability to into conservatorship or receivership. determine claims of creditors against These consultation requirements expire the GSE. onDecember31,2009.Asnotedabove, HERA allows FHFA, as receiver, to FHFA Director James Lockhart conestablish a ‘‘bridge’’ entity to assume sulted with Federal Reserve Board the assets and liabilities of an FHLB in Chairman Bernanke prior to placing receivership. HERA also requires the FannieMaeandFreddieMacintosepa- FHFA director to organize a bridge rate conservatorships on September 7, entity (referred to in HERA as a 2008. limited-life regulated entity) if Fannie Mae or Freddie Mac are placed into a receivership. HERA provides that a Prudential Management and bridge entity established for Fannie Operation Standards Mae or Freddie Mac would immediately, and by operation of law, succeed HERA also requires that the FHFA to the charter of Fannie Mae or Freddie director establish standards for the Mac,asrelevant.Moreover,HERAspe- GSEs related to, among other things, cifically provides that the amount of the management of interest rate risk assets transferred from a failed enter- exposure; management of market risk; prise to the bridge entity must exceed adequacy and maintenance of liquidity the amount of liabilities transferred to and reserves; management of asset and the bridge entity. Together, these provi- investment portfolio growth; investsions help ensure that, if an enterprise ments and acquisitions of assets; overwere to be placed into a receivership, a all risk-management processes; and new, solvent entity would be estab- such other operational and managelished that could continue to fulfill the ment standards as the director deems enterprises’ important mission in accor- appropriate.
190 95th Annual Report, 2008 Increase in Conforming-Loan Limits eralmodificationstotheNationalHousing Act to improve the mortgage HERA also permanently increases the insuranceprogramsoftheFHA.Similar Fannie Mae and Freddie Mac conto the conforming-loan limits of Fannie forming-loan limits, which are the Mae and Freddie Mac, FHA conmaximumdollarsizeofamortgagethat forming-loan limits were increased by may be purchased by the enterprises. theEconomicStimulusActof2008and Earlier in 2008, the Economic Stimulus HERA. Effective January 1, 2009, the Act of 2008 increased, until December maximum size of a single-family mort- 31, 2008, the conforming-loan limit for gage eligible for FHA insurance is the mortgages on single-family residences greater of $417,000, or the lesser of to the greater of $417,000, or 125 per- 115 percent of the area median price or cent of the relevant area median home $625,500. In addition, HERA price (not to exceed $729,500). Effective January 1, 2009, HERA allows • increases from 3 percent to 3.5 per- Fannie Mae and Freddie Mac to pur- cent the down payment that a borchase single-family mortgages with a rower must make in cash or cash maximum origination balance of up to equivalentsonahomeinorderforthe the greater of $417,000, or the lesser of mortgage to be eligible for FHA 115 percent of the area median price or insurance; $625,500. Adjustments also were made • prohibits borrowers from receiving to the conforming-loan limits for two- any part of the required down payto-four-family residences. ment from the seller of the property, any other person who financially New Products and Activities benefits from the transaction, or any thirdpartyorentitythatisreimbursed Under HERA, Fannie Mae and Freddie by such a person or entity for provid- Mac must obtain the FHFA director’s ing the down payment assistance to prior approval before offering any new the borrower; product. In considering a request, the • increases, from 2.25 percent to directormustdeterminethattheproduct 3.0 percent, the maximum annual is consistent with the enterprise’s statumortgage insurance premium that the tory authority, is consistent with the FHA may collect; and safety and soundness of the enterprise • prohibits the secretary of HUD from or the mortgage finance system, and is taking any action, prior to October 1, in the public interest. The director also 2009, to implement the risk-based must request public comment on any premium pricing program that the new product approval request for secretaryhadpublishedintheFederal 30 days. The statute includes certain Register on May 13, 2008, or any exclusions from the definition of a new otherrisk-basedpremiumpricingproproducttoavoidundulyinterferingwith gram based on the borrower’s ‘‘decithe development of loan underwriting sion credit score’’ described in such systems and mortgage products offered Federal Register notice. by the enterprises. FHA Modernization HOPE for Homeowners HERA also includes the FHA Modern- As noted above, HERA also establishes ization Act of 2008, which makes sev- the HOPE for Homeowners Program
Federal Legislative Developments 191 (H4H Program), which is a voluntary existing mortgage at a potentially sigprogram designed to allow qualified, nificant write-down from its current at-risk mortgage borrowers to refinance principalbalanceand,thus,maysignifitheir existing mortgages into new mort- cantly benefit borrowers who are “ungage loans guaranteed by the FHA, derwater”—that is, owe more on their subjecttocertainconditionsandrestric- current mortgage than the value of their tions. FHA may insure eligible mort- home. HERA prohibits the new FHAgages under the H4H Program com- insured mortgage loan from exceeding mencing no earlier than October 1, 90 percent (or such higher percentage 2008, and the authority to insure new as the oversight board for the program mortgages expires on September 30, determines to be appropriate) of the 2011. The Emergency Economic Stabi- appraised value of the property serving lization Act of 2008, enacted on Octo- as security for the mortgage. The new ber3,2008,modifiedtheH4HProgram FHA-insured refinancing loan also may in several respects. The following outnot exceed 132 percent of the conlines the key elements of the H4H Proforming-loan limit for Fannie Mae that gram as amended. was in effect for 2007 for a property of applicable size. Borrower Eligibility Requirements Premiums. HERA requires that HUD To be eligible for the H4H Program, a collect an amount equal to 3 percent of borrower must have a debt-to-income the principal balance of the new H4H ratioofatleast31percentbeforeapply- mortgage as an upfront insurance preing for a H4H Program mortgage. The mium.Thisamountispaidbytheexistborrower must occupy the property as ing lender through a reduction in the his or her primary residence, and the amount paid to the lender upon refiborrower may not have an ownership nancing. The Act also requires borrowinterest in another residential property. ers that refinance into an H4H Program Accordingly, investors and investor mortgagetopaytoHUDanannualpreproperties are not eligible for the pro- mium equal to 1.5 percent of the gram. Additionally, to be eligible for amount of the outstanding mortgage theH4HProgram,aborrowermustcer- balance. tify that he or she did not intentionally default on the existing mortgage or any Release of previous mortgage liens. other debt, and has not knowingly or Participation in the H4H Program by willfully furnished material information borrowers, mortgagees, servicers, and known to be false for the purpose of investors is voluntary. However, all obtaining the existing mortgage. Mort- holders of outstanding mortgage liens gagors that have been convicted under onapropertytoberefinancedunderthe federal or state law for fraud in the past H4H Program must agree to accept the 10 years also are not eligible for this proceeds of the new FHA-insured refiprogram. nancingloanaspaymentinfullfortheir existing mortgages on the property and releaseallliensontheproperty.Inaddi- H4H Mortgage Requirements tion, all prepayment penalties and fees Loan-to-value and maximum loan associated with default or delinquency amount. The new FHA-insured mort- must be waived in order for an existing gage refinances an eligible borrower’s mortgage to be refinanced into a new
192 95th Annual Report, 2008 H4H Program mortgage. HERA also theH4HProgram.TheOversightBoard limits the ability of a person with a iscomposedofthesecretaryofHousing H4H Program mortgage to take a sec- and Urban Development, the Treasury ondlienonthemortgagedpropertydur- secretary, the Federal Reserve Board ing the first five years of the new H4H chairman, and the chairperson of the mortgage term. Board of Directors of the Federal Deposit Insurance Corporation, or the Loan term. HERA mandates that an respective designee of each such per- H4H Program mortgage may have a son. HERA further requires the Board term of not less than 30 years and must to, among other things, establish bearasinglerateofinterestthatisfixed requirementsandstandardsfortheH4H for the entire term of the mortgage, Program and prescribe regulations and thereby eliminating the potential for guidelines as may be necessary or futurepaymentshocksonthemortgage. appropriate to implement such require- First payment default. HERA prohibits ments and standards. The Oversight HUDfrompayinginsurancebenefitson Board published rules to implement the any mortgage where the borrower fails H4H Program in the Federal Register to make the first payment on the new on October 6, 2008, and January 7, H4H Program mortgage. 2009. Requirement to Share Equity Study of Auction or and Appreciation Bulk-Refinance Program HERAalsorequiresborrowersthatrefi- HERA also requires the Oversight nance into an H4H Program mortgage Board to conduct a study of the need to share any newly created equity and for, and efficacy of, an auction or bulkfuture appreciation in the property with refinancing mechanism to facilitate the HUD. Specifically, under HERA, bor- refinancing of existing residential mortrowers are required to share with HUD gages that are at risk for foreclosure aportionofanynewequityinthehome into mortgages insured under the H4H created as a result of the H4H Program. Program. The study must identify and Mortgagors also are required to share examine various options for mechawith HUD 50 percent of any future nisms under which lenders and servicproperty appreciation upon sale or dis- ers of such mortgages may make bids position of the property. HUD is autho- for forward commitments for such rized to offer subordinate mortgage lien insurance in an expedited manner. As holdersontheproperty,inexchangefor required by HERA, the Oversight releasing their lien, either (1) a share of Board submitted the study of auction or HUD’s 50 percent interest in future bulk-refinancing mechanisms to Conappreciation of the mortgaged property gress on September 29, 2008. or (2) an upfront payment in lieu of the right to receive a portion of HUD’s S.A.F.E. Mortgage Licensing Act interestintheproperty’sfutureappreci- AnotherpartofHERA—theSecureand ation, if any. Fair Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E. Act)—pro- Oversight Board vides for the establishment of a nation- HERA also establishes a Board of wide mortgage licensing system and Directors (Oversight Board) to oversee registry for the residential mortgage
Federal Legislative Developments 193 industry. The registry is intended to the state or federal registration system, improve the flow of information be- beforetheymayengageinloanoriginatween regulators, increase industry ac- tions. In connection with an application countability, enhance consumer protec- for licensing and registration, an inditions and information, and establish a vidual must, at a minimum, provide means by which residential mortgage information concerning the applicant’s loan originators would be required, to identity, including fingerprints and perthe extent possible, to act in the best sonal history and experience. An indiinterests of consumers. vidual may not receive a license or reg- The statute requires all states to istration if the individual fails to satisfy develop and maintain a system for certain criteria outlined in the statute. licensing and registering individuals TheS.A.F.E.Actalsooutlinestheminiengaged in mortgage loan originations. mum competence requirements for the PursuanttotheS.A.F.E.Act,thesestate pre-licensing education and testing licensing and registering systems must requirements for loan originators, as interact with the Nationwide Mort- well as for renewal of state-licensed gage Licensing System and Registry loan originators, which includes a con- (NMLSR), which is to be developed tinuing education requirement. and maintained by the Conference of In addition to provisions relating to State Bank Supervisors and the Ameri- registration and licensing, the S.A.F.E. can Association of Residential Mort- Act requires the HUD secretary to recgage Regulators. In addition, the ommend reforms to the Real Estate S.A.F.E. Act requires the federal bank- Settlement Procedures Act of 1974, and ing agencies, along with the Federal submit a preliminary report on the root Financial Institutions Examination causes of defaults and foreclosures of Council and the Farm Credit Adminis- home loans to Congress not later than tration, to jointly develop and maintain six months after the date of statute a system for registering employees of enactment. depository institutions, or regulated subsidiaries of depository institutions, Mortgage Disclosure as loan originators with the NMLSR. Improvement Act Such a system must be implemented within one year after the date of enact- Title X of HERA enacts the Mortgage ment of the S.A.F.E. Act, and is to take Disclosure Improvement Act (MDIA), into consideration, as may be appropri- which amends, in turn, portions of the ate, the same exceptions and require- Truth in Lending Act (TILA) to help ments set forth below for state-licensed ensurethataconsumerisprovidedwith loan originators. If by the end of a one- timely and meaningful disclosures in year period (or in limited cases a two- connection with certain extensions of year period) the secretary of HUD creditsecuredbytheconsumer’sdwelldetermines a state does not have an ing.EESA,enactedonOctober3,2008, adequate system of licensing and regis- alsoincludesseveralamendmentstothe tration, the S.A.F.E. Act requires the MDIA. secretary to establish and maintain a The MDIA, as amended, includes system for that state. mortgage refinancings among the types The S.A.F.E. Act also requires that of extensions of credit subject to early individuals obtain a license from a disclosures under TILA. The amendstate, and that they register with either ments to MDIA also modify the early
194 95th Annual Report, 2008 disclosure requirement of TILA so that of this authority. The central feature creditors must provide certain disclo- of EESA is the establishment of sures to borrowers no later than three the Troubled Assets Relief Program days after receiving an application and (TARP), through which the secretary is at least seven days prior to closing. authorized to purchase troubled assets Additional disclosures are required in from qualifying financial institutions cases of extensions of credit secured by to help maintain and promote fithe dwellings of consumers where the nancial stability. annual rates of interest or schedules of The EESA also includes several payments are variable. Moreover the important limitations and conditions MDIA requires that any disclosure designed to protect the interests of taxstatement that no longer accurately payers. For example, EESA generally reflects the annual percentage rate of requires that the secretary obtain warinterest should be replaced by an accu- rants or comparable debt instruments rate statement within three business from any financial institution from days before the date of transaction. The which the TARP acquires troubled statute also provides that consumers assets. In addition, and as described mustreceivethedisclosuresbeforepay- below, section 111 of EESA requires ing any fee related to the extension of that the secretary develop and impose credit. However, the statute allows a certain executive compensation restricconsumer to waive the timing require- tions on financial institutions from ment, in case of a bona fide personal which the TARP purchases troubled financial emergency, by providing a assets. Related provisions of EESA lender with a signed written request limit the ability of certain financial outlining such emergency and specifi- institutions that participate in TARP to cally requesting waiver of the timing deduct executive compensation exrequirement. penses for federal tax purposes. Some of the disclosure modifications EESA also includes several other codified in the MDIA were previously provisions affecting financial institurequired by regulations issued by the tions or the Federal Reserve, including Board in July 2008. The Board issued a a temporary increase in federal deposit notice of proposed rulemaking on insurance coverage and an acceleration December 10, 2008, to implement the of the effective date of a previously additional requirements included in the adoptedlegislativeamendmentthatper- MDIA. mits the Federal Reserve to pay interest on balances held at Federal Reserve Banks by depository institutions. Emergency Economic Stabilization Act of 2008 Troubled Assets Relief Program On October 3, 2008, President Bush signed into law the Emergency Eco- In light of the extraordinary events nomic Stabilization Act of 2008 occurring in the financial markets and (EESA) (Pub. L. No. 110-343), which the substantial risks such events posed provides the Treasury secretary with to financial stability and the U.S. econimportant new tools to help restore omy, Congress passed EESA to immeliquidity and stability to the financial diately provide the Treasury secretary system, and establishes several mecha- with the authority and facilities to nisms to oversee the implementation restoreliquidityandstabilitytotheU.S.
Federal Legislative Developments 195 financial system. EESA also provides institution having significant operations that the secretary should seek to use in the United States—including but not such authorities and facilities to limited to banks and other depository institutions—which is established and • protect home values, college funds, regulated under U.S. laws, or those of retirement and other savings any of its states, territories, or possesaccounts; sions. EESA also provides that, if Trea- • preserve homeownership; surypurchasestroubledassetsunderthe • promote jobs and economic growth; TARP, the secretary must establish a • maximize overall returns to tax- program to guarantee troubled assets payers; and originated or issued prior to March 14, • provide public accountability for the 2008. The secretary must collect premiexercise of such authority. ums for any guarantee issued under the programinanamountthatthesecretary deems necessary to meet the purposes In exercising this authority under outlinedinEESAandprovidesufficient EESA,theTreasurysecretarymustconreserves, based on an actuarial analysis, sultwiththeFederalReserveBoard,the to ensure taxpayers are fully protected. FDIC, the Comptroller of the Currency, Thepurchaseauthoritygrantedtothe the Director of the Office of Thrift secretary by EESA terminates on Supervision, the Chairman of the December31,2009,althoughthesecre- National Credit Union Administration tary may extend this date until October Board, and the HUD secretary. 3, 2010 upon submission of a written To assist in accomplishing these certification to Congress. However, the goals, EESA authorizes the Treasury authority of the secretary to hold any secretary to establish the TARP and troubled assets purchased prior to the purchase troubled assets from financial termination of authority, or to purchase institutionsonsuchtermsandsubjectto or fund the purchase of troubled assets such conditions as the secretary may under a commitment already entered establish in accordance with EESA. As into before the termination date, is not a general matter, the term ‘‘troubled subject to such termination. assets’’ is defined to include residential EESAauthorizesthesecretarytopurand commercial mortgages, and any chase or insure up to a maximum of securities, obligations, or other instru- $700 billion in troubled assets. Of this ments based on or related to such mortamount, $250 billion was made immegages, so long as they were issued or diately available for use when EESA originatedonorbeforeMarch14,2008. was enacted, and the remaining amount However, EESA also provides that the was made available in two separate term ‘‘troubled assets’’ shall also apply tranches of $100 billion and to any other financial instrument $350 billion. (including, for example, equity instruments)thatthesecretary,afterconsulta- Executive Compensation and tion with the Federal Reserve Board Compensation-Related Tax Provisions Chairman and notification to Congress, determines the purchase of which is As noted above, EESA establishes cernecessary to promote financial market tainexecutivecompensationrestrictions stability. EESA also generally defines a on financial institutions that sell ‘‘financial institution’’ to mean any troubled assets to the Treasury under
196 95th Annual Report, 2008 the TARP. Specifically, EESA requires tary termination or the institution’s that the secretary impose executive bankruptcy filing, insolvency, or compensation restrictions on a financial receivership. institution if the secretary directly (and Title III of EESA modifies the Internot through an auction process) pur- nal Revenue Code to provide special chases troubled assets from the institu- rulesforthetaxtreatmentofcompensation, if market prices for the assets are tion (including so-called ‘‘golden paranot available, and if the secretary chute’’payments)paidbyTARPrecipireceives a meaningful equity or debt ents to covered executives (as defined position in the institution as a result of in the EESA). Among other things, the transaction. These restrictions must financial institutions participating in the TARP and selling troubled assets to the • be designed to ensure that the com- TARP (on an aggregate basis) in excess pensation paid to senior executive of $300 million are prohibited, for a officers of the institution does not limited period, from deducting for fedprovide incentives to take unneces- eral tax purposes any remuneration in sary and excessive risks; excess of $500,000 to any covered executive. In addition, such financial • require the financial institution to institutions will be subject to a 20 perrecover any bonus or incentive comcent tax on certain ‘‘golden parachute’’ pensation paid to a senior executive payments provided to covered officer based on criteria that are later executives. proven to be materially inaccurate; and • prohibitany‘‘goldenparachute’’pay- Foreclosure Mitigation Efforts and ment to a senior executive officer Assistance to Homeowners during the period that the secretary EESA provides that, if Treasury acholdsanequityordebtpositioninthe quires mortgages, mortgage-backed financial institution. securities, and other assets backed by residential real estate under the TARP, For these purposes, the term ‘‘senior the Treasury secretary must implement executive officer’’ refers, in the case of aplanthatseekstomaximizeassistance a publicly held financial institution, to to homeowners and, considering net an individual who is one of the five present value to the taxpayers, encourhighest paid executives of the institu- age the servicers of underlying morttion as disclosed under regulations gages to take advantage of the HOPE issued under the Securities Exchange for Homeowners Program as well as Act of 1934 and, in the case of a non- other programs available to minimize public company, the counterparts of foreclosures.Indealingwithloanmodisuch individuals. fication requests under existing invest- If assets are purchased through an ment contracts, the secretary, where auction and the total amount of assets appropriate and after consideration of acquired from the institution exceeds net present value to the taxpayer, is certain quantitative levels, the secretary directed to consent to reasonable lossmust prohibit any new employment mitigation measures, including rate contract with a senior executive officer reductions or principal write-downs. from providing for a golden parachute Furthermore, the secretary must coordiin the event of the individual’s involun- nate with the FDIC, Board, FHFA,
Federal Legislative Developments 197 HUD, and other agencies that hold Oversight and Transparency troubled assets to identify opportunities Provisions for acquiring different classes of troubled assets, such as mortgage- Continuing Oversight, Auditing, and backed securities, in order to improve Reporting Requirements the loan modification and restructuring The EESA imposes several continuing processes and provide protections to reporting obligations on the Treasury bona fide tenants who are current on Department with respect to its investtheir rent. ments under the TARP. Section 114 of Additionally,EESArequiresthatdes- theEESArequiresTreasury,withintwo ignated ‘‘federal property managers’’ business days after an investment, to develop foreclosure prevention plans make available to the public, in elecforresidentialmortgagesandresidential tronic form, pricing and other informamortgage-backed securities that the tion about the investment. In addition, managers hold, own, or control. Such section 105(a) of EESA requires Treaplans must seek to maximize assistance sury to issue a tranche report approxifor homeowners and, considering net mately every 30 days, which must propresent value to the taxpayers, encour- vide information on, among other age the servicers of the underlying things, its actions taken during the covmortgages to take advantage of the ered period under the TARP and the HOPE for Homeowners Program. Gen- administrative expenses of the TARP. erally speaking, a ‘‘federal property Finally, for each additional aggregate manager’’ is defined to include the Treasury investment of $50 billion FHFA, the FDIC, and the Board, under the TARP, section 105(b) of the assuming that certain specific circum- EESA requires the Department to issue stances are present. The FHFA is a report that describes, among other deemed to be a federal property man- things, the transactions related to its ager only in its capacity as conservator additional incremental exposure, the for Fannie Mae and Freddie Mac, and pricing mechanism for each relevant the FDIC is considered a federal prop- transaction, a description of the chalerty manager in cases where residential lenges that remain in the financial system, and an estimate of the additional mortgage loans and mortgage-backed actions that may be necessary to securities are held by a bridge deposiaddress such challenges. tory institution established by the FDIC EESA also requires that the secretary in connection with the resolution of a provide to Congress no later than April failed insured depository institution. 30,2009,areportthatanalyzesboththe The Board is considered a federal propcurrent state of the regulatory system erty manager only with respect to any and its effectiveness in overseeing mortgageormortgage-backedsecurities financial market participants. This held, owned, or controlled by or on report must include recommendations behalf of a Reserve Bank, other than for improving the regulatory system. when such assets are held, owned, or controlled in connection with open- Special Inspector General market operations under section 14 of for the TARP the Federal Reserve Act or as collateral foranadvanceordiscountthatisnotin As an additional measure to increase default. transparency of TARP-related actions,
198 95th Annual Report, 2008 EESA provides for the establishment of This study must be provided to Conan Office of the Special Inspector Gen- gress no later than June 1, 2009. eral (Special IG) for the TARP, which must, among other things, conduct, Financial Stability Oversight Board supervise, and coordinate audits and EESA also establishes the Financial investigations of the purchase, guaran- Stability Oversight Board (FINSOB), a tee, management, and sale of troubled body comprising the Federal Reserve assets under the TARP. The Special IG Boardchairman;theTreasurysecretary; must provide certain designated comthe FHFA director; the Securities and mittees of Congress with periodic Exchange Commission chairman; and reportssummarizingtheactivitiesofthe the HUD secretary. The FINSOB is Special IG during the reporting period. authorized to review the policies imple- The Special IG, appointed by the Presimented by Treasury under TARP and dentbyandwiththeadviceandconsent make recommendations, as appropriate, of the Senate, also assumes inspector to the Treasury secretary regarding use general duties and responsibilities as of EESA authority. Additionally, the outlined under the Inspector General FINSOB must report suspected TARP- Act of 1978. related fraud, misrepresentations, or malfeasance to the Special IG or the Government Accountability Office U.S. attorney general. Furthermore, the FINSOB is autho- EESA provides authority to the Comprized to ensure, through appropriate troller General of the United States to means,thatthepoliciesimplementedby commence ongoing oversight of TARP theTreasurysecretaryareinaccordance activities and performance, including with the purposes of EESA, are in the examining TARP’s efficacy in meeting economic interests of the United States, the purposes of EESA. The comptroland are consistent with protecting taxler must furnish Congress, as well as payers.TheFINSOBmustmeetatleast the Special IG, with reports at least monthly and file a quarterly report with every 60 days. These reports are certain designated Congressional required to analyze, among other committees. things • the performance of the TARP in Congressional Oversight Panel meeting the purposes of the EESA, EESA also establishes a Congressional • the financial condition of the TARP, Oversight Panel to monitor the TARP • characteristics of transactions and and review the current state of the commitments entered into by the financial markets and the regulatory TARP, system.TheOversightPanelconsistsof • the efficiency of the TARP, and five members appointed by members of • the compliance of TARP, its agents, Congress in the manner specified in and representatives with applicable section 125 of EESA. The Oversight laws and regulations. Panel must submit reports to Congress The comptroller must also undertake every30daysthatdiscuss,amongother a study to determine the extent to things, the use by the Treasury secrewhich leverage and sudden deleverag- tary of EESA authority, the impact of ing of financial institutions served as a purchases made by the TARP on the factor in the current financial crisis. financial markets and financial institu-
Federal Legislative Developments 199 tions, the extent to which the informa- Act.ThissectionoftheFederalReserve tion made available on transactions Act permits the Federal Reserve to under the program has contributed to make secured loans to such persons in market transparency, the effectiveness unusual and exigent circumstances and of foreclosure mitigation efforts, and subject to certain additional conditions. the effectiveness of the program in The newly required reports must inminimizing long-term costs and maxi- clude the justification for exercising mizing the benefits to taxpayers. Addi- such authority, and discuss the specific tionally, EESA requires the Oversight terms of the action, as well as any Panel to submit a separate report ana- expected cost to taxpayers. In addition, lyzingthecurrentstateoftheregulatory while a loan under section 13(3) is outsystem and its effectiveness in provid- standing, the Board must submit periing oversight of financial market par- odic updates to designated congresticipants, including analysis of existing sional committees not less than every gaps in consumer protections and rec- 60 days. These periodic reports must ommendations for improvement. This address the status of the loan, the value separate report was submitted to Con- of collateral held by the Reserve Bank gress on January 20, 2009. which initiated the loan, and the projected cost to taxpayers. Other Provisions of Interest Margin Study Requirement Interest on Reserves Not later than June 1, 2009, the comp- Section 128 of EESA accelerated to troller must complete and submit to October1,2008,theeffectivedateofan designated congressional committees a amendment, previously adopted as part study regarding the extent to which of the Financial Services Regulatory leverage and sudden deleveraging of Relief Act of 2006, that authorizes the financial institutions was a factor Reserve Banks, in accordance with behind the financial crisis. The study Board regulations, to pay interest on must include an analysis of the roles balancesheldbyoronbehalfofdeposi- and responsibilities of the Board, the tory institutions at a Reserve Bank. SEC, the Treasury secretary, and other EESA also authorized the Board to federal banking agencies with respect lower the level of reserve requirements to monitoring these issues, analysis of on transaction accounts below the the authority of the Board to regulate ranges established by the Monetary leverage, including to what extent such Control Act of 1980. On October 9, authority has been used, and an 2008, the Board issued an interim final analysis of usage of margin authority rule implementing this new authority. by the Board, and any related recommendations. Section 13(3) Reporting Requirement Temporary Increase in Deposit Section 129 of EESA requires that the Insurance and FDIC Borrowing Board submit a report to designated Authority Congressional committees within seven days of authorizing any loan to an indi- As noted above, EESA provides for a vidual, partnership, or corporation temporary increase from $100,000 to under the emergency lending authority $250,000 in FDIC deposit insurance of section 13(3) of the Federal Reserve coverage for insured depository institu-
200 95th Annual Report, 2008 tions and NCUA share insurance cover- educational loans under TILA. The age for insured credit unions. This tem- Federal Reserve Board must adopt porary increase ends on December 31, regulations implementing HEOA’s dis- 2009. closure provisions, which require credi- Additionally, EESA allows the FDIC tors to provide a number of new disclotoborrowfromtheTreasuryamountsin sures about the terms and features of excess of that authorized under sections privateeducationalloans.Creditorswill 14(a) and 15(c) of the Federal Deposit also have to disclose information about Insurance Act and as necessary to carry federal student loan programs, which out this increase in deposit insurance may offer less costly alternatives. coverage. The new disclosures required by the HEOA would be incorporated into the Mark-To-Market Accounting segregated cost disclosures that creditors must provide under TILA. Cur- EESA authorizes the SEC to suspend rently, creditors integrate much of this application of the mark-to-market proinformation in credit agreements, along visions embodied in Statement Number with other contract terms. HEOA seeks 157 of the Financial Accounting Stanto highlight key information by includdards Board, if it determines that doing ing it on the TILA disclosure and so is necessary or appropriate in the requiring that the information be dispublic interest and consistent with the closed multiple times during the lendprotection of investors. Additionally, ing process. As a result, the TILA disthe SEC, in consultation with the Fedclosures for private educational loans eral Reserve Board and the Treasury will become longer and more detailed. secretary, must conduct a study to con- HEOA also requires the Board to sider (1) the effects of these mark-todevelop and test model disclosure market standards on the balance sheets forms, which the Board would publish of a financial institution, (2) the impact to encourage lenders to standardize disof such accounting on bank failures in closure format. 2008, (3) the extent to which such stan- HEOA defines ‘‘private educational dards affect the quality of information loans’’ as loans made expressly for available to investors, (4) the process postsecondary educational expenses, used by FASB in developing such stanexcluding loans made, insured, or guardards, and (5) whether alternative acanteed by the federal government. Gencountingstandardswouldbettersuitthe erally, creditors must furnish TILA cost industry. This study, including legisladisclosures before credit is extended. tive and administrative recommenda- Under HEOA, however, creditors will tions, was submitted to Congress on be required to furnish three sets of dis- December 30, 2008. closures for private educational loans. First, creditors must disclose the available loan rates and terms in an applica- Higher Education Opportunity tion or solicitation for a private educa- Act of 2008 tional loan. Creditors must also furnish On August 14, 2008, President Bush asecondsetofdisclosuresaftertheborsigned the Higher Education Opportu- rowerhasbeenapprovedforaloan,and nity Act of 2008 (HEOA) (Pub. L. No. afford the applicant at least 30 days in 11-315),whichincludesamendmentsto which to accept the loan. During this the disclosure requirements for private period, the creditor may not change the
Federal Legislative Developments 201 rate or terms (except for changes to a thename,emblem,ormascotofaneduvariable interest rate based on an cationalinstitutioninawaythatimplies index). If the consumer accepts the that the institution endorses the crediloan, the creditor must then furnish a tor’s loans. Some schools, however, third set of disclosures, after which the enter into ‘‘preferred lender’’ arrangeconsumer has three days in which to ments and explicitly agree to endorse cancel the loan. The creditor may not that creditor’s student loan product. disburse the loan funds until the three- HOEA restricts but does not prohibit day cancellation period expires. this practice. HEOA also contains restrictions for The Board issued a notice of prothe marketing of private student loans. posed rulemaking to implement these It prohibits private creditors from using provisions on March 11, 2009. Á
Records
205 Record of Policy Actions of the Board of Governors This report provides an account of prime mortgages. They are intended to actionstakenbytheBoardonquestions cover subprime mortgages (and generof policy in 2008 as implemented ally avoid covering prime mortgages) through (1) rules and regulations, by requiring mortgage loans to be re- (2) policy statements and other actions, ported if the rate spread is 1.5 percent- (3) special liquidity facilities and other age points or more for first liens and initiatives to address financial strains, 3.5 percentage points or more for secand (4) discount rates for depository ond liens. The amendments are effecinstitutions. All actions were approved tive October 1, 2009. by a unanimous vote of the Board Votesforthisaction:ChairmanBernanke, members, unless indicated otherwise. Vice Chairman Kohn, and Governors Full texts of the actions are available Warsh,Kroszner,andDuke. via the online version of the Annual Report, from the “Reading Rooms” on the Board’s FOIA web page, and on Regulation D request from the Board’s Freedom of Reserve Requirements of Information Office. Policy actions in Depository Institutions 2009 that affect actions approved in 2008 have been summarized through [Docket No. R-1334] March 31, 2009, in editorial notes. On October 3, 2008, the Board approved an interim final rule with Rules and Regulations request for comment to permit the Federal Reserve to begin paying interest on Regulation C depository institutions’ required reserve Home Mortgage Disclosure balances (held by the Reserve Banks to satisfy depository institutions’ reserve requirements)andexcessbalances(held [Docket No. R-1321] by the Reserve Banks in excess of On October 20, 2008, the Board required reserve and clearing balances). approved amendments to conform the The Financial Services Regulatory rules for reporting price information on Relief Act authorized the Federal Rehigher-priced loans with the definition serve to pay interest on such balances, of “higher-priced mortgage loans” beginning October 1, 2011, and the adopted by the Board for Regulation Z Emergency Economic Stabilization Act in July 2008. The new reporting thresh- accelerated the effective date to Octoolds for first-lien and subordinate-lien ber 1, 2008. The interest rates paid are loans are based on the rate spread determined by a formula based on the between a mortgage’s annual percent- target federal funds rate. The Board age rate (APR) and a survey-based es- also made minor changes to its timate of APRs currently offered on clearing-balance policy and the method
206 95th Annual Report, 2008 for recovering float costs. The interim (discussed under “Special Liquidity final rule is effective October 9, 2008. FacilitiesandOtherInitiatives”)withan exemption from the Board’s leverage On October 21, 2008, and November 4, and risk-based capital guidelines for 2008, the Board approved interim final asset-backed commercial paper held as ruleswithrequestsforcommenttoalter a result of participation in the facility. the formulas used for determining the The exemption is subject to safety and interest rates paid on excess balances soundness conditions. The interim final and on required reserves and excess rule is effective September 19, 2008, balances, respectively. and expires January 30, 2009, unless extended by the Board. On December 16, 2008, the Board approved an interim final rule to set the Votesforthisaction:ChairmanBernanke, interest rates on required reserve bal- Vice Chairman Kohn, and Governors ances and excess balances at 1⁄ 4 percent Warsh,Kroszner,andDuke. aftertheFederalOpenMarketCommittee established a target range for the Note: On January 27, 2009, the Board federal funds rate of 0 to 1⁄ 4 percent. approved final rules to conform with Therulealsoprovidesthatinterestrates the extension of the AMLF to October paid on those balances may be rates as 30, 2009. determined by the Board from time to [Docket No. R-1329] time rather than the rates in the regulation. The interim final rule is effective On December 13, 2008, the Board, act- December 23, 2008, and the revised ing with the Federal Deposit Insurance rates apply to maintenance periods Corporation, Office of the Comptroller beginning December 18, 2008. of the Currency, and Office of Thrift Supervision, approved a final rule that Votesfortheseactions:ChairmanBernanke, permits a banking organization to re- Vice Chairman Kohn, and Governors Warsh,Kroszner,andDuke. duce the amount of goodwill that it must deduct from tier 1 capital by the amount of any deferred tax liability Regulation H associated with that goodwill. The final Membership of rule is effective January 29, 2009, and State Banking Institutions may be applied, at the banking organiin the Federal Reserve System zation’s election, for purposes of the regulatory reporting period ending Regulation Y December 31, 2008. Bank Holding Companies Votesforthisaction:ChairmanBernanke, and Change in Bank Control Vice Chairman Kohn, and Governors Warsh,Kroszner,andDuke. [Docket No. R-1332] On September 19, 2008, the Board Regulation W approved an interim final rule with Transactions between request for comment to provide state Member Banks and Their Affiliates member banks or bank holding compa- [Docket No. R-1330] nies participating in the Asset-Backed Commercial Paper Money Market Mu- On September 14, 2008, the Board tual Fund Liquidity Facility (AMLF) approved an interim final rule with
Record of Policy Actions of the Board of Governors 207 request for comment to provide a tem- the extension of the AMLF to October porary exemption for member banks 30, 2009. from certain limitations in section 23A On October 5, 2008, the Board granted of the Federal Reserve Act and Regulaa request by a depository institution for tion W. The exemption increases the an exemption from the limits on transcapacity of member banks to enter into actions with affiliates under section securities-financing transactions with 23A of the Federal Reserve Act and their affiliates and is subject to safety Regulation W to allow the institution to and soundness conditions. The interim purchase assets from affiliated money final rule is effective September 14, market mutual funds under certain cir- 2008, and expires January 30, 2009, cumstances. The Board announced it unless extended by the Board. would consider similar requests from Votesforthisaction:ChairmanBernanke, depositoryinstitutionsundersimilarcir- Vice Chairman Kohn, and Governors cumstances. Warsh,Kroszner,andDuke. Votesforthisaction:ChairmanBernanke, Note: On January 27, 2009, the Board Vice Chairman Kohn, and Governors approved a final rule that extended the Warsh,Kroszner,andDuke. expiration date for the exemption to October 30, 2009. Regulation Y Bank Holding Companies [Docket No. R-1331] and Change in Bank Control On September 19, 2008, the Board [Docket No. R-1336] approved an interim final rule with On October 13, 2008, the Board request for comment to provide a temapproved an interim final rule with porary exemption for member banks request for comment to allow bank from certain provisions of sections 23A holding companies to include in their and23BoftheFederalReserveActand tier 1 capital without restriction the Regulation W to facilitate use of the senior perpetual preferred stock they Asset-Backed Commercial Paper issue to the Department of the Treasury Money Market Mutual Fund Liquidity (Treasury) under its capital purchase Facility (AMLF) (discussed under program. Treasury announced the pro- “Special Liquidity Facilities and Other gram, which was established under the Initiatives”). The exemption increases EmergencyEconomicStabilizationAct, the capacity of participating member on October 14, 2008. The interim final banks to purchase asset-backed comrule is effective October 17, 2008. mercial paper from affiliated money market mutual funds and is subject to Votesforthisaction:ChairmanBernanke, safety and soundness conditions. The Vice Chairman Kohn, and Governors Warsh,Kroszner,andDuke. interim final rule is effective September 19,2008,andexpiresJanuary30,2009, unless extended by the Board. Regulation Z Truth in Lending Votesforthisaction:ChairmanBernanke, Vice Chairman Kohn, and Governors Warsh,Kroszner,andDuke. [Docket No. R-1305] Note: On January 27, 2009, the Board On July 14, 2008, the Board approved approved a final rule to conform with comprehensive amendments under the
208 95th Annual Report, 2008 HomeOwnershipandEquityProtection that prohibit certain unfair or deceptive Actthatareintendedto(1)protectcon- credit card practices and improve consumers in the home mortgage market sumer disclosures in connection with fromunfair,abusive,ordeceptivemort- credit card accounts, other revolving gage lending and servicing practices; credit plans, and overdraft services. (2) preserve responsible lending and Among other changes, the amendments sustainable homeownership; (3) ensure to Regulation AA, which are adopted that advertisements for mortgage loans under the Federal Trade Commission provide accurate and balanced informa- Act, prohibit banks from (1) increasing tion and do not contain misleading or the rate on a pre-existing credit card deceptive representations; and (4) pro- balance (except under limited circumvide consumers with transaction- stances), (2) applying payments in specific disclosures early enough to excess of the minimum in a manner assist them in selecting a mortgage. that maximizes interest charges, and Among other changes, the final rule (3) imposing finance charges based on prohibits certain acts and practices in balances on days in the current billing connection with mortgages, particularly cycle and in the previous billing cycle, higher-priced mortgages; revises the a practice that is sometimes referred to disclosure requirements for mortgage as “two-cycle” billing. Amendments to advertisements; and revises the timing Regulation DD, which implements the requirements for providing disclosures Truth in Savings Act, address deposifor mortgages. The final rule is effec- tory institutions’ disclosure practices tive October 1, 2009, except for the for overdraft services. Amendments to requirement to establish escrow ac- Regulation Z, which implements the counts for taxes and insurance for Truth in Lending Act, revise the disclohigher-priced mortgage loans, which is sures consumers receive in connection effective April 1, 2010 (October 1, with their credit cards and other revolv- 2010, for such loans secured by manu- ing (non-home-secured) credit plans to factured housing). ensure that information is provided in a timely manner and in a form that is Votesforthisaction:ChairmanBernanke, readily understandable. The Regulation Vice Chairman Kohn, and Governors Warsh,Kroszner,andMishkin. AA and Regulation Z amendments are effective July 1, 2010, and the Regula- Regulation AA tion DD amendments are effective Unfair or Deceptive January 1, 2010. Acts or Practices Votesforthisaction:ChairmanBernanke, Vice Chairman Kohn, and Governors Regulation DD Warsh,Kroszner,andDuke. Truth in Savings Regulation Z Regulation GG Truth in Lending Prohibition on Funding of Unlawful Internet Gambling [Docket Nos. R-1314, R-1315, and R-1286] [Docket No. R-1298] On December 18, 2008, the Board On November 7, 2008, the Board approved comprehensive amendments approvedajointfinalruletoimplement
Record of Policy Actions of the Board of Governors 209 the Unlawful Internet Gambling En- if they meet particular conditions and forcement Act. Under the new regula- subject to a preference for U.S. citizens tion, promulgated with the Department over equally qualified noncitizens. The of the Treasury as required by the act, final rule is effective April 2, 2008. non-exempt U.S. financial institutions that participate in designated payment Votesforthisaction:ChairmanBernanke, Vice Chairman Kohn, and Governors systemsmustestablishpoliciesandpro- Warsh,Kroszner,andMishkin. cedures that are reasonably designed to prevent or prohibit payments to gambling businesses involved in unlawful Internet gambling. The final rule also Policy Statements provides non-exclusive examples of and Other Actions such policies and procedures. Compliance with the final rule is required by December 1, 2009. Statement to Servicers on Reporting of Loss Mitigation Votesforthisaction:ChairmanBernanke, of Subprime Mortgages Vice Chairman Kohn, and Governors Warsh,Kroszner,andDuke. On March 2, 2008, the Board approved a statement encouraging Federal Reserve−supervised financial institu- Rules of Practice for Hearings tions that service subprime mortgage loans to report their loss-mitigation [Docket No. R-1333] activities consistent with uniform standards and to consider using the HOPE On September 19, 2008, the Board NOW alliance’s loan-modification reapproved amendments to adjust the porting standards for subprime residenmaximum amount of the statutory civil tial mortgages. The Federal Deposit moneypenaltiesunderitsjurisdictionto Insurance Corporation, Office of the account for inflation, as required by the Comptroller of the Currency, Office of Debt Collection Improvement Act. The Thrift Supervision, and National Credit amendments are effective October 12, Union Administration issued similar 2008. statements to their supervised institutions. Votesforthisaction:ChairmanBernanke, Vice Chairman Kohn, and Governors Votesforthisaction:ChairmanBernanke, Warsh,Kroszner,andDuke. Vice Chairman Kohn, and Governors Warsh,Kroszner,andMishkin. Rules regarding Equal Opportunity Illustrations of Consumer Information for [Docket No. OP-1264] Hybrid Adjustable-Rate Mortgage Products On March 25, 2008, the Board approved the publication of an amend- [Docket No. OP-1292] ment to its Rules regarding Equal Opportunityasafinalrule.Undertherule, On April 15, 2008, the Board, acting certain noncitizen employees are eli- withtheFederalDepositInsuranceCorgibleforaccesstosensitiveinformation poration, Office of the Comptroller of
210 95th Annual Report, 2008 the Currency, Office of Thrift Supervi- Interagency Guidance on the sion, and National Credit Union Ad- Supervisory Review Process for ministration,approvedfinalillustrations Capital Adequacy (Pillar 2) of consumer information for certain related to the Implementation hybrid adjustable-rate mortgage prod- of the Advanced Approaches ucts. The illustrations are intended to Final Rule assist financial institutions in implementing the consumer protection provi- [Docket No. OP-1322] sions of the Interagency Statement on On July 14, 2008, the Board, acting Subprime Mortgage Lending issued in withtheFederalDepositInsuranceCor- July 2007. Financial institutions may poration, Office of the Comptroller of usetheillustrationsasprovided,change theCurrency,andOfficeofThriftSupertheir format, or tailor the information vision, approved interagency guidance to specific transactions or products. for banking organizations using the The illustrations are effective May 29, advanced approaches final rule of the 2008. new capital adequacy framework that is popularly known as Basel II. The ad- Votesforthisaction:ChairmanBernanke vanced approaches rule, which became and Governors Warsh, Kroszner, and Mishkin. Absent and not voting: Vice final on April 1, 2008, implements a ChairmanKohn. new risk-based capital framework that encompasses three “pillars.” The interagency guidance relates to pillar 2 (supervisory review of capital ade- Memorandum of Understanding quacy) and provides details about the with the Securities and Exchange agencies’ standards for ensuring that Commission on Information each institution subject to the advanced Sharing approaches rule has a rigorous process for assessing its overall capital ade- On July 7, 2008, the Board approved a quacy in relation to its risk profile and memorandumofunderstandingwiththe has a comprehensive strategy for main- Securities and Exchange Commission taining appropriate capital levels. that establishes a framework for col- Votesforthisaction:ChairmanBernanke, laborating, coordinating, and sharing Vice Chairman Kohn, and Governors informationinareasofcommonregula- Warsh,Kroszner,andMishkin. toryandsupervisoryinterest.Thememorandum states that such efforts concerning certain banking and securities Policy Statement on companies are important in maintaining Equity Investments in Banks effective oversight, promoting compli- and Bank Holding Companies ance with the banking and securities On September 19, 2008, the Board laws, fostering the stability of financial approved a policy statement to provide markets, and facilitating the effective additional guidance on the Board’s execution of monetary policy by the position on the types of minority equity Federal Reserve. investments in banks and bank holding companies that would not constitute Votesforthisaction:ChairmanBernanke, Vice Chairman Kohn, and Governors “control” for purposes of the Bank Warsh,Kroszner,andMishkin. Holding Company Act. The guidance
Record of Policy Actions of the Board of Governors 211 covers director representation, total sury (Treasury), to provide protection equity ownership, and consultations against unusually large losses on a deswithmanagementanddiscussestheper- ignated pool of Citigroup Inc. assets. missible extent of a noncontrolling in- The protection was one aspect of a vestment for each of these areas. The package of coordinated actions by the guidance also reiterates that control Board, FDIC, and Treasury (discussed determinationsarebasedonallthefacts under “Special Liquidity and Other and circumstances surrounding an in- Facilities”) that reflect the U.S. governvestor’s investment in and relationship ment’s commitment to supporting with a banking organization. financial market stability and restoring Votesforthisaction:ChairmanBernanke, vigorous economic growth. Vice Chairman Kohn, and Governors Votesforthisaction:ChairmanBernanke, Warsh,Kroszner,andDuke. Vice Chairman Kohn, and Governors Warsh,Kroszner,andDuke. Systemic-Risk Exceptions for Note: On January 15, 2009, the Board Federal Deposit Insurance approved a proposal to similarly invoke Corporation Guarantees the systemic-risk exception to allow the FDIC,withTreasury,toprovideprotec- On October 13, 2008, the Board tion against unusually large losses on a approved a proposal to broadly invoke designated pool of Bank of America the systemic-risk exception to the least- Corporation assets, as part of a package cost-resolution requirements in the Fed- of coordinated actions by the Board, eral Deposit Insurance Act. Under the FDIC, and Treasury. act, the Federal Deposit Insurance Corporation(FDIC)isgenerallyrequiredto resolve troubled depository institutions Interagency Statement on in a manner that is least costly to the Meeting the Needs of deposit insurance fund. Invoking the Creditworthy Borrowers systemic-risk exception allowed the FDICtotemporarilyprovideguarantees On November 5, 2008, the Board, actfor new senior debt issued by insured ing with the Federal Deposit Insurance depositoryinstitutionsandtheirholding Corporation, Office of the Comptroller companies and for non-interest-bearing of the Currency, and Office of Thrift transaction deposit accounts at insured Supervision, approved an interagency depository institutions. The FDIC prostatement to emphasize the need for vided the temporary guarantees in conbanking organizations and their supernection with the Department of the visors to work together to ensure that Treasury’s capital purchase program theneedsofcreditworthyborrowersare that was announced on October 14, being met during the ongoing period of 2008. financial and economic stress. The Votesforthisaction:ChairmanBernanke, statementencouragesbankingorganiza- Vice Chairman Kohn, and Governors tions to lend to creditworthy borrowers, Warsh,Kroszner,andDuke. engage in capital planning, work with On November 23, 2008, the Board borrowers to avoid preventable forecloapproved a proposal to invoke the sures, and structure compensation insystemic-risk exception to allow the centives to support prudent lending and FDIC,withtheDepartmentoftheTrea- discourage excessive risk-taking.
212 95th Annual Report, 2008 Votesforthisaction:ChairmanBernanke, depository institutions, a zero fee for Vice Chairman Kohn, and Governors collateralized daylight overdrafts, a Warsh,Kroszner,andDuke. 50-basis-point (annual rate) charge for uncollateralized daylight overdrafts, Memorandum of Understanding and a biweekly daylight-overdraft-fee with the Commodity Futures waiver of $150. The Board also ap- Trading Commission and the provedaninterimpolicychangeforfor- Securities and Exchange eign banking organizations that relates Commission on Credit Default to the calculation of the amount to be Swaps deducted from daylight-overdraft fees and early implementation of a stream- On November 14, 2008, the Board lined procedure for maximum daylightapproved a memorandum of underoverdraft capacity. The interim policy standing with the Commodity Futures changeiseffectiveMarch26,2009.The Trading Commission and the Securities other revisions will be effective in and Exchange Commission that reflects either late 2010 or early 2011; a spethe intent of the parties to cooperate, cific date will be announced at least 90 coordinate, and share information in days in advance. In addition, the Board carrying out their respective responsidecided not to pursue a proposal to bilities and exercising their respective change the daylight-overdraft posting authorities with regard to central counrules but stated that it will reconsider terparties for credit default swaps. The the proposal in the future. memorandum states that such efforts are important in maintaining effective Votesforthisaction:ChairmanBernanke, Vice Chairman Kohn, and Governors oversight; fostering stability in the mar- Warsh,Kroszner,andDuke. ket for credit default swaps and in the financial system as a whole; and pro- Interagency Questions moting compliance with banking, comand Answers regarding modities, and securities laws. Community Reinvestment Votesforthisaction:ChairmanBernanke, Vice Chairman Kohn, and Governors [Docket No. OP-1349] Warsh,Kroszner,andDuke. On December 17, 2008, the Board, acting with the Federal Deposit Insurance Policy on Payment System Risk Corporation, Office of the Comptroller of the Currency, and Office of Thrift [Docket Nos. OP-1345 and OP-1346] Supervision, approved a final notice of On December 13, 2008, the Board new and revised Interagency Questions approved revisions to part II of its Pol- and Answers regarding Community icyonPaymentSystemRisktoimprove Reinvestment.Amongothernewtopics, intraday liquidity management and pay- thequestionsandanswersprovideguidment flows for the banking system and ance on (1) consideration by the agento help mitigate the credit exposures of ciesofamajority-ownedfinancialinsti- Federal Reserve Banks from daylight tution’s activities in cooperation with a overdrafts. The revisions include a new minority- or women-owned financial approach that explicitly recognizes the institution or low-income credit union role of the central bank in providing and (2) how an institution can demonintraday balances and credit to healthy strate that investments in nationwide
Record of Policy Actions of the Board of Governors 213 communitydevelopmentfundsmeetthe Kohn, and Governors Warsh, Kroszner, geographic requirements of the Com- and Duke. munity Reinvestment Act. The agencies’ revisions to existing questions and answersinclude,asadditionalexamples Special Liquidity Facilities of community development services, foreclosure prevention programs for Term Securities Lending Facility low- or moderate-income homeowners On March 11, 2008, the Board and the and credit counseling to help low- or Federal Open Market Committee moderate-income borrowers avoid fore- (FOMC) approved the establishment of closure. The interagency questions and the Term Securities Lending Facility answers are effective January 6, 2009, (TSLF) to strengthen the financing and supersede all previously published position of primary dealers and foster questions and answers. improved conditions in financial mar- Votesforthisaction:ChairmanBernanke, kets more generally. Using an auction Vice Chairman Kohn, and Governors process, the facility lends up to Warsh,Kroszner,andDuke. $200 billion of Treasury securities to primary dealers for a term of 28 days Special Liquidity Facilities (previous practice was to lend overnight) in transactions secured by a and Other Initiatives pledge of other securities. Against the background of continued On July 24, 2008, the Board and the fragility in financial markets, the Board FOMCextendedtheirauthorizationsfor established special liquidity facilities the TSLF until January 30, 2009. and authorized other initiatives in 2008 On September 14, 2008, the Board and to address financial strains and support the FOMC broadened the collateral critical institutions. Unless otherwise accepted under the TSLF to include all indicated, the facilities and initiatives investment-grade debt securities. were established for the Federal ReserveBankofNewYorkandundersec- On November 24, 2008, the Board and tion 13(3) of the Federal Reserve Act, the FOMC extended their authorizawhich permits the Board, in unusual tionsfortheTSLFuntilApril30,2009. and exigent circumstances, to authorize Reserve Banks to extend credit to indi- Note: On January 27, 2009, the Board viduals, partnerships, or corporations and the FOMC extended their authorithatareunabletoobtainadequatecredit zations for the TSLF until October 30, accommodations from other banking 2009. institutions. Also unless otherwise indicated,allfacilitiesandinitiativesautho- Primary Dealer Credit Facility rized before August 31, 2008, were approved by the unanimous vote of On March 16, 2008, the Board Chairman Bernanke, Vice Chairman approved the establishment of the Pri- Kohn, and Governors Warsh, Kroszner, mary Dealer Credit Facility (PDCF) to and Mishkin. After that date, all facili- bolster market liquidity, promote orties and initiatives in 2008 were derly market functioning, and improve approved by the unanimous vote of theabilityofprimarydealerstoprovide Chairman Bernanke, Vice Chairman financing to participants in securitiza-
214 95th Annual Report, 2008 tion markets. Under the facility, over- TermAuctionFacility(TAF)loans,asa night loans to primary dealers may be complement to the previously estabcollateralized by a broad range of lished auctions for 28-day TAF loans. investment-grade debt securities. The Board had initially established the TAF in December 2007 to provide On July 24, 2008, the Board extended depositoryinstitutionswithafacilityfor its authorization for the PDCF until obtaining advances from their local January 30, 2009. Reserve Banks at interest rates determined through auctions. By increasing On September 14, 2008, the Board depository institutions’ access to fundbroadenedthecollateralacceptedbythe ing, the TAF supports the ability of PDCFtocloselymatchthetypesofcolsuch institutions to meet the credit lateral that may be pledged in the trineeds of their customers. The Board party funding arrangements of the authorized the TAF under section 10B major clearing banks. of the Federal Reserve Act, which permits (under certain terms and condi- On September 21, 2008, the Board tions) advances to individual member authorized extensions of credit to the banks. The Federal Open Market Com- U.K.broker-dealersubsidiariesofGoldmittee made coincident changes to its man Sachs, Morgan Stanley, and Merdollar-swap lines with several other rill Lynch and to the primary-dealer central banks to accommodate similar subsidiaries of these firms. Among auctions by those central banks of other terms and conditions, credit ex- 84-day dollar loans. tensions under these authorizations must be secured by the types of collateral accepted (1) at the PDCF, for the Asset-Backed Commercial Paper U.K. broker-dealer subsidiaries, and Money Market Mutual Fund (2) at the primary credit facility for Liquidity Facility depository institutions or at the PDCF, On September 19, 2008, the Board for the primary-dealer subsidiaries. approved the establishment of the On November 23, 2008, the Board Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity authorized extensions of credit to the Facility (AMLF) for the Federal London-based broker-dealer subsidiary Reserve Bank of Boston to provide of Citigroup Inc. under the same terms funding to U.S. depository institutions and conditions. and bank holding companies to help On November 24, 2008, the Board finance their purchases of high-quality extendeditsauthorizationforthePDCF asset-backed commercial paper from until April 30, 2009. money market mutual funds. The facility is designed to assist money funds Note: On January 27, 2009, the Board that hold such paper in meeting reextendeditsauthorizationforthePDCF demption demands from investors and until October 30, 2009. to foster liquidity in asset-backed commercial paper markets and money markets more generally. The Board autho- Term Auction Facility rized the AMLF under sections 13(3) On July 28, 2008, the Board approved and 10B of the Federal Reserve Act theestablishmentofauctionsfor84-day (section 10B permits, under certain
Record of Policy Actions of the Board of Governors 215 terms and conditions, advances to indi- Note: On January 27, 2009, the Board vidual member banks). extended its authorization for the CPFF until October 30, 2009. On November 24, 2008, the Board extended its authorization for the AMLF until April 30, 2009. Money Market Investor Note: On January 27, 2009, the Board Funding Facility extended its authorization for the AMLF until October 30, 2009. On October 21, 2008, the Board approved the establishment of the Commercial Paper Money Market Investor Funding Facil- Funding Facility ity (MMIFF) to support a private-sector On October 7, 2008, the Board initiative designed to provide liquidity approvedtheestablishmentoftheCom- to U.S. money market investors, thus mercial Paper Funding Facility (CPFF) increasing their ability to meet redempto provide a liquidity backstop to U.S. tion requests and their willingness to issuers of commercial paper (CP) invest in money market instruments. through a special-purpose vehicle Improved money market conditions in (SPV) that purchases three-month unse- turn enhance the ability of banks and cured and asset-backed CP directly other financial intermediaries to accomfrom eligible issuers. The CPFF re- modate the credit needs of businesses moves much of the risk that eligible and households. Under the facility, the issuerswillnotbeabletorollovertheir Federal Reserve provides senior sematuring CP, thereby encouraging in- cured funding to a series of privatevestors to engage in term lending in the sector special-purpose vehicles (SPVs). CP market. The CPFF is intended to Each SPV purchases eligible money improve liquidity in short-term funding marketinstrumentsfromeligiblemoney markets, thus increasing the availability market investors using financing from of credit for businesses and households. the facility and from the issuance of The SPV will stop purchasing CP on asset-backed commercial paper to April 30, 2009, unless the Board ex- investors. The SPVs will stop purchastendsthefacility,andtheSPVwillcon- ing money market instruments on April tinue to be funded by the Federal 30, 2009, unless the Board extends the Reserve until the underlying assets facility, and the SPVs will continue to mature. be funded by the Federal Reserve until the underlying assets mature. On October 13, 2008, the Board approved additional details regarding On December 24, 2008, the Board the CPFF’s implementation on October approved changes to the MMIFF that 27, 2008. (1) expand the set of eligible investors On December 25, 2008, the Board that may participate in the facility and approvedsettingtheinterestrateondis- (2) adjust several of the facility’s ecocountwindowloanstotheCPFF’sSPV nomic parameters to ensure that it reat the maximum rate within the target mains a viable source of backup liquidrange for the federal funds rate, if the ity for money market investors even if target federal funds rate is a range of money market interest rates are at low rates rather than a specific rate. levels.
216 95th Annual Report, 2008 Note: On January 27, 2009, the Board Other Initiatives extended its authorization for the MMIFF until October 30, 2009. The Bear Stearns Companies Inc. On March 14, 2008, the Board Term Asset-Backed Securities approved temporary emergency financ- Loan Facility ing for The Bear Stearns Companies On November 24, 2008, the Board Inc. through an arrangement with approved the establishment of the Term JPMorgan Chase & Co. Bear Stearns, a Asset-Backed Securities Loan Facility major investment bank and primary (TALF)tosupporttheissuanceofasset- dealer, was on the brink of failure after backed securities (ABS) collateralized losing the confidence of investors and by consumer and small business loans. finding itself without access to short- The facility is designed to increase term financing markets. The Board creditavailabilityandsupporteconomic judged that a disorderly failure of Bear activitybyfacilitatingrenewedissuance Stearns would threaten overall financial of consumer and small business ABS at stability and would most likely have more-normal interest rate spreads. The significant adverse implications for the TALF will lend up to $200 billion on a U.S. economy. nonrecourse basis to holders of certain Votesforthisaction:ChairmanBernanke, AAA-rated ABS. Using funds from the Vice Chairman Kohn, and Governors Troubled Asset Relief Program, the WarshandKroszner.Absentandnotvot- Department of the Treasury (Treasury) ing:GovernorMishkin. will provide $20 billion of credit pro- On March 16, 2008, the Board authotection to the Federal Reserve in con- rized a nonrecourse loan of up to nection with the facility. $30 billion that would be fully collateralized by a pool of Bear Stearns assets On December 19, 2008, the Board to facilitate JPMorgan’s acquisition of approved revisions to the terms and Bear Stearns. The acquisition was comconditions of the TALF. pleted on June 26, 2008. Note: On February 6, 2009, and February23,2009,theBoardapprovedfur- Provisional Lending to Fannie Mae therrevisionstotheTALF.OnMarch3, and Freddie Mac 2009, the Board and Treasury announcedthelaunchoftheTALFforeli- On July 13, 2008, the Board authorized gibleholdersofABSthatarebackedby lending to the Federal National Mortnewly and recently originated auto, gage Association (Fannie Mae) and the creditcard,andstudentloansandSmall Federal Home Loan Mortgage Corpora- Business Administration–guaranteed tion (Freddie Mac) if necessary. The small business loans. On March 19, authorization was made under section 2009,theBoardexpandedthesetofeli- 13(13) of the Federal Reserve Act, gible collateral for loans under the which permits (under certain terms and TALF to include ABS backed by conditions) advances to an individual, a mortgage-servicing advances, loans or partnership, or a corporation on obligaleases relating to business equipment, tions of the United States, and is inleases of vehicle fleets, and non-auto tendedtosupplementtheDepartmentof floorplanloans,andexpandedthelistof the Treasury’s existing lending authoreligible auto-related receivables. ityandtohelpensuretheabilityofFan-
Record of Policy Actions of the Board of Governors 217 nie Mae and Freddie Mac to promote promote market stability, and protect theavailabilityofhomemortgagecredit theinterestsoftheU.S.governmentand during a period of stress in financial taxpayers. They include a purchase of markets.Nolendingtookplace,andthe AIGequitybyTreasury,modifiedterms companies were placed in conservator- for the Federal Reserve’s existing AIG ship on September 7, 2008. liquidity facility, and two new Federal Reserve lending facilities that each support a distinct AIG portfolio of American International Group, Inc. mortgage-related securities. On September 16, 2008, the Board Note: On March 2, 2009, the Board approved, with the support of the and Treasury announced an additional Department of the Treasury (Treasury), restructuring for AIG, which continues a secured loan of up to $85 billion for to face significant challenges. The plan the American International Group, Inc. is intended to help stabilize the com- (AIG) to assist AIG in meeting its oblipany and, in turn, the financial system. gations as they become due and to facilitate a process under which it can Citigroup Inc. sell certain businesses in an orderly manner with the least possible disrup- On November 23, 2008, the Board tion to the overall economy. The condi- approved financing, if necessary, for tion of AIG, a large complex financial Citigroup Inc. that would backstop institution,haddeterioratedrapidly,and residual risk in a pool of approximately adisorderlyfailureofAIGwouldlikely $306 billion of Citigroup assets secured have systemic implications and poten- by residential and commercial real estially adverse effects on the economy. tate and certain other assets. Market The loan is subject to terms and condi- anxietyabouttheconditionofCitigroup tions that protect the interests of the had intensified, and concerns about the U.S. government and taxpayers. firm’s access to funding continued to mount. The residual financing was ap- On October 6, 2008, the Board autho- proved as part of a package of coordirized borrowing up to $37.8 billion in nated actions with the Department of securities from certain regulated U.S. the Treasury (Treasury) and the Federal insurance subsidiaries of AIG, in return Deposit Insurance Corporation (FDIC). for cash collateral. The authorization TheseactionsincludedTreasuryandthe applied to investment-grade fixed- FDIC providing (1) protection against income securities previously lent by the the possibility of unusually large losses insurance subsidiaries to third parties. on the Citigroup asset pool in return This facility was subsequently repaid for preferred shares of Citigroup and and terminated on December 12, 2008. (2) Treasury investing $20 billion in Citigroup under the Troubled Asset On November 7, 2008, the Board and Relief Program in return for additional Treasuryapprovedarestructuringofthe preferred shares. government’s financial support to AIG. The new measures are intended to Bank of America Corporation establish a more durable capital structure, resolve liquidity issues, facilitate Note: On January 15, 2009, the Board AIG’s execution of its plan to sell cer- approved an agreement with Bank of tain businesses in an orderly manner, America Corporation that is similar to
218 95th Annual Report, 2008 theCitigrouparrangementofNovember from 50 basis points, and announced a 2008. Under the agreement, Treasury temporary change to the Reserve and the FDIC will provide protection Banks’ discount window lending pracagainst the possibility of unusually tices to allow the provision of term large losses on a pool of approximately financingforaslongas90days.1These $118 billion of financial instruments, in changesremainedineffectattheendof return for preferred shares in Bank of 2008. In the remaining seven instances, America. If necessary, the Federal the Board reached its determinations on Reserve Bank of Richmond will pro- the primary credit rate recommendavide nonrecourse credit to Bank of tions of the Reserve Bank boards of America against this pool of financial directors in conjunction with the instruments. FOMC’s decisions to lower the target federal funds rate from 41⁄ 4 percent to a range of 0 to 1⁄ 4 percent. Monetary pol- Discount Rates for icy developments are reviewed more Depository Institutions fully in other parts of this report (see the section “Monetary Policy and Ecoin 2008 nomic Developments” and the minutes of FOMC meetings held in 2008). Under the Federal Reserve Act, the boards of directors of the Federal ReserveBanksmustestablishratesondis- Secondary and Seasonal Credit count window loans to depository institutionsatleastevery14days,subjectto Secondary credit is available in approreview and determination by the Board priate circumstances to depository instiof Governors. tutions that do not qualify for primary credit. The secondary credit rate is set at a spread above the primary credit Primary Credit rate. Throughout 2008, the spread was set at 50 basis points. Primary credit, the Federal Reserve’s Seasonalcreditisavailabletosmaller main lending program, is extended at a depository institutions to meet liquidity rate above the federal funds rate target needs that arise from regular swings in set by the Federal Open Market Comtheir loans and deposits. The rate on mittee (FOMC). It is typically made seasonal credit is calculated every two available, with minimal administration weeksasanaverageofselectedmoneyand for very short terms, as a backup market yields, typically resulting in a source of liquidity to depository institurate close to the federal funds rate tions that, in the judgment of the lendtarget. ingFederalReserveBank,areingener- At year-end, the secondary and seaally sound financial condition. sonal credit rates were 1 percent and During 2008, the Board approved 1.05 percent, respectively.2 eight reductions in the primary credit rate, bringing the rate from 43⁄ 4 percent to 1⁄ 2 percent. One of these reductions 1. The spread of the primary credit rate over came on March 16, when the Board the FOMC’s target rate is usually 100 basis points. In 2007, the Board had approved a narapproved a narrowing of the spread of rowingofthisspreadto50basispoints. the primary credit rate over the 2. Forcurrentandhistoricaldiscountrates,see FOMC’s target rate to 25 basis points, www.frbdiscountwindow.org/.
Record of Policy Actions of the Board of Governors 219 Term Auction Facility Credit Louis, effective January 23, 2008. The Board also approved identical actions In December 2007, the Federal Reserve subsequently taken by the directors of established a temporary Term Auction the Federal Reserve Banks of Atlanta Facility(TAF).UndertheTAF,theFedand Kansas City, effective January 24, eral Reserve auctions term funds to 2008. depositoryinstitutionsthatareingenerally sound financial condition and are Votesforthisaction:ChairmanBernanke, eligible to borrow under the primary Vice Chairman Kohn, and Governors credit program. The amount of each WarshandKroszner.Absentandnotvoting:GovernorMishkin. auction is determined in advance by the FederalReserve,andtheinterestrateon January 30, 2008. Effective this date, TAFcreditisdeterminedbythebidding theBoardapprovedactionstakenbythe process as the rate at which all bids can directors of the Federal Reserve Banks befulfilled,uptothemaximumauction of Boston, New York, Philadelphia, amount and subject to a minimum bid Cleveland, Atlanta, Chicago, Kansas rate. The Federal Reserve conducted City, and San Francisco to lower the regular autions of 28- and 84-day TAF rate on discounts and advances under credit in 2008.3 the primary credit program by 1⁄ 2 percentage point, to 31⁄ 2 percent. The same Votes on Changes to Discount decrease was approved for the Federal Rates for Depository Institutions Reserve Bank of St. Louis, effective January 31, 2008. The Board also ap- About every two weeks during 2008, proved identical actions subsequently theBoardapprovedproposalsbythe12 taken by the directors of the Federal ReserveBankstomaintaintheformulas Reserve Banks of Richmond, Minnefor computing the secondary and seaapolis, and Dallas, effective January 31, sonal credit rates as well as the auction 2008. method by which the TAF credit rate is set. Details on the eight actions by the Votesforthisaction:ChairmanBernanke, Vice Chairman Kohn, and Governors Board to approve changes in the pri- Warsh,Kroszner,andMishkin. mary credit rate are provided below. March 16, 2008. Effective this date, the January 22, 2008. Effective this date, Board approved an action taken by the theBoardapprovedactionstakenbythe directors of the Federal Reserve Bank directors of the Federal Reserve Banks of New York to lower the rate on disof Boston, New York, Philadelphia, counts and advances under the primary Cleveland, Richmond, Chicago, Minneapolis, Dallas, and San Francisco to credit program by 1⁄ 4 percentage point, lower the rate on discounts and adto 31⁄ 4 percent.4 The Board also approved identical actions subsequently vances under the primary credit protaken by the directors of the Federal gram by 3⁄ 4 percentage point, to 4 per- Reserve Banks of Boston, Cleveland, cent. The same decrease was approved Richmond, Chicago, Minneapolis, Kanfor the Federal Reserve Bank of St. 3. For more information on TAF auctions, 4. AsMarch16,2008,wasaSunday,thenew including minimum bid rates and the auction- primarycreditratefortheFederalReserveBank determined rates on TAF credit, see www. of New York was first applied on the next busifederalreserve.gov/monetarypolicy/taf.htm. nessday,Monday,March17.
220 95th Annual Report, 2008 sas City, and San Francisco, effective Philadelphia, Richmond, Minneapolis, March 17, 2008. and Dallas, effective May 1, 2008. Votesforthisaction:ChairmanBernanke, Votesforthisaction:ChairmanBernanke, Vice Chairman Kohn, and Governors Vice Chairman Kohn, and Governors Warsh,Kroszner,andMishkin. Warsh,Kroszner,andMishkin. October8,2008.Effectivethisdate,the March 18, 2008. Effective this date, the Board approved actions taken by the Board approved actions taken by the directors of the Federal Reserve Banks directors of the Federal Reserve Banks of Boston, New York, Philadelphia, of Boston, New York, Cleveland, Chi- Cleveland, Richmond, Atlanta, Chicago,KansasCity,andSanFranciscoto cago,Minneapolis,KansasCity,Dallas, lower the rate on discounts and adand San Francisco to lower the rate on vances under the primary credit prodiscounts and advances under the pric g e ra n m t. T by he 3⁄ B 4 p o e a r r c d e a n l t s a o ge ap p p o r i o n v t, e t d o i 2 d 1 e ⁄ 2 nt p ic e a rl mary credit program by 1⁄ 2 percentage actionssubsequentlytakenbythedirecpoint, to 13⁄ 4 percent. The same decrease was approved for the Federal tors of the Federal Reserve Banks of Reserve Bank of St. Louis, effective Richmond and Minneapolis, effective October 9, 2008. March 19, 2008. The Board also approved actions taken to lower the rate Votesforthisaction:ChairmanBernanke, on discounts and advances under the Vice Chairman Kohn, and Governors Warsh,Kroszner,andDuke. primary credit program by 1 percentage point,to21⁄ 2 percent,bythedirectorsof October 29, 2008. Effective this date, the Federal Reserve Bank of Dallas, theBoardapprovedactionstakenbythe effective March 18, 2008; the Federal directors of the Federal Reserve Banks ReserveBanksofAtlantaandSt.Louis, of Boston, New York, Cleveland, Chieffective March 19, 2008; and the Fed- cago,KansasCity,andSanFranciscoto eral Reserve Bank of Philadelphia, lower the rate on discounts and adeffective March 20, 2008. vances under the primary credit programby1⁄ 2 percentagepoint,to11⁄ 4 per- Votesforthisaction:ChairmanBernanke, cent. The same decrease was approved Vice Chairman Kohn, and Governors for the Federal Reserve Bank of St. Warsh,Kroszner,andMishkin. Louis, effective October 30, 2008. The Board also approved identical actions April 30, 2008. Effective this date, the subsequently taken by the directors of Board approved actions taken by the the Federal Reserve Banks of Philadeldirectors of the Federal Reserve Banks phia, Richmond, Minneapolis, and Dalof New York, Cleveland, Atlanta, Chilas, effective October 30, 2008; and the cago,KansasCity,andSanFranciscoto Federal Reserve Bank of Atlanta, effeclower the rate on discounts and adtive October 31, 2008. vances under the primary credit programby1⁄ 4 percentagepoint,to21⁄ 4 per- Votesforthisaction:ChairmanBernanke, cent. The same decrease was approved Vice Chairman Kohn, and Governors Warsh,Kroszner,andDuke. for the Federal Reserve Bank of St. Louis, effective May 1, 2008. The December 16, 2008. Effective this date, Board also approved identical actions theBoardapprovedactionstakenbythe subsequently taken by the directors of directors of the Federal Reserve Banks the Federal Reserve Banks of Boston, of New York, Cleveland, Richmond,
Record of Policy Actions of the Board of Governors 221 Atlanta, Chicago, Minneapolis, Kansas taken by the directors of the Federal City, and San Francisco to lower the Reserve Banks of Boston and Dallas, rate on discounts and advances under effective December 17, 2008; and the the primary credit program by 3⁄ 4 per- Federal Reserve Bank of Philadelphia, centage point, to 1⁄ 2 percent. The same effective December 18, 2008. decrease was approved for the Federal Reserve Bank of St. Louis, effective Votesforthisaction:ChairmanBernanke, December 17, 2008. The Board also Vice Chairman Kohn, and Governors approved identical actions subsequently Warsh,Kroszner,andDuke. Á
223 Minutes of Federal Open Market Committee Meetings The policy actions of the Federal Open mary of the reasons for their dissent is Market Committee, contained in the provided. minutes of its meetings, are presented Policy directives of the Federal Open in the Annual Report of the Board of Market Committee are issued to the Governors pursuant to the requirements Federal Reserve Bank of New York as of section 10 of the Federal Reserve the Bank selected by the Committee to Act. That section provides that the execute transactions for the System Board shall keep a complete record of Open Market Account. In the area of the actions taken by the Board and by domestic open market operations, the theFederalOpenMarketCommitteeon Federal Reserve Bank of New York all questions of policy relating to open operates under instructions from the market operations, that it shall record Federal Open Market Committee that therein the votes taken in connection take the form of an Authorization for Domestic Open Market Operations and with the determination of open market a Domestic Policy Directive. (A new policies and the reasons underlying Domestic Policy Directive is adopted at each policy action, and that it shall each regularly scheduled meeting.) In include in its annual report to Congress the foreign currency area, the Federal a full account of such actions. Reserve Bank of New York operates The minutes of the meetings contain underanAuthorizationforForeignCurthe votes on the policy decisions made rency Operations, a Foreign Currency at those meetings as well as a summary Directive, and Procedural Instructions of the information and discussions that with Respect to Foreign Currency led to the decisions. In addition, four Operations.1Changesintheinstruments times a year, starting with the October during the year are reported in the min- 2007 Committee meeting, a Summary utes for the individual meetings. ofEconomicProjectionsispublishedas an addendum to the minutes. The descriptions of economic and financial conditions in the minutes and the Summary of Economic Projections are based solely on the information that was available to the Committee at the 1. AsofJanuary1,2008,theFederalReserve time of the meetings. Bank of New York was operating under the Domestic Policy Directive approved at the De- Members of the Committee voting cember 11, 2007, Committee meeting. The other foraparticularactionmaydifferamong policyinstruments(theAuthorizationforDomesthemselves as to the reasons for their ticOpenMarketOperations,theAuthorizationfor votes; in such cases, the range of their Foreign Currency Operations, the Foreign CurrencyDirective,andProceduralInstructionswith views is noted in the minutes. When RespecttoForeignCurrencyOperations)ineffect members dissent from a decision, they asofJanuary1,2008,wereapprovedattheJanuareidentifiedintheminutesandasum- ary30−31,2007,meeting.
224 95th Annual Report, 2008 Meeting Held on Mr. Parkinson,3 Deputy Director, Divi- January 29–30, 2008 sion of Research and Statistics, BoardofGovernors A meeting of the Federal Open Market Mr. Clouse, Senior Associate Director, Committee was held in the offices of Division of Monetary Affairs, the Board of Governors of the Federal BoardofGovernors Reserve System in Washington, D.C., Ms. Liang and Messrs. Reifschneider on Tuesday, January 29, 2008 at 2:00 and Wascher, Associate Directors, p.m. and continued on Wednesday, Division of Research and Statis- January 30, 2008 at 9:00 a.m. tics,BoardofGovernors Ms. Barger3 and Mr. Greenlee,3 Asso- Present: ciate Directors, Division of Bank- Mr.Bernanke,Chairman ing Supervision and Regulation, Mr.Geithner,ViceChairman BoardofGovernors Mr.Fisher Mr.Kohn Mr. Gibson,3 Deputy Associate Direc- Mr.Kroszner tor, Division of Research and Sta- Mr.Mishkin tistics,BoardofGovernors Ms.Pianalto Mr.Plosser Mr. Dale, Senior Adviser, Division of Mr.Stern Monetary Affairs, Board of Gov- Mr.Warsh ernors Messrs. Evans, Lacker, and Lockhart, Mr.Oliner,SeniorAdviser,Divisionof and Ms. Yellen, Alternate Mem- Research and Statistics, Board of bers of the Federal Open Market Governors Committee Messrs. Durham and Perli, Assistant Messrs.Hoenig,Poole,andRosengren, Directors, Division of Monetary Presidents of the Federal Reserve Affairs,BoardofGovernors Banks of Kansas City, St. Louis, Mr. Blanchard, Assistant to the Board, andBoston,respectively Office of Board Members, Board Mr.Madigan,SecretaryandEconomist ofGovernors Ms.Danker,DeputySecretary Mr. Small, Project Manager, Division Mr.Skidmore,AssistantSecretary of Monetary Affairs, Board of Ms.Smith,AssistantSecretary Governors Mr.Alvarez,GeneralCounsel Mr.Baxter,DeputyGeneralCounsel Mr. Bassett,4 Senior Economist, Divi- Mr.Sheets,Economist sion of Monetary Affairs, Board Mr.Stockton,Economist ofGovernors Messrs. Connors, English, and Kamin, Mr. Doyle,4 Senior Economist, Divi- Ms. Mester, Messrs. Rosenblum, sion of International Finance, Slifman, Sniderman, Tracy, and BoardofGovernors Wilcox,AssociateEconomists Ms. Kusko,4 Senior Economist, Divi- Mr. Dudley, Manager, System Open sion of Research and Statistics, MarketAccount BoardofGovernors Mr. Struckmeyer,2 Deputy Staff Director, Office of Staff Director for Management, Board of Governors 3. Attended portion of the meeting relating to the analysis of policy issues raised by financial marketdevelopments. 4. Attended portion of the meeting relating to the economic outlook and monetary policy deci- 2. AttendedWednesday’ssession. sion.
Minutes of FOMC Meetings, January 225 Mr. Luecke, Senior Financial Analyst, FederalReserveBankofRichmond,as Division of Monetary Affairs, alternate. BoardofGovernors Sandra Pianalto, President of the Federal Mr. Driscoll, Economist, Division of Reserve Bank of Cleveland, with Monetary Affairs, Board of Gov- CharlesL.Evans,PresidentoftheFedernors eral Reserve Bank of Chicago, as alternate. Ms. Low, Open Market Secretariat Specialist, Division of Monetary Richard W. Fisher, President of the Federal Affairs,BoardofGovernors ReserveBankofDallas,withDennisP. Lockhart, President of the Federal Ms. Green, First Vice President, Fed- Reserve Bank of Atlanta, as alternate. eralReserveBankofRichmond Gary H. Stern, President of the Federal Messrs. Fuhrer and Judd, Executive Reserve Bank of Minneapolis, with Vice Presidents, Federal Reserve Janet L. Yellen, President of the Fed- Banks of Boston and San FraneralReserveBankofSanFrancisco,as cisco,respectively alternate. Messrs. Altig and Angulo,3 Mses. By unanimous vote, the following Hirtle3 and Mosser, Messrs. officers of the Federal Open Market Peters3 and Rasche, Senior Vice Presidents,FederalReserveBanks Committee were selected to serve until of Atlanta, New York, New York, the selection of their successors at the New York, New York, and St. first regularly scheduled meeting of the Louis,respectively Committee in 2009: Mr. Hakkio, Senior Adviser, Federal BenS.Bernanke Chairman ReserveBankofKansasCity TimothyF.Geithner ViceChairman Mr. Krane, Vice President, Federal BrianF.Madigan Secretaryand ReserveBankofChicago Economist DeborahJ.Danker DeputySecretary Mr. Weber, Senior Research Officer, David W. Skidmore Assistant Secretary Federal Reserve Bank of Minne- MichelleA.Smith AssistantSecretary apolis ScottG.Alvarez GeneralCounsel ThomasC.Baxter,Jr. DeputyGeneral In the agenda for this meeting, it was Counsel reported that advices of the election of RichardM.Ashton AssistantGeneral the following members and alternate Counsel members of the Federal Open Market D.NathanSheets Economist Committee for a term beginning Janu- DavidJ.Stockton Economist ary29,2008hadbeenreceivedandthat Thomas A. Connors, William B. English, these individuals had executed their Steven B. Kamin, Loretta J. Mester, oaths of office. Arthur J. Rolnick, Harvey Rosenblum, The elected members and alternate LawrenceSlifman,MarkS.Sniderman, JosephS.Tracy,andDavidW.Wilcox, members were as follows: AssociateEconomists Timothy F. Geithner, President of the Fed- By unanimous vote, the Committee eral Reserve Bank of New York, with madeafewamendmentstoitsrulesand Christine M. Cumming, First Vice President of the Federal Reserve Bank to the Program for Security of FOMC ofNewYork,asalternate. Information.Theamendmentsprimarily addressed the Committee’s practice of Charles I. Plosser, President of the Federal Reserve Bank of Philadelphia, with approving the minutes via notation Jeffrey M. Lacker, President of the vote, attendance at Committee meet-
226 95th Annual Report, 2008 ings, and access to Committee informa- Committee,shallbedeterminedbycompetition by System employees. tivebidding,afterapplyingreasonablelimi- By unanimous vote, the Federal tations on the volume of agreements with individualdealers. Reserve Bank of New York was sel- (c) To sell U.S. Government securities ected to execute transactions for the andobligationsthataredirectobligationsof, System Open Market Account. orfullyguaranteedastoprincipalandinter- Byunanimousvote,WilliamC.Dud- est by, any agency of the United States to leywasselectedtoserveatthepleasure dealers for System Open Market Account of the Committee as Manager, System under agreements for the resale by dealers of such securities or obligations in 65 busi- Open Market Account, on the undernessdaysorless,atratesthat,unlessotherstanding that his selection was subject wise expressly authorized by the Committo being satisfactory to the Federal tee, shall be determined by competitive Reserve Bank of New York. bidding, after applying reasonable limita- By unanimous vote, the Authoriza- tions on the volume of agreements with tion for Domestic Open Market Opera- individualdealers. tions was reaffirmed in the form shown 2. Inordertoensuretheeffectiveconduct below: ofopenmarketoperations,theFederalOpen Market Committee authorizes the Federal Reserve Bank of New York to lend on an Authorization for Domestic overnight basis U.S. Government securities Open Market Operations heldintheSystemOpenMarketAccountto (Reaffirmed January 29, 2008) dealers at rates that shall be determined by competitive bidding. The Federal Reserve 1. The Federal Open Market Committee Bank of New York shall set a minimum authorizes and directs the Federal Reserve lendingfeeconsistentwiththeobjectivesof Bank of New York, to the extent necessary the program and apply reasonable limitatocarryoutthemostrecentdomesticpolicy tionsonthetotalamountofaspecificissue directive adopted at a meeting of the Comthatmaybeauctionedandontheamountof mittee: securities that each dealer may borrow. The (a) To buy or sell U.S. Government Federal Reserve Bank of New York may securities,includingsecuritiesoftheFederal reject bids which could facilitate a dealer’s Financing Bank, and securities that are ability to control a single issue as deterdirect obligations of, or fully guaranteed as mined solely by the Federal Reserve Bank to principal and interest by, any agency of ofNewYork. the United States in the open market, from ortosecuritiesdealersandforeignandinter- 3. Inordertoensuretheeffectiveconduct national accounts maintained at the Federal ofopenmarketoperations,whileassistingin ReserveBankofNewYork,onacash,regu- the provision of short-term investments for lar, or deferred delivery basis, for the Sys- foreign and international accounts maintemOpenMarketAccountatmarketprices, tained at the Federal Reserve Bank of New and, for such Account, to exchange matur- YorkandaccountsmaintainedattheFederal ing U.S. Government and Federal agency Reserve Bank of New York as fiscal agent securities with the Treasury or the indi- of the United States pursuant to Section 15 vidual agencies or to allow them to mature of the Federal Reserve Act, the Federal withoutreplacement; Open Market Committee authorizes and (b) TobuyU.S.Governmentsecurities, directs the Federal Reserve Bank of New obligations that are direct obligations of, or York (a) for System Open Market Account, fully guaranteed as to principal and interest to sell U.S. Government securities to such by, any agency of the United States, from accountsonthebasessetforthinparagraph dealers for the account of the System Open l(a) under agreements providing for the Market Account under agreements for resalebysuchaccountsofthosesecuritiesin repurchase of such securities or obligations 65 business days or less on terms compain 65 business days or less, at rates that, rabletothoseavailableonsuchtransactions unlessotherwiseexpresslyauthorizedbythe in the market; and (b) for New York Bank
Minutes of FOMC Meetings, January 227 account, when appropriate, to undertake with such procedural instructions as the with dealers, subject to the conditions Committeemayissuefromtimetotime: imposedonpurchasesandsalesofsecurities A. To purchase and sell the following in paragraph l(b), repurchase agreements in foreigncurrenciesintheformofcabletrans- U.S.Governmentandagencysecurities,and fersthroughspotorforwardtransactionson to arrange corresponding sale and repur- theopenmarketathomeandabroad,includchase agreements between its own account ingtransactionswiththeU.S.Treasury,with and such foreign, international, and fiscal theU.S.ExchangeStabilizationFundestabagency accounts maintained at the Bank. lished by Section 10 of the Gold Reserve Transactions undertaken with such accounts Actof1934,withforeignmonetaryauthoriunder the provisions of this paragraph may ties, with the Bank for International Settleprovide for a service fee when appropriate. ments,andwithotherinternationalfinancial institutions: 4. In the execution of the Committee’s decision regarding policy during any inter- Canadiandollars Mexicanpesos meeting period, the Committee authorizes Danishkroner Norwegiankroner Euro Swedishkronor and directs the Federal Reserve Bank of Poundssterling Swissfrancs New York, upon the instruction of the Japaneseyen ChairmanoftheCommittee,toadjustsomewhat in exceptional circumstances the de- B. To hold balances of, and to have gree of pressure on reserve positions and outstanding forward contracts to receive or hence the intended federal funds rate. Any to deliver, the foreign currencies listed in suchadjustmentshallbemadeinthecontext paragraphAabove. of the Committee’s discussion and decision C. To draw foreign currencies and to at its most recent meeting and the Commit- permit foreign banks to draw dollars under tee’s long-run objectives for price stability the reciprocal currency arrangements listed in paragraph 2 below, provided that drawand sustainable economic growth, and shall ingsbyeitherpartytoanysucharrangement bebasedoneconomic,financial,andmoneshall be fully liquidated within 12 months tary developments during the intermeeting after any amount outstanding at that time period. Consistent with Committee practice, was first drawn, unless the Committee, the Chairman, if feasible, will consult with because of exceptional circumstances, spethe Committee before making any adjustcificallyauthorizesadelay. ment. D. To maintain an overall open posi- By unanimous vote, the Committee tion in all foreign currencies not exceeding approved the Authorization for Foreign $25.0 billion. For this purpose, the overall open position in all foreign currencies is Currency Operations with an amenddefined as the sum (disregarding signs) of ment to paragraph 1.D. regarding the net positions in individual currencies, exmaximum open position in all foreign cluding changes in dollar value due to forcurrencies. Accordingly, the Authoriza- eign exchange rate movements and interest tion for Foreign Currency Operations accruals.Thenetpositioninasingleforeign currency is defined as holdings of balances was adopted, as shown below: in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, Authorization for i.e., as the sum of these elements with due Foreign Currency Operations regardtosign. (Amended January 29, 2008) 2. The Federal Open Market Committee 1. The Federal Open Market Committee directs the Federal Reserve Bank of New authorizes and directs the Federal Reserve York to maintain reciprocal currency ar- Bank of New York, for System Open Mar- rangements (“swap” arrangements) for the ketAccount,totheextentnecessarytocarry System Open Market Account for periods outtheCommittee’sforeigncurrencydirec- up to a maximum of 12 months with the tiveandexpressauthorizationsbytheCom- following foreign banks, which are among mittee pursuant thereto, and in conformity thosedesignatedbytheBoardofGovernors
228 95th Annual Report, 2008 of the Federal Reserve System under Sec- eign government or agency thereof; buying tion 214.5 of Regulation N, Relations with such securities under agreements for repur- Foreign Banks and Bankers, and with the chaseofsuchsecurities;sellingsuchsecuriapproval of the Committee to renew such ties under agreements for the resale of such arrangementsonmaturity: securities; and holding various time and other deposit accounts at foreign institu- Amountof tions. In addition, when appropriate in conarrangement Foreignbank nectionwitharrangementstoprovideinvest- (millionsof dollarsequivalent) mentfacilitiesforforeigncurrencyholdings, U.S. Government securities may be pur- BankofCanada ................................2,000 chased from foreign central banks under BankofMexico ................................3,000 agreementsforrepurchaseofsuchsecurities within30calendardays. Any changes in the terms of existing swap arrangements, and the proposed terms of 6. All operations undertaken pursuant to any new arrangements that may be autho- the preceding paragraphs shall be reported rized, shall be referred for review and promptly to the Foreign Currency SubcomapprovaltotheCommittee. mitteeandtheCommittee.TheForeignCurrency Subcommittee consists of the Chair- 3. All transactions in foreign currencies man and Vice Chairman of the Committee, undertaken under paragraph 1.A. above the Vice Chairman of the Board of Govershall, unless otherwise expressly authorized nors, and such other member of the Board by the Committee, be at prevailing market as the Chairman may designate (or in the rates. For the purpose of providing an absenceofmembersoftheBoardservingon investment return on System holdings of the Subcommittee, other Board members foreign currencies or for the purpose of designated by the Chairman as alternates, adjusting interest rates paid or received in andintheabsenceoftheViceChairmanof connectionwithswapdrawings,transactions the Committee, his alternate). Meetings of with foreign central banks may be underthe Subcommittee shall be called at the takenatnon-marketexchangerates. request of any member, or at the request of 4. It shall be the normal practice to theManager,SystemOpenMarketAccount arrange with foreign central banks for the (“Manager”), for the purposes of reviewing coordination of foreign currency transac- recent or contemplated operations and of tions. In making operating arrangements consulting with the Manager on other matwith foreign central banks on System hold- ters relating to his responsibilities. At the ings of foreign currencies, the Federal request of any member of the Subcommit- Reserve Bank of New York shall not com- tee,questionsarisingfromsuchreviewsand mit itself to maintain any specific balance, consultations shall be referred for determiunlessauthorizedbytheFederalOpenMar- nation to the Federal Open Market Comket Committee. Any agreements or under- mittee. standings concerning the administration of 7. TheChairmanisauthorized: the accounts maintained by the Federal A. With the approval of the Commit- ReserveBankofNewYorkwiththeforeign tee, to enter into any needed agreement or banksdesignatedbytheBoardofGovernors understanding with the Secretary of the under Section 214.5 of Regulation N shall Treasuryaboutthedivisionofresponsibility be referred for review and approval to the for foreign currency operations between the Committee. SystemandtheTreasury; 5. Foreign currency holdings shall be B. To keep the Secretary of the Treainvested to ensure that adequate liquidity is sury fully advised concerning System formaintainedtomeetanticipatedneedsandso eign currency operations, and to consult that each currency portfolio shall generally withtheSecretaryonpolicymattersrelating haveanaveragedurationofnomorethan18 toforeigncurrencyoperations; months (calculated as Macaulay duration). C. From time to time, to transmit Such investments may include buying or appropriate reports and information to the sellingoutrightobligationsof,orfullyguar- National Advisory Council on International anteed as to principal and interest by, a for- MonetaryandFinancialPolicies.
Minutes of FOMC Meetings, January 229 8. Staff officers of the Committee are nationalMonetaryFundregardingexchange authorized to transmit pertinent information arrangementsunderIMFArticleIV. on System foreign currency operations to By unanimous vote, the Procedural appropriateofficialsoftheTreasuryDepartment. Instructions with Respect to Foreign CurrencyOperationswerereaffirmedin 9. All Federal Reserve Banks shall parthe form shown below: ticipate in the foreign currency operations for System Account in accordance with paragraph3G(1)oftheBoardofGovernors’ Procedural Instructions StatementofProcedurewithRespecttoFor- with respect to eign Relationships of Federal Reserve Foreign Currency Operations BanksdatedJanuary1,1944. (Reaffirmed January 29, 2008) By unanimous vote, the Foreign Currency Directive was reaffirmed in the In conducting operations pursuant to the authorization and direction of the Federal form shown below: Open Market Committee as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, Foreign Currency Directive the Federal Reserve Bank of New York, (Reaffirmed January 29, 2008) through the Manager, System Open Market Account (“Manager”), shall be guided by 1. System operations in foreign curren- the following procedural understandings ciesshallgenerallybedirectedatcountering with respect to consultations and clearances disorderly market conditions, provided that with the Committee, the Foreign Currency market exchange rates for the U.S. dollar Subcommittee, and the Chairman of the reflect actions and behavior consistent with Committee. All operations undertaken pur- IMFArticleIV,Section1. suant to such clearances shall be reported promptlytotheCommittee. 2. To achieve this end the System shall: A. Undertake spot and forward pur- 1. TheManagershallclearwiththeSubchasesandsalesofforeignexchange. committee (or with the Chairman, if the B. Maintain reciprocal currency Chairmanbelievesthatconsultationwiththe (“swap”)arrangementswithselectedforeign Subcommittee is not feasible in the time centralbanks. available): C. Cooperate in other respects with A. Anyoperationthatwouldresultina central banks of other countries and with change in the System’s overall open posiinternationalmonetaryinstitutions. tion in foreign currencies exceeding $300 milliononanydayor$600millionsincethe 3. Transactions may also be undertaken: mostrecentregularmeetingoftheCommit- A. To adjust System balances in light tee. ofprobablefutureneedsforcurrencies. B. Anyoperationthatwouldresultina B. To provide means for meeting SyschangeonanydayintheSystem’snetpositemandTreasurycommitmentsinparticular tion in a single foreign currency exceeding currencies,andtofacilitateoperationsofthe $150 million, or $300 million when the ExchangeStabilizationFund. operation is associated with repayment of C. For such other purposes as may be swapdrawings. expresslyauthorizedbytheCommittee. C. Anyoperationthatmightgeneratea 4. System foreign currency operations substantial volume of trading in a particular shallbeconducted: currency by the System, even though the A. In close and continuous consulta- change in the System’s net position in that tion and cooperation with the United States currencymightbelessthanthelimitsspeci- Treasury; fiedin1.B. B. In cooperation, as appropriate, with D. Any swap drawing proposed by a foreignmonetaryauthorities;and foreign bank not exceeding the larger of (i) C. In a manner consistent with the $200millionor(ii)15percentofthesizeof obligationsoftheUnitedStatesintheInter- theswaparrangement.
230 95th Annual Report, 2008 2. The Manager shall clear with the ticeably, with private payroll employ- Committee (or with the Subcommittee, if ment posting a small decline in Decemthe Subcommittee believes that consultation ber and the unemployment rate rising. withthefullCommitteeisnotfeasibleinthe Readings on both headline and core time available, or with the Chairman, if the inflation increased in recent months, Chairmanbelievesthatconsultationwiththe Subcommittee is not feasible in the time although the twelve-month change in available): prices of core personal consumption A. Anyoperationthatwouldresultina expenditures in December was about change in the System’s overall open posi- the same as its year-earlier value. tion in foreign currencies exceeding $1.5 On average, private nonfarm payroll billionsincethemostrecentregularmeeting employment in November and DecemoftheCommittee. B. Any swap drawing proposed by a ber rose at only about half of the averforeign bank exceeding the larger of (i) age pace seen from July to October. $200millionor(ii)15percentofthesizeof Over 2007 as a whole, the deterioration theswaparrangement. in labor demand was most pronounced 3. The Manager shall also consult with in the construction and financial activithe Subcommittee or the Chairman about ties industries, which had been hardest proposedswapdrawingsbytheSystemand hitbythedifficultiesinthehousingand about any operations that are not of a rou- mortgage markets. Manufacturing emtinecharacter. ployment declined yet again in Decem- The Manager of the System Open ber, while the decrease in employment Market Account reported on recent in retail trade nearly reversed the sizdevelopments in foreign exchange mar- able increase in that sector recorded in kets.Therewerenoopenmarketopera- November. Aggregate hours of productions in foreign currencies for the Sys- tion or nonsupervisory workers were tem’s account in the period since the unchanged in December. The unemprevious meeting. The Manager also ployment rate rose to 5.0 percent in reported on developments in domestic December after having been at or near financial markets and on System open 4.7 percent since September. market operations in government secu- Industrial production declined in the rities and federal agency obligations fourth quarter, as a drag from motor during the period since the previous vehicles and construction-related indusmeeting. By unanimous vote, the Com- tries more than offset a positive contrimittee ratified these transactions. bution from other industries. Output in The information reviewed at the Jan- high-tech industries moderated in the uary meeting, which included the ad- fourth quarter, largely because of a vance data on the national income and deceleration in production of computers product accounts for the fourth quarter, and semiconductors. Utilities output indicated that economic activity had climbed for a second consecutive quardecelerated sharply in recent months. ter, and mining output was boosted by The contraction in homebuilding inten- increases in natural gas extraction and sified in the fourth quarter, the growth in crude oil. in consumer spending slowed, and sur- The rise in real consumer spending vey measures of both consumer and moderated in the fourth quarter, with business sentiment were at low levels. outlays on non-auto consumer goods In addition, industrial production con- increasing weakly. Spending on sertracted in the fourth quarter. Conditions vices rose solidly in November (the in the labor market deteriorated no- most recent month available), led by
Minutes of FOMC Meetings, January 231 energy services and commissions paid last quarter after having posted sizable to stockbrokers, but warmer-than-usual gains over the summer. Orders and temperatures in December likely shipments rose somewhat in the fourth damped expenditures for energy ser- quarter, but imports in the first two vicesinthatmonth.Salesoflightmotor months of the quarter were below their vehicles were moderate during the average in the third quarter. Nonresifourth quarter. Real disposable personal dential construction remained vigorous income was little changed in the fourth in the fourth quarter. However, indicaquarter, held down by higher consumer tors of future spending in this sector energy prices. Also, the wealth-to- pointed to a slowdown in coming income ratio ticked down in the third months, with a decline in architectural quarter, and appeared likely to decline billings, a rise in retail-sector vacancy again in the fourth quarter, as equity rates, and survey reports that contracprices had fallen since the end of the tors were experiencing more difficulty third quarter and available indicators in obtaining funding. More generally, pointed to continued declines in house surveys of business conditions and senprices in the fourth quarter. In Decem- timent deteriorated and suggested that ber, readings on consumer sentiment capital spending would be reduced in remainedatrelativelylowlevelsbyhis- the near term. torical standards. Real nonfarm inventory investment Both single-family housing starts and excluding motor vehicles appeared to permit issuance fell in December. have stepped up from its average rate Meanwhile, multifamily housing starts over the first three quarters of 2007. In plunged in December, but permit issu- November, the ratio of manufacturing ance pointed to a rebound in multifam- and trade book-value inventories (exily starts in the near term. New home cluding motor vehicles) to sales ticked salesdroppedinNovemberandDecem- down. ber after having held relatively steady The U.S. international trade deficit since August, keeping inventories of widened slightly in October and then unsold homes at elevated levels. Sales more substantially in November, as of existing homes also moved down in increases in imports in both months Decemberbut,onbalance,haddeclined more than offset increases in exports. less in recent months than sales of new Theincreasesinimportsalmostentirely homes. Demand for housing through reflected a jump in the value of imthe end of 2007 likely continued to be ported oil. Non-oil goods imports were restrained by tight financing conditions boosted by a large increase in imports for jumbo and nonprime mortgages. of consumer goods and small increases Real spending on equipment and in several other categories, which more software rose at a sluggish rate in the than offset a steep decline in imports of fourth quarter after having posted a non-oil industrial supplies. Imports of solid increase in the third quarter. Sales automotive products and capital goods of medium and heavy trucks edged up recorded modest gains, with the inafter falling to a four-year low. Spend- crease in capital goods primarily reingonhigh-techcapitalgoodsincreased flecting a jump in imports of telecomat a moderate pace over the second half munications equipment. Imports of of last year. Outside of the transporta- services grew strongly. Exports in both tion and high-tech sectors, spending on months were boosted by higher exports equipment appeared to have declined of services. Exports of industrial sup-
232 95th Annual Report, 2008 plies also recorded a strong gain, aided mixed. Economic activity appeared to byalargeincreaseinexportsoffuelsin be strong in Argentina in both the third November. Higher exports of semicon- and fourth quarters. ductors, aircraft, and machinery pushed In the United States, headline conup exports of capital goods, while sumer price inflation stepped up noticeexports of agricultural goods increased ably in November and December from only slightly following a large jump in thelowratespostedinthesummer.Part the third quarter. In contrast, exports of oftheincreasereflectedtherapidrisein consumer goods fell from their third- energy prices, but prices of core perquarter level. sonal consumption expenditures (PCE) Economic growth in the advanced also moved up faster in those months foreign economies appeared to have than they had earlier in the year. The slowedinthefourthquarter,withrecent pickup in core PCE inflation over the data on household expenditures and second half of 2007 reflected an accelretail sales weakening on balance and eration in prices that had been unusuconsumers and businesses considerably ally soft earlier in the year, such as less upbeat about growth prospects. In prices for apparel, prescription drugs, Japan, the estimate of real GDP growth and nonmarket services. For the year as in the third quarter was revised down, a whole, core PCE prices increased at and business sentiment declined in aboutthesamerateastheyhadin2006. December amidst concerns about high Household survey measures of expectaoil prices. In the euro area, retail sales tions for year-ahead inflation picked up growth declined in October and Nov- in November and remained at that level ember, and consumer and business in December and January. Households’ surveys in November and December longer-term inflation expectations rose pointed to economic weakness. In the in December but ticked down in Janu- United Kingdom, although real GDP ary. Average hourly earnings increased grew solidly in the fourth quarter, the faster in November and December than estimate of third-quarter real GDP they had in October, although over the growth was revised down. In Canada, twelve months that ended in December, indicatorssuggestedthatgrowthineco- this wage measure rose a bit more nomic activity moderated in the fourth slowly than the elevated pace posted in quarter. Private employment shrank in 2006. December after having posted very At its December meeting, the FOMC strong growth in November. Incoming lowered its target for the federal funds data on emerging-market economies rate 25 basis points, to 41⁄ 4 percent. In pointed, on balance, to a slowing of addition, the Board of Governors apgrowth in the fourth quarter. Overall, proved a decrease of 25 basis points in growth in emerging Asia appeared to the discount rate, to 43⁄ 4 percent, leavhave moderated somewhat in the fourth ing the gap between the federal funds quarter,withtradebalancesdecliningin rate target and the discount rate at several countries as exports slowed. 50 basis points. The Committee’s state- Readings on economic activity in Latin ment noted that incoming information America were more mixed. Incoming suggested that economic growth was data suggested that growth slowed in slowing,reflectingtheintensificationof Mexico in the fourth quarter. In Brazil , thehousingcorrectionandsomesoftenthird-quartergrowthwassolid,butindi- ing in business and consumer spending. cators for the fourth quarter were Moreover, strains in financial markets
Minutes of FOMC Meetings, January 233 had increased in recent weeks. The ness and additional financial strains Committee indicated that its action, would likely require an easier stance of combined with the policy actions taken policy. The Committee’s decision to earlier, should help promote moderate reduce the target federal funds rate growth over time. Readings on core 75 basis points on January 22 surprised inflation had improved modestly during market participants and led investors to the year, but elevated energy and com- mark down further the path of policy modity prices, among other factors, over the next few months. Consistent might put upward pressure on inflation. with the shift in the economic outlook, In this context, the Committee judged the revision in policy expectations, and that some inflation risk remained and the reduction in the target federal funds said that it would continue to monitor rate, yields on nominal Treasury couinflation developments carefully. Re- pon securities declined substantially cent developments, including the dete- over the period since the December rioration in financial market conditions, FOMC meeting. The yield curve steephad increased the uncertainty surround- ened somewhat further, with the twoing the outlook for economic growth year yield dropping more than the and inflation. The Committee stated ten-yearyield.Near-terminflationcomthat it would continue to assess the pensation increased in early January effects of financial and other develop- amid rising oil prices, but it retreated in ments on economic prospects and later weeks, along with oil prices, and would act as needed to foster price sta- declined, on net, over the period. bility and sustainable economic growth. Conditions in short-term funding Over the intermeeting period, the marketsimprovednotablyovertheinterexpected path of monetary policy over meeting period, but strains remained. the next year as measured by money Spreads of rates on securities in intermarketfuturesratestilteddownsharply, bank funding markets over risk-free primarily in response to softer-than- rates narrowed somewhat following the expected economic data releases. The announcementoftheTAFonDecember Committee’s action at its December 12 and eased considerably after yearmeetingwaslargelyanticipatedbymar- end, although they remained at someket participants, although some inves- what elevated levels. Spreads of rates tors were surprised by the absence of on asset-backed commercial paper over any indication of accompanying mea- risk-free rates also fell, on net, and the sures to address strains in term funding level of such paper outstanding inmarkets. Some of that surprise was creased in the first two weeks of Janureversed the next day, following the ary for the first time since August. In announcementofaTermAuctionFacil- longer-term corporate markets, yields ity (TAF) and associated swap lines on investment-grade corporate bonds withtheEuropeanCentralBankandthe fell less than those on comparable- Swiss National Bank. The subsequent maturity Treasury securities, while release of the minutes of the meeting yields on speculative-grade bonds rose elicited little market reaction. However, considerably. As a result, corporate investors did mark down the expected bond spreads climbed to their highest path of policy in response to speeches levels since early 2003, apparently by Federal Reserve officials; the reflecting increased concern among inspeeches were interpreted as suggesting vestors about the outlook for corporate that signs of broader economic weak- credit quality over the next few years.
234 95th Annual Report, 2008 Nonetheless, gross bond issuance in institutions offered attractive deposit December remained strong. Commer- rates to secure funding. In contrast, liqcial bank credit expanded briskly in uid deposits continued to increase December, supported by robust growth weakly and currency contracted noticein business loans and in nonmortgage ably, the latter apparently reflecting an loans to households, and in the face of ongoingtrendinoverseasdemandaway survey reports of tighter lending condi- fromU.S.dollarbanknotesandtowards tions. Over the intermeeting period, the euro and other currencies. spreads on conforming mortgages over Intheforecastpreparedforthismeetcomparable-maturity Treasury securi- ing, the staff revised up slightly its estities remained about flat, as did spreads mated increase in aggregate economic on jumbo mortgages, although credit activity in the fourth quarter of 2007 availability for jumbo-mortgage bor- but revised down its projected increase rowers continued to be tight. Broad for the first half of 2008. Although data stock price indexes fell over the inter- on consumer spending and nonresidenmeeting period on perceptions of a tial construction activity for the fourth deteriorating economic outlook and quarter had come in above the staff’s additional write-downs by financial in- expectations, most of the information stitutions. Similar stresses were again received over the intermeeting period evident in the financial markets of was weaker than had been previously major foreign economies. The trade- expected. The drop in housing activity weighted foreign exchange value of the continued to intensify, conditions in dollar against major currencies declined labor markets appeared to have deterioslightly, on balance, over the intermeet- rated noticeably near year-end, and facing period. tory output had weakened. Consumer Debt in the domestic nonfinancial confidence remained low, and indicasector was estimated to have increased tors of business sentiment had worssomewhat more slowly in the fourth ened. Equity prices had also fallen quarter than in the third. The rate of sharply so far in 2008, and, while the increase of nonfinancial business debt functioning of money markets had decelerated in the fourth quarter from improved, conditions in some other its rapid third-quarter pace despite financial markets had become more robustbondissuanceastheriseincom- restrictive. The staff projection showed mercial and industrial lending moder- the weakness in spending dissipating ated. Household mortgage debt ex- over the second half of 2008 and 2009, panded at a slow rate in the fourth in response to the cumulative easing of quarter, reflecting continued weakness monetary policy since August, the in home prices, declining home sales, abatement of housing weakness, a lessand tighter credit conditions for some ening drag from high oil prices, and the borrowers. Nonmortgage consumer cre- prospect of fiscal stimulus. Still, prodit appeared to expand at a moderate jected resource utilization was lower pace. In December, the increase in M2 over the next two years than in the prewas up slightly from its November vious forecast. The projection for core pace, boosted primarily by inflows into PCE price inflation in 2008 was raised the relative safety and liquidity of slightlyinresponsetoelevatedreadings moneymarketmutualfunds.Therisein inrecentmonths.Theforecastforheadsmall time deposits moderated but line PCE price inflation also incorporemained elevated, as several thrift rated a somewhat higher rate of in-
Minutes of FOMC Meetings, January 235 creaseforenergypricesforthefirsthalf activity and house prices still declining of 2008; as a result, headline PCE price and with financial conditions for busiinflation was now expected to exceed nesses and households tightening furcorePCEpriceinflationslightlyforthat ther, significant uncertainties suryear. The forecasts for both headline rounded this outlook and the risks to and core PCE price inflation for 2009 economic growth in the near term were unchanged, with both receding appeared to be weighted to the downfrom their 2008 levels. side. Indeed, several participants noted In conjunction with the FOMC meet- thattherisksofadownturnintheeconing in January, all meeting participants omyweresignificant.Inflationdatahad (Federal Reserve Board members and been disappointing in recent months, Reserve Bank presidents) provided an- and a few participants cited anecdotal nual projections for economic growth, reports that some firms were able to unemployment, and inflation for the pass on costs to consumers. However, period 2008 through 2010. The projec- with inflation expectations anticipated tions are described in the Summary of to remain reasonably well anchored, Economic Projections, which is at- energy and other commodity prices tached as an addendum to these min- expectedtoflattenout,andpressureson utes. resources likely to ease, participants In their discussion of the economic generally expected inflation to modersituationandoutlook,andintheprojec- ate somewhat in coming quarters. tions that they had submitted for this Meeting participants observed that meeting, participants noted that infor- conditions in short-term funding marmation received since the December kets had improved considerably since meeting had been decidedly downbeat the December meeting, reflecting the on balance. In particular, the drop in easing of pressures related to funding housing activity had intensified, factory around the turn of the year as well as output had weakened, news on business the implementation of the TAF. Howinvestment had been soft, and condi- ever, broader financial conditions had tions in labor markets appeared to have tightened significantly, on balance, in deteriorated.Inaddition,consumercon- the weeks leading up to the meeting, as fidence had remained low and business evidence of further deterioration in confidence appeared to have worsened. housing markets and investors’ more Although the functioning of money pessimistic view of the economic outmarkets had improved notably, strains look adversely affected a range of remained evident in a number of other financial markets. Many participants financial markets, and credit conditions were concerned that the drop in equity had become generally more restrictive. prices, coupled with the ongoing de- Against this backdrop, participants cline in house prices, implied reducexpected economic growth to remain tions in household wealth that would weakinthefirsthalfofthisyearbefore likely damp consumer spending. Morepicking up in the second half, aided in over, elevated volatility in financial part by a more accommodative stance markets likely reflected increased unof monetary policy and by likely fiscal certainty about the economic outlook, stimulus. Further ahead, participants and that greater uncertainty could lead judged that economic growth would firms and households to limit spending. continue to pick up gradually in 2009 The availability of credit to consumers and 2010. Nonetheless, with housing and businesses appeared to be tighten-
236 95th Annual Report, 2008 ing, likely adding to restraint on eco- the rates on outstanding adjustable-rate nomic growth. Participants discussed mortgages,bothofwhichwouldtendto the risks to financial markets and insti- improve some households’ finances. tutions posed by possible further dete- Nonetheless, participants viewed the rioration in the condition of financial housing situation and its potential furguarantors,andmanyperceivedapossi- ther effect on employment, income, and bility that additional downgrades in wealth as one of the major sources of these firms’ credit ratings could put downside risk to the economic outlook. increased strains on financial markets. Recent data as well as anecdotal To be sure, some positive financial information indicated that consumer developments were evident. Banks ap- spending had decelerated considerably, peared to be making some progress in perhaps partly reflecting a spillover strengthening their balance sheets, with from the weakness in the housing secseveral financial institutions able to tor.Participantsremarkedthatdeclining raise significant amounts of capital to house prices and sales appeared to be offset the large losses they had suffered depressing consumer sentiment and that in recent quarters. Nevertheless, partici- the contraction in wealth associated pants generally viewed financial mar- with decreases in home and equity kets as still vulnerable to additional prices probably was restraining spendeconomic and credit weakness. Some ing. In addition, consumption expendinoted the especially worrisome possi- tures were being damped by slower bility of an adverse feedback loop, that growth in real disposable income inis, a situation in which a tightening of duced by high energy prices and possicredit conditions could depress invest- bly by a softening of the labor market. ment and consumer spending, which, in The December employment report turn, could feed back to a further tight- showed that job growth had slowed ening of credit conditions. appreciably, and other indicators also In their discussion of individual sec- pointed to emerging weakness in the tors of the economy, meeting partici- labor market in the intermeeting period. pants emphasized that activity in hous- And spending in the future could be ingmarketshadcontinuedtodeteriorate affectedbyanongoingtighteninginthe sharply. With single-family permits and availability of consumer credit amid starts still falling, sales of new homes signs that lenders were becoming dropping precipitously, sales of existing increasingly cautious in view of some homes flat, and inventories of unsold deterioration of credit performance on homes remaining elevated even in the consumer loans and widening expectafaceoffallinghouseprices,severalpar- tions of slower income growth. Some ticipants noted the absence of signs of participants, however, cited evidence stabilization in the sector. Of further that workers in some sectors were still concernwerethereducedavailabilityof in short supply and saw signs that the nonconforming loans and the apparent labor market remained resilient. tightening by banks of credit standards The outlook for business investment on mortgages, both of which had the had turned weaker as well since the potential for intensifying the housing time of the December meeting. Several contraction. The recent declines in participants reported that firms in their interest rates had spurred a surge in districts were reducing capital expendiapplications for mortgage refinancing tures in anticipation of a slowing in and would limit the upward resets on sales. Manufacturing activity appeared
Minutes of FOMC Meetings, January 237 to have slowed or contracted in many domestic spending was slackening, it districts. Although a few participants could also damp commodity prices and reported more upbeat attitudes among help reduce global price pressures. firms in the technology and energy Participants agreed that the inflation sectors, business sentiment overall ap- data that were received since the Depeared to be declining. Moreover, a cember meeting had been disappointnumber of indicators pointed to a tight- ing. But many believed that the slow ening in credit availability to busi- growth in economic activity anticipated nesses. For example, the Senior Loan for the first half of this year and the Officer Opinion Survey on Bank Lend- associated slack in resource utilization ing Practices indicated that banks had would contribute to an easing of price tightened lending standards and pricing pressures. Moreover, a leveling-off of terms on business loans. Lending stan- energy and commodity prices such as dardshadbeenraisedespeciallysharply thatembeddedinfuturesmarketswould on commercial real estate loans. While also help moderate inflation pressures. real outlays for nonresidential construc- However, some participants cautioned tion apparently continued to rise that commodity prices had remained through the fourth quarter, anecdotal stubbornlyhighforquitesometimeand evidence pointed to a weakening of that inferences drawn in the past from commercial real estate spending in sev- futures markets about likely trends in eral districts, with some projects being suchpriceshadoftenproveninaccurate. canceled or scaled back. Participants also related anecdotal evi- Most participants anticipated that a dence of firms facing increasing input fiscal stimulus package, including tax cost pressures and in some cases being rebates for households and bonus de- able to pass on those costs to consumpreciation allowances for businesses, ers. Moreover, headline inflation had would be enacted before long and beengenerallyabove2percentoverthe would support economic growth in the past four years, and participants noted second half of the year. Some pointed that such persistently elevated readings out, however, that the fiscal stimulus could ultimately affect inflation expecpackage might not help in the near tations. Some survey measures of inflaterm, when the risks of a downturn in tionexpectationshadedgedupinrecent economic activity appeared largest. In months, and longer-term financial maraddition, the effects of the proposed ket gauges of inflation compensation package would likely be temporary, had climbed. The latter probably rewith the stimulus reversing in 2009. flected at least in part increased un- With regard to the external sector, certainty—inflation risk—rather than some participants noted that growth greater inflation expectations; increases abroad had recently been strong and in nominal wages did not appear to be that increasing U.S. exports had been a incorporating higher inflation expectasignificant source of strength for the tions. On balance, expectations seemed U.S. economy of late. However, avail- to remain fairly well anchored, but parable data suggested that economic ticipants agreed that continued stability activity outside the United States ap- of inflation expectations was essential. peared to be decelerating somewhat. In the discussion of monetary policy Although slowing foreign growth for the intermeeting period, most memwould reduce a source of support for bers believed that a further significant the U.S. economy at the same time that easing in policy was warranted at this
238 95th Annual Report, 2008 meeting to address the considerable recent information pointed to a deepenworsening of the economic outlook ing of the housing contraction as well since December as well as increased as to some softening in labor markets. downsiderisks.Ashadbeenthecasein The Committee again viewed it as apsome previous cyclical episodes, a rela- propriate to indicate that it expected tively low real federal funds rate now inflationtomoderateincomingquarters appeared appropriate for a time to but also to emphasize that it would be counter the factors that were restraining necessary to monitor inflation developeconomic growth, including the slide in ments carefully. The action taken at the housing activity and prices, the tighten- meeting, combined with the cumulative ingofcreditavailability,andthedropin policy easing already in place, should equity prices. Members judged that a help to promote moderate growth over 50 basis point reduction in the federal time and to mitigate the risks to ecofunds rate, together with the Commitnomicactivity.However,memberscontee’s previous policy actions, would curredthatdownsideriskstogrowthrebring the real short-term rate to a level mained, and that the Committee would that was likely to help the economy continue to assess the effects of finanexpand at a moderate pace over time. cial and other developments on eco- Still, with no signs of stabilization in nomic prospects and would act in a the housing sector and with financial timely manner as needed to address conditions not yet stabilized, the Comthose risks. mittee agreed that downside risks to At the conclusion of the discussion, growth would remain even after this the Committee voted to authorize and action. Members were also mindful of directtheFederalReserveBankofNew theneedforpolicytopromotepricesta- York, until it was instructed otherwise, bility, and some noted that, when prosto execute transactions in the System pects for growth had improved, a Account in accordance with the followreversal of a portion of the recent easing domestic policy directive: ing actions, possibly even a rapid reversal, might be appropriate. However, The Federal Open Market Committee most members agreed that a 50 basis seeksmonetaryandfinancialconditionsthat point easing at this meeting would will foster price stability and promote sustainable growth in output. To further its likely not contribute to an increase in long-run objectives, the Committee in the inflation pressures given the actual and immediatefutureseeksconditionsinreserve expected weakness in economic growth marketsconsistentwithreducingthefederal and the consequent reduction in pres- fundsratetoanaverageofaround3percent. sures on resources. Rather, members The vote encompassed approval of agreed that inflation was likely to modthe statement below to be released at erate in coming quarters, but they also 2:15 p.m.: concurred that it would be necessary to continue to monitor inflation develop- The Federal Open Market Committee ments carefully. decidedtodaytoloweritstargetforthefed- The Committee agreed that the state- eral funds rate 50 basis points to 3 percent. ment to be released after the meeting Financial markets remain under considerable stress, and credit has tightened further should indicate that financial markets for some businesses and households. Moreremainedunderconsiderablestress,that over, recent information indicates a deepencredit had tightened further for some ing of the housing contraction as well as businesses and households, and that somesofteninginlabormarkets.
Minutes of FOMC Meetings, January 239 The Committee expects inflation to mod- before it would have its full effect on erate in coming quarters, but it will be nec- the economy. essary to continue to monitor inflation The Committee then turned to a disdevelopmentscarefully. cussion of selected longer-term regula- Today’s policy action, combined with those taken earlier, should help to promote tory and structural issues raised by moderate growth over time and to mitigate recent financial market developments. the risks to economic activity. However, A staff presentation began by noting downsideriskstogrowthremain.TheCom- that the difficulties in financial markets mittee will continue to assess the effects of started with unexpectedly heavy losses financial and other developments on ecoon subprime mortgages and related nomic prospects and will act in a timely mannerasneededtoaddressthoserisks. structured securities, which led investors to question the valuations of com- Votes for this action: Messrs. Berplex structured instruments more gennanke, Geithner, Kohn, Kroszner, and Mishkin,Ms.Pianalto,Messrs.Plosser, erally and to pull back from such Stern, and Warsh. Votes against this investments. The resulting effects in action:Mr.Fisher. markets put pressure on some large Mr. Fisher dissented because he pre- banking organizations, particularly ferred to leave the federal funds rate through losses on subprime-mortgageunchanged. The rate had been lowered related securities and other assets, and by 75 basis points just one week earlier through the unplanned expansion of in a decision he supported, which balance sheets triggered by the disrupbrought the funds rate down 175 basis tion of various markets in which assets points since September. Given these were securitized. The remainder of the actions, he felt that monetary policy presentation, and the discussion by was already quite stimulative, while meeting participants, focused on two headline inflation was too high at more issues: first, the important role of credit than 3 percent over the last year. ratings in the securitization process, Demand-pull inflation pressures from including the methods used to set ratemerging-market economies abroad ings and the way investors use ratings appeared to be continuing, and anec- in making their investment decisions; dotal reports from business contacts and second, how weaknesses in risk suggested greater willingness domesti- management practices at some large cally to pass rising costs through to global financial services organizations appear to have led to outsized losses at prices. Moreover, Mr. Fisher was conthose institutions, and the reasons that cerned that inflation expectations could such weaknesses may have emerged at become unanchored if the perception of some firms and not at others. negative real rates of interest were to Itwasagreedthatthenextmeetingof become pervasive. At the same time, the Committee would be held on Tuesthe economy appeared to be still growday, March 18, 2008. ing, albeit at a substantially weakened The meeting adjourned at 1:15 p.m. pace. Given the policy tradeoffs confronting the FOMC at this time, Mr. Fisher saw the upside risks to inflation Notation Vote asbeinggreaterthanthedownsiderisks to longer-term economic growth, espe- By notation vote completed on Decemcially in light of the recent, aggressive ber 31, 2007, the Committee unanieasing of monetary policy and the lag mously approved the minutes of the
240 95th Annual Report, 2008 FOMC meeting held on December 11, weakening. Among other develop- 2007. ments,strainsinsomefinancialmarkets had intensified, as it appeared that investors were becoming increasingly Conference Calls concerned about the economic outlook On January 9, 2008, the Committee and the downside risks to activity. Parreviewed recent economic data and ticipants discussed the possibility that financial market developments. The these developments could lead to an available information suggested that the excessive pull-back in credit availabildownside risks to growth had increased ity and in investment. Although inflasignificantly since the time of the tion was expected to moderate from December FOMC meeting. Participants recent elevated levels, participants discussed the possibility that the slow- stressed that this outlook relied upon ing in economic growth and associated inflation expectations remaining well softening in labor markets might exac- anchored and that the inflation situation erbate the tightening in credit condi- should continue to be monitored caretionsandthecorrectioninhousingmar- fully. ket activity and prices, which could in Allmembersjudgedthatasubstantial turnweighfurtheroneconomicactivity. easing in policy in the near term was Participants emphasized the risks that appropriate to foster moderate ecosuch adverse dynamics could pose to nomic growth and reduce the downside economic and financial stability. risks to economic activity. Most mem- Participants noted that core price in- bersjudgedthatanimmediatereduction flation had edged up in recent months, in the federal funds rate was called for boosted in part by the pass-through of to begin aligning the real policy rate higherenergycoststothepricesofcore with a weakening economic situation. consumer goods and services. Inflation Such an action, by demonstrating the was expected to edge lower this year as Committee’s commitment to act decienergy prices leveled off and pressures sively to support economic activity, onresourceseased.However,thisslow- might reduce concerns about economic ing in inflation was dependent on infla- prospectsthatseemedtobecontributing tion expectations remaining well an- to the deteriorating conditions in financhored, and participants noted that cial markets, which could feed back on considerable uncertainty surrounded the the economy. However, some concern inflation outlook. was expressed that an immediate policy Most participants were of the view action could be misinterpreted as dithat substantial additional policy easing rectedatrecentdeclinesinstockprices, in the near term might well be neces- rather than the broader economic outsary to promote moderate economic look, and one member believed it prefgrowth over time and to reduce the erable to delay policy action until the downside risks to growth, and partici- scheduled FOMC meeting on January pants discussed the possible timing of 29–30. Some members also noted that such policy actions. were policy to become very stimulative On January 21, 2008, the Committee it would be important for the Commitagain met by conference call. Incoming tee to be decisive in reversing the informationsincetheconferencecallon course of interest rates once the econ- January 9 had reinforced the view that omy had strengthened and downside the outlook for economic activity was risks had abated.
Minutes of FOMC Meetings, January 241 At the conclusion of the discussion, fied policy action before the regularly the Committee voted to authorize and scheduled meeting the following week. directtheFederalReserveBankofNew Brian F. Madigan York, until it was instructed otherwise, Secretary to execute transactions in the System Account in accordance with the following domestic policy directive: Addendum: Summary of Economic Projections The Federal Open Market Committee seeksmonetaryandfinancialconditionsthat In conjunction with the January 2008 will foster price stability and promote sus- FOMC meeting, the members of the tainable growth in output. To further its long-run objectives, the Committee in the Board of Governors and the presidents immediatefutureseeksconditionsinreserve of the Federal Reserve Banks, all of marketsconsistentwithreducingthefederal whomparticipateinthedeliberationsof funds rate to an average of around 31⁄2 per- the FOMC, provided projections for cent. economic growth, unemployment, and The vote encompassed approval of inflation in 2008, 2009, and 2010. Prothetextbelowforinclusioninthestate- jections were based on information ment to be released at 8:30 a.m. on available through the conclusion of the Tuesday, January 22: January meeting, on each participant’s assumptions regarding a range of fac- TheFederalOpenMarketCommitteehas torslikelytoaffecteconomicoutcomes, decided to lower its target for the federal and on his or her assessment of approfundsrate75basispointsto31⁄2percent. The Committee took this action in view priate monetary policy. “Appropriate ofaweakeningoftheeconomicoutlookand monetary policy” is defined as the increasing downside risks to growth. While future policy that, based on current strains in short-term funding markets have information, is deemed most likely to eased somewhat, broader financial market foster outcomes for economic activity conditionshavecontinuedtodeteriorateand credit has tightened further for some busi- and inflation that best satisfy the parnessesandhouseholds.Moreover,incoming ticipant’s interpretation of the Federal information indicates a deepening of the Reserve’s dual objectives of maximum housing contraction as well as some softenemployment and price stability. inginlabormarkets. The projections, which are summa- The Committee expects inflation to moderate in coming quarters, but it will be nec- rizedintable1andchart1,suggestthat essary to continue to monitor inflation FOMCparticipantsexpectedthatoutput developmentscarefully. would grow at a pace appreciably Appreciable downside risks to growth below its trend rate in 2008, owing priremain. The Committee will continue to marily to a deepening of the housing assess the effects of financial and other contraction and a tightening in the developments on economic prospects and will act in a timely manner as needed to availability of household and business addressthoserisks. credit, and that the unemployment rate Votes for this action: Messrs. Ber- would increase somewhat. Given the nanke,Geithner,Evans,Hoenig,Kohn, substantial reductions in the target fed- Kroszner,Rosengren,andWarsh.Votes eral funds rate through the January against this action: Mr. Poole. Absent FOMC meeting as well as the assumpandnotvoting:Mr.Mishkin tion of appropriate policy going for- Mr. Poole dissented because he did ward, output growth further ahead was notbelievethatcurrentconditionsjusti- projectedtopickuptoapacearoundor
242 95th Annual Report, 2008 Table 1. Economic Projections of Federal Reserve Governors and Reserve Bank Presidents Percent 2008 2009 2010 CentralTendency1 GrowthofrealGDP............. 1.3to2.0 2.1to2.7 2.5to3.0 Octoberprojections ........... 1.8to2.5 2.3to2.7 2.5to2.6 Unemploymentrate.............. 5.2to5.3 5.0to5.3 4.9to5.1 Octoberprojections ........... 4.8to4.9 4.8to4.9 4.7to4.9 PCEinflation ................... 2.1to2.4 1.7to2.0 1.7to2.0 Octoberprojections ........... 1.8to2.1 1.7to2.0 1.6to1.9 CorePCEinflation .............. 2.0to2.2 1.7to2.0 1.7to1.9 Octoberprojections ........... 1.7to1.9 1.7to1.9 1.6to1.9 Range2 GrowthofrealGDP............. 1.0to2.2 1.8to3.2 2.2to3.2 Octoberprojections ........... 1.6to2.6 2.0to2.8 2.2to2.7 Unemploymentrate.............. 5.0to5.5 4.9to5.7 4.7to5.4 Octoberprojections ........... 4.6to5.0 4.6to5.0 4.6to5.0 PCEinflation ................... 2.0to2.8 1.7to2.3 1.5to2.0 Octoberprojections ........... 1.7to2.3 1.5to2.2 1.5to2.0 CorePCEinflation .............. 1.9to2.3 1.7to2.2 1.4to2.0 Octoberprojections ........... 1.7to2.0 1.5to2.0 1.5to2.0 Note:ProjectionsofthegrowthofrealGDP,ofPCE ploymentrateinthefourthquarteroftheyearindicated. inflation,andofcorePCEinflationarepercentchanges Each participant’s projections are based on his or her fromthefourthquarterofthepreviousyeartothefourth assessmentofappropriatemonetarypolicy. quarteroftheyearindicated.PCEinflationandcorePCE 1. Thecentraltendencyexcludesthethreehighestand inflation are the percentage rates of change in, respec- threelowestprojectionsforeachvariableineachyear. tively,thepriceindexforpersonalconsumptionexpendi- 2. Therangeforavariableinagivenyearincludesall tures and the price index for personal consumption participants’projections,fromlowesttohighest,forthat expendituresexcludingfoodandenergy.Projectionsfor variableinthatyear. theunemploymentratearefortheaveragecivilianunema bit above its long-run trend by 2010. of the projections provided in conjunc- Inflation was expected to decline in tion with the October FOMC meeting, 2008 and 2009 from its recent elevated which was 1.8 to 2.5 percent. These levels as energy prices leveled out and downwardrevisionstothe2008outlook economicslackcontainedcostandprice stemmed from a number of factors, increases. Most participants judged that includingafurtherintensificationofthe considerable uncertainty surrounded housingmarketcorrection,tightercredit their projections for output growth and conditions amid increased concerns viewed the risks to their forecasts as about credit quality and ongoing turweighted to the downside. A majority moil in financial markets, and higher of participants viewed the risks to the oil prices. However, some participants inflation outlook as broadly balanced, noted that a fiscal stimulus package but a number of participants saw the would likely provide a temporary boost risks to inflation as skewed to the to domestic demand in the second half upside. of this year. Beyond 2008, a number of factors were projected to buoy eco- The Outlook nomicgrowth,includingagradualturn- The central tendency of participants’ around in housing markets, lower interprojections for real GDP growth in est rates associated with the substantial 2008, at 1.3 to 2.0 percent, was consid- easing of monetary policy to date and erably lower than the central tendency appropriate adjustments to policy going
Minutes of FOMC Meetings, January 243 forward,andananticipatedreductionin With output growth running below financial market strains. Real GDP was trendoverthenextyearorso,mostparexpected to accelerate somewhat in ticipants expected that the unemploy- 2009 and by 2010 to expand at or a ment rate would edge higher. The little above participants’ estimates of central tendency of participants’ projecthe rate of trend growth. tions for the average rate of unemploy-
244 95th Annual Report, 2008 ment in the fourth quarter of 2008 was to their longer-run sustainable or opti- 5.2 to 5.3 percent, above the 4.8 to mal levels. Consequently, the rate of 4.9 percent unemployment rate fore- unemployment was projected by some casted in October and broadly sugges- participants to remain slightly above its tiveofsomeslackinlabormarkets.The longer-run sustainable level even in unemployment rate was generally ex- 2010, and inflation was judged likely pectedtochangerelativelylittlein2009 still to be a bit above levels that some and then to edge lower in 2010 as out- participants judged would be consistent put growth picks up, although in both with the Federal Reserve’s dual manyears the unemployment rate was pro- date. jectedtobealittlehigherthanhadbeen anticipated in October. Risks to the Outlook The higher-than-expected rates of overallandcoreinflationsinceOctober, Most participants viewed the risks to which were driven in part by the steep their GDP projections as weighted to run-up in oil prices, had caused partici- thedownsideandtheassociatedrisksto pants to revise up somewhat their pro- their projections of unemployment as jections for inflation in the near term. tilted to the upside. The possibility that The central tendency of participants’ housepricescoulddeclinemoresteeply projections for core PCE inflation in thananticipated,furtherreducinghouse- 2008 was 2.0 to 2.2 percent, up from holds’ wealth and access to credit, was the 1.7 to 1.9 percent central tendency perceived as a significant risk to the inOctober.However,coreinflationwas central outlook for economic growth expected to moderate over the next two and employment. In addition, despite years, reflecting muted pressures on some recovery in money markets after resources and fairly well-anchored in- the turn of the year, financial market flation expectations. Overall PCE infla- conditions continued to be strained— tion was projected to decline from its stock prices had declined sharply since current elevated rate over the coming the December meeting, concerns about year, largely reflecting the assumption further potential losses at major finanthat energy and food prices would flat- cialinstitutionshadmountedamidworten out. Thereafter, overall PCE infla- ries about the condition of financial tion was projected to move largely in guarantors, and credit conditions had step with core PCE inflation. tightenedingeneralforbothhouseholds Participants’ projections for 2010 and firms. The potential for adverse were importantly influenced by their interactions, in which weaker economic judgments about the measured rates of activity could lead to a worsening of fiinflation consistent with the Federal nancial conditions and a reduced avail- Reserve’s dual mandate to promote ability of credit, which in turn could maximum employment and price stabil- further damp economic growth, was ityandaboutthetimeframeoverwhich viewed as an especially worrisome policy should aim to attain those rates possibility. given current economic conditions. Regarding risks to the inflation out- Many participants judged that, given look, several participants pointed to the the recent adverse shocks to both ag- possibility that real activity could regregate demand and inflation, policy bound less vigorously than projected, would be able to foster only a gradual leading to more downward pressure on return of key macroeconomic variables costs and prices than anticipated. How-
Minutes of FOMC Meetings, January 245 ever, participants also saw a number of Table2. AverageHistoricalProjectionError upside risks to inflation. In particular, Ranges the pass-through of recent increases in Percentagepoints energyandcommoditypricesaswellas 2008 2009 2010 of past dollar depreciation to consumer RealGDP1 .............. ±1.2 ±1.4 ±1.4 prices could be greater than expected. Unemploymentrate2 ..... ±0.5 ±0.8 ±1.0 In addition, participants recognized a Totalconsumerprices3... ±1.0 ±1.0 ±0.9 risk that inflation expectations could Note: Error ranges shown are measured as plus or become less firmly anchored if the cur- minus the root mean squared error of projections that werereleasedinthewinterfrom1986through2006for rent elevated rates of inflation persisted thecurrentandfollowingtwoyearsbyvariousprivate for longer than anticipated or if the and government forecasters. As described in the box recent substantial easing in monetary “ForecastUncertainty,”undercertainassumptions,there isabouta70percentprobabilitythatactualoutcomesfor policy was misinterpreted as reflecting realGDP,unemployment,andconsumerpriceswillbein less resolve among Committee mem- rangesimpliedbytheaveragesizeofprojectionerrors bers to maintain low and stable infla- madeinthepast.FurtherinformationisinDavidReifschneiderandPeterTulip(2007),“GaugingtheUncertion. On balance, a larger number of taintyoftheEconomicOutlookfromHistoricalForecastparticipants than in October viewed the ing Errors,” Finance and Economics Discussion Series #2007-60(November). risks to their inflation forecasts as 1. Projectionispercentchange,fourthquarterofthe broadly balanced, although several par- previousyeartofourthquarteroftheyearindicated. ticipants continued to indicate that their 2. Projectionisthefourthquarteraverageofthecivilianunemploymentrate(percent). inflationprojectionswereskewedtothe 3. Measure is the overall consumer price index, the upside. pricemeasurethathasbeenmostwidelyusedingovern- The ongoing financial market turbu- mentandprivateeconomicforecasts.Projectionispercent change, fourth quarter of the previous year to the lenceandtighteningofcreditconditions fourth quarter of the year indicated. The slightly narhad increased participants’ uncertainty rower estimated width of the confidence interval for inflation in the third year compared with those for the abouttheoutlookforeconomicactivity. secondandthirdyearsislikelytheresultofusingalim- Mostparticipantsjudgedthattheuncer- itedsampleperiodforcomputingthesestatistics. tainty attending their January projec- Diversity of Participants’ Views tions for real GDP growth and for the unemployment rate was above typical Charts 2(a) and 2(b) provide more levels seen in the past. (Table 2 pro- detail on the diversity of participants’ vides an estimate of average ranges of views. The dispersion of participants’ forecast uncertainty for GDP growth, projections for real GDP growth was unemployment, and inflation over the markedly wider than in the forecasts past twenty years.5) In contrast, the un- submitted in October, which in turn certainty attached to participants’ infla- were considerably more diverse than tion projections was generally viewed those submitted in conjunction with the as being broadly in line with past expe- June FOMC meeting and included in rience, although several participants the Board’s Monetary Policy Report to judged that the degree of uncertainty the Congress in July. Mirroring the about inflation was higher than normal. increase in diversity of views on real GDP growth, the dispersion of participants’ projections for the rate of unem- 5. The box “Forecast Uncertainty” at the end ploymentalsowidenednotably,particuof this summary discusses the sources and inter- larly for 2009 and 2010. The dispersion pretationofuncertaintyineconomicforecastsand of projections for output and employexplains the approach used to assess the uncerment seemed largely to reflect differing tainty and risks attending participants’ projections. assessments of the effect of financial
246 95th Annual Report, 2008 market conditions on real activity, the maximum employment. Views also difspeed with which credit conditions fered about the pace at which output might improve, and the depth and dura- and employment would recover toward tion of the housing market contraction. those levels over the forecast horizon The dispersion of participants’ longer- and beyond, given appropriate moneterm projections was also affected to tary policy. The dispersion of the prosome degree by differences in their jections for PCE inflation in the near judgments about the economy’s trend term partly reflected different views on growth rate and the unemployment rate the extent to which recent increases in that would be consistent over time with energy and other commodity prices
Minutes of FOMC Meetings, January 247 would pass through into higher con- views of the rate of inflation consistent sumer prices and on the influence that with the Federal Reserve’s dual objecinflation expectations would exert on tives and the time it would take to inflation over the short and medium achieve these goals given current run. Participants’ inflation projections economic conditions and appropriate further out were influenced by their policy.
248 95th Annual Report, 2008 Forecast Uncertainty Theeconomicprojectionsprovidedbythe jections are broadly balanced, the nummembers of the Board of Governors and bers reported in table 2 might imply a the presidents of the Federal Reserve probability of about 70 percent that Banks help shape monetary policy and actual GDP would expand between can aid public understanding of the basis 1.8 percent to 4.2 percent in the current for policy actions. Considerable uncer- year,and1.6percentto4.4percentinthe tainty attends these projections, however. second and third years. The correspond- The economic and statistical models and ing 70 percent confidence intervals for relationships used to help produce eco- overall inflation would be 1 percent to nomic forecasts are necessarily imperfect 3 percent in the current and second descriptions of the real world. And the years, and 1.1 percent to 2.9 percent in future path of the economy can be thethirdyear. affected by myriad unforeseen develop- Because current conditions may differ ments and events. Thus, in setting the from those that prevailed on average stance of monetary policy, participants over history, participants provide judgconsider not only what appears to be the ments as to whether the uncertainty mostlikelyeconomicoutcomeasembod- attachedtotheirprojectionsofeachvariiedintheirprojections,butalsotherange able is greater than, smaller than, or of alternative possibilities, the likelihood broadly similar to typical levels of foreof their occurring, and the potential costs cast uncertainty in the past as shown in totheeconomyshouldtheyoccur. table 2. Participants also provide judg- Table 2 summarizes the average his- ments as to whether the risks to their torical accuracy of a range of forecasts, projections are weighted to the upside, includingthosereportedinpastMonetary downside, or are broadly balanced. That Policy Reports and those prepared by is, participants judge whether each vari- FederalReserveBoardstaffinadvanceof ableismorelikelytobeaboveorbelow meetings of the Federal Open Market their projections of the most likely out- Committee. The projection error ranges come. These judgments about the uncershowninthetableillustratetheconsider- tainty and the risks attending each parableuncertaintyassociatedwitheconomic ticipant’s projections are distinct from forecasts.Forexample,supposeapartici- thediversityofparticipants’viewsabout pantprojectsthatrealGDPandtotalcon- the most likely outcomes. Forecast sumer prices will rise steadily at annual uncertainty is concerned with the risks ratesof,respectively,3percentand2per- associated with a particular projection, cent. If the uncertainty attending those rather than with divergences across a projections is similar to that experienced numberofdifferentprojections. in the past and the risks around the pro-
Minutes of FOMC Meetings, March 249 Meeting Held on Mr. Parkinson, Deputy Director, Divi- March 18, 2008 sion of Research and Statistics, BoardofGovernors A meeting of the Federal Open Market Ms. Bailey, Deputy Director, Division Committee was held in the offices of ofBankingSupervisionandReguthe Board of Governors of the Federal lation,BoardofGovernors Reserve System in Washington, D.C., Mr. Clouse, Deputy Director, Division on Tuesday, March 18, 2008 at 8:30 of Monetary Affairs, Board of a.m. Governors Present: Ms. Liang and Messrs. Reifschneider Mr.Bernanke,Chairman and Wascher, Associate Directors, Mr.Geithner,ViceChairman Division of Research and Statis- Mr.Fisher tics,BoardofGovernors Mr.Kohn Mr. Gagnon, Visiting Associate Direc- Mr.Kroszner tor, Division of Monetary Affairs, Mr.Mishkin BoardofGovernors Ms.Pianalto Mr.Plosser Mr. Blanchard, Assistant to the Board, Mr.Stern Office of Board Members, Board Mr.Warsh ofGovernors Messrs. Evans, Lacker, and Lockhart, Mr.Carpenter,AssistantDirector,Diviand Ms. Yellen, Alternate Mem- sion of Monetary Affairs, Board bers of the Federal Open Market ofGovernors Committee Mr. Small, Project Manager, Division Messrs. Hoenig and Rosengren, Presi- of Monetary Affairs, Board of dents of the Federal Reserve Governors BanksofKansasCityandBoston, Mr.Luecke,SectionChief,Divisionof respectively Monetary Affairs, Board of Governors Mr. Sapenaro, First Vice President, FederalReserveBankofSt.Louis Ms. Low, Open Market Secretariat Specialist, Division of Monetary Mr.Madigan,SecretaryandEconomist Affairs,BoardofGovernors Ms.Danker,DeputySecretary Mr.Skidmore,AssistantSecretary Mr. Judd, Executive Vice President, Ms.Smith,AssistantSecretary Federal Reserve Bank of San Mr.Alvarez,GeneralCounsel Francisco Mr.Ashton,AssistantGeneralCounsel Messrs.Altig,Rasche,Sellon,andSul- Mr.Sheets,Economist livan,SeniorVicePresidents,Fed- Mr.Stockton,Economist eral Reserve Banks of Atlanta, St. Messrs. Connors, English, and Kamin, Louis, Kansas City, and Chicago, Ms. Mester, Messrs. Rolnick, respectively Rosenblum, Slifman, Sniderman, Mr. Olivei, Vice President, Federal andWilcox,AssociateEconomists ReserveBankofBoston Mr. Dudley, Manager, System Open Mr. Pesenti, Assistant Vice President, MarketAccount Federal Reserve Bank of New York Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Mr. Hetzel, Senior Economist, Federal Management, Board of Governors ReserveBankofRichmond
250 95th Annual Report, 2008 The Manager of the System Open cent rate of a year earlier. The labor Market Account reported on recent force participation rate declined in developments in foreign exchange mar- February. kets.Therewerenoopenmarketopera- Industrial production declined in tions in foreign currencies for the Sys- February after edging up slightly in the tem’s account in the period since the previous two months. The output of previous meeting. The Manager also utilities dropped back after a weatherreported on developments in domestic related surge in January, while mining financial markets and on System open output fell somewhat in the first two market operations in government secu- months of the year on average. Manurities and federal agency obligations facturing production edged down after during the period since the previous having flattened out in January. The meeting. By unanimous vote, the Com- motor vehicle and construction-related mittee ratified these transactions. industriescontinuedtoholddownover- The information reviewed at the all manufacturing output even as high- March meeting indicated that economic tech production posted moderate inactivity had continued to decelerate in creases. The factory utilization rate recent months. The contraction in edged down in February to a level homebuilding intensified, consumer noticeably below its recent high in the spending appeared to be weakening, third quarter of 2007. and survey measures of both consumer Real consumer spending appeared to and business sentiment were at de- have stalled in recent months. Real outpressedlevels.Industrialproductionfell lays for nondurable and durable conin February, and private payroll em- sumer goods, including automobiles, ployment posted a third consecutive were estimated to have declined, on monthlydecline.Afterhavingincreased average, in January and February. Real in recent months through January, both disposable personal income was unheadline and core inflation as measured changed in the fourth quarter, held by the consumer price index (CPI) downbyhigherfoodandenergyprices, droppednoticeablyinFebruary.Inearly and moved up only slightly in January. March, however, prices of oil and other Furtherdeclinesinhousepricesledtoa commodities rose sharply. noticeable decrease in the ratio of Labor demand softened markedly in household wealth to disposable income recent months. The decline in private in the fourth quarter. The downturn in payroll employment that began last equity prices since December further December steepened through February. reduced household wealth in the first Although employment by firms in the quarter. Readings on consumer sentinonbusiness services sector and in state ment dropped sharply in February from and local governments continued to already low levels, and the Reuters/ rise, declines elsewhere were wide- University of Michigan survey respread. Losses were greatest in the mained at a depressed level in early manufacturing, construction, and retail March. trade sectors. Aggregate hours of pri- The contraction in residential convate production or nonsupervisory struction continued into early 2008. workers fell slightly in the first two Single-family housing starts fell in both months of the year. The unemployment January and February. After having rate edged down to 4.8 percent in Feb- dropped especially sharply in Decemruary, but was still up from the 4.5 per- ber, multifamily housing starts re-
Minutes of FOMC Meetings, March 251 bounded somewhat in the first two Exports rose sharply in both months, months of the year. New home sales while imports dipped in December declinedagaininJanuary,therebypush- before recovering in January. Increases inginventoriesofunsoldhomestoeven in exports were broadly based except higher levels relative to sales. Sales of for automotive exports, which dropped existing homes held roughly steady in sharply in December and remained low January, and the index of pending sales in January. Imports of services were up agreements in that month was consis- moderately. Oil imports soared, reflecttent with flat sales in February and ing increases in both prices and vol- March. Overall, demand for housing umes. Most other categories of imports continued to be restrained by tight dropped in December and January on financing conditions for jumbo and net, with especially large declines in nonprime mortgages. imports of automotive and consumer Real spending on equipment and goods. software rose at a sluggish rate in the Inthemajoradvancedforeigneconofourth quarter. In January, orders and mies, the rate of growth of real gross shipments of nondefense capital goods domestic product (GDP) generally deexcluding aircraft were above their clined in the fourth quarter. The source fourth-quarter levels. However, the of the slowdown varied substantially overall outlook for capital spending in across economies. In the euro area and thefirstquarterwasweakinlightofthe in the United Kingdom, output was deterioration in surveys of business restrained by a softening in domestic conditionsandattitudesandtheworsendemand.Incontrast,Canadiandomestic ing situation in markets for business demand continued to increase at a very finance. On the heels of robust gains strongpace,butbecauseofanoffsetting during most of last year, nominal steep decline in net exports, real GDP spending on nonresidential structures rose only modestly. Japan was the decelerated in December and posted an exception among the advanced foreign outright decline in January. Although economies to the pattern of slower spending in this sector is often volatile, growth; real GDP there strengthened in the recent deceleration was consistent the fourth quarter with higher domestic with mounting indications of slowing spending and continued strength in demand for nonresidential buildings exports. Japanese exports to the United and tightening credit conditions. Real investment in nonfarm inven- States, however, declined. Available tories excluding motor vehicles re- first-quarter economic indicators for the mained at a steady pace in the fourth advanced foreign economies were quarter of 2007, but motor vehicle mixed, but, on balance, they pointed to inventories fell sharply. After declining slowing growth. Real activity also in November, the ratio of manufactur- appearedtohaveslowedabitinemerging and trade book-value inventories ing markets, though it continued to (excluding motor vehicles) to sales advance at a fairly strong rate. In ticked up in December and held steady emerging Asia, the pace of real GDP in January, but this ratio remained well growth picked up in the fourth quarter below its average value in 2007. in China and South Korea, but it soft- The U.S. international trade deficit ened in most other countries. The rate narrowed substantially in December of increase in economic activity slowed and was about unchanged in January. in Brazil, Mexico, and several other
252 95th Annual Report, 2008 countriesinLatinAmericainthefourth labormarkets.TheCommitteeexpected quarter, but remained generally strong. inflationtomoderateincomingquarters IntheUnitedStates,theheadlineCPI but said that it would be necessary to continued to rise rapidly in January but continue to monitor inflation developwas flat in February. For those two ments carefully. The Committee indimonths on average, the rate of headline cated that its action, combined with the inflation was down significantly from policy actions taken earlier, should help itselevatedlevelinthefourthquarterof to promote moderate growth over time 2007, as retail energy prices stopped and to mitigate the risks to economic rising and core inflation moderated a activity. However, the Committee noted bit; these two factors more than offset thatdownsideriskstogrowthremained. an acceleration of food prices. How- The Committee stated that it would ever, the increase in world petroleum continue to assess the effects of finanprices in early March pointed to a cial and other developments on ecorenewed burst of energy price inflation nomic prospects and would act in a in the near term. Available information, timely manner as needed to address including producer prices for Febru- these risks. ary, suggested that prices of core per- Over the intermeeting period, condisonal consumption expenditures (PCE) tions in some short-term funding marmoved up a bit more slowly than the kets worsened. Spreads in interbank core CPI in January and somewhat funding markets widened, as did faster than the core CPI in February. spreads on lower-rated commercial Household survey measures of expecta- paper. Obtaining credit through repurtions for year-ahead inflation jumped in chaseagreementsbackedbyagencyand March to their highest levels in about private-label mortgage-backed securitwo years; in contrast, survey measures ties (MBS) also became more difficult of longer-term inflation expectations amid reports of larger “haircuts” being were unchanged or up slightly. Average applied by lenders and news that some hourly earnings increased at a some- market participants missed margin calls what slower rate in January and Febru- on positions as a result. Concerns over ary than they had in November and the health of financial guarantors December. Over the twelve months that caused dislocations in the markets for ended in February, this wage measure municipal securities, and the ratios of rose a bit more slowly than in the pre- municipal bond yields to those on comvious twelve months. parable-maturity Treasuries climbed to AtitsJanuary30meeting,theFOMC historically high levels. In longer-term lowered its target for the federal funds corporate markets, yields on inrate 50 basis points, to 3 percent. In vestment-grade and speculative-grade addition, the Board of Governors ap- corporate bonds rose, pushing their proved a decrease of 50 basis points in spreads relative to Treasuries to the the discount rate, to 31⁄ 2 percent. The highestlevelssince2002orevenearlier Committee’sstatementnotedthatfinan- in some cases. Nonetheless, gross bond cial markets remained under consider- issuance in January and February able stress and that credit had tightened remained solid for investment-grade further for some businesses and house- firms. holds. Moreover, incoming information Commercial bank credit decelerated indicated a deepening of the housing in January and February, damped by a contractionaswellassomesofteningin reduction in merger and acquisition
Minutes of FOMC Meetings, March 253 activity, weak business spending, fewer chase transactions that would facilitate previously committed loan deals com- funding of primary dealers’ assets and ing onto banks’ books, and slower resi- that the volume of lending through the dential mortgage lending. Commercial Term Auction Facility (TAF) would be real estate lending at banks, however, increased. On March 11, the Federal continued to advance briskly in January Reserve,incoordinationwithothercenand February, while the rise in con- tral banks, announced the expansion sumer loans was moderate. Over the andextensionofthereciprocalcurrency intermeeting period, spreads on con- arrangements that were established in forming and jumbo residential mort- December as well as the creation of gages over comparable-maturity Trea- a Term Securities Lending Facility sury securities jumped, and credit (TSLF) under which the Federal Redefault swap premiums for the gov- serve would lend Treasury securities to ernment-sponsored enterprises in- primarydealersforlongertermsthanin creased to record highs. Issuance of the existing program and based on a conforming MBS continued to be broader range of collateral. On March strong, while credit availability for 14,theFederalReserveBoardapproved jumbo and nonprime mortgage borrow- the temporary financing arrangement ers remained tight. Broad stock price announced that morning by JPMorgan indexes fell further over the intermeet- Chase & Co. and The Bear Stearns ing period on negative economic news Companies Inc. On March 16, the Fedas well as concerns about the outlook eral Reserve announced the creation of for many financial institutions. a lending facility to improve the ability Similarstresseswereagainevidentin of primary dealers to provide financing the financial markets of major foreign toparticipantsinsecuritizationmarkets. economies.However,economicnewsin In addition, the Federal Reserve lowthese economies was generally less ered the primary credit rate, or discount downbeat than in the United States, rate,25basispointsto3.25percent,and leadingtoexpectationsofgreatermone- extended the maximum maturity of pritary easing in the United States than mary credit loans to ninety days from elsewhere. The trade-weighted foreign thirty days. It also approved the longerexchange value of the dollar against term financing arrangement announced major currencies declined notably. that evening by JPMorgan Chase M2increasedstronglyinJanuaryand and Bear Stearns in conjunction with February, boosted primarily by height- the acquisition of Bear Stearns by ened demands for the relative safety JPMorgan Chase. and liquidity of money market mutual Over the intermeeting period, the funds. The decline in opportunity costs expected path of monetary policy over associated with monetary policy easing the next year as measured by money also supported rapid growth of liquid market futures rates moved down deposits. sharply, largely in response to softer- In the two weeks prior to the March than-expected economic data releases meeting, the Federal Reserve an- and deteriorating financial market connounced several measures to bolster ditions. The Committee’s action at the liquidity and promote orderly function- January30meetinghadbeenviewedby ing in financial markets. On March 7, market participants as the most likely the Federal Reserve announced that it outcome, but near-term futures rates would initiate a series of term repur- declined a few basis points as investors
254 95th Annual Report, 2008 had placed some probability on a became more restrictive. The staff prosmaller policy move. Neither the subse- jection showed a contraction of real quent release of the minutes of the GDP in the first half of 2008 followed meeting nor the March 7 Federal Re- by a slow rise in the second half. The serve announcements elicited signifi- recentlyenactedfiscalstimuluspackage cant market reaction. The March 11 was expected to boost real GDP in the TSLFannouncementwasfollowedbya second half of 2008, but that effect was step-up in money market futures rates projected to unwind in 2009. The foreas liquidity concerns eased somewhat cast showed real GDP rising at a rate and market participants evidently con- somewhat above the growth rate of its cluded that less policy easing would be potential in 2009, in response to the needed than previously anticipated. impetus from cumulative monetary pol- However, liquidity concerns reemerged icy easing, continued strength in net subsequently, prompting a further drop exports, a lessening drag from high oil in money market futures rates. Consis- prices, and a relaxation of financial tent with the shift in the economic out- marketstrains.Evenwiththispickupin look, the revision in policy expecta- growthin2009,resourceutilizationwas tions, and the reduction in the target anticipated to follow a lower trajectory federal funds rate, yields on short- and than in the previous forecast. medium-term nominal Treasury coupon TheforecastforcorePCEpriceinflasecurities declined substantially after tion over the first half of 2008 was the January 30 FOMC meeting. How- raised in response to elevated readings ever,yieldsonlong-termTreasuriesfell in recent months. In addition, the foremuch less than those on shorter-term cast for headline PCE price inflation instruments, and the yield curve steep- incorporated a much higher rate of ened significantly. Inflation compen- increase for energy prices for the first sation—the difference between yields half of the year; as a result, headline on nominal Treasury securities and PCE price inflation was expected to those on inflation-indexed issues—was substantially exceed core PCE price little changed on balance for shorter- inflationin2008.By2009,theforecasts term issues, but longer-term inflation for both the headline and core PCE compensation rose. price indexes showed inflation receding Intheforecastpreparedforthismeet- fromits2008level,inlinewiththepreing, the staff substantially revised down vious forecasts. its projection for the pace of real GDP In their discussion of the economic throughout 2008. Although the avail- situation and outlook, FOMC particiable data on spending and production pants noted that prospects for both ecoearly in the first quarter were not mate- nomic activity and near-term inflation rially weaker than the staff’s expecta- had deteriorated in view of increasingly tions, many other indicators of real fragile financial markets and tighter activity were more negative. Payroll credit conditions, rising prices for oil employment declined substantially; oil andothercommodities,andthedeepenprices surged again, crimping real ing contraction in the housing sector. household incomes; and measures of Home prices had declined more steeply consumer and business sentiment dete- than anticipated, and the weakening rioratedsharply.Moreover,houseprices housing market, combined with a softfell by more than anticipated, and con- ening in labor markets, appeared to be ditionsinabroadrangeofdebtmarkets weighing on consumer sentiment. Busi-
Minutes of FOMC Meetings, March 255 nesses also were seen as becoming mortgageassetsquiteunclearandmany morepessimisticandcautious,despitea financial institutions experiencing sigstrong foreign demand for U.S. goods. nificant balance sheet pressures, many Strains in financial markets had in- lenders pulled back from risk taking— creased, portending a possible further notablybyincreasingcollateralmargins tighteningintheavailabilityofcreditto on secured lending—and liquidity dihouseholds and businesses. Against this minished in a number of financial marbackdrop, many participants thought kets.Inthesecircumstances,manymarsome contraction in economic activity ket participants were experiencing in the first half of 2008 now appeared greater difficulties obtaining funding, likely. The economy was expected to and meeting participants regarded fibegin to recover in the second half of nancial markets as unusually fragile. the year, supported by recent monetary The new liquidity facilities recently policy easing and fiscal stimulus. Ac- introduced by the Federal Reserve commodative monetary policy and a would probably be helpful in bolstering recovery in financial markets along market liquidity and promoting orderly with an abatement of the downdraft in market functioning, but even so, the housing activity were expected to help ongoing strains were likely to raise the foster a further pickup in economic price and reduce the availability of growth in 2009. However, considerable credit to businesses and households. uncertainty surrounded this forecast, Evidence that an adverse feedback loop and some participants expressed con- wasunderway,inwhicharestrictionin cern that falling house prices and credit availability prompts a deteriorastresses in financial markets could lead tion in the economic outlook that, in to a more severe and protracted down- turn, spurs additional tightening in turn in activity than currently antici- credit conditions, was discussed. Sevpated. Participants noted that recent eralparticipantsnotedthattheproblems readingsoninflationhadgenerallybeen of declining asset values, credit losses, elevated, that energy prices had risen andstrainedfinancialmarketconditions sharply, and that some indicators of could be quite persistent, restraining inflation expectations had risen. Most credit availability and thus economic participants anticipated that a flattening activityforatimeandhavingthepotenof oil and other commodity prices and tial subsequently to delay and damp easing pressures on resources would economic recovery. contribute to some moderation in infla- Participants noted that the contraction pressures. Nonetheless, uncertain- tion in the housing sector had deepened ties about the outlook for inflation had and that considerable uncertainty surrisen. rounded the outlook for housing. Al- Stresses in financial markets had though some stabilization in housing intensified noticeably since the January markets was likely needed to help unmeeting. Several meeting participants derpin an economic recovery in coming notedthatpricediscoveryformortgage- quarters, there was little indication that related financial assets had become that process had yet begun. Elevated increasingly difficult in an environment rates of foreclosures and large invenof declining house prices and consider- tories of unsold property were likely to able uncertainty as to the ultimate depress home prices for some time. extent of such declines. With the mag- Lower home prices would eventually nitude and distribution of losses on buoy home buying, but in the mean-
256 95th Annual Report, 2008 time the prospect of continued price mixedbut,overall,inventoriesappeared declines could lead potential homebuy- to be roughly in balance with desired erstodeferpurchasesforatime,further levels. damping housing activity and adding to In discussing the external sector of downward pressure on home values. the economy, some participants indi- Participants noted that the trajectory of cated that net exports remained a house prices was a major source of notable source of support for the econuncertainty in their economic outlook. omy. Growth in exports was being sup- Recent data and anecdotal reports portedbystrengthinforeigneconomies from business contacts suggested that as well as declines in the foreign consumer spending was decelerating exchange value of the dollar. However, noticeably, though it apparently had not some of the recent increase in net yet actually declined substantially. Par- exports resulted from weaker imports, ticipants noted that private payroll which reflected softer domestic spendemployment had fallen in February for ing. Some participants saw somewhat the third consecutive month, and sug- slower global economic growth as a gested that increasing concerns among possible consequence of the problems workers about prospects for employ- in financial markets and weakness in ment and income likely were holding the United States and noted that such a down consumer outlays. Rising energy development could potentially limit the priceswerealsodampinggrowthinreal support that exports would provide to incomes. One participant reported that the U.S. economy going forward. lenders were restricting draws on home The recent information on inflation equitylines,andthetighteningofcredit was seen as disappointing. With the availability more generally was prob- exception of the February report on ably starting to constrain consumer consumer prices, readings on inflation spending. Also, the continued fall in had generally been elevated. Agriculhome prices and declines in equity tural prices were rising at a substantial prices were weighing on household clip, partly in response to strong global wealth, with a depressing effect on demand, lean supplies, and a lower forspending. eignexchangevalueofthedollar.Other The outlook for business spending commodity prices also were climbing had also dimmed since the time of the rapidly, and crude oil prices were near January meeting. Anecdotal reports recordlevels.Severalparticipantsstated from many regions of the country that business contacts had emphasized pointed to a retrenchment in capital that their input costs were rising and spendinginresponsetoincreasedpessi- thattheywereseekingtopassonhigher mism about economic prospects and costs to their customers. Some particiheightened caution on the part of busi- pants, however, expressed the view that ness managers. The tightening supply emerging economic slack would limit of credit was seen as exacerbating this the extent to which firms could pass on softnessinbusinessoutlaysandcontrib- their higher costs and could serve to uting particularly to a pullback from damp inflation more generally. Morenonresidential construction projects. over, available data and anecdotal However, investment spending on agri- reports suggested that unit labor costs cultural equipment was reported to be were rising only modestly, and thus quite strong, spurred by soaring crop were seen as unlikely to exert signifiprices. Reports on inventories were cant upward pressure on prices. Weaker
Minutes of FOMC Meetings, March 257 growth, both in the United States and rates should help buoy economic activabroad, should also contribute to a flat- ity and ameliorate strains in these martening of oil and other commodity kets. Even with a substantial easing at prices over time, which would also thismeeting,mostmemberssawoverall reduce price pressures and the threat of inflation as likely to moderate in comrising inflation expectations. On bal- ing quarters, reflecting a projected ance, most participants still expected leveling-out of energy and commodity inflation to moderate later this year and prices and an easing of pressures on in 2009. However, the recent deprecia- resource utilization. However, inflation tion of the dollar could boost import pressures had apparently risen even as prices and thus contribute to higher the outlook for growth had weakened. inflation. Moreover, with both core and Withtheuncertaintiesintheoutlookfor headline inflation having been some- both economic activity and inflation what elevated, participants expressed elevated, members noted that approprisome concern that inflation expecta- ately calibrating the stance of policy tions might become less firmly an- was difficult, partly because some time chored. Indeed, some indicators sug- would be required to assess the effects gested that inflation expectations had of the substantial easing of policy to edged higher of late. In view of these date. All in all, members judged that a considerations, significant uncertainty 75 basis point easing of policy at this attendedthenear-termoutlookforprice meeting was appropriate to address the pressures. On balance, however, partic- combination of risks of slowing ecoipants emphasized that appropriate nomic growth, inflationary pressures, monetary policy, combined with effec- and financial market disruptions. tive communication of the Committee’s The Committee agreed that the statecommitment to price stability, would ment to be released after the meeting foster price stability over time. should indicate that economic activity In the Committee’s discussion of had weakened further, reflecting slower monetary policy for the intermeeting growth in consumer spending and softperiod, most members judged that a ening in the labor market, that financial substantial easing in the stance of markets remained under considerable monetary policy was warranted at this stress, and that the tightening of credit meeting. The outlook for economic conditions and the deepening of the activity had weakened considerably housing market contraction were likely since the January meeting, and mem- to weigh on economic growth over the bers viewed the downside risks to eco- next few quarters. Given recent develnomic growth as having increased. opments, the Committee concurred that Indeed, some believed that a prolonged the statement should note that inflation and severe economic downturn could hadbeenelevatedandthatsomeindicanot be ruled out given the further tors of inflation expectations had risen, restriction of credit availability and on- but agreed that the announcement going weakness in the housing market. should also reiterate that inflation was Membersrecognizedthatmonetarypol- expected to moderate in coming quaricy alone could not address fully the ters. As in recent statements, the Comunderlying problems in the housing mittee emphasized that it would conmarket and in financial markets, but tinue to monitor inflation developments they noted that, through a range of carefully. The Federal Reserve had imchannels, lower short-term real interest plementedanumberofmeasurestofos-
258 95th Annual Report, 2008 ter market liquidity in recent weeks, moderate in coming quarters, reflecting a andmembersthoughtthatthestatement projected leveling-out of energy and other commodity prices and an easing of presshould note that policy actions taken sures on resource utilization. Still, uncertoday and earlier, including those litainty about the inflation outlook has quidity measures, would promote mod- increased.Itwillbenecessarytocontinueto erate growth over time. In light of the monitorinflationdevelopmentscarefully. uncertainties regarding the housing sec- Today’s policy action, combined with tor and financial market developments, those taken earlier, including measures to foster market liquidity, should help to prohowever, the Committee repeated its mote moderate growth over time and to recent indications that downside risks mitigate the risks to economic activity. to growth remained. The Committee However, downside risks to growth remain. agreed on the need to act in a timely The Committee will act in a timely manner manner to promote its dual objectives as needed to promote sustainable economic of sustainable economic growth and growthandpricestability. price stability. Votes for this action: Messrs. Ber- At the conclusion of the discussion, nanke, Geithner, Kohn, Kroszner, and Mishkin, Ms. Pianalto, Messrs. Stern the Committee voted to authorize and and Warsh. Votes against this action: directtheFederalReserveBankofNew Messrs.FisherandPlosser. York, until it was instructed otherwise, to execute transactions in the System Messrs. Fisher and Plosser dissented Account in accordance with the follow- because, in light of heightened inflation ing domestic policy directive: risks, they favored easing policy less aggressively.Incomingdatasuggesteda The Federal Open Market Committee weaker near-term outlook for economic seeksmonetaryandfinancialconditionsthat growth, but the Committee’s earlier will foster price stability and promote suspolicy moves had already reduced the tainable growth in output. To further its long-run objectives, the Committee in the target federal funds rate by 225 basis immediatefutureseeksconditionsinreserve points to address risks to growth, and marketsconsistentwithreducingthefederal the full effect of those rate cuts had yet funds rate to an average of around 21⁄4 perto be felt. While financial markets recent. mained under stress, the Federal Re- The vote encompassed approval of serve had already taken separate, sigthe statement below to be released at nificant actions to address liquidity 2:15 p.m.: issues in markets. In fact, Mr. Fisher felt that focusing on measures targeted The Federal Open Market Committee at relieving liquidity strains would imdecidedtodaytoloweritstargetforthefederal funds rate 75 basis points to 21⁄4 per- prove economic prospects more quickly cent. and lastingly than would further reduc- Recentinformationindicatesthattheout- tions in the federal funds rate at this look for economic activity has weakened point; he believed that alleviating these further. Growth in consumer spending has strains would increase the efficacy of slowed and labor markets have softened. Financial markets remain under consider- the earlier rate cuts. Both Messrs. ablestress,andthetighteningofcreditcon- Fisher and Plosser were concerned that ditions and the deepening of the housing inflation expectations could potentially contractionarelikelytoweighoneconomic become unhinged should the Commitgrowthoverthenextfewquarters. tee continue to lower the funds rate in Inflation has been elevated, and some indicators of inflation expectations have the current environment. They pointed risen. The Committee expects inflation to to measures of inflation and indicators
Minutes of FOMC Meetings, March 259 of inflation expectations that had risen, expected to help restore the functioning andMr.Fisherstressedtheinternational offinancialmarketsmoregenerallyand influences on U.S. inflation rates. Mr. thereby promote the effective conduct Plosser noted that the Committee could of monetary policy as well as macronot afford to wait until there was clear economic stability. During the discusevidence that inflation expectations sion, participants expressed concerns were no longer anchored, as by then it that establishment of the facility could would be too late to prevent a further be viewed as setting a precedent and increase in inflation pressures. thus raise expectations of other actions Itwasagreedthatthenextmeetingof in the future, and they also noted some the Committee would be held on Tues- uncertainty about how effective the day−Wednesday, April 29–30, 2008. facility would be in practice. On bal- The meeting adjourned at 1:15 p.m. ance, the Committee decided that the facilitycouldproveusefulinpreventing an escalation of an unhealthy dynamic Notation Vote that was developing in money and By notation vote completed on Febru- credit markets, in which liquidity and ary 19, 2008, the Committee unani- collateral concerns were spreading. In mously approved the minutes of the addition, the Committee agreed to FOMC meeting held on January 29–30, expand and extend the existing recipro- 2008. cal currency agreements with the European Central Bank and the Swiss National Bank. Conference Call The Committee voted to approve the OnMarch10,2008,theCommitteemet following resolutions: to review financial market develop- Term Securities Lending Facility ments and to consider proposals aimed at supporting the liquidity and orderly In addition to the current authorization functioningofthosemarkets.Inlightof granted to the Federal Reserve Bank of the sharp further deterioration of some New York to engage in overnight secukey money and credit markets, and rities lending transactions, and in order against the backdrop of a weaker eco- to ensure the effective conduct of open nomic outlook, meeting participants market operations, the Federal Open discussed the potential usefulness and Market Committee authorizes the Fedrisks of instituting a Term Securities eral Reserve Bank of New York to lend Lending Facility, under which primary up to $200 billion of U.S. Government dealers would be able to borrow Trea- securitiesheldintheSystemOpenMarsury securities for a term of approxi- ket Account to primary dealers for a matelyonemonthagainstanycollateral term that does not exceed 35 days at eligible for open market operations and rates that shall be determined by comthe highest-quality private mortgage petitive bidding. securities. Most participants concluded These lending transactions may be that offering this facility was an appro- against pledges of U.S. Government priate step that could help alleviate securities, other assets that the Reserve pressures in the financing markets for Bank is specifically authorized to buy Treasury and some mortgage-backed and sell under section 14 of the Federal securities. By improving conditions in Reserve Act (including federal agency funding markets, the measure was residential-mortgage-backed securities
260 95th Annual Report, 2008 (MBS)), and non-agency AAA-rated currency arrangement (“swap” arrangeresidential MBS. ment) with the Swiss National Bank to The Federal Reserve Bank of New an amount not to exceed $6 billion. York shall set a minimum lending fee Draws are authorized up to the full consistent with the objectives of the amount of the swap. The current swap program and apply reasonable limita- arrangement shall be extended until tions on the total amount of a specific September 30, 2008, unless further issue that may be auctioned and on the extended by the Federal Open Market amount of securities that each dealer Committee. may borrow. Votes for these actions: Messrs. Ber- The Federal Reserve Bank of New nanke, Geithner, Fisher, Kohn, and Yorkmayrejectbidswhichcouldfacili- Kroszner,Ms.Pianalto,Messrs.Plosser tate a dealer’s ability to control a single and Warsh, and Ms. Yellen. Votes issue as determined solely by the Fed- against these actions: None. Absent eral Reserve Bank of New York. and not voting: Mr. Mishkin. Ms. Yellenvotedasalternatemember. This authority shall expire at such timeasdeterminedbytheFederalOpen Brian F. Madigan Market Committee or the Board of Secretary Governors. Secretary’s note: By notation vote completed on March 20, 2008, the Meeting Held on Committee unanimously approved a April 29–30, 2008 resolutionthataddednon-agencyAAArated commercial-mortgage-backed A meeting of the Federal Open Market securitiestothelistofcollateralaccept- Committee was held in the offices of able in connection with the Term Se- the Board of Governors of the Federal curities Lending Facility. Reserve System in Washington, D.C., onTuesday,April29,2008at2:00p.m. Swap Authorizations and continued on Wednesday, April 30, The Federal Open Market Committee 2008 at 9:00 a.m. directs the Federal Reserve Bank of NewYorktoincreasetheamountavail- Present: Mr.Bernanke,Chairman able from the System Open Market Mr.Geithner,ViceChairman Account under the existing reciprocal Mr.Fisher currency arrangement (“swap” arrange- Mr.Kohn ment) with the European Central Bank Mr.Kroszner to an amount not to exceed $30 billion. Mr.Mishkin Ms.Pianalto Withinthataggregatelimit,drawsofup Mr.Plosser to $15 billion are hereby authorized. Mr.Stern The current swap arrangement shall be Mr.Warsh extended until September 30, 2008, Ms. Cumming, Messrs. Evans, Lacker, unless further extended by the Federal and Lockhart, and Ms. Yellen, Open Market Committee. Alternate Members of the Federal TheFederalOpenMarketCommittee OpenMarketCommittee directs the Federal Reserve Bank of Messrs. Bullard, Hoenig, and Rosen- NewYorktoincreasetheamountavailgren, Presidents of the Federal able from the System Open Market Reserve Banks of St. Louis, Kan- Account under the existing reciprocal sas City, and Boston, respectively
Minutes of FOMC Meetings, April 261 Mr.Lyon,FirstVicePresident,Federal Ms. Edwards,6 Associate Director, ReserveBankofMinneapolis Division of Monetary Affairs, BoardofGovernors Mr.Madigan,SecretaryandEconomist Ms.Danker,DeputySecretary Ms. Shanks,6 Associate Secretary, Mr.Skidmore,AssistantSecretary Office of the Secretary, Board of Ms.Smith,AssistantSecretary Governors Mr.Alvarez,GeneralCounsel Mr.Baxter,DeputyGeneralCounsel Messrs. Reifschneider and Wascher, Mr.Sheets,Economist Associate Directors, Division of Mr.Stockton,Economist Research and Statistics, Board of Governors Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. Rosenblum, Mr. Gagnon, Visiting Associate Direc- Slifman, Sniderman, and Wilcox, tor, Division of Monetary Affairs, AssociateEconomists BoardofGovernors Mr. Dudley, Manager, System Open Ms. Martin,6 Associate General Coun- MarketAccount sel,LegalDivision,BoardofGovernors Ms. J. Johnson,6 Secretary, Office of theSecretary,BoardofGovernors Mr. Carpenter,6 Assistant Director, Division of Monetary Affairs, Ms. Roseman,6 Director, Division of BoardofGovernors Reserve Bank Operations and Payment Systems, Board of Gov- Mr. Dale, Senior Adviser, Division of ernors Monetary Affairs, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Mr.Oliner,SeniorAdviser,Divisionof Management, Board of Governors Research and Statistics, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board Ms. Allison,6 Senior Counsel, Legal ofGovernors Division,BoardofGovernors Mr.Frierson,6DeputySecretary,Office Mr. Gross,6 Special Assistant to the of the Secretary, Board of Gover- Board, Office of Board Members, nors BoardofGovernors Ms. Bailey, Deputy Director, Division Ms. Weinbach, Adviser, Division of ofBankingSupervisionandRegu- Monetary Affairs, Board of Govlation,BoardofGovernors ernors Mr. Clouse, Deputy Director, Division Mr. Small, Project Manager, Division of Monetary Affairs, Board of of Monetary Affairs, Board of Governors Governors Messrs. Hammond6 and Marquardt,6 Mr.Luecke,SectionChief,Divisionof Deputy Directors, Division of Monetary Affairs, Board of Gov- Reserve Bank Operations and ernors Payment Systems, Board of Gov- Ms.Beattie,6AssistanttotheSecretary, ernors Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs,BoardofGovernors 6. Attended portion of the meeting relating to theimplicationsofinterestonreservesformone- Ms.Hughes,6StaffAssistant,Officeof tarypolicyimplementation. theSecretary,BoardofGovernors
262 95th Annual Report, 2008 Mr. Fuhrer, Executive Vice President, ber was taken at this meeting because FederalReserveBankofBoston of the provision that each party must Messrs. Hilton, McAndrews,6 Rasche, provide six months’ prior notice of an Rudebusch, Steindel, Sullivan, intention to terminate its participation. and Weinberg, Senior Vice Presi- Inviewofcontinuingstrainsininterdents, Federal Reserve Banks of bank and other financial markets, the New York, New York, St. Louis, Committeetookupproposalstoexpand San Francisco, New York, Chiseveral of the liquidity arrangements cago, and Richmond, respectively that had been put in place in recent Messrs. Clark and Meyer,6 Vice Presi- months. Chairman Bernanke indicated dents, Federal Reserve Banks of his intention to increase the overall size Kansas City and Philadelphia, of the Term Auction Facility under delrespectively egated authority from the Board of Mr. Weber, Senior Research Officer, Governors, and he proposed increases Federal Reserve Bank of Minnein the swap lines with the European apolis Central Bank and Swiss National Bank Mr. Roberds, Policy Adviser, Federal to help address pressures in short-term ReserveBankofAtlanta dollarfundingmarkets.Meetingparticipants discussed the possible costs and The Manager of the System Open benefits of a proposed broadening of Market Account reported on recent deeligible collateral for the Term Securivelopments in foreign exchange marties Lending Facility (TSLF). On balkets.Therewerenoopenmarketoperaance, the Committee agreed that extions in foreign currencies for the panding the range of eligible collateral System’saccountintheperiodsincethe for the TSLF might help to increase the previous meeting. The Manager also effectiveness of the facility and so furreported on developments in domestic ther promote the orderly functioning of financial markets and on System open financial markets. market operations in government secu- By unanimous votes, the Committee rities and federal agency obligations approved the following three resoluduring the period since the previous tions: meeting. By unanimous vote, the Committee ratified these transactions. The Federal Open Market Committee By unanimous vote, the Committee directs the Federal Reserve Bank of New York to increase the amount available from extendedforoneyearbeginninginmidtheSystemOpenMarketAccountunderthe December 2008 the reciprocal currency existing reciprocal currency arrangement (“swap”) arrangements with the Bank (“swap” arrangement) with the European of Canada and the Banco de Mexico. Central Bank to an amount not to exceed ThearrangementwiththeBankofCan- $50 billion. Within that aggregate limit, drawsofupto$25billionareherebyauthoada is in the amount of $2 billion rized. The current swap arrangement shall equivalent and that with the Banco de be extended until January 30, 2009, unless Mexico is in the amount of $3 billion further extended by the Federal Open Marequivalent.Botharrangementsareasso- ketCommittee. ciated with the Federal Reserve’s par- The Federal Open Market Committee directs the Federal Reserve Bank of New ticipationintheNorthAmericanFrame- York to increase the amount available from work Agreement of 1994. The vote to theSystemOpenMarketAccountunderthe renew the System’s participation in the existing reciprocal currency arrangement swap arrangements maturing in Decem- (“swap” arrangement) with the Swiss
Minutes of FOMC Meetings, April 263 National Bank to an amount not to exceed and the labor force participation rate $12 billion. Within that aggregate limit, was little changed. draws of up to $6 billion are hereby autho- Although industrial production rose rized. The current swap arrangement shall in March, production over the first be extended until January 30, 2009, unless quarter as a whole was soft, having defurther extended by the Federal Open MarketCommittee. clined, on average, in January and Feb- In connection with the Term Securities ruary. Gains in manufacturing output of Lending Facility, the Federal Reserve Bank consumerandhigh-techgoodsinMarch of New York may accept pledges of AAA- were partially offset by a sharp drop in rated asset-backed securities (in addition to production of motor vehicles and parts theotherassetspreviouslyauthorizedbythe and by ongoing weakness in the output FOMC) as collateral against loans of U.S. Governmentsecurities. of construction-related industries. The output of utilities rebounded in March The information reviewed at the Apfollowing a weather-related drop in rilmeeting,whichincludedtheadvance February, and mining output moved up dataonthenationalincomeandproduct after exhibiting weakness earlier in the accounts for the first quarter, indicated year. The factory utilization rate edged that economic growth had remained up in March but stayed well below its weak so far this year. Labor market recent high in the third quarter of 2007. conditions had deteriorated further, and Real consumer spending expanded manufacturing activity was soft. Hous- slowly in the first quarter. Real outlays ing activity had continued its sharp on durable goods, including automodescent, and business spending on both biles, were estimated to have declined structures and equipment had turned in March, but expenditures on nonduradown. Consumer spending had grown ble goods were thought to have edged very slowly, and household sentiment up,boostedbyasizableincreaseinreal had tumbled further. Core consumer outlays for gasoline. For the quarter as price inflation had slowed in recent a whole, however, real expenditures on months, but overall inflation remained both durable and nondurable goods elevated. declined. Real disposable personal in- Labor demand continued to weaken comealsogrewslowlyinthefirstquarin March. Private payroll employment ter, restrained by rapidly rising prices fell in March at a rate similar to that in forenergyandfood.Theratioofhouse- January and February. The reduction in hold wealth to disposable income apjobs was again widespread, with losses peared to have moved down again in registered at firms in the construction, the first quarter, damped by the appremanufacturing, and professional and ciablenetdeclineinbroadequityprices business services sectors. Employment over that period and by further reatfirmsinthenonbusinessservicessec- ductions in house prices. Measures of tor, which includes health care, contin- consumer sentiment fell sharply in ued to rise. Aggregate hours of private March and April; the April reading of production or nonsupervisory workers consumer sentiment published in the movedupinMarchbutpostedadecline Reuters/University of Michigan Survey for the first quarter as a whole after of Consumers was near the low levels having contracted slightly in the first posted in the early 1990s. two months of the year. The unemploy- Residentialconstructioncontinuedits ment rate rose to 5.1 percent in March, rapid contraction in the first quarter. significantly above its level a year ago, Single-family housing starts maintained
264 95th Annual Report, 2008 their steep downward trajectory in but motor vehicle inventories continued March, and starts of multifamily homes to fall. Some of the drop in motor vehideclined to the lower portion of their cle stocks was a result of the disruption recentrange.Salesofnewsingle-family to production from a labor dispute. The homes declined in February to a very ratio of book-value inventories to sales low rate and dropped further in March. in the manufacturing and trade sector Even though production cuts by home- (excluding motor vehicles) moved up a builders helped to reduce the level of little,onaverage,inJanuaryandFebruinventories at the end of February, the ary. Still, outside of categories tied to slow pace of sales caused the ratio of housing and construction, firms did not unsold new homes to sales to increase appear to be burdened with excess further. Sales of existing homes re- stocks. mained weak, on average, in February The U.S. international trade deficit and March, and the index of pending widened in February. Imports rose sales agreements in February suggested sharply, more than offsetting continued continued sluggish activity in coming robust growth of exports. Most major months. The recent softening in resi- categories of non-oil imports increased dential housing demand was consistent in February, and imports of natural gas, with reports of tighter credit conditions automobiles, and consumer goods surforbothprimeandnonprimeborrowers. ged. Imports of services continued to In the business sector, real spending rise at a robust pace. By contrast, oil on equipment and software contracted imports moved down. Increases in exslightly in the first quarter after having ports in February were concentrated in posted a small increase in the fourth agricultural goods, automobiles, and quarter. Following declines in both industrial supplies, particularly fuels. shipments and orders of nondefense Exports of capital goods declined for capitalgoodsexcludingaircraftinJanu- the second consecutive month, with ary and February, shipments increased weakness evident across a wide range in March, but orders were flat. The of products. deteriorating outlook for sales, reduced Real economic growth in the major credit availability, and downbeat read- advanced foreign economies was estiings on business sentiment all pointed matedtohaveslowedfurtherinthefirst to further weakness in capital spending quarter and consumer and business senin the near term. Real outlays for non- timent was generally down. In Japan, residential structures also were esti- business sentiment fell significantly mated to have declined in the first and indicators of investment remained quarter. Indicators suggested that the weak.Intheeuroarea,growthwasestidemand for commercial properties had mated to have remained subdued in the fallen off substantially from record lev- first quarter, with Germany and France els last year, and commercial property faring better than Italy and Spain. prices appeared to be decelerating. Growth in the United Kingdom slowed Reduced credit availability and less- in the first quarter, as credit conditions favorable lending terms had apparently tightened. Available data for Canada weighed on activity in this sector. indicated a continued substantial drag Real investment in nonfarm inven- from exports in the first quarter, altories excluding motor vehicles was though domestic demand appeared relaestimated to have bounced back to a tively robust. In emerging market econmoderateannualrateinthefirstquarter, omies, economic growth slowed some
Minutes of FOMC Meetings, April 265 in the fourth quarter and was estimated economic activity had weakened furto have held about steady in the first ther; growth in consumer spending had quarter. In emerging Asia, real eco- slowed,andlabormarketshadsoftened. nomic growth was estimated to have It also indicated that financial markets picked up in the first quarter from a remained under considerable stress, and robust pace in the fourth quarter, led by that the tightening of credit conditions brisk expansions in China and Sin- and the deepening of the housing congapore. Growth in other emerging traction were likely to weigh on eco- Asian economies generally remained nomic growth over the next few quarsubdued. The pace of expansion in ters. Inflation had been elevated, and Latin America likely declined some in some indicators of inflation expectathe first quarter, largely because the tions had risen, but the Committee Mexican economy slowed in the wake expected inflation to moderate in comof softer growth in the United States. ing quarters, reflecting a projected Headline inflation in the United leveling-out of energy and other com- States was elevated in March. Although modity prices and an easing of presthe increase in food prices slowed in sures on resource utilization. Still, the March relative to earlier in the year, Committee noted that uncertainty about energy prices rose sharply. Excluding the inflation outlook had increased, and these categories, core inflation rose at a that it would be necessary to continue relatively subdued rate again in March. to monitor inflation developments care- The core personal consumption expen- fully. The Committee said that its ditures (PCE) price index increased at a action, combined with those taken earsomewhat more moderate rate in the lier,includingmeasurestofostermarket firstquarterthaninthefourthquarterof liquidity, should help to promote mod- 2007. Survey measures of households’ erate growth over time and to mitigate expectations for year-ahead inflation the risks to economic activity. The rose further in early April, but survey Committee noted, however, that downmeasures of longer-term inflation ex- sideriskstogrowthremained,andindipectations moved relatively little. Aver- cated that it would act in a timely manage hourly earnings increased in March ner as needed to promote sustainable at a somewhat slower pace than in economic growth and price stability. January and February. This wage mea- Conditions in U.S. financial markets sure rose significantly less over the improved somewhat, on balance, over 12 months that ended in March than in the intermeeting period, but strains in the previous 12 months. The employ- some short-term funding markets inment cost index for hourly compensa- creased. Pressures on bank balance tioncontinuedtoriseatamoderaterate sheets and capital positions appeared to in the first quarter. mount further, reflecting additional At its March 18 meeting, the Federal lossesonasset-backedsecuritiesandon Open Market Committee (FOMC) low- business and household loans. Against ered its target for the federal funds rate thisbackdrop,termspreadsininterbank 75 basis points, to 21⁄ 4 percent. In addi- funding markets and spreads on comtion, the Board of Governors approved mercial paper issued by financial instia decrease of 75 basis points in the dis- tutions widened significantly. Financial countrate,to21⁄ 2 percent.TheCommit- institutions continued to tap the Federal tee’s statement noted that recent infor- Reserve’s credit programs. Primary mation indicated that the outlook for credit borrowing picked up noticeably
266 95th Annual Report, 2008 after March 16, when the Federal conditions in the Senior Loan Officer Reservereducedthespreadbetweenthe Opinion Survey on Bank Lending Pracprimary credit rate and the target fed- tices conducted in April. Part of the eral funds rate to 25 basis points. strength in commercial and industrial Demand for funds from the Term Auc- loans was apparently due to increased tion Facility stayed high over the per- utilization of existing credit lines, the iod. In addition, the Primary Dealer pricing of which reflects changes in Credit Facility drew substantial demand lending policies only with a lag. Some through late March, although the banks surveyed in April reported that amount outstanding subsequently de- they had started to take actions to limit clined somewhat. Early in the period, their exposure to home equity lines of historically low interest rates on Trea- credit, draws on which had grown rapsury bills and on general-collateral idly in recent months. After having Treasury repurchase agreements indi- tightenedconsiderablyinMarch,condicated a considerable demand for safe- tions in the conforming segment of the havenassets.However,FederalReserve residential mortgage market recovered actions that increased the availability of somewhat. Spreads of rates on con- Treasury securities to the public appar- forming residential mortgages over ently helped to improve conditions in those on comparable-maturity Treasury those markets. In five weekly auctions securities decreased, and credit default beginningonMarch27,theTermSecu- swap premiums for the governmentrities Lending Facility provided a sub- sponsored enterprises declined substanstantialvolumeofTreasurysecuritiesin tially. Broad stock price indexes inexchange for less-liquid assets. Yields creased markedly over the intermeeting on short-term Treasury securities and period, mainly in response to earnings Treasury repurchase agreements moved reportsandannouncementsofrecapitalhigher,onbalance,followingtheseauc- izations from major financial institutions;nonetheless,“haircuts”appliedby tions that evidently lessened investors’ lenders on non-Treasury collateral re- concerns about the possibility of severe mained elevated, and in some cases difficulties materializing at those firms. increased somewhat, toward the end of Conditions in the money markets of the period. major foreign economies remained In longer-term credit markets, yields strained, particularly in the United on investment-grade corporate bonds Kingdomandtheeuroarea.Terminterrose, but their spreads relative to Trea- bank funding spreads rose in these sury securities decreased a bit from re- areas, despite steps taken by their cencent multiyear highs. In contrast, yields tral banks to help ease liquidity preson speculative-grade issues dropped, sures.Yieldsonsovereigndebtintheadand their spreads relative to Treasury vanced foreign economies moved up in yields narrowed significantly. Gross a range that was about in line with the bond issuance by nonfinancial firms increasesincomparableTreasuryyields was robust in March and the first half in the United States. The tradeofAprilandincludedasmallamountof weighted foreign exchange value of the issuance by speculative-grade firms. dollar against major currencies rose. Supported by increases in business and M2expandedbrisklyagaininMarch, residentialrealestateloans,commercial as households continued to seek the bank credit expanded briskly in March relative liquidity and safety of liquid despite the report of tighter lending deposits and retail money market mu-
Minutes of FOMC Meetings, April 267 tual funds. The increases in these com- 2009. The available indicators of recent ponentswerealsosupportedbydeclines economic activity had come in close to in opportunity costs stemming from the staff’s expectations and had continmonetary policy easing. ued to suggest that a substantial soften- Over the intermeeting period, the ing in economic activity was under expected path of monetary policy over way. The staff projection pointed to a the next year as measured by money contraction of real GDP in the first half market futures rates moved up signifi- of 2008 followed by a modest rise in cantly on net, apparently because eco- the second half of this year, aided in nomic data releases and announcements partbythefiscalstimuluspackage.The by large financial firms imparted forecast showed real GDP expanding at greater confidence among investors a rate somewhat above its potential in about the prospects for the economy’s 2009, reflecting the impetus from performance in coming quarters. Fu- cumulative monetary policy easing, turesratesalsomovedupinresponseto continued strength in net exports, a both the Committee’s decision to lower gradual lessening in financial market the target for the federal funds rate by strains, and the waning drag from past 75 basis points at the March 18 meet- increases in energy prices. Despite this ing, which was a somewhat smaller pickupinthepaceofactivity,thetrajecreduction than market participants had tory of resource utilization anticipated expected, and the Committee’s accom- through 2009 implied noticeable slack. panying statement, which reportedly TheprojectionforcorePCEpriceinflaconveyed more concern about inflation tionin2008asawholewasunchanged; than had been anticipated. The subse- itwasreducedabitoverthefirsthalfof quent release of the minutes of the the year to reflect the somewhat lower- March FOMC meeting elicited limited than-expected readings of recent core reaction. Consistent with the higher PCE inflation and raised a bit over the expected path for policy and easing of second half of the year to incorporate safe-haven demands, yields on nominal the spillover from larger-than-an- Treasury coupon securities rose sub- ticipated increases in prices of crude oil stantially over the period, and the Trea- and non-oil imports since the previous sury yield curve flattened. Measures of FOMC meeting. The forecast of headinflation compensation for the next five line PCE inflation in 2008 was revised years derived from yields on inflation- up in light of the further run-up in indexed Treasury securities were quite energy prices and somewhat higher volatile around the time of the March foodpriceinflation;headlinePCEinfla- FOMC meeting and on balance in- tion was expected to exceed core PCE creasedsomewhatovertheintermeeting priceinflationbyaconsiderablemargin period, although they remained in the this year. In view of the projected slack lower portion of their range over the in resource utilization in 2009 and flatpast several months. Measures of tening out of oil and other commodity longer-term inflation compensation de- prices, both core and headline PCE clined, returning to around the middle price inflation were projected to drop of their recent elevated range. backfromtheir2008levels,inlinewith Intheforecastpreparedforthismeet- the staff’s previous forecasts. ing, the staff made little change to its In conjunction with the FOMC meetprojection for the growth of real gross ing in April, all meeting participants domestic product (GDP) in 2008 and (Federal Reserve Board members and
268 95th Annual Report, 2008 Reserve Bank presidents) provided an- flect transitory factors, and energy and nual projections for economic growth, other commodity prices had increased the unemployment rate, and inflation further since March. Total PCE inflafor the period 2008 through 2010. The tion was projected to moderate from projections are described in the Sum- its current elevated level to between mary of Economic Projections, which 11⁄ 2 percent and 2 percent in 2010, is attached as an addendum to these although participants stressed that this minutes. expected moderation was dependent on In their discussion of the economic food and energy prices flattening out situation and outlook, FOMC partici- and critically on inflation expectations pants noted that the data received since remaining reasonably well anchored. theMarchFOMCmeeting,whilepoint- Conditions across a number of finaning to continued weakness in economic cial markets had improved since the activity, had been broadly consistent previous FOMC meeting. Equity prices with their expectations. Conditions and yields on Treasury securities had across a number of financial markets increased, volatility in both equity and were judged to have improved over the debt markets had ebbed somewhat, and intermeeting period, but financial mar- a range of credit risk premiums had kets remained fragile and strains in moveddown.Participantsnotedthatthe some markets had intensified. Although better tone of financial markets had participants anticipated that further im- beenhelpedbytheapparentwillingness provement in market conditions would and ability of financial institutions to occur only slowly and that some back- raise new capital. Investors’ confidence sliding was possible, the generally bet- had probably also been buoyed by corterstateoffinancialmarketshadcaused porate earnings reports for the first participants to mark down the odds that quarter, which suggested that profit economicactivitycouldbeseverelydis- growth outside of the financial sector ruptedbyafurthersubstantialdeteriora- remained solid, and also by the resolution in the financial environment. Eco- tion of the difficulties of a major nomic activity was anticipated to be broker-dealer in mid-March. Moreover, weakestoverthenextfewmonths,with the various liquidity facilities intromany participants judging that real duced by the Federal Reserve in recent GDP was likely to contract slightly in months were thought to have bolstered the first half of 2008. GDP growth was market liquidity and aided a return to expected to begin to recover in the sec- more orderly market functioning. But ond half of this year, supported by participants emphasized that financial accommodative monetary policy and markets remained under considerable fiscal stimulus, and to increase further stress, noted that the functioning of in 2009 and 2010. Views varied about many markets remained impaired, and the likely pace and vigor of the recov- expressed concern that some of the ery through 2009, although all partici- recent recovery in markets could prove pants projected GDP growth to be at or fragile. Strains in short-term funding abovetrendin2010.Incominginforma- markets had intensified over the intertion on the inflation outlook since the meeting period, in part reflecting con- MarchFOMCmeetinghadbeenmixed. tinuing pressures on the liquidity posi- Readings on core inflation had im- tions of financial institutions. Despite a proved somewhat, but some of this narrowing of spreads on corporate improvement was thought likely to re- bonds, credit conditions were seen as
Minutes of FOMC Meetings, April 269 remaining tight. The Senior Loan Offi- remained a key source of downside risk cer Opinion Survey on Bank Lending to participants’ projections for eco- Practices conducted in April indicated nomic growth. that banks had tightened lending stan- Growth in consumer spending apdardsandpricingtermsonloanstoboth peared to have slowed to a crawl in businesses and households. Participants recent months and consumer sentiment stressedthatitcouldtakesometimefor had fallen sharply. The pressure on the financial system to return to a more households’ real incomes from higher normal footing, and a number of par- energy prices and the erosion of wealth ticipants were of the view that financial resulting from continuing declines in headwinds would probably continue to house prices likely contributed to the restrain economic activity through deceleration in consumer outlays. Remuch of next year. Even so, the likeli- ports from contacts in the banking and hood that the functioning of the finan- financial services sectors indicated that cial system would deteriorate substan- the availability of both consumer credit tially further with significant adverse and home equity lines had tightened implications for the economic outlook considerably further in recent months was judged by participants to have andthatdelinquencyratesonhousehold receded somewhat since the March credit had continued to drift upwards. FOMC meeting. Consumer sentiment and spending had The housing market had continued to alsobeenhelddownbythesofteningin weaken since the previous meeting, and labor markets—nonfarm payroll emparticipants saw little indication of a ployment had fallen for the third conbottoming out in either housing activity secutivemonthinMarchandtheunemor prices. Housing starts and the de- ployment rate had moved up. The mand for new homes had declined fur- restraint on spending emanating from ther, house prices in many parts of the weakness in labor markets was excountry were falling faster than they pected to increase over coming quarhadtowardstheendof2007,andinven- ters, with participants projecting the tories of unsold homes remained quite unemployment rate to pick up further elevated. A small number of partici- this year and to remain elevated in pants reported tentative signs that hous- 2009. ing activity in a few areas of the coun- Consumption spending was likely to try might be beginning to pick up, and be supported in the near term by the a narrowing of credit risk spreads on fiscal stimulus package, which was AAA indexes of sub-prime mortgages expected to boost spending temporarily in recent weeks was also noted. None- inthemiddleofthisyear.Someparticitheless, the outlook for the housing pantssuggestedthattheweakeconomic market remained bleak, with housing environment could increase the propendemand likely to be affected by restric- sity of households to use their tax tive conditions in mortgage markets, rebates to pay down existing debt and fears that house prices would fall fur- so might diminish the impact of the ther, and weakening labor markets. The package. However, it was also noted possibility that house prices could de- that the tightening in credit availability cline by more than anticipated, and that might mean a significant number of the effects of such a decline could be households may be credit constrained amplifiedthroughtheirimpactonfinan- and this might increase the proportion cial institutions and financial markets, of the rebates that is spent. The timing
270 95th Annual Report, 2008 and magnitude of the impact of the meeting had been mixed. Recent readstimuluspackageonGDPwasalsoseen ings on core inflation had improved asdependingontheextenttowhichthe somewhat, although participants noted boost to consumption spending is ab- thatsomeofthatimprovementprobably sorbed by a temporary run-down in reflected transitory factors. Moreover, firms’ inventories or by an increase in theincreaseincrudeoilpricestorecord imports rather than by an expansion in levels, together with rapid increases domestic output. in food and import prices in recent The outlook for business spending months, was likely to put upward presremained decidedly downbeat. Indica- sure on inflation over the next few tors of business sentiment were low, quarters. Prices embedded in futures and reports from business contacts sug- contracts continued to point to a gested that firms were scaling back leveling-off of energy and commodity their capital spending plans. Several prices. Although these futures contracts participants reported that uncertainty probably remained the best basis for abouttheeconomicoutlookwasleading projecting movements in commodity firms to defer spending projects until prices,participantsemphasizedtheconprospects for economic activity became siderable uncertainty attending the clearer. The tightening in the supply of likely path of commodity prices and businesscreditwasalsoseenasholding cautioned that commodity prices in back investment, with some firms ap- recent years had often advanced more parentlyreluctanttoreducetheirliquid- quickly than had been implied by fuitypositionsinthecurrentenvironment. tures contracts. Several participants Spendingonnonresidentialconstruction reported that business contacts had projectscontinuedtoslow,althoughthe expressed growing concerns about the extent of that slowing varied across the increase in their input costs and that country. A few participants reported there were signs that an increasing that the commercial real estate market number of firms were seeking to pass in some areas remained relatively firm, on these higher costs to their customers supported by low vacancy rates. in the form of higher prices. Other par- The strength of U.S. exports re- ticipants noted, however, that the extent mainedanotablebrightspot.Growthin of the pass-through of higher energy exports, which had been supported by and food prices to core retail prices solid advances in foreign economies appeared relatively limited to date, and and by declines in the foreign exchange that profit margins in the nonfinancial value of the dollar, had partially insu- sector remained reasonably high, suglatedtheoutputandprofitsofU.S.com- gesting that there was some scope for panies, especially those in the manu- firms to absorb cost increases without facturing sector, from the effects of raising prices. Available data and anecweakening domestic demand. Several dotal reports indicated that gains in participants voiced concern, however, laborcompensationremainedmoderate, that the pace of activity in the rest of and some participants suggested that the world could slow in coming quar- wage growth was unlikely to pick up ters, suggesting that the impetus pro- sharply in coming quarters if, as anticivided from net exports might well pated,labormarketsremainedrelatively diminish. soft.However,severalparticipantswere The information received on the in- of the view that wage inflation tended flation outlook since the March FOMC to lag increases in prices and so may
Minutes of FOMC Meetings, April 271 not provide a useful guide to emerging ronment. Several participants expressed price pressures. the view that the easing in monetary On balance, participants expected the policy since last fall had not as yet led recent increases in oil and food prices to a loosening in overall financial conto continue to boost overall consumer ditions, but rather had prevented finanprice inflation in the near term; thereaf- cial conditions from tightening as much ter,totalinflationwasprojectedtomod- as they otherwise would have in reerate, with all participants expecting sponse to escalating strains in financial total PCE inflation of between 11⁄ 2 per- markets. This view suggested that the centand2percentby2010.Participants stimulusfrompastmonetarypolicyeasstressedthattheexpectedmoderationin ing would be felt mainly as conditions inflation was dependent on the contin- in financial markets improved. uedstabilityofinflationexpectations.A In the Committee’s discussion of number of participants voiced concern monetary policy for the intermeeting that long-term inflation expectations period, most members judged that polcoulddriftupwardsifheadlineinflation icy should be eased by 25 basis points remained elevated for a protracted per- at this meeting. Although prospects for iod or if the recent substantial policy economic activity had not deteriorated easing was misinterpreted by the public significantly since the March meeting, as suggesting that Committee members theoutlookforgrowthandemployment hadagreatertoleranceforinflationthan remained weak and slack in resource previously thought. The possibility that utilization was likely to increase. An inflation expectations could increase additional easing in policy would help was viewed as a key upside risk to the to foster moderate growth over time inflation outlook. However, participants withoutimpedingamoderationininflaemphasized that appropriate monetary tion. Moreover, although the likelihood policy, combined with effective com- that economic activity would be semunicationoftheCommittee’scommit- verely disrupted by a sharp deteriorament to price stability, would mitigate tion in financial markets had apparently this risk. receded,mostmembersthoughtthatthe Participants stressed the difficulty of risks to economic growth were still gaugingtheappropriatestanceofpolicy skewed to the downside. A reduction in in current circumstances. Some partici- interest rates would help to mitigate pants noted that the level of the federal those risks. However, most members funds target, especially when compared viewed the decision to reduce interest with the current rate of inflation, was ratesatthismeetingasaclosecall.The relatively low by historical standards. substantial easing of monetary policy Eventakingaccountofcurrentfinancial since last September, the ongoing steps headwinds, such a low rate could sug- takenbytheFederalReservetoprovide gest that policy was reasonably accom- liquidity and support market functionmodative. However, other participants ing, and the imminent fiscal stimulus observed that the pronounced strains in would help to support economic activbanking and financial markets imparted ity. Moreover, although downside risks muchgreateruncertaintytosuchassess- togrowthremained,memberswerealso ments and meant that measures of the concerned about the upside risks to the stance of policy based on the real fed- inflation outlook, given the continued eral funds rate were not likely to pro- increases in oil and commodity prices videareliableguideinthecurrentenvi- and the fact that some indicators sug-
272 95th Annual Report, 2008 gested that inflation expectations had The vote encompassed approval of risen in recent months. Nonetheless, the statement below to be released at most members agreed that a further, 2:15 p.m.: modest easing in the stance of policy The Federal Open Market Committee was appropriate to balance better the decidedtodaytoloweritstargetforthefedrisks to achieving the Committee’s dual eral funds rate 25 basis points to 2 percent. objectives of maximum employment Recent information indicates that ecoandpricestabilityoverthemediumrun. nomic activity remains weak. Household The Committee agreed that the state- and business spending has been subdued and labor markets have softened further. ment to be released after the meeting Financial markets remain under considershould take note of the substantial polable stress, and tight credit conditions and icyeasingtodateandtheongoingmea- thedeepeninghousingcontractionarelikely sures to foster market liquidity. In light toweighoneconomicgrowthoverthenext of these significant policy actions, the fewquarters. Although readings on core inflation have risks to growth were now thought to be improvedsomewhat,energyandothercommore closely balanced by the risks to modity prices have increased, and some inflation. Accordingly, the Committee indicators of inflation expectations have feltthatitwasnolongerappropriatefor risen in recent months. The Committee the statement to emphasize the down- expects inflation to moderate in coming side risks to growth. Given these cir- quarters, reflecting a projected leveling-out of energy and other commodity prices and cumstances, future policy adjustments an easing of pressures on resource utilizawould depend on the extent to which tion. Still, uncertainty about the inflation economic and financial developments outlookremainshigh.Itwillbenecessaryto affected the medium-term outlook for continue to monitor inflation developments growth and inflation. In that regard, carefully. Thesubstantialeasingofmonetarypolicy several members noted that it was untodate,combinedwithongoingmeasuresto likelytobeappropriatetoeasepolicyin foster market liquidity, should help to proresponse to information suggesting that mote moderate growth over time and to the economy was slowing further or mitigate risks to economic activity. The even contracting slightly in the near Committee will continue to monitor economic and financial developments and will term, unless economic and financial act as needed to promote sustainable ecodevelopments indicated a significant nomicgrowthandpricestability. weakening of the economic outlook. Votes for this action: Messrs. Ber- At the conclusion of the discussion, nanke, Geithner, Kohn, Kroszner, and the Committee voted to authorize and Mishkin, Ms. Pianalto, Messrs. Stern directtheFederalReserveBankofNew and Warsh. Votes against this action: York, until it was instructed otherwise, Messrs.FisherandPlosser. to execute transactions in the System Messrs. Fisher and Plosser dissented Account in accordance with the follow- because they preferred no change in the ing domestic policy directive: targetfederalfundsrateatthismeeting. The Federal Open Market Committee Although the economy had been weak, seeksmonetaryandfinancialconditionsthat it had evolved roughly as expected will foster price stability and promote sus- since the previous meeting. Stresses in tainable growth in output. To further its financial markets also had continued, long-run objectives, the Committee in the but the Federal Reserve’s liquidity faimmediatefutureseeksconditionsinreserve marketsconsistentwithreducingthefederal cilities were helpful in that regard and fundsratetoanaverageofaround2percent. the more worrisome development in
Minutes of FOMC Meetings, April 273 theirviewwastheoutlookforinflation. ducing the burden and complexity Rising prices for food, energy, and associated with the current system of other commodities; signs of higher in- reserve requirements and ensuring that flation expectations; and a negative real the Committee’s interest rate targets federal funds rate raised substantial could be reliably achieved. Participants concerns about the prospects for infla- noted that frameworks for monetary tion. Mr. Plosser cited the recent rapid policy implementation employed in growth of monetary aggregates as addi- other countries span a wide range and tional evidence that the economy had that the experiences of these countries ampleliquidityaftertheaggressiveeas- provided useful information for the ing of policy to date. Mr. Fisher was Federal Reserve’s consideration of alconcerned that an adverse feedback ternative approaches. They agreed that loopwasdevelopingbywhichlowering furtherstudywasrequiredtonarrowthe the funds rate had been pushing down range of options under consideration the exchange value of the dollar, con- and that it would be important to contributing to higher commodity and im- sult closely with depository institutions port prices, cutting real spending by and others in the design of a new businesses and households, and there- system. fore ultimately impairing economic ac- Itwasagreedthatthenextmeetingof tivity. To help prevent inflation ex- the Committee would be held on Tuespectations from becoming unhinged, day−Wednesday, June 24–25, 2008. both Messrs. Fisher and Plosser felt the The meeting adjourned at 1:00 p.m. Committee should put additional emphasis on its price stability goal at this Notation Votes point, and they believed that another reduction in the funds rate at this meet- By notation vote completed on March ing could prove costly over the longer 20, 2008, the Committee unanimously run. approved a resolution that added non- InajointsessionoftheFederalOpen agency AAA-rated commercial-mort- Market Committee and the Board of gage-backedsecuritiestothelistofcol- Governors, meeting participants turned lateralacceptableinconnectionwiththe to a discussion of the implications of Term Securities Lending Facility. the payment of interest on reserves for By notation vote completed on April monetary policy implementation. Fol- 7, 2008, the Committee unanimously lowing passage of the Financial Ser- approved the minutes of the FOMC vices Regulatory Relief Act of 2006, meeting held on March 18, 2008. which will permit the Federal Reserve to reduce reserve requirements and to Brian F. Madigan pay interest on reserves beginning in Secretary 2011, the staff had undertaken work to explore and evaluate alternative ap- Addendum: proaches to monetary policy implemen- Summary of Economic Projections tationusingthesenewauthorities.After a staff presentation summarizing the In conjunction with the April 2008 work to date, policymakers discussed FOMC meeting, the members of the the potential advantages and disadvan- Board of Governors and the presidents tages of several of the alternative ap- of the Federal Reserve Banks, all of proaches. Considerations included re- whomparticipateinthedeliberationsof
274 95th Annual Report, 2008 Table 1. Economic Projections of Federal Reserve Governors and Reserve Bank Presidents Percent 2008 2009 2010 CentralTendency1 GrowthofrealGDP............. 0.3to1.2 2.0to2.8 2.6to3.1 Januaryprojections ........... 1.3to2.0 2.1to2.7 2.5to3.0 Unemploymentrate.............. 5.5to5.7 5.2to5.7 4.9to5.5 Januaryprojections ........... 5.2to5.3 5.0to5.3 4.9to5.1 PCEinflation ................... 3.1to3.4 1.9to2.3 1.8to2.0 Januaryprojections ........... 2.1to2.4 1.7to2.0 1.7to2.0 CorePCEinflation .............. 2.2to2.4 1.9to2.1 1.7to1.9 Januaryprojections ........... 2.0to2.2 1.7to2.0 1.7to1.9 Range2 GrowthofrealGDP............. 0.0to1.5 1.8to3.0 2.0to3.4 Januaryprojections ........... 1.0to2.2 1.8to3.2 2.2to3.2 Unemploymentrate.............. 5.3to6.0 5.2to6.3 4.8to5.9 Januaryprojections ........... 5.0to5.5 4.9to5.7 4.7to5.4 PCEinflation ................... 2.8to3.8 1.7to3.0 1.5to2.0 Januaryprojections ........... 2.0to2.8 1.7to2.3 1.5to2.0 CorePCEinflation .............. 1.9to2.5 1.7to2.2 1.3to2.0 Januaryprojections ........... 1.9to2.3 1.7to2.2 1.4to2.0 Note:ProjectionsofthegrowthofrealGDP,ofPCE ploymentrateinthefourthquarteroftheyearindicated. inflation,andofcorePCEinflationarepercentchanges Each participant’s projections are based on his or her fromthefourthquarterofthepreviousyeartothefourth assessmentofappropriatemonetarypolicy. quarteroftheyearindicated.PCEinflationandcorePCE 1. Thecentraltendencyexcludesthethreehighestand inflation are the percentage rates of change in, respec- threelowestprojectionsforeachvariableineachyear. tively,thepriceindexforpersonalconsumptionexpendi- 2. Therangeforavariableinagivenyearincludesall tures and the price index for personal consumption participants’projections,fromlowesttohighest,forthat expendituresexcludingfoodandenergy.Projectionsfor variableinthatyear. theunemploymentratearefortheaveragecivilianunemthe FOMC, provided projections for the growthtobemuchweakerin2008than rates of economic growth, unemploy- last year, owing primarily to a continment, and inflation in 2008, 2009, and ued contraction of housing activity, a 2010. Projections were based on infor- reduction in the availability of housemationavailablethroughtheconclusion hold and business credit, and rising of the April meeting, on each partici- energy prices. The unemployment rate pant’sassumptionsregardingarangeof was expected to increase significantly. factors likely to affect economic out- However, output growth further ahead comes, and on his or her assessment of was projected to pick up by enough to appropriate monetary policy. “Appro- begintoreversesomeoftheincreasein priate monetary policy” is defined as the unemployment rate by 2010. In the future policy that, based on current light of the recent surge in the prices information, is deemed most likely to of oil and other commodities, inflation foster outcomes for economic activity was expected to remain elevated in and inflation that best satisfy the par- 2008. Inflation was projected to moderticipant’s interpretation of the Federal ate in 2009 and 2010 as the prices of Reserve’s dual objectives of maximum crude oil and other commodities level employment and price stability. out and economic slack damps cost The projections, which are summa- and price pressures. Most participants rizedintable1andchart1,suggestthat judged that the uncertainty around their FOMC participants expected economic projections for both output growth and
Minutes of FOMC Meetings, April 275 inflation was greater than normal. Most The Outlook viewed the risks to output as weighted to the downside. Participants were The central tendency of participants’ roughly evenly divided as to whether projections for real GDP growth in the risks to the inflation outlook are 2008, at 0.3 to 1.2 percent, was considbroadly balanced or skewed to the erably lower than the central tendency upside. of the projections provided in conjunc-
276 95th Annual Report, 2008 tion with the January FOMC meeting, With output growth well below trend which was 1.3 to 2.0 percent. Partici- this year, most participants expected pants viewed activity as likely to be that the unemployment rate would particularly weak in the first half of move up. The central tendency of par- 2008; some rebound was anticipated in ticipants’ projections for the average the second half of the year. Incoming rate of unemployment in the fourth data on spending and employment quarter of 2008 was 5.5 to 5.7 percent, already indicated a softening economy above the 5.2 to 5.3 percent unemploythisyear.Realincomeswerebeingheld ment rate forecasted in January and downbyhigheroilprices;fallinghouse consistentwithsignificantslackinlabor prices had reduced household wealth; markets and the economy. Most particiand households and businesses were pants expected the unemployment rate facing tighter credit conditions. Exports to edge down in 2009 and 2010. were seen as a notable source of The steep run-up in the prices of oil strength this year owing to continued and other commodities since January economic growth overseas and the de- was the primary factor leading participreciation of the dollar over the past pants to revise up sharply their projecyear or so. Many participants also said tions for overall inflation in the near that the substantial easing of monetary term. In contrast, the central tendencies policy since last year and the fiscal oftheprojectionsforcorePCEinflation stimuluspackageshouldhelptosupport in 2008 increased only moderately, spending in the second half of the year. from 2.0 to 2.2 percent in January to Beyond 2008, factors projected to buoy 2.2 to 2.4 percent in April, reflecting economic growth included the contin- the effects of higher food and energy ued effects of an accommodative stance prices on other goods and services and of monetary policy in conjunction with the rise in import prices associated with a gradual easing of financial market the decline in the dollar and higher strains, a stabilization in housing mar- inflation in our trading partners. kets, and a leveling-off of oil and Rates of both overall and core inflacommodityprices.Participantswereen- tion were expected to decline over the couraged by steps taken at major fi- next two years, reflecting a flattening nancial institutions to bolster their bal- out of the prices of oil and other comance sheets and to raise new capital. modities consistent with futures market Some expressed the view that financial pricesandtheeffectsofsignificantecomarket sentiment may have swung ex- nomic slack. Participants’ projections cessively to the pessimistic side, and for 2010 were importantly influenced that risk spreads would come down and by their judgments about the measured credit would become more available as rates of inflation consistent with the risk aversion diminishes. Also, demand Federal Reserve’s dual mandate to proand supply in the housing market mote maximum employment and price should become better aligned as the de- stability and about the time frame over cline in house prices increases the which policy should aim to attain those affordability of homeownership and the rates given current economic condidecline in housing starts reduces the tions. Many participants judged that, supplyofnewhomes.Mostparticipants given the recent adverse shocks to both expected real GDP to grow roughly at aggregate demand and inflation, policy their estimates of its trend rate in 2009 would be able to foster only a gradual and somewhat above trend in 2010. return of key macroeconomic variables
Minutes of FOMC Meetings, April 277 to their longer-run sustainable or opti- Some noted that downside risks to mal levels. Consequently, the rate of aggregate demand implied a risk of unemployment was projected by many greater economic slack and correspondparticipants to remain above its longer- ing downside risks to price pressures. run sustainable level even in 2010, and However, many participants (noticeably inflation was viewed likely still to be a more than in January) saw the upside bit above levels that some participants risks to inflation as greater than the judged would be consistent with the downside risks to inflation. In particu- Federal Reserve’s dual mandate. lar, the pass-through of recent increases inenergyandcommoditypricesaswell as of past dollar depreciation to con- Risks to the Outlook sumer prices could be greater than ex- Most participants viewed the risks to pected.Inaddition,someparticipantsextheir GDP projections as weighted to pressed concern that commodity prices thedownsideandtheassociatedrisksto may not flatten out as implied by futheir projections of the unemployment tures prices, thus putting further uprateastiltedtotheupside.Thepossibil- ward pressure on prices. Finally, inflaitythathousepricescoulddeclinemore tion expectations could become less steeply than anticipated, putting fur- firmly anchored if the current elevated ther downward pressure on residential rates of inflation were to persist for investment and consumption, was per- longer than anticipated or if the public ceived as a significant risk to the out- were to misinterpret the recent substanlook for economic growth and employ- tial policy easing as reflecting less rement. Another risk was the possibility solve among Committee members to that foreign economies might slow maintain low and stable inflation. more than expected, damping U.S. ex- Participants continued to view uncerports. Financial market conditions con- tainty about the outlook for economic tinued to pose serious risks—stock activity as higher than normal, with prices had declined on net since the some noting that economic slowdowns January meeting and credit conditions are generally associated with heightened had tightened further for both house- uncertainty as are episodes of unusual holds and firms. Although several par- credit restraint. In addition, participants ticipants noted that financial strains had expressed notably more uncertainty eased somewhat in April, most agreed about their inflation projections than that overall financial conditions re- they had in January, reflecting in part mained tighter than at the beginning of the difficulty of assessing the opposing theyear.Thepotentialforadverseinter- effects of increased economic slack and actions, in which weaker economic higher energy prices. (Table 2 provides activity could lead to a worsening of estimates of average ranges of forecast financial conditions and a reduced avail- uncertaintyforGDPgrowth,unemployabilityofcredit,whichinturncouldfur- ment, and inflation since 1987.7) ther damp economic growth, continued to be viewed as a worrisome possibility. Regarding risks to the inflation out- 7. The box “Forecast Uncertainty” at the end look, participants pointed to the possi- of this summary discusses the sources and interpretationofuncertaintyineconomicforecastsand bility that economic slack could put explains the approach used to assess the uncereither more or less downward pressure tainty and risks attending participants’ projecon costs and prices than anticipated. tions.
278 95th Annual Report, 2008 Table2. AverageHistoricalProjectionError was also apparent in projections for the Ranges unemployment rate. The dispersion of Percentagepoints projections for output and employment in 2008 seemed largely to reflect differ- 2008 2009 2010 ing assessments of the effect of finan- RealGDP1 .............. ±1.0 ±1.3 ±1.4 Unemploymentrate2 ..... ±0.4 ±0.7 ±1.0 cial market conditions on real activity, Totalconsumerprices3... ±0.7 ±1.0 ±1.0 the speed with which credit conditions Note: Error ranges shown are measured as plus or might improve, and the depth and duraminus the root mean squared error of projections that tion of the housing market contraction. werereleasedinthespringfrom1987through2007for thecurrentandfollowingtwoyearsbyvariousprivate For 2009, views differed notably about and government forecasters. As described in the box the pace at which output and employ- “ForecastUncertainty,”undercertainassumptions,there isabouta70percentprobabilitythatactualoutcomesfor ment would recover, with some particirealGDP,unemployment,andconsumerpriceswillbein pants concerned that financial strains rangesimpliedbytheaveragesizeofprojectionerrors could prove more persistent than most madeinthepast.FurtherinformationisinDavidReifschneiderandPeterTulip(2007),“GaugingtheUncer- participants expected. The dispersion of taintyoftheEconomicOutlookfromHistoricalForecast- participants’ longer-term projections ing Errors,” Finance and Economics Discussion Series #2007-60(November). wasalsoaffectedtosomedegreebydif- 1. Projectionispercentchange,fourthquarterofthe ferences in their judgments about the previousyeartofourthquarteroftheyearindicated. economy’s trend growth rate and the 2. Projectionisthefourth-quarteraverageofthecivilianunemploymentrate(percent). unemployment rate that would be con- 3. Measure is the overall consumer price index, the sistent over time with maximum empricemeasurethathasbeenmostwidelyusedingovernmentandprivateeconomicforecasts.Projectionisper- ployment. The dispersion of the projeccent change, fourth quarter of the previous year to the tions for PCE inflation in 2008 and fourthquarteroftheyearindicated. 2009 had widened somewhat since Diversity of Participants’ Views January, reflecting different views on the extent to which recent increases in Charts 2(a) and 2(b) provide more the prices of oil and other commodities detail on the diversity of participants’ would pass through into higher conviews. The dispersions of participants’ sumer prices, on whether the prices of projections for real GDP growth in oilandothercommoditieswouldflatten 2008 and 2009 were roughly equally out as implied in futures market prices, wide in January and April, but for 2010 and on the influence that inflation exthe dispersion was a bit wider in April. pectationswouldexertoninflationover RelativetotheprojectionsmadeinJune the short and medium run. Participants’ 2007, just before the onset of financial inflation projections further out were market turbulence, the diversity in influenced by their views of the rate of views about real activity had widened considerably.8Thisincreaseddispersion inflation consistent with the Federal Reserve’s dual objectives and the time it would take to achieve these goals 8. TheJune2007projectionswereincludedin given current economic conditions and the Board’s Monetary Policy Report to the CongressinJuly2007. appropriate policy.
Minutes of FOMC Meetings, April 279
280 95th Annual Report, 2008
Minutes of FOMC Meetings, April 281 Forecast Uncertainty Theeconomicprojectionsprovidedbythe jections are broadly balanced, the nummembers of the Board of Governors and bers reported in table 2 would imply a the presidents of the Federal Reserve probability of about 70 percent that Banks inform discussions of monetary actual GDP would expand between policy among policymakers and can aid 2.0 percent to 4.0 percent in the current publicunderstandingofthebasisforpol- year, 1.7 percent to 4.3 percent in the icy actions. Considerable uncertainty at- second year, and 1.6 percent to 4.4 pertends these projections, however. The centinthethirdyear.Thecorresponding economic and statistical models and rela- 70percentconfidenceintervalsforovertionships used to help produce economic all inflation would be 1.3 percent to forecasts are necessarily imperfect de- 2.7 percent in the current year and scriptions of the real world. And the 1.0 percent to 3.0 percent in the second future path of the economy can be af- andthirdyears. fected by myriad unforeseen develop- Because current conditions may differ ments and events. Thus, in setting the from those that prevailed on average stance of monetary policy, participants over history, participants provide judgconsider not only what appears to be the ments as to whether the uncertainty mostlikelyeconomicoutcomeasembod- attachedtotheirprojectionsofeachvariiedintheirprojections,butalsotherange able is greater than, smaller than, or of alternative possibilities, the likelihood broadly similar to typical levels of foreof their occurring, and the potential costs cast uncertainty in the past as shown in totheeconomyshouldtheyoccur. table 2. Participants also provide judg- Table 2 summarizes the average his- ments as to whether the risks to their torical accuracy of a range of forecasts, projections are weighted to the upside, includingthosereportedinpastMonetary downside, or are broadly balanced. That Policy Reports and those prepared by is, participants judge whether each vari- FederalReserveBoardstaffinadvanceof ableismorelikelytobeaboveorbelow meetings of the Federal Open Market their projections of the most likely out- Committee. The projection error ranges come. These judgments about the uncershowninthetableillustratetheconsider- tainty and the risks attending each parableuncertaintyassociatedwitheconomic ticipant’s projections are distinct from forecasts.Forexample,supposeapartici- thediversityofparticipants’viewsabout pantprojectsthatrealGDPandtotalcon- the most likely outcomes. Forecast sumer prices will rise steadily at annual uncertainty is concerned with the risks ratesof,respectively,3percentand2per- associated with a particular projection, cent. If the uncertainty attending those rather than with divergences across a projections is similar to that experienced numberofdifferentprojections. in the past and the risks around the pro-
282 95th Annual Report, 2008 Meeting Held on Mr. Cole, Director, Division of Bank- June 24–25, 2008 ing Supervision and Regulation, BoardofGovernors A meeting of the Federal Open Market Mr. Struckmeyer, Deputy Staff Direc- Committee was held in the offices of tor, Office of Staff Director for the Board of Governors of the Federal Management, Board of Governors Reserve System in Washington, D.C., Mr. Blanchard, Assistant to the Board, on Tuesday, June 24, 2008 at 2:00 p.m. Office of Board Members, Board and continued on Wednesday, June 25, ofGovernors 2008 at 9:00 a.m. Mr.Frierson,9DeputySecretary,Office of the Secretary, Board of Gover- Present: nors Mr.Bernanke,Chairman Mr.Geithner,ViceChairman Ms. Bailey,9 Deputy Director, Division Mr.Fisher ofBankingSupervisionandRegu- Mr.Kohn lation,BoardofGovernors Mr.Kroszner Mr.Mishkin Mr. Clouse, Deputy Director, Division Ms.Pianalto of Monetary Affairs, Board of Mr.Plosser Governors Mr.Stern Mr. Parkinson,9 Deputy Director, Divi- Mr.Warsh sion of Research and Statistics, Ms. Cumming, Messrs. Evans, Lacker, BoardofGovernors and Lockhart, and Ms. Yellen, Ms.Barger,9DeputyDirector,Division Alternate Members of the Federal ofBankingSupervisionandRegu- OpenMarketCommittee lation,BoardofGovernors Messrs. Bullard, Hoenig, and Rosen- Mr. Stehm,9 Associate Director, Divigren, Presidents of the Federal sion of Reserve Bank Operations Reserve Banks of St. Louis, Kan- and Payment Systems, Board of sas City, and Boston, respectively Governors Mr.Madigan,SecretaryandEconomist Messrs. Reifschneider and Wascher, Ms.Danker,DeputySecretary Associate Directors, Division of Mr.Skidmore,AssistantSecretary Research and Statistics, Board of Ms.Smith,AssistantSecretary Governors Mr.Alvarez,GeneralCounsel Mr.Baxter,DeputyGeneralCounsel Mr. Gagnon,10 Visiting Associate Mr.Sheets,Economist Director, Division of Monetary Mr.Stockton,Economist Affairs,BoardofGovernors Messrs. Connors, English, and Kamin, Mr.Wright,DeputyAssociateDirector, Ms. Mester, Messrs. Rolnick, Division of Monetary Affairs, Rosenblum, Slifman, Tracy, and BoardofGovernors Wilcox,AssociateEconomists Mr.Zakrajsˇek,AssistantDirector,Divi- Mr. Dudley, Manager, System Open sion of Monetary Affairs, Board MarketAccount ofGovernors Ms. J. Johnson,9 Secretary, Office of Mr. Erceg,10 Assistant Director, DivitheSecretary,BoardofGovernors sion of International Finance, BoardofGovernors 9. Attended portion of the meeting relating to the supervisory report concerning investment 10. Attended portions of the meeting through banksandrelatedpolicyissues. thepolicyvote.
Minutes of FOMC Meetings, June 283 Mr.Oliner,SeniorAdviser,Divisionof velopments in foreign exchange mar- Research and Statistics, Board of kets.Therewerenoopenmarketopera- Governors tions in foreign currencies for the Mr. Gross,9 Special Assistant to the System’saccountintheperiodsincethe Board, Office of Board Members, previous meeting. The Manager also BoardofGovernors reported on developments in domestic Ms. Tevlin,10 Senior Economist, Divi- financial markets and on System open sion of Research and Statistics, market operations in government secu- BoardofGovernors rities and federal agency obligations during the period since the previous Mr.Ammer,10SeniorEconomist,Divimeeting. By unanimous vote, the Comsion of International Finance, BoardofGovernors mittee ratified these transactions. TheinformationreviewedattheJune Ms. Beechey, Economist, Division of meeting indicated that economic activ- Monetary Affairs, Board of Govity had remained soft in recent months. ernors Manufacturingactivityhaddeteriorated, Ms. Dykes, Project Manager, Division business investment in equipment apof Monetary Affairs, Board of peared to have moved down, and resi- Governors dential construction had continued its Mr.Luecke,SectionChief,Divisionof steep descent. Labor market conditions Monetary Affairs, Board of Govhad weakened further, and consumer ernors sentiment was at historical lows, but Ms.Beattie,9AssistanttotheSecretary, despite these developments, consumer Office of the Secretary, Board of spending appeared resilient. Core con- Governors sumer price inflation had been stable Ms. Low, Open Market Secretariat over recent months, but headline infla- Specialist, Division of Monetary tion had remained elevated because of Affairs,BoardofGovernors furthersubstantialincreasesinfoodand Ms.Hughes,9StaffAssistant,Officeof energy prices. theSecretary,BoardofGovernors Labor demand continued to weaken in April and May. Private payroll em- Mr. Barron, First Vice President, FederalReserveBankofAtlanta ployment fell at a slower rate than earlier in the year, but the decline in jobs Mr. Fuhrer, Executive Vice President, was again widespread, with the excep- FederalReserveBankofBoston tion of nonbusiness services. As a re- Messrs. Altig, Angulo,9 Rasche, Sch- sult, aggregate hours of private producweitzer, Sellon, and Weinberg, tion or nonsupervisory workers fell, on Senior Vice Presidents, Federal average, in April and May. The un- Reserve Banks of Atlanta, New York, St. Louis, Cleveland, Kan- employment rate jumped from 5.0 persas City, and Richmond, respec- cent in April to 5.5 percent in May and tively was now about a percentage point Messrs. Fernald and Fisher, and Ms. above its level of a year ago. The in- McLaughlin, Vice Presidents, creasefromApriltoMaywasaccompa- Federal Reserve Banks of San nied by a rise in labor force participa- Francisco, Chicago, and New tion, especially among young people. York,respectively Industrial production contracted in The Manager of the System Open April and May at a slightly faster pace Market Account reported on recent de- than in the first quarter. Manufacturing
284 95th Annual Report, 2008 output also fell in April and was un- sulted in continued reductions of invenchanged in May; over the two months, tories of unsold new homes, the slow factory production slowed across a pace of sales left the ratio of unsold broad range of industries. Production in new homes to sales at elevated levels the high-tech sector continued to ex- not seen since the early 1980s. Sales of pandbutatonlyamodestrate.Thefac- existing homes remained little changed tory utilization rate edged down further through April at a low level. However, in April and May to a level below its the index of pending sales agreefirst-quarter average and was well ments—an indicator of existing home below its recent high in the third quar- sales in coming months—jumped in ter of 2007. April to its highest reading in six The growth of real consumer spend- months. Conditions in mortgage credit ing appeared to have picked up moder- markets remained tight, particularly for ately from its sluggish pace in the first nonprimeborrowersandforthoseseekquarter. Real outlays on goods other ing nonconforming mortgages. than motor vehicles increased at a In the business sector, real spending robust pace, on average, in April and on equipment and software appeared to May. However, retail purchases of mo- move down a bit further in April and tor vehicles fell to a low level. More May following a slight decrease in the broadly, households’ financial condi- first quarter. Business outlays on transtions appeared to have weakened in portation equipment continued to fall recentmonths.Realdisposablepersonal sharply. The data on shipments and income had been rising only slowly orders of nondefense capital goods since last summer, restrained by the through May suggested that spending gradual deterioration in labor market on high-tech equipment and software conditions and sharp increases in food wasexpandingsluggishly,whileoutlays and energy prices. The ratio of house- for other equipment remained weak. hold wealth to income had dropped The slower pace of capital expenditures sharply in the first quarter, reflecting appearedconsistentwithageneraldetesubstantial net declines in broad equity rioration of business conditions, includprices and further depreciation of house ingadecelerationofsales,apessimistic prices.Measuresofconsumersentiment toneacrossmonthlysurveysofbusiness fell further in April and May; the May conditions, and tighter standards and readings from the Reuters/University of terms on business credit. Real spending Michigan Surveys of Consumers and on nonresidential construction continthe Conference Board Consumer Confi- ued to rise in the first quarter, but at a denceSurveywereneartheirlowpoints substantially slower rate than over the reached during the early 1990s. previous two years. The architectural Activity in the housing sector re- billing index plummeted recently, and mained very weak in April and May. vacancyratesforcommercialproperties Single-family housing starts posted fur- ticked up. ther declines, leaving the pace of con- Real nonfarm inventories excluding struction in this sector down about two- motor vehicles rose only slightly in the thirds from the peak in early 2006; first quarter, as firms cut production to starts of multifamily homes were a bit keep inventories aligned with the slugbelow their average over the last gish pace of sales. The ratio of book- 10 years. Although production cuts in value inventories to sales (excluding the single-family housing sector re- motor vehicles) ticked down in April
Minutes of FOMC Meetings, June 285 andhadchangedrelativelylittle,onnet, India appeared to have continued exsince the middle of 2007. Despite panding at the rapid rates seen in 2007. sharply lower sales of motor vehicles, Inflation stayed high, on balance, in all the modest pace of production allowed regions, as recent price increases for inventories to fall further through May. food and energy added to global infla- Production at automakers was re- tionary pressures. strained by both weak demand and dis- Headline consumer price inflation in ruptions caused by labor disputes. the United States remained elevated in The U.S. international trade deficit April and May, mostly because of large widened in April, as a jump in imports increases in food and energy prices. outweighedariseinexports.Mostcate- Excluding these categories, core prices gories of goods imports rebounded in roseatarelativelysubduedrateinthese AprilfromlowerlevelsinMarch,espe- two months. Average hourly earnings cially petroleum products, the prices of increased in April and May at a slower which had moved sharply higher. Im- pace than in the first quarter, bringing ports of non-oil industrial supplies, the change over the 12 months ending capital goods, and automotive products in May below the pace over the previalsosurgedinApril,whereasimportsof ous 12 months. The employment cost consumergoodsexpandedmoreslowly. index for hourly compensation rose The increase in exports was broad- moderately in the first quarter and at a based, with strong increases in exports similar rate to recent years. of industrial supplies, capital and con- At its April 29–30 meeting, the Fedsumer goods, and automotive products. eral Open Market Committee (FOMC) Economic activity in advanced for- lowered its target for the federal funds eign economies appeared to have ex- rate 25 basis points, to 2 percent. In panded moderately in the first quarter, addition, the Board of Governors apbut the pace of that activity varied proved a decrease of 25 basis points in markedly across economies. In the euro the discount rate, to 21⁄ 4 percent. The area and Japan, strong investment con- Committee’s statement noted that retributed to a sharp acceleration in out- cent information indicated that ecoput. Economic growth in the United nomic activity remained weak; house- Kingdom moderated because of a slow- hold and business spending had been down in real estate and business activi- subdued, and labor markets had softties.Fallingexportsandinventoriessub- ened further. Financial markets retracted from Canadian output growth. mained under considerable stress, and Recent data pointed to broad softness tight credit conditions and the deepenacross the advanced foreign economies ing housing contraction were likely to in the second quarter, consistent with a weigh on economic growth over the weakening of consumer and business nextfewquarters.Althoughreadingson confidence. Indicators for emerging core inflation had improved somewhat, market economies pointed to continued energy and other commodity prices had solidgrowthinthefirstquarter,albeitat increased, and some indicators of inflaa slower pace than last year among tion expectations had risen in recent Latin American economies. In particu- months. The Committee expected inflalar,economicactivityinMexicoslowed tion to moderate in coming quarters, further in the first quarter, in the wake reflecting a projected leveling-out of of weaker growth in the United States. energy and other commodity prices and In contrast, real output in China and an easing of pressures on resource utili-
286 95th Annual Report, 2008 zation.Still,uncertaintyabouttheinfla- Conditions eased somewhat in some tion outlook remained high, and the U.S. financial markets over the inter- Committee noted that it would be nec- meeting period but nonetheless reessary to continue to monitor inflation mained strained. Functioning of shortdevelopments closely. The Committee term funding markets showed some stated that the substantial easing of improvement; spreads in interbank monetary policy to date, combined with funding markets generally declined, as ongoing measures to foster market did spreads on lower-rated commercial liquidity, should help to promote mod- paper. However, liquidity in the market erate growth over time and to mitigate forinterbankloansatmaturitiesbeyond risks to economic activity. The Com- three months remained thin, and the mittee indicated that it would continue spreads quoted on those instruments to monitor economic and financial were little changed. Demand for funds developments and act as needed to pro- from the Term Auction Facility remote sustainable economic growth and mained substantial, but stop-out rates price stability. relative to minimum bid rates declined The expected path of monetary pol- considerably relative to prior auctions, icy moved down following the Com- likely in response to increased auction mittee’s decision at its April meeting to sizes. Depository institutions’ use of reduce the target federal funds rate by primary credit borrowing increased, on 25 basis points. Although the decision balance, over the intermeeting period. had largely been anticipated by finan- Credit outstanding through the Primary cial markets, investors had assigned Dealer Credit Facility declined signifisome odds to an unchanged target rate. cantly over the intermeeting period. Subsequently, money market futures Conditions in the market for Treasury rates rose substantially, on net, as repurchase agreements appeared to stronger-than-expected data on spend- improvesomewhat,butconditionswere ing and on labor markets along with still poor for lower-quality collateral. somewhat improved conditions in fi- Supported by sales and redemptions of nancial markets appeared to impart Treasury securities from the System greater confidence about prospects for Open Market Account and exchanges economic activity. Nominal Treasury under the Term Securities Lending yields also rose noticeably, and the Facility, yields on overnight Treasury Treasury yield curve flattened. Mea- repurchase agreements were around sures of short-term inflation compensa- typical spreads to the effective federal tion derived from yields on inflation- funds rate during much of the interindexed Treasury securities increased meeting period, but “haircuts” applied over the intermeeting period, due in by lenders on non-Treasury collateral part to sharply higher prices for oil and remained elevated. Term Securities agricultural commodities. Measures of Lending Facility auctions held since the longer-term inflation compensation April FOMC meeting were generally remained around the middle of their undersubscribed. recent elevated range. Some survey In longer-term credit markets, yields measures of households’ expectations on investment- and speculative-grade of near-term inflation rose sharply, corporate bonds had risen significantly while survey measures of longer-term since the end of April but by slightly expectations ranged from unchanged to less than yields on comparable-maturity slightly higher. Treasury securities, implying a further
Minutes of FOMC Meetings, June 287 modest narrowing of credit spreads. deceleration seemed to reflect primarily CorporatebondissuancesurgedinMay, an unwinding of heightened demand as some nonfinancial firms reduced for the relative safety and liquidity of their reliance on short-term debt in money market mutual funds that had favor of bond financing. Commercial boosted M2 in prior months. paper outstanding declined, and busi- In the forecast prepared for the meetness lending by banks decelerated, ing,thestaffraiseditsprojectionforthe partly reflecting continued low issuance growth of real gross domestic product of leveraged loans as well as tighter (GDP) for 2008. The available indicacredit standards and terms at banks. tors of spending, particularly those for Over the intermeeting period, spreads consumption and business investment, ofratesonconformingresidentialmort- suggested that economic activity in the gages over comparable-maturity Trea- firsthalfoftheyearhadbeensomewhat sury securities remained about flat. firmer than previously expected. The Spreads on jumbo mortgages, however, staff projection prepared for the meetwidened somewhat and credit avail- ing pointed to modest expansion in real ability for jumbo-mortgage borrowers GDP in the first half of 2008 followed continued to be tight. In the secondary by a slight slowdown in growth in the market, issuance of mortgage-backed second half, when several factors were securities by government-sponsored en- likely to restrain spending, including terprises was strong, but issuance of lower household wealth, slower real securities backed by nonconforming incomegrowthduetosharplyhigheroil residential mortgages and commercial prices, and tight credit conditions. The mortgages remained low. Broad stock paceofeconomicactivitywasprojected prices were somewhat volatile but de- to pick up in 2009 as those effects clined modestly, on net, over the inter- waned and weakness in housing conmeeting period. The surge in oil prices struction abated. Despite this acceleraweighed on equity prices outside of the tion, the trajectory of economic growth energy sector, and a more pessimistic anticipated through 2009 implied nooutlookforfutureearningsinthefinan- ticeable slack in resource utilization. cial sector caused stocks of financial The staff’s projection for price inflainstitutions to decline significantly. tion in core personal consumption ex- Conditions in the money markets of penditures (PCE) for 2008 as a whole many major foreign economies re- wasunchanged;recentreadingsoncore mained strained, showing little im- PCE inflation were better than anticiprovement since late April despite pated and led the staff to lower its proongoing activities of foreign central jection for the first half of the year. But banks aimed at easing liquidity pres- some of the recent improvement was sures in funding markets. Yields on seen as reflecting transitory factors, and sovereign debt in the advanced foreign theforecastofcoreinflationforthesececonomies moved up approximately in ond half of this year and next year was line with increases in comparable Trea- marked up to incorporate the likely sury yields in the United States. The pass-through of the recent jumps in the trade-weighted foreign exchange value pricesofenergyandothercommodities, of the dollar against major currencies and the reversal of these transitory facrose. tors. The further large increase in en- M2 rose much more slowly in April ergy prices also prompted an upward and May than in the first quarter. The revisionoftheforecastofheadlinePCE
288 95th Annual Report, 2008 inflationinthesecondhalfof2008,and would probably continue to expand headline inflation was expected to ex- slowly over the next several quarters, ceed core inflation by a considerable restrained by a range of factors, includmargin this year. However, in view of a ing strains in financial markets and inprojected leveling-out of energy prices stitutions and the resulting tightness of and the anticipated slack in resource credit conditions; ongoing weakness in utilization, headline inflation was ex- the housing sector; and the increases in pected to decline considerably in 2009 energy and agricultural commodity from its pace in the second half of prices.And,althoughtheincomingdata 2008, and core inflation was forecasted suggested reduced odds that these facto edge lower. tors would cause an appreciable con- In conjunction with the FOMC meet- tractionofeconomicactivityinthenear ing in June, all meeting participants term, participants continued to see sig- (Federal Reserve Board members and nificant downside risks to growth. At Reserve Bank presidents) provided pro- the same time, however, the outlook for jections for economic growth, the inflation had deteriorated. Recent inunemployment rate, and inflation for creases in energy and some other comthe years 2008 through 2010. The pro- modity prices would boost inflation jections are described in the Summary sharply in coming months. A levelingof Economic Projections, which is out of energy prices and continued attached as an addendum to these min- slack in resource utilization were exutes. A number of participants noted pected to lead inflation to moderate in that, given the recent large adverse 2009 and 2010. However, participants shocks to output and inflation, their had become more concerned about projections even late in the forecast upside risks to the inflation outlook— period did not fully reveal their percep- including the possibility that persistent tions of longer-run sustainable rates of advances in energy and food prices economic growth and unemployment or could spur increases in long-run inflathe measured rates of inflation that tion expectations. would be consistent with price stability. Although financial market conditions In this context, participants discussed generally appeared to have improved several possible refinements of the somewhat over the intermeeting period, Committee’s approach to projections most participants viewed markets as that could provide a clearer indication remaining under considerable stress. of participants’ views about these vari- Some participants noted that the availables and agreed to consider this matter ability of the liquidity facilities that the further. Federal Reserve had introduced in In their discussion of the economic recent months had probably bolstered situation and outlook, FOMC partici- the confidence of investors and lenders pants noted that spending in recent and thus was likely responsible for part months had evidently been less weak of the improvement in market functionthan anticipated, leading participants to ing. Term spreads in interbank funding revise up their assessment of economic markets had declined, but remained growth in the first half of 2008. None- elevated by historical standards. The theless, most participants judged that leveraged loan market had improved the slightly firmer path of spending did somewhat and corporate bond issuance not presage a near-term strengthening had been strong. However, the equity of the expansion. Economic activity pricesofmanyinvestmentandcommer-
Minutes of FOMC Meetings, June 289 cial banks had declined over the inter- gages, automobile loans, and home meeting period, reflecting increased equity lines of credit were becoming concernaboutassetqualityandtheout- harder to obtain, and some existing look for profits. The deteriorating con- home equity lines were being cut, even dition of some financial guarantors and for consumers with good credit scores. mortgage insurers contributed to wor- The possibilities that the decline in ries about banks. Investors remained house prices would be more protracted chary of securitized products, such as than previously anticipated, that spillmortgage credits not guaranteed by a overs from the decline in housing government-sponsored enterprise or wealth to consumption could be larger agency. A number of financial institu- than expected, and that the household tionshadbeensuccessfulinraisingnew savingratemightrisemoresteeplythan capital, but reportedly on less favorable currently projected were seen as posing terms than before. Participants judged downside risks to consumption spendthat many financial institutions would ing going forward. need to continue to recapitalize and Participants judged that the outlook reduce their leverage. Some anticipated for the housing market remained bleak, that this process could well be pro- with falling prices, slow sales, high tracted, and that financial intermedia- inventories of unsold homes, and furtionconsequentlywouldbeimpededfor ther declines in construction activity some time, holding back growth well over coming months. Although a few into 2009. Overall, financial market participants saw tentative signs that the conditions, while better in many re- housing market might be bottoming out spects, appeared to remain fragile, and in some parts of the country, most participantsjudgedthatpotentialfurther aggregate indicators of housing activity adverse financial market developments pointed to continued weakness. Also, still posed downside risks to economic mortgage rates had increased, and the activity. equity prices of housing-related firms Recent data pointed to more resil- had fallen over the intermeeting period, ience in consumer spending in the sec- after having stabilized earlier in the ond quarter than had been expected. year, suggesting renewed pessimism However,mostparticipantsthoughtthat amonginvestorsaboutprospectsforthe much of the recent strength probably housing industry. Rising foreclosures indicated only a more delayed slowing wereseenaslikelytocontinuetoaddto in consumer spending than had been downward pressure on house prices. expected rather than a more favorable Business spending was expected to trend. Falling wealth and real income, remain sluggish, as tight credit contightening credit conditions, rising en- ditions, uncertainty about economic ergy prices, and sharply declining con- growth, and the rising costs of inputs— sumer sentiment were seen as likely to especially energy and raw materials— restrain consumer spending later this appeared to be making firms quite cauyear, particularly after the effects of the tious and inclined to defer capital fiscal stimulus waned. Lenders were expenditures. Businesses had been able exhibiting greater caution in extending to raise a considerable volume of funds credit to households, partly in response in bond markets of late, and profits and to actual and expected increases in cash flow were still strong in the nonfidelinquency rates on household credit. nancial business sector. But some re- Participants reported that second mort- gional banks that had experienced sub-
290 95th Annual Report, 2008 stantial credit losses were expected to increases in the prices of energy, food, adopt a significantly more conservative andimports,andtheyexpectedheadline lending posture, further limiting the inflation to rise in the very near term. availability of credit to small busi- However, core inflation had been stable nesses. Although the available data of late, and participants anticipated that indicated that spending on nonresiden- a leveling-out of energy prices and tial construction projects had remained slack in labor and product markets relatively robust in recent months, par- would contribute to a moderation of ticipants thought that this strength inflation pressures over time. Reports might have reflected projects initiated on the ability of firms to pass cost sometimeago,whentheeconomicout- increases on to customers were mixed, look and credit conditions were more but some participants commented that favorable, and they expected poor busi- the global nature of inflationary presness sentiment and tighter credit to lead sures could make imports more expencommercial construction to soften later sive and give firms greater scope to this year and next year. Some anecdotal raise prices. Some participants noted reports of recently delayed or canceled that wage growth had been quite modnew construction projects supported erate, reinforcing a view that longerthis view. term inflation expectations and labor Regarding economic activity in var- cost pressures had remained fairly well ious business sectors, participants re- contained. However, others commented ported continued overall softness in that wages might accelerate with a lag manufacturing, especially in the hous- only after inflation expectations had ing-related and motor vehicle sectors. movedhigher,andthatitwouldbevery Flooding in the Midwest had disrupted costly to subsequently bring those extransportation and damaged corn and pectations back down. Participants’ soybean crops. However, production in views of the recent evidence on inflathe energy and steel sectors appeared to tion expectations varied. Some noted be strengthening, and industry contacts that the increase was greatest for shortgenerally reported that demand for ex- term survey measures of households’ ported goods was buoyant. Labor mar- inflation expectations, which may be kets in most regions continued to influenced disproportionately by conweaken gradually. Most participants sumers’ perceptions of changes in the anticipated persistent slack in labor prices of food and gasoline; those parmarkets, with the unemployment rate ticipants judged that underlying inflarising further through next year, before tiontrendshadnotrisennearlyasmuch declining slightly in 2010. and anticipated that such survey mea- The current account deficit had nar- sures would reverse their recent inrowedsignificantlyonbalanceinrecent creases as headline inflation moderated. quarters, and still-solid foreign growth However, others saw the signs of a rise was expected to contribute to a further in inflation expectations as more broadnarrowing of the real U.S. trade deficit based and were concerned that this in coming quarters. However, a few development could signal an erosion of participants commented that this effect confidence in the Committee’s commitmight fade over time, as they expected menttopricestabilityand,absenteffecdemand in foreign economies to slow. tive action by the Committee, could Participants were concerned about impart greater momentum to the inflathe inflationary consequences of recent tion process. Participants agreed that
Minutes of FOMC Meetings, June 291 the possibilities of greater pass-through balance sheet pressures, and in these of cost increases into prices, higher circumstances credit availability was long-run inflation expectations feeding likely to remain constrained for some into labor costs and other prices, and time. At the same time, however, the further increases in energy prices all near-term outlook for inflation had posed upside risks to inflation that had deteriorated, and the risks that underintensified since the time of the April lying inflation pressures could prove to FOMC meeting. be greater than anticipated appeared to Some participants noted that certain have risen. Members commented that measures of the real federal funds rate, thecontinuedstrongincreasesinenergy especially those using actual or fore- and other commodity prices would casted headline inflation, were now prompt a difficult adjustment process negative, and very low by historical involvingbothlowergrowthandhigher standards. In the view of these particiratesofinflationinthenearterm.Mempants, the current stance of monetary bers were also concerned about the policy was providing considerable supheightened potential in current circumport to aggregate demand and, if the stances for an upward drift in long-run negative real federal funds rate was inflation expectations. With increased maintained, it could well lead to higher upside risks to inflation and inflation trend inflation. In this view, a signifiexpectations,membersbelievedthatthe cant portion of the easing in monetary next change in the stance of policy policy since last fall was aimed at procould well be an increase in the funds viding insurance against the risk of an rate; indeed, one member thought that especially severe weakening in ecopolicyshouldbefirmedatthismeeting. nomic activity and, with downside risks However,intheviewofmostmembers, having diminished somewhat, some the outlook for both economic activity firming in policy would be appropriate and price pressures remained very unvery soon, if not at this meeting. Howcertain, and thus the timing and magniever, other participants observed that tude of future policy actions was quite the high level of risk spreads and the unclear. Against this backdrop, most restricted availability of credit sugmembersjudgedthatanunchangedfedgested that overall financial conditions eral funds rate at this meeting reprewere not especially accommodative; insented an appropriate balancing of the deed, borrowing costs for many households and businesses were higher than risks to the economic outlook and was they had been last summer. consistent, for now, with a policy path In the Committee’s discussion of that would support an eventual decline monetary policy for the intermeeting in both inflation and unemployment. period, members generally agreed that Nonetheless, members recognized that the risks to growth had diminished circumstances could change quickly somewhat since the time of the last and noted that they might need to FOMC meeting while the upside risks respond promptly to incoming informato inflation had increased. Nonetheless, tion about the evolution of risks. the risks to growth remained tilted to At the conclusion of the discussion, the downside. Conditions in some fi- the Committee voted to authorize and nancial markets had improved, but directtheFederalReserveBankofNew many financial institutions continued to York, until it was instructed otherwise, experience significant credit losses and to execute transactions in the System
292 95th Annual Report, 2008 Account in accordance with the follow- funds rate at this meeting. While the ing domestic policy directive: financial system was still frail and downside risks to growth remained, the The Federal Open Market Committee risk that inflation would fail to moderseeksmonetaryandfinancialconditionsthat will foster price stability and promote sus- ate as expected by the Committee had tainable growth in output. To further its increased substantially over the interlong-run objectives, the Committee in the meeting period. Relatively strong deimmediatefutureseeksconditionsinreserve mand for oil and other commodities marketsconsistentwithmaintainingthefedabroad, as well as increased labor and eral funds rate at an average of around other operating costs in the emerging 2percent. economies, was boosting prices of glo- The vote encompassed approval of bally traded goods and services. Mr. the statement below to be released at Fisher was especially concerned about 2:15 p.m.: behavioral changes among business op- The Federal Open Market Committee erators that appeared to be accommodecided today to keep its target for the fed- datinginflationarypressures.Inparticueralfundsrateat2percent. lar, firms increasingly appeared to be Recent information indicates that overall planning to pass through their higher economic activity continues to expand, partly reflecting some firming in household inputcoststofinalgoodspricesinorder spending.However,labormarketshavesoft- to protect their profit margins. Overall, ened further and financial markets remain Mr. Fisher viewed inflation expectaunder considerable stress. Tight credit contions as becoming less well anchored. ditions, the ongoing housing contraction, To help restrain inflation expectations and the rise in energy prices are likely to weigh on economic growth over the next and inflation, Mr. Fisher felt it would fewquarters. be appropriate for the Committee to The Committee expects inflation to mod- tighten the stance of monetary policy. eratelaterthisyearandnextyear.However, InajointsessionoftheFederalOpen in light of the continued increases in the Market Committee and the Board of prices of energy and some other commodi- Governors, meeting participants turned tiesandtheelevatedstateofsomeindicators of inflation expectations, uncertainty about to a consideration of policy issues retheinflationoutlookremainshigh. gardinginvestmentbanksandotherpri- Thesubstantialeasingofmonetarypolicy mary securities dealers. Participants todate,combinedwithongoingmeasuresto discussed the financial activities and foster market liquidity, should help to procondition of primary dealers as well as mote moderate growth over time. Although downside risks to growth remain, they the objectives of, procedures for, and appear to have diminished somewhat, and experience to date in administering the the upside risks to inflation and inflation Primary Dealer Credit Facility (PDCF) expectationshaveincreased.TheCommittee and the Term Securities Lending Facilwill continue to monitor economic and ity (TSLF). (The PDCF and the TSLF financial developments and will act as needed to promote sustainable economic had been established in March in regrowthandpricestability. sponse to unusual and exigent conditions in financial markets.) In view of Votes for this action: Messrs. Bernanke, Geithner, Kohn, Kroszner, and the continuing significant strains in Mishkin,Ms.Pianalto,Messrs.Plosser, financial markets, participants also dis- Stern, and Warsh. Votes against this cussed the possibility of extending the action:Mr.Fisher. PDCF and the TSLF past year-end. In Mr. Fisher dissented because he pre- addition, they reviewed progress in neferred an increase in the target federal gotiations with staff of the Securities
Minutes of FOMC Meetings, June 293 and Exchange Commission regarding monetary policy” is defined as the fua memorandum of understanding in- ture policy that, based on current infortendedtogovernarrangementsforshar- mation, is deemed most likely to foster ing information on broker-dealers and outcomes for economic activity and infor cooperation in the supervision of flation that best satisfy the participant’s primary dealers. Finally, participants interpretation of the Federal Reserve’s exchanged views on longer-run issues dual objectives of maximum employregarding appropriate arrangements for ment and price stability. supervision and regulation of invest- FOMC participants generally exment banks and other securities dealers pected that, over the remainder of this and for the access of such firms to cen- year, output would expand at a pace tral bank liquidity, as well as on pos- appreciably below its trend rate, owing sible measures to strengthen financial primarily to continued weakness in market functioning and thus enhance housing markets, the substantial rise in financial stability. energy prices in recent months, and the Itwasagreedthatthenextmeetingof reduction in the availability of housethe Committee would be held on Tueshold and business credit resulting from day, August 5, 2008. continued strains in financial markets. The meeting adjourned at 1:15 p.m. As indicated in table 1 and figure 1, output growth further ahead was pro- Notation Vote jectedtopickupsufficientlytobeginto reverse some of the increase in the un- BynotationvotecompletedonMay20, employment rate by 2010. In light of 2008, the Committee unanimously apthe recent surge in the prices of oil and proved the minutes of the FOMC meetagricultural commodities, total inflation ing held on April 29–30, 2008. was expected to rise further in coming Brian F. Madigan monthsandtobeelevatedfor2008asa Secretary whole. However, many participants expected that persistent economic slack and a flattening out of energy and other Addendum: commodity prices in line with futures Summary of Economic Projections marketpriceswouldcauseoverallinflation to decline noticeably in 2009 and In conjunction with the June 2008 2010. Most participants judged that FOMC meeting, the members of the greater-than-normal uncertainty sur- Board of Governors and the presidents rounded their projections for both outof the Federal Reserve Banks, all of put growth and inflation. A significant whomparticipateindeliberationsofthe majorityofparticipantsviewedtherisks FOMC, provided projections for ecoto their forecasts for output growth as nomic growth, unemployment, and inweightedtothedownside,andasimilar flation in 2008, 2009, and 2010. Pronumber saw the risks to the inflation jections were based on information outlook as skewed to the upside. available through the conclusion of the June meeting, on each participant’s The Outlook assumptions regarding a range of factorslikelytoaffecteconomicoutcomes, The central tendency of participants’ and on his or her assessment of appro- projections for real GDP growth in priate monetary policy. “Appropriate 2008, at 1.0 percent to 1.6 percent, was
294 95th Annual Report, 2008 Table1. EconomicProjectionsofFederalReserveGovernorsandReserveBankPresidents, June2008 Percent Variable 2008 2009 2010 Centraltendency1 ChangeinrealGDP ............. 1.0to1.6 2.0to2.8 2.5to3.0 Aprilprojection ............... 0.3to1.2 2.0to2.8 2.6to3.1 Unemploymentrate.............. 5.5to5.7 5.3to5.8 5.0to5.6 Aprilprojection ............... 5.5to5.7 5.2to5.7 4.9to5.5 PCEinflation ................... 3.8to4.2 2.0to2.3 1.8to2.0 Aprilprojection ............... 3.1to3.4 1.9to2.3 1.8to2.0 CorePCEinflation .............. 2.2to2.4 2.0to2.2 1.8to2.0 Aprilprojection ............... 2.2to2.4 1.9to2.1 1.7to1.9 Range2 ChangeinrealGDP ............. 0.9to1.8 1.9to3.0 2.0to3.5 Aprilprojection ............... 0.0to1.5 1.8to3.0 2.0to3.4 Unemploymentrate.............. 5.5to5.8 5.2to6.1 5.0to5.8 Aprilprojection ............... 5.3to6.0 5.2to6.3 4.8to5.9 PCEinflation ................... 3.4to4.6 1.7to3.0 1.6to2.1 Aprilprojection ............... 2.8to3.8 1.7to3.0 1.5to2.0 CorePCEinflation .............. 2.0to2.5 1.8to2.3 1.5to2.0 Aprilprojection ............... 1.9to2.5 1.7to2.2 1.3to2.0 Note: Projections of change in real gross domestic civilianunemploymentrateinthefourthquarterofthe product(GDP)andofinflationarefromthefourthquar- yearindicated.Eachparticipant’sprojectionsarebased terofthepreviousyeartothefourthquarteroftheyear onhisorherassessmentofappropriatemonetarypolicy. indicated.PCEinflationandcorePCEinflationarethe 1. Thecentraltendencyexcludesthethreehighestand percentage rates of change in, respectively, the price threelowestprojectionsforeachvariableineachyear. indexforpersonalconsumptionexpenditures(PCE)and 2. Therangeforavariableinagivenyearincludesall thepriceindexforPCEexcludingfoodandenergy.Pro- participants’projections,fromlowesttohighest,forthat jectionsfortheunemploymentratearefortheaverage variableinthatyear. noticeably higher than the central ten- some financial markets since April. dency of the projections provided in Real GDP growth was expected to inconjunction with the April FOMC crease in 2009 as the adjustment in the meeting, which was 0.3 percent to housing sector ran its course, financial 1.2 percent. The upward revision to the markets gradually resumed more- 2008 outlook stemmed primarily from normal functioning, and the downward better-than-expected data on consumer pressure on real incomes stemming and business spending received be- from increases in energy and food tween the April and June FOMC meet- prices in the first half of 2008 began to ings. Nonetheless, several participants fade. In 2010, economic activity was noted that the recent firmness in con- projected to expand at or a little above sumerspendingcouldwellprovetransi- participants’ estimates of the rate of tory and that the ongoing housing mar- trend growth. ket correction, tight credit conditions, Withoutputgrowthcontinuingtorun and elevated energy prices would damp below trend in the second half of 2008, domestic demand in the second half of most participants expected that the unthis year. Still, the substantial easing of employment rate would move up somemonetary policy since last year and the what over the remainder of this year. continued strength in exports should The central tendency of participants’ help to support economic growth; in projections for the average rate of unaddition, strains had eased somewhat in employment in the fourth quarter of
Minutes of FOMC Meetings, June 295 2008 was 5.5 percent to 5.7 percent, junction with the April FOMC meeting unchanged from the central tendency of and consistent with some slack in reprojections that were provided in con- source utilization. The central tendency
296 95th Annual Report, 2008 of participants’ projections was for the ticipants saw as consistent with the unemployment rate to stabilize in 2009 price stability objective of the Federal andtoedgedownin2010asoutputand Reserve’s dual mandate. Most particiemployment growth pick up. pants saw further declines in both un- The surge in the prices of oil and employment and inflation as likely in agricultural commodities since April the period beyond the forecast horizon. led participants to revise up noticeably theirprojectionsfortotalinflationinthe Risks to the Outlook near term. However, the central tendency of participants’ projections for Most participants viewed the risks to corePCEinflationin2008was2.2per- their projections for GDP growth as cent to 2.4 percent, unchanged from the weighted to the downside and the assocentral tendency in April, as lower- ciated risks to their projections for the than-expected rates of core inflation unemployment rate as tilted to the upover recent months offset the expecta- side. The possibility that house prices tionsofsomepass-throughoftherecent could decline more steeply than anticisurge in energy prices into core infla- pated, further reducing households’ tion over the next few months. Rates of wealth, restricting their access to credit, both overall and core inflation were and eroding the capital of lending instiexpected to decline over the next two tutions, continued to be perceived as a years, reflecting a flattening out of the significant downside risk to the outlook prices of oil and other commodities for economic growth. Although financonsistent with futures market prices, cial markets had shown some further slackinresourceutilization,andlonger- improvement since April, conditions in term inflation expectations that were those markets remained strained; a expected to remain generally well an- number of participants also pointed to chored. the risk that further improvement could The contour of participants’ projec- be quite slow and subject to relapse. tionsforoutputgrowth,unemployment, The potential for current tight credit andinflationwasimportantlyshapedby conditions to exert an unexpectedly their judgments about the measured large restraint on household and busirates of inflation consistent with the nessspendingwasalsoviewedasasig- Federal Reserve’s dual mandate to pro- nificant downside risk to economic acmote maximum employment and price tivity. An adverse feedback loop, in stability and about the time horizon which weaker economic activity led to over which policy should aim to attain a further worsening of financial condithoseratesgivencurrenteconomiccon- tions, which in turn could damp ecoditions. Most participants judged that it nomicgrowthevenfurther,continuedto might take a substantial period of time be viewed as a worrisome possibility, for output and inflation to recover from though less so than in April. Indeed, the recent shocks, which had elevated some participants pointed to the apparinflationanddampedeconomicactivity. ent resilience of the U.S. economy in A number of participants projected that the face of recent financial distress and the rate of unemployment might remain suggested that the adverse effects of slightly above its longer-run sustainable financialdevelopmentsoneconomicaclevel even in 2010; total inflation in tivity outside of the housing sector 2010 was also judged likely to continue could prove to be more modest than to run a bit above levels that most par- anticipated.
Minutes of FOMC Meetings, June 297 Most participants viewed the risks to Table2. AverageHistoricalProjectionError their inflation projections as weighted Ranges to the upside. Recent sharp increases in Percentagepoints energy and food prices and the pass- Variable 2008 2009 2010 through of dollar depreciation into ChangeinrealGDP1 .... ±0.9 ±1.3 ±1.4 import prices could boost inflation in Unemploymentrate1 ..... ±0.3 ±0.7 ±1.0 the near term by more than currently Totalconsumerprices2... ±0.6 ±1.0 ±1.0 anticipated. Although participants gen- Note: Error ranges shown are measured as plus or erally assumed that commodity prices minus the root mean squared error of projections that werereleasedinthesummerfrom1987through2007for will flatten out, roughly in line with the thecurrentandfollowingtwoyearsbyvariousprivate trajectory implied by futures prices, the and government forecasters. As described in the box fact that futures markets had persis- “ForecastUncertainty,”undercertainassumptions,there isabouta70percentprobabilitythatactualoutcomesfor tently underpredicted commodity prices realGDP,unemployment,andconsumerpriceswillbein in recent experience was viewed as an rangesimpliedbytheaveragesizeofprojectionerrors madeinthepast.FurtherinformationisinDavidReifupside risk to the outlook for inflation. schneiderandPeterTulip(2007),“GaugingtheUncer- Participants also saw a risk that infla- taintyoftheEconomicOutlookfromHistoricalForecasttion expectations could become less ing Errors,” Finance and Economics Discussion Series 2007-60 (Board of Governors of the Federal Reserve firmly anchored, particularly if the cur- System,November). rent elevated rates of headline inflation 1. Fordefinitions,refertogeneralnoteintable1. did not moderate as quickly as they 2. Measure is the overall consumer price index, the pricemeasurethathasbeenmostwidelyusedingovernexpected. mentandprivateeconomicforecasts.Projectionisper- Participants continued to view uncer- cent change, fourth quarter of the previous year to the fourthquarteroftheyearindicated. tainty about the outlook for economic activity as higher than normal, with a Diversity of Participants’ Views number pointing to uncertainty about the duration and effects of the ongoing Figures 2.A and 2.B provide more definancial strains on real activity. In ad- tail on the diversity of participants’ dition,participantsexpressednoticeably views regarding likely economic outmore uncertainty about their inflation comes over the projection period. The projections than they had in January dispersion of participants’ projections andApril,ashiftinperceptionthatthey for real GDP growth in 2008 was noattributed importantly to increased un- ticeably narrower than in the forecasts certainty about the future course of provided in April, reflecting primarily energy and food prices and to greater the accumulation of data about the uncertainty about the extent of pass- actual performance of the economy in through of changes in those prices into the first half of the year; their views core inflation. (Table 2 provides esti- about output growth in coming quarters mates of forecast uncertainty for real and in 2009 continued to exhibit appre- GDP growth, unemployment, and infla- ciabledispersion.Thedispersionofpartion since 1987.11) ticipants’ projections for real activity next year seemed largely to reflect differing assessments of the effects of adverse financial market conditions on 11. Thebox“ForecastUncertainty”attheend economic growth, the speed with which of this summary discusses the sources and inter- credit conditions might improve, and pretationofuncertaintyineconomicforecastsand the depth and duration of the correction explains the approach used to assess the uncerin the housing market. Indeed, views tainty and risks attending participants’ projections. differed notably on the pace at which
298 95th Annual Report, 2008 output and employment would recover The dispersion of participants’ longerin 2009, with some participants ex- term projections was also affected to pressingaconcernthatgrowthmightbe some degree by differences in their constrained by the persistence of finan- judgments about the economy’s trend cial strains over a considerable period. growth rate and the unemployment rate
Minutes of FOMC Meetings, June 299 that would be consistent over time with centincreasesinenergyandfoodprices maximum employment. The dispersion would pass through into higher conof the projections for PCE inflation in sumer prices. In addition, participants the near term reflected in large part dif- held differing views on the degree to fering views on the extent to which re- which inflation expectations were an-
300 95th Annual Report, 2008 Forecast Uncertainty Theeconomicprojectionsprovidedbythe past and the risks around the projections members of the Board of Governors and are broadly balanced, the numbers rethe presidents of the Federal Reserve portedintable2wouldimplyaprobabil- Banks inform discussions of monetary ity of about 70 percent that actual GDP policy among policymakers and can aid would expand 2.1 percent to 3.9 percent publicunderstandingofthebasisforpol- in the current year, 1.7 percent to icy actions. Considerable uncertainty at- 4.3 percent in the second year, and tends these projections, however. The 1.6 percent to 4.4 percent in the third economic and statistical models and rela- year. The corresponding 70 percent contionships used to help produce economic fidence intervals for overall inflation forecasts are necessarily imperfect de- would be 1.4 percent to 2.6 percent in scriptions of the real world. And the fu- the current year and 1.0 percent to ture path of the economy can be affected 3.0percentinthesecondandthirdyears. by myriad unforeseen developments and Because current conditions may differ events. Thus, in setting the stance of from those that prevailed on average monetarypolicy,participantsconsidernot over history, participants provide judgonly what appears to be the most likely ments as to whether the uncertainty economic outcome as embodied in their attachedtotheirprojectionsofeachvariprojections, but also the range of alterna- able is greater than, smaller than, or tive possibilities, the likelihood of their broadly similar to typical levels of foreoccurring, and the potential costs to the cast uncertainty in the past as shown in economyshouldtheyoccur. table 2. Participants also provide judg- Table 2 summarizes the average his- ments as to whether the risks to their torical accuracy of a range of forecasts, projections are weighted to the upside, includingthosereportedinpastMonetary downside, or are broadly balanced. That Policy Reports and those prepared by is, participants judge whether each vari- FederalReserveBoardstaffinadvanceof ableismorelikelytobeaboveorbelow meetings of the Federal Open Market their projections of the most likely out- Committee. The projection error ranges come. These judgments about the uncershowninthetableillustratetheconsider- tainty and the risks attending each parableuncertaintyassociatedwitheconomic ticipant’s projections are distinct from forecasts.Forexample,supposeapartici- thediversityofparticipants’viewsabout pant projects that real gross domestic the most likely outcomes. Forecast product (GDP) and total consumer prices uncertainty is concerned with the risks will rise steadily at annual rates of, re- associated with a particular projection, spectively,3percentand2percent.Ifthe rather than with divergences across a uncertainty attending those projections numberofdifferentprojections. is similar to that experienced in the chored and the role that expectations rateofinflationconsistentwiththeFedmight play in the inflation process over eral Reserve’s dual objectives and the the short and medium term. Partic- time it would take to achieve these ipants’ inflation projections further goals given current economic condiahead were shaped by the views of the tions and appropriate policy.
Meetings of the FOMC, August 301 Meeting Held on Ms. Liang, Messrs. Reifschneider and August 5, 2008 Wascher, Associate Directors, Division of Research and Statis- A meeting of the Federal Open Market tics,BoardofGovernors Committee was held in the offices of Mr. Levin, Deputy Associate Director, the Board of Governors of the Federal Division of Monetary Affairs, Reserve System in Washington, D.C., BoardofGovernors on Tuesday, August 5, 2008 at 8:30 Mr. Small, Project Manager, Division a.m. of Monetary Affairs, Board of Governors Present: Mr.Bernanke,Chairman Mr.Luecke,SectionChief,Divisionof Mr.Geithner,ViceChairman Monetary Affairs, Board of Gov- Ms.Duke ernors Mr.Fisher Mr.Kohn Ms. Wei, Economist, Division of Mr.Kroszner Monetary Affairs, Board of Gov- Mr.Mishkin ernors Ms.Pianalto Ms. Low, Open Market Secretariat Mr.Plosser Specialist, Division of Monetary Mr.Stern Affairs,BoardofGovernors Mr.Warsh Mr. Connolly, First Vice President, Messrs. Evans, Lacker, and Lockhart, FederalReserveBankofBoston and Ms. Yellen, Alternate Members of the Federal Open Market Messrs. Fuhrer and Judd, Executive Committee Vice Presidents, Federal Reserve Banks of Boston and San Fran- Messrs. Bullard, Hoenig, and Rosencisco,respectively gren, Presidents of the Federal Reserve Banks of St. Louis, Kan- Messrs. Altig, Hakkio, Rasche, and sas City, and Boston, respectively Sullivan, Senior Vice Presidents, FederalReserveBanksofAtlanta, Mr.Madigan,SecretaryandEconomist Kansas City, St. Louis, and Chi- Ms.Danker,DeputySecretary cago,respectively Mr.Skidmore,AssistantSecretary Ms.Smith,AssistantSecretary Messrs. Danzig and Duca, Vice Presi- Mr.Alvarez,GeneralCounsel dents, Federal Reserve Banks of Mr.Ashton,AssistantGeneralCounsel NewYorkandDallas,respectively Mr.Sheets,Economist Mr. Weber, Senior Research Officer, Messrs.Connors,English,Kamin,Sni- Federal Reserve Bank of Minnederman, and Wilcox, Associate apolis Economists Mr. Hetzel, Senior Economist, Federal Mr. Dudley, Manager, System Open ReserveBankofRichmond MarketAccount Mr. Sill, Economic Advisor, Federal Mr. Blanchard, Assistant to the Board, ReserveBankofPhiladelphia Office of Board Members, Board ofGovernors Mr. Del Negro, Officer, Federal ReserveBankofNewYork Ms. Bailey, Deputy Director, Division ofBankingSupervisionandRegu- The Manager of the System Open lation,BoardofGovernors Market Account reported on recent developments in foreign exchange mar- Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for kets.Therewerenoopenmarketopera- Management, Board of Governors tions in foreign currencies for the Sys-
302 95th Annual Report, 2008 tem’s account in the period since the Industrial production declined in the previous meeting. The Manager also second quarter after having been flat reported on developments in domestic over the previous two quarters. Motor financial markets and on System open vehicle assemblies tumbled in the secmarket operations in government secu- ondquarterbecauseofsoftdemandand rities and federal agency obligations the effects of strikes. Production of during the period since the previous high-tech equipment continued to exmeeting. By unanimous vote, the Com- pand at a moderate pace; however, the mittee ratified these transactions. available indicators of high-tech manu- The information reviewed at the Au- facturingactivitypointedtoslowerprogust meeting indicated that the econ- duction in the current quarter. The outomyexpandedatamoderatepaceinthe put of other manufacturing industries second quarter, but recent financial contracted, on balance, in the second quarter,andindicatorsofnear-termpromarket developments highlighted some duction generally pointed to further of the stresses that the economy faced declines, including a sizable retrenchgoing forward. Both consumer and ment in the scheduled production of business spending recorded gains in the motor vehicles. The factory utilization second quarter, and net exports contribrate held steady in June at a rate below utedimportantlytotheriseinrealgross its long-run average but was still well domestic product (GDP). However, above its low rate from 2001 through residential construction continued to 2002. fall sharply, the labor market weakened Real personal consumption expendifurther, and industrial production detures(PCE)rosemodestlyinthesecond clined. Core consumer price inflation quarter after posting weak gains in the remained relatively stable, while headprevious two quarters. However, real lineinflationwaselevatedasaresultof outlays for goods other than motor large increases in food and energy vehicles dropped noticeably in June prices. afterthreemonthsofrobustgains.Sales Labor demand continued to contract of motor vehicles, which had begun to in July. Private nonfarm payroll emweaken earlier in the year, fell sharply ploymentfellinJulyatapaceonlyabit in June and again in July. Tax rebates less than the average monthly rate durprovided a notable, albeit temporary ing the first six months of the year. By boost to income since the end of April, industry, the pattern of job losses was but real disposable income excluding roughly similar to those earlier in the rebates was essentially flat in the secyear, although July’s report showed a ond quarter. The ratio of wealth to smallerdeclineinconstructionthanear- income likely declined again in the seclier. Nonbusiness services, which in- ond quarter, as equity prices declined, clude health and education, remained on balance, and house prices continued the only notable source of net additions tofall.Consumersentimentroseabitin to employment. Both the average work- July but remained at a depressed level. week and aggregate hours edged down Residential construction activity conin July. The unemployment rate rose in tinuedtodescendrapidlybutatasome- July and was about 1 percentage point what slower pace than during the secabove its level of a year earlier, while ond half of last year. Single-family the labor force participation rate was housing starts fell further in June, leavabout unchanged. ing the pace of construction in this sec-
Meetings of the FOMC, August 303 tor well below its December reading. offset a moderate increase in imports. Starts of multifamily homes jumped in Most major categories of non-oil im- June to a level well above the range of ports rose in May; imports of consumer readings seen over the past two years. goods increased rapidly. In contrast, the However, available information sug- value of petroleum imports fell back gested that this increase could be traced despite higher prices, and imports of to more-stringent building codes that automotive products also fell. The intook effect in New York City on July 1, crease in exports was supported by which apparently led developers to strong exports of industrial supplies, move up some planned apartment pro- particularly petroleum products, and jects. Even though cuts in new con- services. struction continued to trim the level of Across the advanced foreign econonewhomeinventories,themonths’sup- mies, information received since the ply of new homes remained quite high last meeting pointed to subdued growth because of the ongoing reductions in in the second quarter and increasthe demand for new houses. Sales of ing inflation pressures. Weak secondexisting single-family homes fell in quarter data on industrial production June. Tight conditions in the mortgage and sentiment in the euro area as well credit markets continued to restrain as on consumer expenditures and exhousing demand, particularly for bor- ports in Japan suggested that the firstrowers seeking nonconforming mort- quarter strength in output growth was gages. House prices remained on a not sustained. Conditions worsened downward trajectory. considerably in the United Kingdom, In the business sector, real spending with a deepening slump in the housing on equipment and software declined in sector. In all the major advanced forthe second quarter as outlays on trans- eign economies, rising food and fuel portation equipment dropped sharply. prices continued to drive overall infla- Spending on computers and software tion to recent highs, but core measures rose at a moderate rate in the second of inflation generally rose only modquarter, while outlays on other equip- estly. Recent indicators for emerging ment improved a bit last quarter after market economies pointed to some having declined in the preceding two slowing of growth in the second quarquarters. Data through June continued ter. Real GDP growth in China modertoshowarobustincreaseinnonresiden- ated but remained strong. Incoming tial construction activity. However, va- data suggested further slowing elsecancy rates for commercial properties where in emerging Asia, and secondticked up in the first quarter, and the quarter activity appeared to have rearchitectural billings index registered a mained sluggish in Mexico. Headline string of weak readings from February inflation rose further in much of the to June. developing world, largely owing to Real nonfarm inventories excluding higher food and energy prices, and sevmotor vehicles fell sharply in the sec- eral countries continued to face upward ond quarter. The ratio of book-value pressure on core inflation as well. inventories to sales (excluding motor Headline consumer price inflation in vehicles) ticked down again in May. the United States stepped up in recent The U.S. international trade deficit months, largely as a result of sizable narrowed in May, as a large increase in increases in food and energy prices. exportsofgoodsandservicesmorethan Excluding these categories, core con-
304 95th Annual Report, 2008 sumer price inflation was elevated in should help promote moderate growth June but, on balance, was running this over time. Although downside risks to year at about the same rate as last year. growthremained,theyappearedtohave Some survey-based measures of year- diminished somewhat, and the upside ahead inflation expectations moved up risks to inflation and inflation expectasharplyinrecentmonths;longer-termin- tions increased. The Committee indiflation expectations were little changed cated that it would continue to monitor recentlybutremainedabovetheirlevels economic and financial developments at the end of 2007. Excluding food and and would act as needed to promote energy, sharp increases in the prices of sustainable economic growth and price products and services at earlier stages stability. of processing continued to put upward Themarket’sexpectedpathofmonepressures on business costs and con- tary policy moved down following the sumer prices. Unit labor costs appar- announcementoftheCommittee’sdeciently continued to increase at a re- sion at its June meeting to leave the strained pace during the second quarter, target federal funds rate unchanged. Alreflecting only moderate gains in though the decision was largely anworker compensation and relatively ticipated, the policy statement was strong productivity performance, with reportedly viewed by investors as placlittle sign of higher overall inflation ing more emphasis on the downside passing through to higher worker com- risks to growth than they had anticipensation. pated. Subsequently, the semiannual At its June 24–25 meeting, the Fed- Monetary Policy Report to the Coneral Open Market Committee (FOMC) gress and the accompanying testimony kept its target for the federal funds rate also led investors to mark down the exat 2 percent. The Committee’s state- pectedpathforthefederalfundsrate,as mentnotedthatrecentinformationindi- did intensifying concerns about the cated that overall economic activity health of financial institutions and the continued to expand, partly because of outlook for the housing-related govsome firming in household spending. ernment-sponsored enterprises (GSEs). However, labor markets softened fur- Consistent with the revision in policy ther and financial markets remained expectations, yields on short- and meunder considerable stress. Tight credit dium-term nominal Treasury coupon conditions, the ongoing housing con- securities fell over the intermeeting traction, and the rise in energy prices period. Yields on long-term Treasury were likely to weigh on economic securities declined less than those on growth over the next few quarters. The shorter-term instruments, and the yield Committeeexpectedinflationtomoder- curve steepened. Measures of shorteratelaterthisyearandnext.However,in horizon inflation compensation derived light of the continued increases in the from yields on inflation-indexed Treaprices of energy and some other com- sury securities dropped over the intermodities and the elevated state of some meeting period as energy prices reindicators of inflation expectations, versed some of their earlier rise, while uncertainty about the inflation outlook measures of longer-term inflation comremained high. The Committee stated pensation rose slightly. that the substantial easing of monetary Functioning in the interbank funding policy to date, combined with ongoing markets remained strained over the measures to foster market liquidity, intermeeting period. Spreads of the
Meetings of the FOMC, August 305 Londoninterbankofferedrate,orLibor, potential consequences of financial over comparable-maturity overnight strains for the broader economy over index swap rates were unchanged to theintermeetingperiod.OnJuly13,the slightly higher, and spreads on lower- TreasuryDepartmentproposedaplanto rated nonfinancial and asset-backed support the liquidity and solvency of commercial paper remained well above the two GSEs, and the Board of Goverhistorical norms. Depository institu- nors of the Federal Reserve System tions’ use of both overnight and term announced that the Federal Reserve primary credit borrowing continued to Bank of New York was authorized to be strong during the intermeeting lend to the two institutions if necessary, period, peaking in late June amid reducing somewhat market concerns quarter-end pressures. However, new abouttheGSEs.Concernseasedfurther extensionsofcreditthroughthePrimary as Congress passed legislation, which Dealer Credit Facility (PDCF) were was subsequently signed by the Presinegligible during July. On July 30, the dent, authorizing the Treasury to pro- Board of Governors and the FOMC vide liquidity and capital to the GSEs. announced enhancements to existing Over the intermeeting period, spreads liquidity facilities, including extension ofratesonconformingresidentialmortof the PDCF and the Term Securities gages over those on comparable- Lending Facility through January 30, maturity Treasury securities moved 2009. Conditions in the market for higher. Offer rates on 30-year jumbo Treasury repurchase agreements were mortgagesalsorose,andcreditfornonfairly stable, although there was some conforming mortgages remained diffideteriorationofconditionsinthemarket cult to obtain. In the secondary market, for agency collateral. issuance of mortgage-backed securities In longer-term credit markets, yields by GSEs appeared to have slowed in on both investment- and speculative- July from its strong second-quarter grade corporate bonds rose over the pace, while issuance of securities intermeeting period even though combacked by nonconforming loans and of parable-maturity Treasury yields decommercial mortgage-backed securities clined slightly, which resulted in a widremained nil. ening of already elevated spreads. Pressures in the money markets of Corporatebondissuanceslowedfurther, many major foreign economies eased as did lending by banks to businesses and households, and issuance of lever- slightly over the intermeeting period. aged loans remained very weak. Broad Yields on sovereign debt in the adequity price indexes were volatile and vanced foreign economies fell, mainly declined modestly, on net, between the because of declines in inflation com- June and August FOMC meetings. pensation. The trade-weighted index of Stock prices of financial firms fell the dollar against the currencies of sharply in mid-July but subsequently major trading partners rose a bit on net. recouped most of those losses. Energy M2 expanded at a moderate pace in sector stocks significantly underper- July, reversing the deceleration in May formed the broad indexes owing to and June. The expansion was broad recent declines in oil prices. based, reflecting an acceleration in liq- Uncertaintiesaboutthefinancialcon- uid deposits as well as renewed inflows dition of Fannie Mae and Freddie Mac to retail money market mutual funds added to market worries about the and small time deposits.
306 95th Annual Report, 2008 In the forecast prepared for the meet- households and businesses. Growth in ing, the staff marked down its forecast overall economic activity was generally of real GDP growth in the second half expected to be weak during the remainof 2008 and in 2009. Although the der of 2008 before recovering modestly increase in real GDP in the second next year, and nearly all meeting parquarter was a bit faster than anticipated ticipants saw continuing downside risks at the time of the June meeting, the to growth. Recent readings on inflation labor market continued to weaken sig- had been high, but growth in unit labor nificantly, financial conditions re- costs had remained subdued and commained unfavorable, consumer and modity prices had declined of late. Acbusiness confidence was downbeat, and cordingly, most participants anticipated manufacturing activity was contracting. thatinflationwouldmoderateincoming All told, the staff continued to expect quarters. However, participants also exthatrealGDPwouldriseatlessthanits pressed significant concerns about the potential rate through the first half of upsideriskstoinflation,particularlythe next year. Nonetheless, real GDP risk that longer-term inflation expectagrowth was anticipated to return to its tions could become unmoored. potentialrateinthesecondhalfof2009 Many participants referred to the as housing activity leveled out and adverse financial sector developments financialconditionsbecamelessrestric- that had occurred over the intermeeting tive. Core PCE price inflation was ex- period. Heightened investor apprehenpected to pick up somewhat in the sec- sion about the viability of Fannie Mae ond half of this year, mostly as a result and Freddie Mac had eased following oftheupwardpressuresfromthisyear’s legislativeaction,butpressuresonthese run-upsinpricesofenergyandimports. firms continued. Reflecting these Core inflation was then expected to strains, interest rates on residential edge down in 2009 as the impetus from mortgages had moved upward, a develprior increases in the prices of imports, opment that was seen as potentially energy, and other commodities abated exacerbating the contraction in the and the margin of slack in resource use housing sector. Commercial banks had widened. reported that terms and standards had In their discussion of the economic been tightened on nearly all categories situationandoutlook,manyFOMCpar- of loans. Declining mortgage asset valticipantsnotedthatrecentdevelopments ues increased capital pressures on lendsuggested that economic activity was ers exposed to real estate markets. likely to remain damped for several While some financial institutions had quarters. Although economic growth in strengthened their balance sheets with the second quarter had apparently been new capital issues, raising new capital boosted by fiscal stimulus, resilience in had become increasingly difficult. consumption spending even before tax Moreover, broad equity price indexes rebates were distributed, and robust had declined and borrowing costs for gains in exports, recent indicators nonfinancial firms had increased, inpointed to a near-term deceleration in cluding a recent rise in corporate bond householdspendingandtosofterexport yields across most risk categories. demand. Moreover, increasing concerns Many participants believed that these about financial institutions had contrib- developments were likely to restrain utedtoawideningofsomeriskspreads aggregate demand and economic and a further tightening of credit to growth. Others, however, thought that
Meetings of the FOMC, August 307 the extent of such adverse effects was Growth in exports had provided sublikely to be limited, noting that bank stantial impetus to overall demand in lending had continued to grow at a thesecondquarter.However,manyparmoderate pace and that consumption ticipants observed that decelerating acand business capital spending had in- tivity in some foreign economies would creased in the second quarter despite tend to dampen export gains going forthe tightening of credit terms. ward. Indeed, recent indications of a While consumer spending had been slowingglobaleconomymayhaveconbolstered temporarily by the effects of tributed to the marked declines in the the tax rebates, retail sales had weak- prices of oil and some other commodiened during late spring and auto sales ties over the intermeeting period. had dropped sharply in both June and Participants pointed to potential in- July. The unemployment rate jumped teractions between financial stresses and the housing market contraction as duringtheintermeetingperiod,andparthe primary source of continuing downticipants generally anticipated that payside risks to growth. Many participants roll employment would decline further noted that the financial system rein coming months. For example, automained fragile, with some expressing motive parts suppliers in one District continued concern about the possibility had reported plans for laying off workof an adverse feedback loop in which ers, idling production, and closing sevtighter conditions in the mortgage mareral plants. Lower equity prices and the ket would contribute to further declines ongoing deterioration in house prices in the housing sector and additional had reduced household wealth signifilosses for lenders, leading to further cantly, while real incomes had been tightening of lending terms and standiminished by earlier increases in the dards. In contrast, several other participrices of food and energy. All of these pants suggested that risks to the finanfactors—in conjunction with tightened cial system had receded, partly as a access to auto loans, home equity lines resultoftheimplementationbytheFedof credit, and other consumer loans— eral Reserve of special liquidity faciliwere viewed as pointing towards weak ties, and that prevailing credit condigrowth in personal consumption expentions were broadly consistent with the ditures during the second half of 2008. typicalpatternsobservedduringperiods The weaker outlook for consumer of weak growth or recession. demand,alongwithtightercreditcondi- Headline inflation was generally extions for businesses, was expected to pected to moderate in coming quarters, weigh on business spending going for- reflecting importantly an anticipated ward. Moreover, some signs of weak- leveling-out of prices for energy and nessinthecommercialrealestatesector other commodities. Although measures were seen as suggesting a slower pace of core inflation might well edge up of investment in nonresidential struc- laterthisyear,giventhepass-throughto tures over coming quarters, although finalgoodspricesofearlierincreasesin that deceleration might be gradual due the prices of energy and other inputs, to the lags in the planning and execu- most participants anticipated that core tion of such projects. However, the inflation would edge back down during elevated level of energy prices was 2009. Some participants reported that boosting investment in the oil-pro- firms were increasingly using various ducing industry. pricing strategies—such as escalation
308 95th Annual Report, 2008 clauses or the imposition of fuel sur- In the Committee’s discussion of charges—to pass higher costs on to monetary policy for the intermeeting their customers, who were apparently period, members agreed that labor marbecoming less resistant to such price kets had softened further, that financial adjustments. However, one participant markets remained under considerable mentioned the difficult pricing deci- stress, and that these factors—in consionsofmanufacturerswhofaceacom- junction with still-elevated energy bination of elevated input costs along prices and the ongoing housing conwith weakening demand for their prod- traction—would likely weigh on ecoucts. And a number of participants nomic growth in coming quarters. In noted that the outlook for slack in addition, members saw continuing resource utilization should tend to limit downside risks to this outlook, particuthe extent of pass-through, contain the larly reflecting possible further deteriodegree of inflation spillover to goods ration in financial conditions. Members and services without high commodity generally anticipated that inflation content, and reinforce the anticipated would moderate; however, they emphamoderation in inflation. sized the risks to the inflation outlook Participantsexpressedsignificantcon- posed by persistent high readings on cernsabouttheupsideriskstoinflation, headline inflation and a possible unespecially the risk that persistently high mooring of inflation expectations. headline inflation could result in an Against this backdrop, nearly all memunmooring of long-run inflation expec- bers judged that leaving the federal tations.Someviewedtheupsiderisksto funds rate unchanged at this meeting inflationashavingdiminishedmodestly was appropriate and would most effecover the intermeeting period, mainly as tively promote progress toward the a result of the drop in the prices of oil Committee’s dual objectives of maxiand some other commodities as well as mum employment and price stability. the greater likelihood of persistent eco- Most members did not see the current nomic slack. However, others viewed stance of policy as particularly accomthese risks as having increased, particu- modative, given that many households larlyinlightofcontinuedelevatedread- and businesses were facing elevated ings on headline inflation, the low level borrowing costs and reduced credit of the real federal funds rate, anecdotal availability due to the effects of finaninformation suggesting that firms were cialmarketstrainsaswellasmacroecohaving more success in passing higher nomic risks. Although members genercosts on to their customers, and some ally anticipated that the next policy signs of an upward drift over recent move would likely be a tightening, the months in investors’ expectations and timing and extent of any change in poluncertainty regarding inflation over the icy stance would depend on evolving longerrun;moreover,therecentdecline economic and financial developments in energy prices might well be reversed and the implications for the outlook for incomingmonths.Anumberofpartici- economic growth and inflation. pants worried about the possibility that At the conclusion of the discussion, core inflation might fail to moderate the Committee voted to authorize and next year unless the stance of monetary directtheFederalReserveBankofNew policy was tightened sooner than cur- York, until it was instructed otherwise, rently anticipated by financial markets. to execute transactions in the System
Meetings of the FOMC, August 309 Account in accordance with the follow- inflation expectations, which were at ing domestic policy directive: risk of drifting higher. While the financial system remained fragile and eco- The Federal Open Market Committee nomic growth was sluggish and could seeksmonetaryandfinancialconditionsthat will foster price stability and promote sus- weaken further, he saw a greater risk to tainable growth in output. To further its the economy from upward pressures on long-run objectives, the Committee in the inflation. In his view, businesses had immediatefutureseeksconditionsinreserve become more inclined to raise prices to marketsconsistentwithmaintainingthefedpass on the higher costs of imported eral funds rate at an average of around goods and higher energy costs, the lat- 2percent. ter of which were well above their lev- The vote encompassed approval of els of late 2007. Accordingly, he supthe statement below to be released at ported a policy tightening at this 2:15 p.m.: meeting. The Federal Open Market Committee Itwasagreedthatthenextmeetingof decided today to keep its target for the fed- the Committee would be held on Tueseralfundsrateat2percent. day, September 16, 2008. Economicactivityexpandedinthesecond The meeting adjourned at 1:50 p.m. quarter, partly reflecting growth in consumerspendingandexports.However,labor markets have softened further and financial Conference Call markets remain under considerable stress. Tightcreditconditions,theongoinghousing On July 24, 2008, the Federal Open contraction, and elevated energy prices are Market Committee met in a joint seslikely to weigh on economic growth over the next few quarters. Over time, the sub- sion with the Board of Governors to stantial easing of monetary policy, com- consider several proposals to extend or bined with ongoing measures to foster mar- enhanceFederalReserveSystemliquidket liquidity, should help to promote ity facilities. In light of continued sigmoderateeconomicgrowth. nificant stresses in financial markets Inflation has been high, spurred by the earlier increases in the prices of energy and and the experience to date with the some other commodities, and some indica- Term Auction Facility (TAF), the Term tors of inflation expectations have been SecuritiesLendingFacility(TSLF),and elevated. The Committee expects inflation the Primary Dealer Lending Facility tomoderatelaterthisyearandnextyear,but (PDCF), the staff proposed modificathe inflation outlook remains highly uncertain. tions to these programs. The modifica- Although downside risks to growth tions included auctioning options on up remain,theupsideriskstoinflationarealso to an additional $50 billion of TSLF of significant concern to the Committee. loansandlengtheningthetermtomatu- The Committee will continue to monitor rity of all loans made under the TAF to economic and financial developments and 84 days. Contingent upon Board apwill act as needed to promote sustainable economicgrowthandpricestability. proval of the change to TAF loans, the Committee was asked to consider an Votesforthisaction:Messrs.Bernanke expansionoftheexistingcurrencyswap andGeithner,Ms.Duke,Messrs.Kohn, Kroszner, and Mishkin, Ms. Pianalto, arrangement with the European Central Messrs. Plosser, Stern, and Warsh. Bank to facilitate a similar change in Votesagainstthisaction:Mr.Fisher. the term of dollar credits auctioned by Mr. Fisher dissented because he fa- the ECB. Finally, policymakers were vored an increase in the target federal asked to vote on extending the availfunds rate to help restrain inflation and ability of the TSLF and PDCF past the
310 95th Annual Report, 2008 year-end, a topic that had been dis- WithMr.Plosserdissenting,theComcussed on a preliminary basis at the mittee voted to approve the resolution joint Board/FOMC meeting on June 25, below.Mr.Plosserdissentedbecausehe 2008. viewed the net benefit of the TSLF In the discussion, meeting partici- options as being insufficient to justify pants exchanged views on issues en- adding them to the support already tailed in administering the TAF and being provided to market liquidity. term primary discount window credit. TSLF Options Authorization Issues regarding credit risk and collateral requirements received particular In addition to the current authorizations attention. granted to the Federal Reserve Bank of Some participants raised questions New York to engage in term securities about the net benefit of approving and lending transactions, the Federal Open announcing the proposed changes at Market Committee authorizes the Fedthis time, asking, for example, whether eralReserveBankofNewYorktooffer such an announcement could suggest options on up to $50 billion in addithat the Federal Reserve saw financial tional draws on the Facility, subject to the other terms and conditions previmarkets as more fragile than expected ously established for the Facility. or whether adjustments to the liquidity Mr.Lockhartvotedasalternatememfacilities could cause market analysts to ber at this meeting. infer that the System intended to keep thefacilitiesinplacepermanently.Most Notation Votes participants expressed general support for the proposals as improving the Sys- By notation vote completed on July 14, tem’s tools for supporting market li- 2008, the Committee unanimously quidity. However, there was consider- approved the minutes of the FOMC able sentiment for altering the TAF meeting held on June 24–25, 2008. proposal to allow for both 28- and By notation vote completed on July 84-day credits, and the Chairman di- 29, 2008, the Committee unanimously rected the staff to confer, to consult fur- approved the following resolution: ther with policymakers, and to revise Swap Authorization the proposal accordingly for notation The Federal Open Market Committee votes in the near future by the Board directs the Federal Reserve Bank of and the FOMC. NewYorktoincreasetheamountavail- At this meeting, the Committee able from the System Open Market unanimously approved the following Account under the existing reciprocal resolution: currency arrangement (“swap” arrange- TSLF Extension Authorization ment) with the European Central Bank to an amount not to exceed $55 billion. The FOMC extends until January 30, Withinthataggregatelimit,drawsofup 2009, its authorizations for the Federal to $25 billion are hereby authorized. Reserve Bank of New York to engage The swap arrangement continues to be in transactions with primary dealers authorized through January 30, 2009, through the Term Securities Lending unless extended by the Federal Open Facility, subject to the same collateral, Market Committee. interest rate and other conditions previ- Brian F. Madigan ously established by the Committee. Secretary
Minutes of the FOMC, September 311 Meeting Held on Mr. Parkinson, Deputy Director, Divi- September 16, 2008 sion of Research and Statistics, BoardofGovernors A meeting of the Federal Open Market Mr. Struckmeyer, Deputy Staff Direc- Committee was held in the offices of tor, Office of Staff Director for the Board of Governors of the Federal Management, Board of Governors Reserve System in Washington, D.C., Mr. Gagnon, Visiting Associate DireconTuesday,September16,2008at8:30 tor, Division of Monetary Affairs, a.m. BoardofGovernors Present: Messrs. Reifschneider and Wascher, Mr.Bernanke,Chairman Associate Directors, Division of Ms.Duke Research and Statistics, Board of Mr.Fisher Governors Mr.Kohn Mr.Oliner,SeniorAdviser,Divisionof Mr.Kroszner Research and Statistics, Board of Ms.Pianalto Governors Mr.Plosser Mr.Stern Mr. Small, Project Manager, Division Mr.Warsh of Monetary Affairs, Board of Governors Ms. Cumming, Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Mr.Luecke,SectionChief,Divisionof Alternate Members of the Federal Monetary Affairs, Board of Gov- OpenMarketCommittee ernors Messrs. Bullard, Hoenig, and Rosen- Mr. Carlson, Economist, Division of gren, Presidents of the Federal Monetary Affairs, Board of Gov- Reserve Banks of St. Louis, Kan- ernors sas City, and Boston, respectively Ms. Low, Open Market Secretariat Mr.Madigan,SecretaryandEconomist Specialist, Division of Monetary Ms.Danker,DeputySecretary Affairs,BoardofGovernors Mr.Skidmore,AssistantSecretary Mr. Moore, First Vice President, Fed- Ms.Smith,AssistantSecretary eral Reserve Bank of San Fran- Mr.Alvarez,GeneralCounsel cisco Mr.Sheets,Economist Mr.Stockton,Economist Mr. Judd, Executive Vice President, Messrs. Connors, English, Kamin, Federal Reserve Bank of San Rolnick, Rosenblum, Slifman, Francisco Tracy, and Wilcox, Associate Mr. Altig, Ms. Baum, Messrs. Rasche, Economists Schweitzer, Sellon, and Tootell, Mr. Dudley, Manager, System Open Senior Vice Presidents, Federal MarketAccount Reserve Banks of Atlanta, New York, St. Louis, Cleveland, Kan- Mr. Cole, Director, Division of Bank- sas City, and Boston, respectively ing Supervision and Regulation, BoardofGovernors Mr. Krane, Vice President, Federal ReserveBankofChicago Mr. Blanchard, Assistant to the Board, Office of Board Members, Board Mr. Chatterjee, Senior Economic ofGovernors Adviser, Federal Reserve Bank of Philadelphia Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Mr. Wolman, Senior Economist, Fed- Governors eralReserveBankofRichmond
312 95th Annual Report, 2008 The Manager of the System Open roserapidlyforathirdstraightmonthin Market Account reported on recent de- July but then edged down in August, velopments in foreign exchange mar- because of a sharp drop in energy kets.Therewerenoopenmarketopera- prices. Core consumer price inflation tions in foreign currencies for the remained elevated in July and eased System’saccountintheperiodsincethe somewhat in August. previous meeting. The Manager also The labor market continued to reported on developments in domestic weaken. According to the August emfinancial markets and on System open ployment report, private payroll emmarket operations in government secu- ployment fell by a bit more than the rities and federal agency obligations average seen earlier this year. Most during the period since the previous major industry groups shed jobs; manumeeting. By unanimous vote, the Com- facturing posted a particularly noticemittee ratified these transactions. able loss. Job losses in the construction In light of severe stresses in dollar industry diminished over July and Aufundingmarkets,theCommitteeconsid- gust despite the ongoing contraction in ered a proposal intended to provide residential investment. Hiring in nonthe flexibility necessary to respond business services, which include the promptly to requests from foreign cen- education and health industries, and in tralbankstoengageintemporaryrecip- natural resources and mining increased rocal currency (“swap”) arrangements in line with recent trends. The average to be used in supporting dollar liquidity workweek held steady and aggregate in their jurisdictions. After the discus- hours edged lower. The unemployment sion, the Committee voted unanimously rate jumped 0.4 percentage point, to to authorize its Foreign Currency Sub- 6.1 percent, in August, while the labor committeetodirecttheFederalReserve force participation rate held steady. BankofNewYorkasneededtoexpand Industrial production fell sharply in existingswaparrangementsandtoenter August after edging up in July. Motor into new arrangements with foreign vehicle assemblies dropped in August central banks to address strains in as automakers scaled back production money markets. This authority extends following a sharp decline in vehicle through January 30, 2009. sales in July. The output of high-tech TheinformationreviewedattheSep- equipmentroseatamoderaterateinthe tembermeetingindicatedthateconomic first half of the year, but indicators of activity decelerated considerably in production gains in the high-tech sector recent months. The labor market dete- pointed toward relatively subdued riorated further in August as private growth in the third quarter. The output payrolls declined and the unemploy- of other manufacturing sectors declined ment rate moved markedly higher. for a third consecutive month in Au- Industrial output was little changed in gust, and indicators of near-term pro- July, but fell sharply in August. Con- duction suggested that the industrial sumer spending weakened noticeably in sectorwaslikelytoremainsoftoverthe recent months. Meanwhile, residential nextfewmonths.Formostmajorindusinvestment continued to decline steeply try groups, factory utilization rates in through midyear. In contrast, business August remained below their long-run investment in equipment and structures averages. generally held up through July. On the Real personal consumption expendiinflation front, overall consumer prices tures (PCE) turned down in June and
Minutes of the FOMC, September 313 declined more noticeably in July; over especially for borrowers seeking nonthetwomonths,outlaysformotorvehi- conforming mortgages. Several indexes cles dropped markedly and spending on indicatedthathousepriceshaddeclined other goods weakened substantially. substantially over the past 12 months, The recent weakness in consumer and these prices appeared to remain on spending on goods excluding motor a downward trajectory. vehicles contrasted sharply with solid In the business sector, investment in growth in the spring. Outlays for ser- equipment and software fell in the secvices were reported to have increased ond quarter, largely reflecting a sharp modestly in June and July. Total nomi- drop in spending on motor vehicles. In nal retail sales decreased in August. contrast,growthofrealoutlaysfornon- Real disposable income was boosted transportation equipment posted a modsignificantly by the tax rebates in the erate gain. The data on nominal orders second quarter; excluding the tempo- and shipments of nondefense capital rary rebates, real disposable income fell goods excluding aircraft rose substanin that quarter and continued to move tially in July, although some of the gain lowerinJuly.EarlySeptemberreadings in nominal shipments may have reon consumer sentiment rose from the flected unusually large price increases. low levels recorded over the past sev- Moreover, as in previous months, eral months. orders and shipments were likely sup- Residential construction activity con- ported in July by increased foreign tinued to decline steeply through mid- demand.Realnonresidentialinvestment year. In July, both single-family hous- increased at a robust rate in the second ing starts and permit issuance fell quarter; however, nominal expenditures further. In the multifamily sector, starts declined in July, and forward-looking dropped back in July to a rate more in indicators remained downbeat. Vacancy line with its historical range. June’s rates for commercial properties moved spike in multifamily starts was related higher in the first half of the year and to more-stringent building codes that the architectural billings index contintook effect in New York City on July 1, ued to register weak readings. which apparently led developers to pull Real nonfarm inventories excluding forward the start date of some planned motor vehicles fell in the second quarapartment projects. Recent cutbacks in ter. The book value of manufacturing new residential construction reduced and trade inventories (excluding motor the level of new home inventories, and vehicles) stepped up modestly in July the relative stability in sales of new from the second-quarter level, but the homes allowed those inventory reduc- ratio of these inventories to sales held tions to begin to bring down the steady. months’ supply of new homes for sale. The U.S. international trade deficit Even so, the months’ supply of new widened in July, as a surge in the value homes for sale remained extremely of imports of goods and services more elevated relative to the level that pre- than offset strong growth in exports. vailed before the downturn in the hous- Imports in July were led by a rapid ing market. Sales of existing single- increase in imports of oil, reflecting family homes were relatively flat since both higher volumes and higher prices, the end of last year. Tight conditions in and were supported by a rise in imports mortgage markets over the summer ofindustrialsupplies,capitalgoods,and continued to restrain housing demand, services. The strength in exports was
314 95th Annual Report, 2008 broadly based but benefited in particu- increase moderately with no sign of lar from robust exports of automotive acceleration. products. At its August meeting, the Federal Economic indicators pointed to a Open Market Committee (FOMC) kept marked deceleration of economic activ- the target federal funds rate unchanged ity in the advanced foreign economies. at 2 percent. The Committee’s state- In the second quarter, gross domestic ment noted that economic activity product (GDP) was flat in Canada and expanded in the second quarter, partly the United Kingdom and fell in both reflecting growth in consumer spending Japan and the euro area. In July, em- and exports. However, labor markets ploymentcontinuedtoweakeninJapan, had softened further and financial marand retail sales fell in the euro area. ketsremainedunderconsiderablestress. Headline inflation in the major ad- Tight credit conditions, the ongoing housing contraction, and elevated envanced foreign economies stayed elergypriceswerelikelytoweighonecoevated. Data received over the internomic growth over the next few quarmeeting period showed a further ters. The Committee stated that, over slowing of growth in emerging market time, the substantial easing of monetary economies. For Mexico, anemic growth policy, combined with ongoing meain the second quarter followed a slight sures to foster market liquidity, should contraction in the first. In Asia, output help to promote moderate economic decelerated significantly in the second growth.Inflationhadbeenhigh,spurred quarter, as growth moderated in China by the earlier increases in the prices of and weakened more sharply in several energy and some other commodities, other economies. Headline inflation and some indicators of inflation expecrose in some developing countries but tationshadbeenelevated.TheCommitfell in others. tee expected inflation to moderate later Headline consumer prices in the thisyearandnextyear,buttheinflation United States declined slightly in Auoutlook remained highly uncertain. gust after having risen rapidly during Although downside risks to growth the preceding three months. Energy remained, the upside risks to inflation prices dropped steeply, and the rate of were also of significant concern to the increase in food prices moderated Committee. The Committee indicated somewhat. Core consumer prices rose a that it would continue to monitor ecobitmoreslowlyinAugustthantheyhad nomic and financial developments and in June and July. Excluding food and wouldactasneededtopromotesustainenergy, producer prices rose modestly able economic growth and price stabilin August, although prices for capital ity. goods other than motor vehicles and Over the intermeeting period, inveshigh-tech equipment posted a large tors marked down considerably their increase. During recent months, some expectations for the path of monetary cost pressures eased as the prices of policy. Policy expectations were largely crude oil and other commodities de- unaffected by the outcome of the clined and non-oil import prices decel- AugustFOMCmeeting,astheCommiterated. Some measures of inflation tee’s decision to leave the target federal expectations were down notably over funds rate unchanged was broadly the intermeeting period. Measures of anticipatedandtheaccompanyingstatehourly labor compensation continued to ment was reportedly in line with inves-
Minutes of the FOMC, September 315 tor expectations. Subsequently, the intermeeting period, and liquidity in expectedfuturepathofmonetarypolicy non-Treasury, nonagency term repo dropped amid increasing concerns markets remained poor. about the health of financial institu- In longer-term credit markets, yields tions. The market’s expectation for the on investment-grade corporate bonds onset of policy tightening was also were not much changed, but yields on pushed back as labor market conditions speculative-gradebondsrosesomewhat. weakened and oil prices declined fur- Risk spreads on corporate bonds ther, developments that were seen as jumped, as comparable-maturity Treatemperinginflationpressures.Yieldson sury yields dropped; most of the innominal Treasury coupon securities crease in risk spreads occurred late in declined over the intermeeting period theintermeetingperiod.Corporatebond while yields on inflation-indexed Trea- issuance moderated a bit further in surysecuritieswereroughlyunchanged, August, while growth of bank lending which left inflation compensation no- to businesses was tepid. Broad equity ticeablylower.Thedecreaseininflation indexes declined over the intermeeting compensation was most pronounced at period. Financial sector equity indexes shorter horizons, likely reflecting the were volatile and ended the period drop in oil prices. down sharply. Conditions in short-term funding Liquidity conditions in the money markets remained strained for most of markets of major foreign economies theintermeetingperiodanddeteriorated deteriorated over the intermeeting considerably just before the FOMC period. Sovereign bond yields moved meeting. The spreads of London inter- down, mainly reflecting declines in bank offered rates, or Libor, over inflation compensation. On a tradecomparable-maturity overnight index weighted basis, the dollar rose against swap rates, especially those beyond the thecurrenciesofourmajortradingpartone-month horizon, moved up from ners. already-high levels. In the commercial M2 contracted slightly in August folpaper market, spreads on lower-rated lowing a generally weak performance nonfinancial and asset-backed commer- over the previous few months. The cial paper fluctuated in an elevated August data showed a considerable range,asdidspreadsonfinancialpaper. reallocation among the components of Depository institutions continued to bid M2. Liquid deposits and retail money aggressively for 28-day funds at the funds fell while small time deposits Term Auction Facility (TAF) during the surged as some banks and thrifts bid intermeeting period, and demand for aggressively for these deposits. funds was strong at both of the 84-day On September 7, the Treasury De- TAF auctions. The amount of overnight partment and the Federal Housing primary credit outstanding was about Finance Agency announced that Fannie unchanged at a high level, while term Mae and Freddie Mac had been placed primary credit continued to rise. No into conservatorship and that Treasury credit was extended through the Pri- would establish a backstop lending mary Dealer Credit Facility until the facility for the government-sponsored final week of the intermeeting period. enterprises (GSEs), purchase preferred Conditions in markets for repurchase stock in the GSEs as necessary to agreements, or repos, against some ensure that they maintain a positive net types of collateral deteriorated over the worth, and initiate a program to
316 95th Annual Report, 2008 purchase mortgage-backed securities dition of other large financial firms, (MBS). Following the announcement, including American International spreads on Fannie Mae and Freddie Group, a prominent insurance and Mac debt and on agency MBS nar- financial services company. To further rowed,whilesharepricesfortheircom- support market liquidity and to help mon and preferred stock fell. Auctions keep the federal funds rate near its tarof GSE debt following the conservator- get,theFederalReserveconductedvery ship announcement reportedly attracted large reserve- adding open market heavy demand, but market participants operationsthedaybeforeandthemornindicated that liquidity in the secondary ing of the FOMC meeting. Market market for GSE debt remained some- expectations for the path of monetary what lower than normal. Before the policy moved down sharply. Yields on conservatorship announcement, interest nominal Treasury securities dropped rates on 30-year fixed-rate mortgages steeply, and credit spreads on corporate had declined less than those on com- bonds widened significantly. Equity parable-maturity Treasury securities, markets were volatile and equity prices leaving mortgage spreads at the top of dropped considerably. theirrangeofthepasttwodecades.Fol- In the forecast prepared for the meetlowing the Treasury announcement, ing, the staff left its projection for real rates and spreads on new conforming GDP growth in the second half of 2008 fixed-rate mortgages dropped sharply. little changed from the previous meet- In the days immediately before the ing, but it marked down its forecast for FOMC meeting, Lehman Brothers 2009 slightly. Real GDP was estimated Holdings filed for bankruptcy, Bank of to have increased at a solid pace in the America announced that it would second quarter; however, the available acquire Merrill Lynch, and market con- indicators pointed to a sharp deceleracernsaboutthehealthofotherfinancial tion in economic activity in the third institutionsincreased.Toaddresspoten- quarter. Consumer spending softened tial liquidity pressures in financial mar- appreciablyinrecentmonths,andhouskets associated with these develop- ing construction remained on a steep ments, the Federal Reserve announced downtrend. Some of the weakness in several additional initiatives, including the household sector appeared to reflect an expansion of collateral eligible for the ongoing deterioration in the labor the Primary Dealer Credit Facility and market, but the effects of the earlier the Term Securities Lending Facility run-up in oil prices, weakened balance (TSLF), increases in the size and fre- sheets, and restrictive financial condiquency of TSLF auctions, and a tempo- tions also likely put the finances of raryrelaxationofthelimitationsonbro- many households and businesses under kerdealers’ access to funding from pressure. The staff continued to expect affiliated depository institutions. In ad- that real GDP would advance slowly in dition, a consortium of 10 major banks the fourth quarter of 2008 and at a announced the creation of a liquidity faster rate in 2009, but still less than pool from which participants could that of its potential. Real GDP growth draw collateralized loans. Despite these was expected to pick up to slightly enhancedliquiditymeasures,short-term above the rate of potential growth in funding markets remained severely 2010, as the restraint on household and strained, reflecting investors’ height- business spending associated with fiened concerns about the financial con- nancial market turmoil gradually eases
Minutes of the FOMC, September 317 and the contraction in the housing sec- afurthertighteningofcreditavailability torcomestoanend.Thestaff’soutlook to households and firms. Meeting parfor both core and overall PCE inflation ticipants were highly uncertain about over the next two years also changed future financial developments and their little. The staff continued to project that implications for the broader economy. coreinflationwouldedgelowerin2009 There was agreement that the liquidity and 2010 as the prices of imports, facilities established by the Federal energy, and other commodities deceler- Reserve over the past year had been ate and the margin of resource slack helpful in ameliorating strains in finanremains relatively wide. cial markets, but it was also noted that In their discussion of the economic the capital of banks and other financial situation and outlook, FOMC partici- institutions would need to be bolstered pantsnotedthatfinancialmarketstrains inordertostrengthenthefunctioningof had intensified in the days before the the financial system and ease conmeeting and that these strains could straints on credit. potentially weigh further on economic Strains on the financial system, and activity. Participants agreed that eco- their interactions with housing developnomic growth was likely to be sluggish ments and the real economy more in the second half of 2008. Several par- broadly, continued to restrain aggregate ticipants had marked down their near- demand and pose substantial downside term outlook for economic activity and risks to the expected path for economic some judged that downside risks had activity. The fall in employment in increased, but most continued to expect August highlighted concerns that an a gradual recovery in 2009. Despite adverse dynamic was taking hold, in concern that recent high inflation read- which economic weakness increased fiings suggested that price pressures nancial firms’ losses, leading to tighter could persist, participants generally creditconditionsandthuscausingafurthought that the outlook for inflation ther softening in economic activity. had improved, mainly reflecting the However, some participants cited indirecent declines in the prices of oil and cationsthatthepaceofdeclineinhouse other commodities, the stronger foreign prices might begin to slow in coming exchange value of the dollar, and the months, which would serve to limit the weakening of the labor market. strains on lenders. Mortgage rates had Participants noted that stresses on fallen after action on the GSEs, invenfinancial markets and institutions had tories of houses for sale had fallen, and increased. The announcement of gov- reports from contacts in some parts of ernment support for Fannie Mae and the nation suggested a possible bottom- Freddie Mac appeared to have had a ing of the housing sector might not be positive impact on financial markets, far off, although the differences in the most importantly on the primary and prospects for housing across states and secondary markets for residential mort- regions seemed to be large. All in all, gages.However,thebankruptcyofLeh- the contraction in the housing sector man Brothers and market concerns and the adverse implications for the about other financial institutions were performance of mortgage-related financausing a wide variety of financial cial assets continued to represent a drag firmstoexperienceincreasingdifficulty on economic performance. inobtainingfundingandraisingcapital, Recent readings on consumer spendadevelopmentthatwaslikelytoleadto ing had been weak despite the tax
318 95th Annual Report, 2008 rebates, which were mostly paid out by with increased economic slack would mid-July; these indicators suggested tend to damp inflation. Various meathat consumption may remain soft as sures of inflation expectations had dethe effects of the stimulus fade over the clinedsincethelastmeeting,andnominear term. Falling real estate prices nal wage increases had continued to be werelikelytocontinuetoreducehouse- moderate. Indeed, with solid growth in hold wealth, and the eroding quality of productivity, unit labor costs had been consumerloanshadthepotentialtolead well contained. Still, reports from busito a further tightening of credit condi- ness contacts suggested that firms were tions. Many participants worried that continuingtoattempttopassthroughto the deterioration in labor market condi- their customers previous increases in tions over the summer would damp the the costs of energy and other raw mategrowth of income and depress con- rials and would resist reversing previsumer confidence, further holding back ous price increases. Participants noted consumption. that recent readings on core and head- Business spending had held up well line inflation had been elevated, and over the summer, and inventories ap- they expressed concern that high inflapeared to be well managed. However, tion might become embedded in expecreports from business contacts sug- tations and retain considerable momengested that new commercial real estate tum. projects were difficult to finance. With Members agreed that keeping the credit conditions generally tight and federal funds rate unchanged at this economicprospectsrelativelyuncertain, meeting was appropriate. The current investmentspendingwaslikelytobeon low real federal funds rate appeared the soft side going forward. necessary to provide adequate counter- Foreigneconomicgrowthhadslowed weight to the restraining effects of tight in recent months and the dollar had credit conditions and of continued derisen broadly; both of these develop- clines in the housing market on spendments suggested that the contributions ing and output. Committee members to U.S. GDP growth from net exports generally saw the current stance of would likely be less strong than it had monetary policy as consistent with a been of late. Some participants noted gradual strengthening of economic that financial strains were increasing in growth beginning next year, although many foreign countries. However, a they recognized that recent financial beneficialsideeffectoftheglobalslow- developments had boosted the downdown was the falling prices of oil and side risks to the economic outlook. other commodities, which would help Inflation risks appeared to have diminto bolster real incomes of U.S. house- ished in response to the declines in the holds. pricesofenergyandothercommodities, Participants generally were some- the recent strengthening of the dollar, what more confident about the outlook and the outlook for somewhat greater for some moderation in inflation over economic slack, and Committee memthe forecast horizon. Recent substantial bers were a bit more optimistic that declines in the prices of oil and other inflation would moderate in coming commodities should help to contain quarters. However, the possibility that broader price pressures in coming quar- core inflation would not moderate as ters. In addition, the effects of the anticipated was still a significant constronger dollar on import prices along cern.Withsubstantialdownsiderisksto
Minutes of the FOMC, October 319 growth and persisting upside risks to bined with ongoing measures to foster marinflation, members judged that leaving ketliquidity,shouldhelptopromotemoderateeconomicgrowth. the federal funds rate unchanged at this Inflation has been high, spurred by the time suitably balanced the risks to the earlier increases in the prices of energy and outlook. Some members emphasized some other commodities. The Committee that if intensifying financial strains led expects inflation to moderate later this year toasignificantworseningofthegrowth and next year, but the inflation outlook remainshighlyuncertain. outlook, a policy response could be The downside risks to growth and the required; however, such a response was upside risks to inflation are both of signifinot called for at this meeting. Indeed, it cant concern to the Committee. The Comwas noted that, with elevated inflation mittee will monitor economic and financial developments carefully and will act as still a concern and growth expected to needed to promote sustainable economic pick up next year if financial strains growthandpricestability. diminish, the Committee should also Votes for this action: Mr. Bernanke, remain prepared to reverse the policy Mses. Cumming and Duke, Messrs. easingputinplaceoverthepastyearin Fisher, Kohn, and Kroszner, Ms. Piana timely fashion. alto,Messrs.Plosser,Stern,andWarsh. At the conclusion of the discussion, Votes against this action: None. Ms. CummingvotedasthealternateforMr. the Committee voted to authorize and Geithner. directtheFederalReserveBankofNew York, until it was instructed otherwise, Itwasagreedthatthenextmeetingof to execute transactions in the System the Committee would be held on Tues- Account in accordance with the follow- day−Wednesday, October 28–29, 2008. ing domestic policy directive: The meeting adjourned at 12:30 p.m. The Federal Open Market Committee Notation Vote seeksmonetaryandfinancialconditionsthat will foster price stability and promote sus- By notation vote completed on August tainable growth in output. To further its 25, 2008, the Committee unanimously long-run objectives, the Committee in the approved the minutes of the FOMC immediatefutureseeksconditionsinreserve marketsconsistentwithmaintainingthefed- meeting held on August 5, 2008. eral funds rate at an average of around Brian F. Madigan 2percent. Secretary The vote encompassed approval of the statement below to be released at 2:15 p.m.: Meeting Held on October 28–29, 2008 The Federal Open Market Committee decided today to keep its target for the fed- A meeting of the Federal Open Market eralfundsrateat2percent. Committee was held in the offices of Strains in financial markets have inthe Board of Governors of the Federal creasedsignificantlyandlabormarketshave Reserve System in Washington, D.C., weakenedfurther.Economicgrowthappears to have slowed recently, partly reflecting a on Tuesday, October 28, 2008 at 2:00 softening of household spending. Tight p.m. and continued on Wednesday, credit conditions, the ongoing housing con- October 29, 2008 at 9:00 a.m. traction,andsomeslowinginexportgrowth are likely to weigh on economic growth Present: over the next few quarters. Over time, the Mr.Bernanke,Chairman substantial easing of monetary policy, com- Mr.Geithner,ViceChairman
320 95th Annual Report, 2008 Ms.Duke Messrs. Levin and Nelson, Associate Mr.Fisher Directors, Division of Monetary Mr.Kohn Affairs,BoardofGovernors Mr.Kroszner Ms. Kole, Assistant Director, Division Ms.Pianalto of International Finance, Board of Mr.Plosser Governors Mr.Stern Mr.Warsh Mr. McCarthy, Visiting Reserve Bank Officer, Division of Monetary Ms. Cumming, Messrs. Evans, Lacker, Affairs,BoardofGovernors and Lockhart, and Ms. Yellen, Alternate Members of the Federal Mr.Oliner,SeniorAdviser,Divisionof OpenMarketCommittee Research and Statistics, Board of Governors Messrs. Bullard, Hoenig, and Rosengren, Presidents of the Federal Mr. Small, Project Manager, Division Reserve Banks of St. Louis, Kan- of Monetary Affairs, Board of sas City, and Boston, respectively Governors Mr.Madigan,SecretaryandEconomist Messrs. Bassett and Luecke, Section Ms.Danker,DeputySecretary Chiefs, Division of Monetary Mr.Skidmore,AssistantSecretary Affairs,BoardofGovernors Ms.Smith,AssistantSecretary Mr.Alvarez,GeneralCounsel Mr.Morin,SeniorEconomist,Division Mr.Baxter,DeputyGeneralCounsel of Research and Statistics, Board Mr.Sheets,Economist ofGovernors Mr.Stockton,Economist Ms. Low, Open Market Secretariat Messrs. Connors, English, and Kamin, Specialist, Division of Monetary Ms. Mester, Messrs. Rosenblum, Affairs,BoardofGovernors Slifman, Sniderman, and Wilcox, Mr. Moore, First Vice President, Fed- AssociateEconomists eralReserveBankofCleveland Mr. Dudley, Manager, System Open Mr. Fuhrer, Executive Vice President, MarketAccount FederalReserveBankofBoston Ms. Bailey, Deputy Director, Division Messrs. Altig and McAndrews, Ms. ofBankingSupervisionandRegu- Mosser, Messrs. Rasche, Sullivan, lation,BoardofGovernors and Williams, Senior Vice Presi- Mr. Clouse, Deputy Director, Division dents, Federal Reserve Banks of of Monetary Affairs, Board of Atlanta,NewYork,NewYork,St. Governors Louis, Chicago, and San Francisco,respectively Mr.Struckmeyer,12DeputyStaffDirec- Messrs. Clark and Hornstein, Vice tor, Office of Staff Director for Presidents,FederalReserveBanks Management, Board of Governors of Kansas City and Richmond, Mr. Blanchard, Assistant to the Board, respectively Office of Board Members, Board Mr. Weber, Senior Research Officer, ofGovernors Federal Reserve Bank of Minne- Messrs. Reifschneider and Wascher, apolis Associate Directors, Division of The Manager of the System Open Research and Statistics, Board of Governors Market Account reported on recent developments in foreign exchange markets.Therewerenoopenmarketopera- 12. AttendedWednesday’ssessiononly. tions in foreign currencies for the Sys-
Minutes of the FOMC, October 321 tem’s account in the period since the TheFOMCamendsparagraph1.A.ofthe previous meeting. The Manager also Authorization for Foreign Currency Operareported on developments in domestic tions to include the New Zealand dollar in the list of foreign currencies in which the financial markets and on System open Federal Reserve Bank of New York may market operations in government secutransact for the System Open Market rities and federal agency obligations Account. during the period since the previous Meeting participants also discussed a meeting. By unanimous vote, the Comproposal to set up temporary liquiditymittee ratified these transactions. relatedswaparrangementswiththecen- In the discussion of System open tral banks of Mexico, Brazil, Korea, market operations over the period, it andSingapore.Intheirremarks,particiwasnotedthatreservemanagementhad pants focused on the outlook for combecomemorecomplexasaresultofthe plementarity between these swaps and large provision of reserves associated withtherecentexpansionoftheFederal thenewshort-termliquidityfacilitythat Reserve’s liquidity facilities; in particu- the International Monetary Fund was lar, the effective federal funds rate had considering; on the governance and been persistently below the FOMC’s structure of the swap lines; and on the target.Whilethepaymentofintereston particular countries included. Several reserves seemed to be helpful in miti- participants pointed to the international gating downward pressure on the funds reserves held by the countries and the rate, a number of institutions evidently importance of ensuring that these temwere willing to sell funds at interest porary swap lines, like the others that rates below that paid on excess reserve had been established during this period, balances. Anecdotal reports suggested be used only for the purposes intended. that this was particularly the case for On balance, the Committee concluded those institutions that are not eligible to that in current circumstances the swap receive interest on the balances they arrangements with these four large and maintain at the Federal Reserve. Going systemically important economies were forward, however, the interest rate on appropriate, and it unanimously apexcess reserve balances could be ad- proved the following resolutions. justed, and it might establish a more The FOMC directs the Federal Reserve effective floor on the federal funds rate BankofNewYorktoestablishandmaintain over time as more depository institua reciprocal currency arrangement (“swap tions revise their strategies in the fedarrangement”) for the System Open Market eral funds market in light of the pay- Account with each of (i) the Banco Central ment of interest on reserves. do Brasil, (ii) the Bank of Korea, (iii) the In view of a further widening in Banco de Mexico, and (iv) the Monetary financial market strains internationally, Authority of Singapore. Each such swap arrangement would be for an aggregate the Committee considered proposals to amountnottoexceed$30billion.Drawings establish temporary reciprocal currency under the arrangement require approval. (“swap”) arrangements with several Unless extended by the Committee, each additional foreign central banks. Mem- suchswaparrangementshallexpireonApril bers unanimously approved the follow- 30,2009. TheFOMCamendsparagraph1.A.ofthe ingresolution,whicheffectivelypermit- Authorization for Foreign Currency OperatedtheForeignCurrencySubcommittee tions to include the Brazilian real, the to establish a swap line with the Re- Koreanwon,andtheSingaporedollarinthe serve Bank of New Zealand. list of foreign currencies in which the Fed-
322 95th Annual Report, 2008 eral Reserve Bank of New York may trans- tions. The housing market remained actfortheSystemOpenMarketAccount. weak, with construction activity, new TheFOMCdelegatestotheForeignCur- homesales,andhomepricesfallingfurrency Subcommittee the authority to ther. Business spending on equipment approve individual drawing requests of up to $5 billion under each of the aforemen- and software appeared to have declined tioned swap arrangements with the Banco againinthethirdquarter,andindicators Central do Brasil, the Bank of Korea, the of investment in structures weakened. Banco de Mexico, and the Monetary Economic activity in many foreign AuthorityofSingapore. economies slowed in recent months. A number of adverse financial devel- Headline consumer inflation measures, opments influenced economic and pulled down by declines in consumer financial market conditions over the energy prices, moderated in August and intermeeting period. Lehman Brothers September. Core consumer inflation Holdings had filed for bankruptcy the measures also eased somewhat in these day before the meeting of the Commit- two months. tee in September. In large part because The labor market continued to of losses on Lehman debt, the net asset weaken. According to the September value of a major money market mutual labor market report, the unemployment fund fell below $1 per share, spurring a rateremainedat6.1percent,butprivate substantial outflow from money market payroll employment fell faster than the mutual funds and straining their liquid- average pace earlier in the year. Most ity.TherapiddeteriorationofAmerican major industry groups shed jobs. The International Group, Inc. (AIG), and manufacturing, construction, and tem- Wachovia Corporation, along with the porary help industries continued to closing of Washington Mutual, led to experience sizable losses in employintensified market concerns about the ment;meanwhile,retailtradeandfinancondition of financial institutions. In cial services registered larger declines this environment, investors pulled back than earlier in the year. Nonbusiness from risk-taking, funding markets for services added jobs, but at the slowest terms beyond overnight largely ceased rate of the year. The average workweek to function at times, credit risk spreads and aggregate hours declined in Seprose sharply, and equity prices regis- tember, and weekly unemployment tered steep declines. insurance claims continued to rise in The information reviewed at the October. October meeting indicated that eco- Industrialproductiondroppedsharply nomic conditions deteriorated in recent in September. Although much of the months. The labor market weakened decline was due to the effects of the further in September as private payrolls recent hurricanes and a strike at an airfell at a faster pace than earlier in the craft manufacturer, most major indusyear and the unemployment rate re- tries experienced slow or declining outmained above 6 percent. Industrial pro- put in recent months. Motor vehicle duction fell in September, although assemblies were unchanged in the third much of the drop was related to effects quarteratalowlevel.Thepaceofhighof recent hurricanes and a strike at an tech equipment production slowed in aircraft manufacturer. Consumer spend- the third quarter relative to its rate in ing declined, reflecting stagnant real the first half of the year, reportedly in income, tighter credit, declining wealth, part because tight credit conditions and concerns about economic condi- were restraining demand. Available in-
Minutes of the FOMC, October 323 formation suggested that demand and unsold houses, the slower rate of sales production in this sector were likely kept the months’ supply of new homes to remain relatively subdued over the very elevated relative to the level that coming months. The output of other had prevailed before the downturn in manufacturing sectors declined in the the housing market. Sales of existing third quarter. While standard indicators single-family homes in September were of near-term production suggested fac- somewhat higher than they had been tory output would decline further over earlier in the year, likely supported by the next few months, the recovery of increases in foreclosure-related sales. production in industries affected by the Tight conditions in mortgage markets hurricanes was expected to offset these continued to restrain housing demand, declines to a degree. The factory utili- especially for borrowers needing nonzation rate fell in September to well conforming mortgages. Several indexes below its long-run average. indicated that house prices declined Real personal consumption expendi- substantially over the 12 months tures (PCE) apparently declined in Sep- through August. tember for the fourth consecutive In the business sector, investment in month. Motor vehicle sales fell back to equipment and software appeared to their very low July pace, and prelimi- weaken further in the third quarter. nary reports indicated that the slump Nominal shipments of nondefense capicontinued into October, as tighter credit tal goods excluding aircraft were flat in conditions were restraining demand. the third quarter, while orders for those Purchases of goods other than motor goods declined. Demand for high-tech vehicles were estimated to have fallen equipment appeared to have softened noticeably. Real outlays on services considerably, and spending on nonother than energy increased only mod- high-tech,non-transportationequipment estly in July and August. Real dispos- was estimated to have fallen. Transporable income, excluding the effects of tation equipment investment was held tax rebates and the emergency unem- down in the third quarter by falling ployment benefits, was little changed in sales for medium and heavy trucks and July and August from the second- by a strike-induced drop in aircraft quarter average. Measures of consumer deliveries in September. Nominal exsentimentdroppedinOctobertonearor penditures on nonresidential structures below their low levels of midyear, with declined for the second consecutive the Conference Board measure excep- monthinAugust.Forward-lookinginditionally low. cators turned more downbeat: Vacancy Residential construction activity con- rates for commercial properties rose tinued to decline steeply through the further, property values declined, and thirdquarter.InSeptember,bothsingle- the architectural billings index fell in family housing starts and permit issu- September. Furthermore, the latest ance fell. In the multifamily sector, Senior Loan Officer Opinion Survey on starts edged up in September but re- Bank Lending Practices indicated that mained toward the lower end of their banks tightened lending standards for two-year range. New home sales in commercial real estate loans over the August and September were at a pace past three months. well below that of the first half of the The book-value data for manufacturyear. Although the cutbacks in home- ing and trade inventories suggested that building had reduced the inventory of the real value of inventories continued
324 95th Annual Report, 2008 to decline over the summer through for the euro area suggested some decel- August,butanumberofindicatorssug- eration in prices. gested that stocks in some industries In emerging market economies, data remained above desired levels. The received over the intermeeting period days’ supply of light motor vehicles at showed a continued slowing of real dealers had risen, on balance, through activity. Real GDP growth in China theyearandwasratherhighinSeptem- moveddowninthethirdquarter.Indusber. The ratio of book-value inventories trial production contracted in recent to sales in the manufacturing and trade months for many countries. External sectors, excluding motor vehicles, rose balances deteriorated significantly in in August, particularly in a number of many emerging market economies as durable goods sectors. In addition, the exports to advanced economies slowed. index of customers’ inventories in the Headline inflation in emerging market Institute of Supply Management’s man- economies eased, reflecting falling oil ufacturing survey indicated that inven- and food prices. tories remained above desired levels. Headline consumer prices in the The U.S. international trade deficit United States were estimated to have narrowed in August, with a decline in risen only modestly in September, exthe value of imports more than offset- tendingtherecentmoderationofoverall ting a fall in the value of exports of inflation following the rapid increases goods and services. A drop in the value earlier in the year. Consumer energy of petroleum imports, which reflected prices fell for the second consecutive both lower volumes and a decrease in month, while retail food prices continprices, exceeded an increase in non-oil uedtoclimbatarapidpace,boostedby imports that was driven by a rise in the substantial run-up in farm commodimports of consumer goods and indus- ity prices through midyear. Core contrial supplies. Exports of automotive sumer price inflation rose somewhat products fell sharply in August after a during the third quarter, reflecting the surge in July, and exports of consumer pass-through of previous increases in goods, industrial supplies, and services the costs of energy and materials and moved down after strong increases importprices.Thoseupwardpricepresin previous months. Aircraft exports sures diminished recently: Prices of oil surged, but sales of other capital goods andothercommoditiesfellsharplyover declined. the intermeeting period, and non-oil The data for the advanced foreign import prices as well as producer prices economies during the intermeeting of intermediate materials excluding period generally suggested that eco- food and energy declined in September. nomic activity was weakening further, Some survey measures of inflation and confidence indicators in these areas expectationsdeclinedduringtheperiod. declined as the financial crisis wors- Available measures of hourly labor ened. Labor market conditions deterio- compensation increased at about the rated in these economies, with the same moderate pace as over the past exceptionofCanada.Realgrossdomes- several years. tic product (GDP) fell in the United At its September meeting, the Fed- Kingdom in the third quarter. Headline eral Open Market Committee (FOMC) inflation continued to be elevated in kept the target federal funds rate unmany economies, but the most recent changed at 2 percent. The Committee’s consumer price indexes for Japan and statement noted that strains in financial
Minutes of the FOMC, October 325 markets had increased significantly and expectedpathforthefederalfundsrate. that labor markets had weakened fur- Yields on short-term nominal Treasury ther. Economic growth appeared to coupon securities declined over the have slowed recently, which partly re- intermeeting period, reportedly as a flected a softening of household spend- result of substantial flight-to-quality ing. Tight credit conditions, the ongo- flows and heightened demand for liing housing contraction, and some quidity. In contrast, higher term premislowing in export growth were likely to umsandexpectationsofincreasesinthe weigh on economic growth over the supply of Treasury securities associated next few quarters. The Committee with the Emergency Economic Stabilistated that, over time, the substantial zation Act and other initiatives seemed easing of monetary policy, combined to put upward pressure on longer-term with ongoing measures to foster market nominal Treasury yields. Yields on liquidity,shouldhelppromotemoderate longer-term inflation-indexed Treasury economic growth. Inflation had been securities, which are relatively illiquid, high, spurred by the earlier increases in rose more sharply than did those on the prices of energy and some other nominal securities. Measures of inflacommodities. The Committee expected tion compensation based on differences inflation to moderate later this year and between nominal and inflation-indexed next year, but the inflation outlook Treasury yields were quite volatile over remained highly uncertain. The down- the intermeeting period and, because of sideriskstogrowthandtheupsiderisks shifting liquidity premiums, likely proto inflation were both of significant vided less information than usual conconcern to the Committee. The Com- cerning inflation expectations or inflamittee indicated that it would continue tion uncertainty. to monitor economic and financial de- In the wake of the failures or near velopments carefully and would act as failures of several large financial instineeded to promote sustainable eco- tutions, short-term funding markets nomic growth and price stability. came under significant additional pres- Over the intermeeting period, market sure over the intermeeting period, and participantsmarkeddowntheirexpecta- the Federal Reserve and other central tions for the path of the federal funds banks took a number of actions to prorate for the next two years. The Com- videliquidityandimprovemarketfuncmittee’s decision to leave the target tioning. In the overnight federal funds federalfundsrateunchangedattheSep- market, financial institutions became tember FOMC meeting led some in- more selective about the counterparties vestors to scale back expectations for with whom they were willing to trade. policyeasingoverthenextyear.Subse- TheovernightLondoninterbankoffered quently, however, market expectations rate (Libor) rose substantially, and the reversed in response to the heightened spread of term Libor rates over comfinancial turmoil and to generally parable-maturity overnight index swap weaker-than-expected economic data. (OIS) rates rose sharply from already- TheCommittee’sdecisiontoreducethe high levels. The demand for commertarget federal funds rate 50 basis points cial paper declined as prime money as part of a coordinated action with market mutual funds experienced large other central banks on October 8, along net outflows after the net asset value of with the accompanying statement, led one such fund fell below $1 per share. investors to mark down further the Asaconsequence,riskspreadsoncom-
326 95th Annual Report, 2008 mercial paper rose considerably and deterioratedinthesecondarymarketfor were very volatile. Amid strong flows syndicated leveraged loans, with prices into government-only money market falling to new lows and bid-asked mutual funds, the demand for short- spreads widening notably. Broad equity dated Treasury bills rose, and these price indexes declined sharply over the securities traded with very low yields intermeeting period, and option-implied despite sizable new issuance during the volatility on the S&P 500 index rose period. The market for repurchase well above its previous record high. agreements (repos) also experienced The Senior Loan Officer Opinion Sursignificant dislocations during the inter- vey pointed to further tightening of meeting period. Partly because of high termsandstandardsforconsumerloans. demand for Treasury securities, the Consumercreditincreasedatitsslowest overnightreporateforTreasurygeneral pace in more than 15 years during the collateralwasnearzeroformuchofthe three months ending in August. Condiperiod, and failures to deliver Treasury tions in the municipal bond market securities reached record highs. Repo were also poor over much of the interrates on agency collateral also were meeting period. volatile, and liquidity in non-Treasury, The strains from the banking and non-agency repo markets was poor. credit crisis intensified and took on a Conditions in short-term funding mar- more global aspect over the intermeetkets improved somewhat following the ing period. This development and the announcements of a U.S. government related erosion of the economic outlook guarantee of certain liabilities of U.S. and reduction in inflationary pressures banking organizations and similar ac- led many central banks to reduce their tions by foreign authorities, the expan- policy rates, including in the internasion of swap arrangements between the tionally coordinated action announced Federal Reserve and other central on October 8. Liquidity conditions in banks, and a number of initiatives by the money markets of major foreign theFederalReserveandtheTreasuryto economies deteriorated further. Spreads address the pressures on money market between term Libor and OIS rates in mutual funds and the commercial paper euros and sterling rose from alreadymarket. elevatedlevels,althoughbylessthanin In longer-term credit markets, yields dollars. Sovereign bond yields in the and spreads on investment-grade and advanced foreign economies were volaspeculative-grade corporate bonds in- tile; nominal yield curves in many creased, while indexes of credit default countries steepened on net. Equity marswap (CDS) spreads for investment- ket indexes fell sharply in the advanced grade financial and nonfinancial firms economies as well as in emerging marreached unprecedented levels. Liquidity ket economies, which until recently had in the corporate bond and CDS markets not been hit as hard by the financial was strained. Issuance of investment- turmoil. The dollar appreciated against grade corporate bonds was moderate in most currencies, with the prominent September and October, while there exception of the Japanese yen. was little issuance of speculative-grade In the United States, M2 accelerated bonds. Commercial and industrial loans sharplyinSeptember,anditappearedto continued to expand rapidly in early be on pace for another large increase in October,asfirmsdrewonexistingbank October, apparently reflecting a heightlines of credit. However, conditions ened preference by households and
Minutes of the FOMC, October 327 firms for safe assets. Liquid deposits from money market mutual funds. On expanded strongly in September, but October 7, the Board announced the leveled off in early October. Small time creationoftheCommercialPaperFunddeposits increased briskly in September ing Facility (CPFF), which provides a and early October as banks and thrifts liquidity backstop to U.S. issuers of reportedlycontinuedtobidaggressively highly rated commercial paper through for these deposits. Retail money funds, aspecial-purposevehiclethatpurchases whichwerelittlechangedinSeptember, three-month unsecured commercial experienced significant net inflows in paper and ABCP directly from eligible early October. In contrast, institutional issuers.OnOctober21,itpublicizedthe money funds, which are not included in creation of the Money Market Investor M2, experienced substantial outflows Funding Facility (MMIFF), under during this period. which the Federal Reserve Bank of In response to the extraordinary New York will provide funding to a stresses in financial markets, the Fed- series of special-purpose vehicles to eral Reserve together with other U.S. facilitate an industry-supported initiagovernment agencies and many foreign tive to finance the purchase of certain central banks and governments imple- highlyratedcertificatesofdeposit,bank mentedanumberofunprecedentedpol- notes, and commercial paper from U.S. icy initiatives during the intermeeting money market mutual funds. The period. Early in the period, the condi- AMLF, CPFF, and MMIFF were intion of AIG, a large complex financial tendedtoimprovetheliquidityinshortinstitution, deteriorated rapidly. In view term debt markets and ease the strains of the likely systemic implications and in credit markets more broadly. the potential for significant adverse In addition, to address the sizable effects on the economy of a disorderly demand for dollar funding in foreign failure of AIG, the Federal Reserve jurisdictions, the FOMC authorized the Board on September 16, with the sup- expansion of its existing swap lines port of the Treasury, authorized the with the European Central Bank and Federal Reserve Bank of New York to Swiss National Bank; by the end of the lend up to $85 billion to the firm to intermeetingperiod,theformalquantity assistitinmeetingitsobligationsandto limits on these lines had been elimifacilitate the orderly sale of some of its nated. The quantity limits were also businesses. On October 8, the Federal liftedonnewswaplinessetupwiththe Reserve announced a supplemental Bank of Japan and the Bank of Engliquidity arrangement for AIG. land. The FOMC authorized new swap The Federal Reserve Board also ap- lines with five other central banks durproved a number of new facilities to ing the period. In domestic markets, the address strains in short-term funding Federal Reserve raised the regular aucmarkets. On September 19, it an- tion amounts of the 28- and 84-day nounced the Asset-Backed Commercial maturity Term Auction Facility (TAF) Paper Money Market Mutual Fund auctions to $150 billion each. Also, the Liquidity Facility (AMLF), which ex- Federal Reserve announced two fortends nonrecourse loans at the primary ward TAF auctions for $150 billion credit rate to U.S. depository institu- each, to be conducted in November to tions and bank holding companies to provide funding over year-end. In total, finance the purchase of high-quality up to $900 billion of TAF credit over asset-backedcommercialpaper(ABCP) year-end was authorized.
328 95th Annual Report, 2008 Despite the substantial provision of Credit extended through the Primary liquidity by the Federal Reserve and Dealer Credit Facility rose rapidly other central banks, functioning in ahead of quarter-end; although it submany credit markets remained very sidedsubsequently,theamountofcredit poor, a situation that reflected market outstanding remained well above the participants’ uncertainty about their levels seen before mid-September. The liquidity needs and their future access Term Securities Lending Facility tofundingaswellasconcernsaboutthe (TSLF) auctions conducted over the inhealthofmanyfinancialinstitutions.To termeeting period had very high destrengthen confidence in U.S. financial mand; in addition, dealers exercised institutions, the Treasury, the Federal most of the options for TSLF loans Reserve, and the Federal Deposit Insur- spanning the September quarter-end. ance Corporation (FDIC) issued a joint Two initiatives were introduced over statement on October 14, which inthe intermeeting period to help manage cludedseveralelements.First,theTreathe expansion of the balance sheet and sury announced a voluntary capital purpromote control of the federal funds chase plan under which eligible rate. First, on September 17, the Treafinancial institutions could sell presury announced a temporary Suppleferred shares to the U.S. government. mentary Financing Program at the Second,theFDICprovidedatemporary request of the Federal Reserve. Under guarantee of the senior unsecured debt this program, the Treasury issued shortof all FDIC-insured institutions and term bills over and above its regular their holding companies, as well as all borrowing program, with the proceeds balances in non-interest-bearing transdeposited at the Federal Reserve. This action deposit accounts. The statement facility helped offset the provision of included notice that nine major finanreserves to the banking system through cial institutions had agreed to particithe various liquidity facilities. Second, pate in both the capital purchase proemploying authority granted under the gram and the FDIC guarantee program. EmergencyEconomicStabilizationAct, Third, the Federal Reserve announced the Federal Reserve Board announced details of the CPFF, which was schedon October 6 that it would pay interest uled to begin on October 27. After this onrequiredandexcessreservebalances joint statement and the announcements of similar programs in a number of beginning on October 9. The payment other countries, financial market pres- of interest on excess reserve balances sures appeared to ease somewhat, was intended to assist in maintaining though conditions remained strained. the federal funds rate close to the target The expansion of existing liquidity set by the Committee. Initially, the facilities as well as the creation of new interest rate on required reserves was facilities contributed to a notable in- set at the average target federal funds crease in the size of the Federal Re- rate over each reserve maintenance serve’s balance sheet. The amount of period less 10 basis points, while the primary credit outstanding rose consid- rate on excess reserves was set at the erably over the intermeeting period, lowest target federal funds rate over with both foreign and domestic deposi- each reserve maintenance period less tory institutions making use of the dis- 75basispoints.OnOctober22,therate count window. TAF credit outstanding on excess reserves was adjusted to be more than doubled over the period. the lowest target federal funds rate dur-
Minutes of the FOMC, October 329 ingthemaintenanceperiodless35basis energy,materials,andimportpricesand points. of resource slack were expected to be In the forecast prepared for the meet- greater than at the time of the Septeming, the staff lowered its projection for ber FOMC meeting. Core inflation was economic activity in the second half of projected to slow considerably in 2009 2008 as well as in 2009 and 2010. Real and then to edge down further in 2010. GDP appeared to have declined in the InconjunctionwiththisFOMCmeetthirdquarter,andthefewavailableindi- ing, all participants—that is, Federal cators that reflected conditions follow- Reserve Board members and Reserve ing the intensification of the financial Bank presidents—provided annual promarket turmoil in mid-September jections for economic growth, the unpointed to another decline in the fourth employment rate, and inflation for the quarter. The declines in stock-market period 2008 through 2011. The projecwealth, low levels of consumer senti- tions are described in the Summary of ment, weakened household balance Economic Projections, which is atsheets, and restrictive credit conditions tached as an addendum to these minwere likely to hinder household spend- utes. ing over the near term. Business expen- In their discussion of the economic ditures also probably would be held situation and outlook, FOMC meeting back by a weaker sales outlook and participants indicated that the worsentighter credit conditions. The staff ex- ing financial situation, the slowdown in pected that real GDP would continue to growth abroad, and incoming informacontract somewhat in the first half of tion on economic activity had led them 2009 and then rise in the second half, to mark down significantly their outwith the result that real GDP would be look for growth. While economic activabout unchanged for the year. Although ity had evidently already been slowing futures markets pointed to a lower tra- over the summer, the turmoil in recent jectory for oil prices than at the time of weekshadapparentlyresultedintighter the September meeting, real activity financial conditions and greater uncerwasexpectedtoberestrainedbyfurther tainty among businesses and housecontraction in residential investment, holdsabouteconomicprospects,further reduced household wealth, continued limiting their ability and willingness to tight credit conditions, and a deteriora- make significant spending committion of foreign economic performance. ments.Recentmeasuresofbusinessand In2010,realGDPgrowthwasexpected consumer sentiment had fallen to histo pick up to near the rate of potential torical lows. Participants generally exgrowth, as the restraints on household pected the economy to contract moderand business spending from the finan- ately in the second half of 2008 and the cial market tensions were anticipated to first half of 2009, and agreed that the begin to ease and the contraction in the downside risks to growth had inhousingmarkettocometoanend.With creased. While some expected an imgrowth below its potential rate for an proving financial situation to contribute extendedperiod,theunemploymentrate to a recovery in growth by mid-2009, was expected to rise significantly others judged that the period of ecothrough early 2010. The staff reduced nomic weakness could persist for some its forecast for both core and overall time. Several participants indicated that PCE inflation, as the disinflationary they expected some fiscal stimulus in effects of the receding cost pressures of coming quarters, but they were uncer-
330 95th Annual Report, 2008 tainabouttheextentanddurationofthe tighter than prior to the recent disrupresulting support to economic activity. tions. Moreover, some participants Participantsagreedthatincomingquar- noted that the specifics and effectiveters inflation was likely to move down ness of some government programs to to levels consistent with price stability, support financial markets and institureflecting the recent declines in the tions remained unclear. pricesofenergyandothercommodities, Participants indicated that the inthe appreciation of the dollar, and the crease in financial turmoil had already expected widening of margins of re- had an impact on business decisions. source slack. Indeed, some saw a risk Reports from contacts in many parts of thatovertimeinflationcouldfallbelow the country suggested that the weaker levels consistent with the Federal Re- and less certain economic outlook was serve’s dual objectives of price stability leading businesses to cancel capital and and maximum employment. otherdiscretionaryexpendituresandlay Participants noted that financial con- off workers. Several participants noted ditions had worsened significantly over thatevenbusinessesthathadpreviously the intermeeting period. The failure or been largely unaffected by the financial nearfailureofanumberofmajorfinan- turbulencewerenowexperiencingdifficial institutions had deepened market culties obtaining new credit, and some concerns about counterparty credit risk businesses were said to be drawing and liquidity risk. As a result, financial downlinesofcreditpreemptivelyrather intermediaries had cut back on lending than risk the lines becoming unavailto some counterparties, particularly for able. Contacts indicated that fewer terms beyond overnight, and in general commercial real estate construction were conserving liquidity and capital. projects were being undertaken. Resi- Moreover, risk aversion of investors dential construction activity remained increased,drivingcreditspreadssharply extremely subdued, with the stock of higher. Survey results and anecdotal unsold homes still very elevated. information also suggested that credit Meeting participants noted that real conditions had tightened significantly consumer spending had been weakenfurther for businesses and households. ing through the summer, responding to Equity prices had varied widely and lower employment and tighter credit. weresubstantiallylower,onnet.Partici- Moreover, households, like businesses, pants saw the potential for financial were reportedly reacting to the shiftstrains to intensify if some investors, ing economic circumstances in recent such as hedge funds, found it necessary weeks by cutting expenditures further. to sell assets and as lending institutions Spending on consumer durables, such built reserves against losses. Partici- as automobiles, and discretionary items pants were concerned that the negative had been particularly hard hit, and spiral in which financial strains lead to retailers anticipated very weak holiday weakerspending,whichinturnleadsto spending. higher loan losses and a further deterio- Participants noted that the financial rationinfinancialconditions,couldper- turmoil had increasingly become an sist for a while longer. While the global international phenomenon, leading to a effortstorecapitalizebanksandguaran- marked deterioration in global growth tee deposits had helped stabilize the prospects. While advanced foreign situation, risk spreads remained higher, economies had already shown signs of asset prices lower, and credit conditions slowing, they had been significantly
Minutes of the FOMC, October 331 affected by the worsening of financial for some time, inflation could fall strains over the intermeeting period. belowlevelsconsistentwiththeFederal Moreover, a number of emerging mar- Reserve’s dual mandate for promoting ket economies, which had heretofore price stability and maximum employbeen less influenced by the financial ment, a development that would pose developments in industrial countries, important policy challenges in light of had in recent weeks been significantly the already-low level of the Commitaffected, as the increasing strains in tee’s federal funds rate target. financialmarketsledglobalinvestorsto Participants discussed a number of pull back from exposures to such econ- issues relating to broader monetary polomies. As a result, interest rates on icy strategy. Over the past year, the emerging market debt had shot up and FederalReserve’sresponsetothefinanprices of emerging market equity had cial turbulence had encompassed subdropped sharply. Participants saw the stantialmonetarypolicyeasing,theprostronger dollar and weaker growth vision of large volumes of liquidity abroad as likely to restrain future through standard and extraordinary growth in U.S. exports. means, and facilitating the resolution of Participants agreed that inflation was troubled, systemically important finanlikely to diminish materially in coming cialinstitutions.Participantsjudgedthat quarters. Commodity prices had fallen the policy actions had been helpful and sharply, the dollar had strengthened well calibrated to their assessment of notably, and considerable economic the developing situation. Several parslack was anticipated. Moreover, some ticipants observed that it would be crusurvey measures of inflation expecta- cial for such policy actions to be untions had declined as had those derived wound appropriately as the financial from inflation-linked Treasury securi- situation normalized. However, particities, although recent movements in the pants also observed that unfolding ecolatter measures were likely influenced nomic developments could require the in part by increases in the premiums FOMCtofurtherloweritstargetforthe required to hold the relatively illiquid federal funds rate in the future and to inflation-indexed securities. Some par- review the adequacy of its liquidity ticipants indicated that their business facilities. contacts had reported reduced pricing In the discussion of monetary policy power and lower markups. Against this for the intermeeting period, Committee backdrop, participants generally ex- members agreed that significant easing pectedinflationtodeclinetolevelscon- in policy was warranted at this meeting sistent with price stability. A few par- in view of the marked deterioration in ticipants noted that disruptions to the the economic outlook and anticipated credit intermediation process and the reduction in inflation pressures. The inefficiencies associated with shifts of recentsubstantialtighteninginfinancial resources among economic sectors conditions, the sharp downshift in could be expected to reduce aggregate spendinghereandabroad,andtherapid supply as well as restrain aggregate abatement of upside inflation risks all demand; as a consequence, such factors suggested that a forceful policy recould limit the effect of slower output sponse would be appropriate. Some growth on rates of resource slack and memberswereconcernedthattheeffecinflation.Others,though,sawariskthat tiveness of cuts in the target federal if resource utilization remained weak funds rate may have been diminished
332 95th Annual Report, 2008 bythefinancialdislocations,suggesting immediatefutureseeksconditionsinreserve that further policy action might have marketsconsistentwithreducingthefederal fundsratetoanaverageofaround1percent. limited efficacy in promoting a recoveryineconomicgrowth.Andsomealso The vote encompassed approval of noted that the Committee had limited the statement below to be released at room to lower its federal funds rate tar- 2:15 p.m.: get further and should therefore con- The Federal Open Market Committee sider moving slowly. However, others decidedtodaytoloweritstargetforthefedmaintained that the possibility of re- eral funds rate 50 basis points to 1 percent. duced policy effectiveness and the lim- The pace of economic activity appears to haveslowedmarkedly,owingimportantlyto ited scope for reducing the target fura decline in consumer expenditures. Busither were reasons for a more aggressive nessequipmentspendingandindustrialpropolicy adjustment; an easing of policy duction have weakened in recent months, should contribute to a beneficial reduc- andslowingeconomicactivityinmanyfortion in some borrowing costs, even if a eigneconomiesisdampingtheprospectsfor U.S. exports. Moreover, the intensification given rate reduction currently would offinancialmarketturmoilislikelytoexert elicit a smaller effect than in more typiadditional restraint on spending, partly by cal circumstances, and more aggressive further reducing the ability of households easing should reduce the odds of a andbusinessestoobtaincredit. deflationary outcome. Members also In light of the declines in the prices of energy and other commodities and the saw the substantial downside risks to weaker prospects for economic activity, the growth as supporting a relatively large Committee expects inflation to moderate in policy move at this meeting, though coming quarters to levels consistent with evenaftertoday’s50basispointaction, pricestability. the Committee judged that downside Recent policy actions, including today’s rate reduction, coordinated interest rate cuts riskstogrowthwouldremain.Members by central banks, extraordinary liquidity anticipated that economic data over the measures, and official steps to strengthen upcoming intermeeting period would financial systems, should help over time to show significant weakness in economic improve credit conditions and promote a activity, and some suggested that addi- returntomoderateeconomicgrowth.Nevertional policy easing could well be ap- theless, downside risks to growth remain. The Committee will monitor economic and propriate at future meetings. In any financial developments carefully and will event, the Committee agreed that it act as needed to promote sustainable ecowould take whatever steps were neces- nomicgrowthandpricestability. sary to support the recovery of the Votesforthisaction:Messrs.Bernanke economy. and Geithner, Ms. Duke, Messrs. At the conclusion of the discussion, Fisher, Kohn, and Kroszner, Ms. Pianthe Committee voted to authorize and alto,Messrs.Plosser,Stern,andWarsh. directtheFederalReserveBankofNew Votesagainstthisaction:None. York, until it was instructed otherwise, Itwasagreedthatthenextmeetingof to execute transactions in the System the Committee would be held on Tues- Account in accordance with the follow- day, December 16, 2008. ing domestic policy directive: The meeting adjourned at 11:45 a.m. The Federal Open Market Committee seeksmonetaryandfinancialconditionsthat Conference Calls will foster price stability and promote sustainable growth in output. To further its On September 29, 2008, the Committee long-run objectives, the Committee in the met by conference call to review recent
Minutes of the FOMC, October 333 developments and to consider changes functioning of the commercial paper to swap arrangements with foreign cen- market. Since the September 16 FOMC tral banks. Amid signs of growing meeting,indicatorsofeconomicactivity strains in money markets, the discus- in both the United States and in major sion focused on recent Federal Reserve foreign countries had come in weaker actions and on potential expansions in than expected. In the United States, official liquidity facilities. In light of automobile sales, capital goods shipsevere pressures in dollar funding mar- ments, and private payrolls had fallen kets abroad, the Committee unani- notably. Elsewhere, indicators of ecomously approved both extending the nomic activity and sentiment had deteliquidity-related swap arrangements riorated in a broad range of important with foreign central banks an additional foreign economies. Prices of crude oil three months, through April 30, 2009, and other commodities had dropped and increasing substantially the sizes of substantially, and some measures of those existing arrangements. The en- inflationexpectationshaddeclined.Parlarged facilities would support the ticipants agreed that downside risks to provision of U.S. dollar liquidity in economic growth had increased and amounts of up to $30 billion by the upsideriskstoinflationhaddiminished. Bank of Canada, $80 billion by the Participants discussed the considerable Bank of England, $120 billion by the expansion of Federal Reserve liquidity Bank of Japan, $15 billion by Dan- in recent months. Most agreed that marks Nationalbank, $240 billion by these actions to provide liquidity had the European Central Bank, $15 billion had a beneficial impact. Nonetheless, by the Norges Bank, $30 billion by the financial conditions were exerting con- Reserve Bank of Australia, $30 billion siderable restraint on economic activity. by Sveriges Riksbank, and $60 billion Allmembersjudgedthatasignificant by the Swiss National Bank. In addi- easing in policy at this time was approtion, the Committee was briefed on priate to foster moderate economic plans for implementation of a provision growth and to reduce the downside in pending legislation that would allow risks to economic activity. Members the Federal Reserve to begin immedi- also welcomed the opportunity to cooratelytopayinterestonreservesheldby dinate this policy action with similar depository institutions, and on the pro- measures by the Bank of Canada, the posed acquisition of Wachovia by Citi- Bank of England, the European Central group. Bank,SverigesRiksbank,andtheSwiss On October 7, 2008, the Committee National Bank. By showing that policyagain met by conference call. Stresses makers around the globe were working in financial markets had continued to closely together, had a similar view of increase: Interest-rate spreads in inter- global economic conditions, and were bank funding markets had widened willing to take strong actions to address markedly, corporate and municipal those conditions, coordinated action bond yields had risen, and equity prices couldhelptobolsterconsumerandbushad dropped sharply. For the first time inessconfidenceandsoyieldgreaterecin many years, the net asset value of a onomic benefits than unilateral action. major money market fund had fallen At the conclusion of the discussion, below$1pershare;thiseventsparkeda the Committee voted to authorize and flight out of prime money market funds directtheFederalReserveBankofNew and caused a severe impairment of the York, until it was instructed otherwise,
334 95th Annual Report, 2008 to execute transactions in the System ReserveBankofNewYorkmaytransactfor Account in accordance with the follow- theSystemOpenMarketAccount. ing domestic policy directive: By notation vote completed on October 6, 2008, the Committee unani- The Federal Open Market Committee seeksmonetaryandfinancialconditionsthat mously approved the minutes of the will foster price stability and promote sus- FOMC meeting held on September 16, tainable growth in output. To further its 2008. long-run objectives, the Committee in the By notation vote completed October immediatefutureseeksconditionsinreserve 11, 2008 the Committee unanimously marketsconsistentwithreducingthefederal funds rate to an average of around 11⁄2 per- approved the following resolution: cent. The Federal Open Market Committee The vote encompassed approval of authorizestheFederalReserveBankofNew the statement below: York (FRBNY) to increase the amounts available from the System Open Market TheFederalOpenMarketCommitteehas Account under the existing reciprocal curdecided to lower its target for the federal rency arrangements (“swap” arrangements) funds rate 50 basis points to 11⁄2 percent. with the Bank of England, the European The Committee took this action in light of Central Bank, the Bank of Japan, and the evidence pointing to a weakening of eco- Swiss National Bank to meet the amounts nomic activity and a reduction in inflation- requested by those central banks in connecarypressures. tion with their fixed-rate tender auctions. Incoming economic data suggest that the The FRBNY must report to the Committee paceofeconomicactivityhasslowedmark- each time the aggregate draws by one of edly in recent months. Moreover, the inten- these central banks increases the level outsification of financial market turmoil is standing for that bank by an increment of likely to exert additional restraint on spend- $200 billion over the level outstanding on ing,partlybyfurtherreducingtheabilityof October10,2008. households and businesses to obtain credit. Inflation has been high, but the Committee Brian F. Madigan believesthatthedeclineinenergyandother Secretary commodity prices and the weaker prospects for economic activity have reduced the upsideriskstoinflation. Addendum: The Committee will monitor economic Summary of Economic Projections and financial developments carefully and will act as needed to promote sustainable In conjunction with the October 28–29, economicgrowthandpricestability. 2008 FOMC meeting, the members of Votesforthisaction:Messrs.Bernanke the Board of Governors and the presiand Geithner, Ms. Duke, Messrs. dents of the Federal Reserve Banks, all Fisher, Kohn, and Kroszner, Ms. Pianof whom participate in deliberations of alto,Messrs.Plosser,Stern,andWarsh. the FOMC, provided projections for Votesagainstthisaction:None. economic growth, unemployment, and inflationin2008,2009,2010,and2011. Notation Votes Projections were based on information By notation vote completed September available through the conclusion of the 21, 2008 the Committee unanimously meeting, on each participant’s assumpapproved the following resolution: tions regarding a range of factors likely toaffecteconomicoutcomes,andonhis TheFOMCamendsparagraph1.A.ofthe or her assessment of appropriate mone- Authorization for Foreign Currency OperationstoincludeAustraliandollarsinthelist tary policy. “Appropriate monetary polof foreign currencies in which the Federal icy” is defined as the future policy that,
Minutes of the FOMC, October 335 Table1. EconomicProjectionsofFederalReserveGovernorsandReserveBankPresidents, October2008 Percent Variable 2008 2009 2010 2011 Centraltendency1 ChangeinrealGDP ............. 0.0to0.3 –0.2to1.1 2.3to3.2 2.8to3.6 Juneprojection ............... 1.0to1.6 2.0to2.8 2.5to3.0 n/a Unemploymentrate.............. 6.3to6.5 7.1to7.6 6.5to7.3 5.5to6.6 Juneprojection ............... 5.5to5.7 5.3to5.8 5.0to5.6 n/a PCEinflation ................... 2.8to3.1 1.3to2.0 1.4to1.8 1.4to1.7 Juneprojection ............... 3.8to4.2 2.0to2.3 1.8to2.0 n/a CorePCEinflation .............. 2.3to2.5 1.5to2.0 1.3to1.8 1.3to1.7 Juneprojection ............... 2.2to2.4 2.0to2.2 1.8to2.0 n/a Range2 ChangeinrealGDP ............. –0.3to0.5 –1.0to1.8 1.5to4.5 2.0to5.0 Juneprojection ............... 0.9to1.8 1.9to3.0 2.0to3.5 n/a Unemploymentrate.............. 6.3to6.6 6.6to8.0 5.5to8.0 4.9to7.3 Juneprojection ............... 5.5to5.8 5.2to6.1 5.0to5.8 n/a PCEinflation ................... 2.7to3.6 1.0to2.2 1.1to1.9 0.8to1.8 Juneprojection ............... 3.4to4.6 1.7to3.0 1.6to2.1 n/a CorePCEinflation .............. 2.1to2.5 1.3to2.1 1.1to1.9 0.8to1.8 Juneprojection ............... 2.0to2.5 1.8to2.3 1.5to2.0 n/a Note: Projections of change in real gross domestic civilianunemploymentrateinthefourthquarterofthe product(GDP)andofinflationarefromthefourthquar- yearindicated.Eachparticipant’sprojectionsarebased terofthepreviousyeartothefourthquarteroftheyear onhisorherassessmentofappropriatemonetarypolicy. indicated.PCEinflationandcorePCEinflationarethe 1. Thecentraltendencyexcludesthethreehighestand percentage rates of change in, respectively, the price threelowestprojectionsforeachvariableineachyear. indexforpersonalconsumptionexpenditures(PCE)and 2. Therangeforavariableinagivenyearincludesall thepriceindexforPCEexcludingfoodandenergy.Pro- participants’projections,fromlowesttohighest,forthat jectionsfortheunemploymentratearefortheaverage variableinthatyear. basedoncurrentinformation,isdeemed and other commodities and the widenmost likely to foster outcomes for eco- ing slack in resource utilization, particinomic activity and inflation that best pantsexpectedthatinflationwoulddrop satisfytheparticipant’sinterpretationof markedly in coming quarters. Particithe Federal Reserve’s dual objectives pants generally judged that the degree ofmaximumemploymentandpricesta- of uncertainty surrounding their projecbility. tions for both economic activity and Given the recent intensification and inflation was greater than historical broadening of the global financial cri- norms. Most participants viewed the sis, FOMC participants viewed the out- risks to the growth outlook as skewed look for economic growth and employ- to the downside, and nearly all of them ment as having worsened significantly saw the risks to the inflation outlook as since June. As indicated in Table 1 and either balanced or tilted to the downdepicted in Figure 1, participants exside. pected that real GDP growth would remainveryweaknextyearandthatthe The Outlook subsequent pace of recovery would be quiteslow;theyalsoanticipatedthatthe Participants’ projections for real GDP unemployment rate would increase sub- growth in 2008 had a central tendency stantially further. In view of the recent of 0 to 0.3 percent, compared with the sharp declines in the prices of energy central tendency of 1 to 1.6 percent for
336 95th Annual Report, 2008 the growth projections that were made whole were due almost entirely to sublast June. The downward revisions in stantial shifts in their views of secondtheir growth forecasts for the year as a half growth. A number of participants
Minutes of the FOMC, October 337 noted that incoming data on consumer Participants anticipated that labor spending and employment had been market conditions would continue to weaker than expected during the sum- deteriorate over the coming year. Their mer, even prior to the intensification of projections for the unemployment rate the financial crisis. Many participants during the fourth quarter of this year highlighted the recent decline in con- hadacentraltendencyof6.3to6.5persumer confidence and the extent to cent, an upward shift of more than which households were swiftly curbing 1⁄ 2 percentagepointfromtheirJuneprotheir outlays in response to large losses jectionsandafurtherrisefromSepteminstock-marketandhousingwealthand ber’s unemployment rate of 6.1 perdeteriorationinlabormarketconditions. cent—which was the latest available Severe dislocations in credit markets figure at the time of the FOMC meetwere also seen as weighing heavily on ing. Looking further ahead, the central tendency of participants’ unemployconsumerspendingandbusinessinvestmentrateprojectionswas7.1to7.6perment. cent for 2009, 6.5 to 7.3 percent for Participants’ growth projections had 2010, and 5.5 to 6.6 percent for 2011. acentraltendencyof–0.2to1.1percent Mostparticipantsjudgedthattheunemfor 2009, 2.3 to 3.2 percent for 2010, ployment rate in 2011 would still be and2.8to3.6percentfor2011,asmost above its longer-run sustainable level participants expected that the near-term and hence would be likely to decline weakness in economic activity would furtherintheperiodbeyondtheforecast continueintonextyearandthatthesubhorizon. sequent recovery would be relatively The central tendency of participants’ gradual. Growth in 2009 was likely to projections for total PCE inflation in berestrainedbypersistentcreditmarket 2008 declined to 2.8 to 3.1 percent, strains and ongoing adjustments in the about a percentage point lower than the housing sector, as well as by weak funcentraltendencyoftheirprojectionslast damentals for household and business June. Participants noted that this downspending. Indeed, many participants anward revision in the near-term inflation ticipated that financial market stresses outlook mainly reflected the recent would recede only slowly, notwithsharp decline in the prices of energy standing the extraordinary measures and other commodities, apparently trigthathadbeentakentoenhanceliquidity gered by the global slowdown in ecoand stabilize financial markets and nomic activity. Most participants also institutions. Participants also noted that marked down their forecasts for inflademand for exports was likely to be tion beyond 2008, reflecting their exdamped in coming quarters by the sig- pectations of widening resource slack nificantly weaker economic outlook for over coming quarters as well as gradual many U.S. trading partners. Participants pass-throughofthedropinthepricesof expected that more robust economic energy and raw materials. The central expansion would resume in 2010, and tendencyofparticipants’projectionsfor most anticipated that growth would rise total PCE inflation was 1.3 to 2 percent further in 2011 to a pace that would for 2009, 1.4 to 1.8 percent for 2010, temporarily exceed its longer-run sus- and 1.4 to 1.7 percent for 2011. Particitainable rate and hence would help pants generally projected that inflation reduce the degree of slack in resource at the end of the projection period utilization. would be close to or a bit below their
338 95th Annual Report, 2008 assessments of the measured rates of Table2. AverageHistoricalProjectionError inflation consistent with the Federal Ranges Reserve’s dual mandate for promoting Percentagepoints price stability and maximum employ- Variable 2008 2009 2010 2011 ment. ChangeinrealGDP1 .... ±0.6 ±1.3 ±1.4 ±1.4 Unemploymentrate1 ..... ±0.2 ±0.6 ±0.9 ±1.0 Risks to the Outlook Totalconsumerprices2... ±0.3 ±1.0 ±1.0 ±1.0 Participants continued to view uncer- Note: Error ranges shown are measured as plus or tainty about the outlook for economic minus the root mean squared error of projections that werereleasedintheautumnfrom1987through2007for activity as higher than normal.13 The thecurrentandfollowingthreeyearsbyvariousprivate risks to their projections for GDP and government forecasters. As described in the box “ForecastUncertainty,”undercertainassumptions,there growth were judged as being skewed to isabouta70percentprobabilitythatactualoutcomesfor thedownsideandtheassociatedrisksto realGDP,unemployment,andconsumerpriceswillbein their projections for the unemployment rangesimpliedbytheaveragesizeofprojectionerrors madeinthepast.FurtherinformationisinDavidReifrate were tilted to the upside. ParticischneiderandPeterTulip(2007),“GaugingtheUncerpants emphasized the considerable de- taintyoftheEconomicOutlookfromHistoricalForecastgree of uncertainty about the future ing Errors,” Finance and Economics Discussion Series 2007-60 (Board of Governors of the Federal Reserve course of the financial crisis and its System,November). impact on the real economy. Previous 1. Fordefinitions,refertogeneralnoteintable1. 2. Measure is the overall consumer price index, the episodes of financial market turmoil pricemeasurethathasbeenmostwidelyusedingovernmight not provide much information mentandprivateeconomicforecasts.Projectionisperabout the likely trajectory going for- cent change, fourth quarter of the previous year to the fourthquarteroftheyearindicated. ward, given the severity of the current crisis and the extraordinary government measures that had been taken. Several uncertainty might be associated with participants highlighted the risk of a gauging the magnitude and stimulative persistent negative feedback loop be- effects of other policy tools such as tween credit markets and economic quantitative easing. activity, while others referred to the As in June, most participants continpossibility that financial market func- uedtoviewtheuncertaintysurrounding tioning might normalize more rapidly theirinflationprojectionsashigherthan andhencethattheadverseeffectsofthe historical norms. The majority of parcrisis might be somewhat smaller than ticipantsjudgedtheriskstotheinflation anticipated in their modal outlook. outlook as roughly balanced, and a Some participants noted that further number of others viewed these risks as monetary policy easing could eventu- skewedtothedownside—amarkedshift ally become constrained by the lower from June, when the risks to inflation boundofzeroonnominalinterestrates, were generally seen as tilted to the in which case an elevated degree of upside. Many participants noted that their assessments regarding the downside risks to inflation were linked to 13. Table 2 provides estimates of forecast theirjudgmentsregardingthemagnitude uncertainty since 1987 for the change in real GDP,theunemploymentrate,andtotalconsumer of downside risks to economic activity. price inflation. At the end of this summary, the Some participants also noted that box“ForecastUncertainty”discussesthesources heightened volatility of prices for enand interpretation of uncertainty in economic ergy and other commodities was conforecastsandexplainstheapproachusedtoassess tributing to the elevated degree of unthe uncertainty and risks attending participants’ projections. certaintyregardingtheinflationoutlook.
Minutes of the FOMC, October 339 Diversity of Views Figures 2.C and 2.D provide corresponding information regarding the di- Figures 2.A and 2.B provide further versity of participants’ views regarding detail on the diversity of participants’ the inflation outlook. The dispersion in views regarding likely outcomes for participants’ projections for 2009 and real GDP growth and the unemploy- 2010 was substantially greater than in ment rate, respectively. For both vari- June, primarily reflecting differences in ables, the dispersion of participants’ their views about how much slack in projections for 2008 was noticeably resource utilization was likely to denarrower than in the forecasts provided velopandabouttheextenttowhichthat inJune,mainlyduetotheaccumulation slack would place downward pressure of incoming data regarding the perforon increases in wages and prices. Some mance of the economy to date. In conparticipantsindicatedthattheirinflation trast, participants’ projections for 2009 projections for 2011 were roughly in and 2010 exhibited substantially greater line with their assessments of the meadispersion than in June, mainly reflectsured rate of inflation consistent with ing the diversity of views regarding the the Federal Reserve’s dual mandate for duration of the financial crisis and the promoting price stability and maximum magnitude and persistence of its impact employment; other participants anticion the real economy. The dispersion in pated that inflation in 2011 would be a participants’ projections was also afbit below their assessments of the manfected to some degree by differences in date-consistent inflation rate, mainly theirestimatesofthelonger-runratesof reflecting the lagged effects of weak output growth and unemployment to economic activity and the relatively which the economy would converge sluggish pace of recovery. under appropriate policy and in the absence of any further shocks.
340 95th Annual Report, 2008
Minutes of the FOMC, October 341
342 95th Annual Report, 2008
Minutes of the FOMC, October 343
344 95th Annual Report, 2008 Forecast Uncertainty Theeconomicprojectionsprovidedbythe jections are broadly balanced, the nummembers of the Board of Governors and bers reported in table 2 would imply a the presidents of the Federal Reserve probability of about 70 percent that Banks inform discussions of monetary actual GDP would expand between policy among policymakers and can aid 2.4 percent to 3.6 percent in the current publicunderstandingofthebasisforpol- year, 1.7 percent to 4.3 percent in the icy actions. Considerable uncertainty at- second year, and 1.6 percent to 4.4 pertends these projections, however. The cent in the third and fourth years. The economic and statistical models and rela- corresponding 70 percent confidence tionships used to help produce economic intervals for overall inflation would be forecasts are necessarily imperfect de- 1.7 percent to 2.3 percent in the current scriptions of the real world. And the yearand1.0percentto3.0percentinthe future path of the economy can be af- second,third,andfourthyears. fected by myriad unforeseen develop- Because current conditions may differ ments and events. Thus, in setting the from those that prevailed on average stance of monetary policy, participants over history, participants provide judgconsider not only what appears to be the ments as to whether the uncertainty mostlikelyeconomicoutcomeasembod- attachedtotheirprojectionsofeachvariiedintheirprojections,butalsotherange able is greater than, smaller than, or of alternative possibilities, the likelihood broadly similar to typical levels of foreof their occurring, and the potential costs cast uncertainty in the past as shown in totheeconomyshouldtheyoccur. table 2. Participants also provide judg- Table 2 summarizes the average his- ments as to whether the risks to their torical accuracy of a range of forecasts, projections are weighted to the upside, includingthosereportedinpastMonetary downside, or are broadly balanced. That Policy Reports and those prepared by is, participants judge whether each vari- FederalReserveBoardstaffinadvanceof ableismorelikelytobeaboveorbelow meetings of the Federal Open Market their projections of the most likely out- Committee. The projection error ranges come. These judgments about the uncershowninthetableillustratetheconsider- tainty and the risks attending each parableuncertaintyassociatedwitheconomic ticipant’s projections are distinct from forecasts.Forexample,supposeapartici- thediversityofparticipants’viewsabout pantprojectsthatrealGDPandtotalcon- the most likely outcomes. Forecast unsumer prices will rise steadily at annual certainty is concerned with the risks ratesof,respectively,3percentand2per- associated with a particular projection, cent. If the uncertainty attending those rather than with divergences across a projections is similar to that experienced numberofdifferentprojections. in the past and the risks around the pro-
Meetings of the FOMC, December 345 Meeting Held on Ms.Johnson,15Secretary,Officeofthe December 15–16, 2008 Secretary,BoardofGovernors Mr. Struckmeyer, Deputy Staff Direc- A meeting of the Federal Open Market tor, Office of Staff Director for Committee was held in the offices of Management, Board of Governors the Board of Governors of the Federal Mr. Blanchard, Assistant to the Board, Reserve System in Washington, D.C., Office of Board Members, Board on Monday, December 15, 2008 at 2:00 ofGovernors p.m. and continued on Tuesday, Messrs. Clouse and Parkinson,14 December 16, 2008 at 9:00 a.m. Deputy Directors, Divisions of Monetary Affairs and Research Present: and Statistics, respectively, Board Mr.Bernanke,Chairman ofGovernors Ms.Duke Mr.Fisher Mr. Frierson,15 Deputy Secretary, Mr.Kohn Office of the Secretary, Board of Mr.Kroszner Governors Ms.Pianalto Mr.Plosser Messrs. Leahy,15 Nelson,16 Reif- Mr.Stern schneider,andWascher,Associate Mr.Warsh Directors, Divisions of International Finance, Monetary Affairs, Ms. Cumming, Messrs. Evans, Lacker, Research and Statistics, and and Lockhart, and Ms. Yellen, Research and Statistics, respec- Alternate Members of the Federal tively,BoardofGovernors OpenMarketCommittee Mr. Gagnon,15 Visiting Associate Messrs. Bullard, Hoenig, and Rosen- Director, Division of Monetary gren, Presidents of the Federal Affairs,BoardofGovernors Reserve Banks of St. Louis, Kansas City, and Boston, respectively Ms. Shanks,15 Associate Secretary, Office of the Secretary, Board of Mr.Madigan,SecretaryandEconomist Governors Ms.Danker,DeputySecretary Mr.Skidmore,AssistantSecretary Messrs.PerliandReeve,DeputyAsso- Ms.Smith,AssistantSecretary ciate Directors, Divisions of Mr.Alvarez,GeneralCounsel Monetary Affairs and Interna- Mr.Ashton,14AssistantGeneralCoun- tionalFinance,respectively,Board sel ofGovernors Mr.Sheets,Economist Mr. Covitz, Assistant Director, Divi- Mr.Stockton,Economist sion of Research and Statistics, Messrs. Connors, English, and Kamin, BoardofGovernors Ms. Mester, Messrs. Rolnick, Ms.Goldberg,15VisitingReserveBank Rosenblum, Slifman, and Wilcox, Officer, Division of International AssociateEconomists Finance,BoardofGovernors Mr. Dudley, Manager, System Open MarketAccount Mr. Cole, Director, Division of Banking Supervision and Regulation, BoardofGovernors 15. Attended the portion of the meeting relating to the zero lower bound on nominal interest rates. 16. Attended the meeting through the discussionofthezerolowerboundonnominalinterest 14. AttendedTuesday’ssession. rates.
346 95th Annual Report, 2008 Mr. Zakrajsek,15 Assistant Director, The Manager of the System Open Division of Monetary Affairs, Market Account reported on recent BoardofGovernors developments in foreign exchange mar- Messrs. Meyer15 and Oliner, Senior kets.Therewerenoopenmarketopera- Advisers, Divisions of Monetary tions in foreign currencies for the Sys- Affairs and Research and Statis- tem’s account in the period since the tics,respectively,BoardofGover- previous meeting. The Manager also nors reported on developments in domestic Mr. Small, Project Manager, Division financial markets and on System open of Monetary Affairs, Board of market operations in government secu- Governors rities and federal agency obligations Messrs. Ahmed and Luecke, Section during the period since the previous Chiefs, Divisions of International meeting. By unanimous vote, the Com- Finance and Monetary Affairs, mittee ratified these transactions. respectively, Board of Governors The information reviewed at the December meeting pointed to a signifi- Ms.Aaronson,SeniorEconomist,Division of Research and Statistics, cant contraction in economic activity in BoardofGovernors the fourth quarter. Conditions in the labor market deteriorated considerably Messrs. Gapen and McCabe,15 Econoinrecentmonthsasmostmajorindustry mists, Divisions of Monetary groups shed jobs. Private payrolls con- Affairs and Research and Statistics,respectively,BoardofGover- tinued to fall at a faster pace than earnors lier in the year, and the unemployment rate rose to 6.7 percent. Industrial pro- Ms. Beattie,15 Assistant to the Secreduction, excluding special hurricanetary, Office of the Secretary, BoardofGovernors and strike-related effects, fell further in November, and consumer spending de- Ms. Low, Open Market Secretariat clined across a broad range of spend- Specialist, Division of Monetary ing categories over recent months. The Affairs,BoardofGovernors housingmarketweakenedagainascon- Mr. Werkema, First Vice President, struction activity, new home sales, and Federal Reserve Bank of Chicago home prices declined further. In the business sector, investment in equip- Mr. Fuhrer, Executive Vice President, FederalReserveBankofBoston mentandsoftwareappearedtocontinue to contract. Financial markets saw a Messrs. Altig, Hilton, Potter, Rasche, further pullback in risk-taking, spurred Rudebusch, Schweitzer, Sellon, in part by the more pessimistic outlook Sullivan, and Weinberg, Senior for economic activity; this situation Vice Presidents, Federal Reserve BanksofAtlanta,NewYork,New led to lower equity prices, higher risk York, St. Louis, San Francisco, spreads, and tighter constraints in credit Cleveland, Kansas City, Chicago, markets, all of which intensified the andRichmond,respectively decline in real activity. On the inflation Mr. Burke,15 Assistant Vice President, front, headline consumer prices de- Federal Reserve Bank of New clined in recent months, as energy York prices continued to fall and consumer food price increases moderated. Mr. Eggertsson,15 Senior Economist, Federal Reserve Bank of New The labor market continued to York worsen. According to the November
Meetings of the FOMC, December 347 employment report, payroll employ- month in October, with the slowdown ment fell at a rapid pace over the pre- evident in nearly all broad spending ceding three months, with substantial categories. Sales of light motor vehilosses across a wide range of industry cles, which slumped in October, fell groups, including manufacturing, con- further in November, but the available struction, retail, financial activities, and information on retail sales suggested a business services. Indicators of hiring small increase in real outlays for other plans also dropped steeply in Novem- consumer goods. The annualized threeber, and other labor market indicators month change in spending on services suggested that jobs remained in short inOctoberwasjustone-thirdoftherate supply.Theunemploymentrateclimbed registered in the first half of 2008. Preto 6.7 percent in November, while the liminary data for October and Novemlabor force participation rate fell after bersuggestedthatoverallfourth-quarter remaining steady for much of the year. real spending would receive a modest New claims for unemployment insur- boostfromrecentpricedeclinesforgasancerosesharplythroughearlyDecem- oline. Real incomes were also boosted ber. by the reversal in energy prices, though Industrial production, excluding spe- the negative wealth effects of continued cialhurricane-andstrike-relatedeffects, declines in equity and house prices fellmarkedlyinNovemberaftersizable likely offset this somewhat. Measures declines in the preceding two months. of consumer sentiment released in The recent contraction in industrial out- November and December remained put was broadly based. The steep pace low, and available evidence suggested of decline in the production of con- further tightening in consumer credit sumergoodsreflectednotonlycutbacks conditions in recent months. in motor vehicle assemblies but also Real construction activity continued dropsintheoutputofothergoods,such to decline in November. Single-family as appliances, furniture, and products housing starts and permit issuance fell related to home improvement. The pro- further. In the multifamily sector, starts ductionofbusinessequipmentwasheld dropped sharply in November while down by declines in the output of both permit issuance remained on a downindustrialandhigh-techequipment.The trend. Housing demand remained weak, output of construction supplies ex- and although the number of unsold new tended its decline after a brief pause in single-family homes continued to move the middle of the year, and the contrac- lower, inventories remained elevated tion in the production of materials relative to the current pace of sales. intensified. In particular, steel produc- Sales of existing single-family homes tion plummeted, and the output of changed little, although a drop in pendorganic chemicals contracted notice- ing home sales in October pointed to ably. For most major industry groups, further declines in the near term. The factory utilization rates declined rela- comparative strength of existing home tive to their levels in July and remained sales appeared to be attributable partly below their long-run averages. Avail- to increases in foreclosure-related and able forward-looking indicators pointed other distressed sales. Financing condito a significant downturn in manufac- tions for prime borrowers appeared to turing output in coming months. easeslightlyaftertheFederalReserve’s Real personal consumption expendi- announcement that it would purchase tures (PCE) fell for the fifth straight agency debt and agency mortgage-
348 95th Annual Report, 2008 backed securities (MBS) to support was more than offset by a significant mortgage financing, while the market decline in exports. Much of the decline for nonconforming loans remained im- in exports was the result of drops in paired. Several indexes indicated that agricultural goods and industrial suphouse prices continued to decline sub- plies,whichlargelyreflectedadecrease stantially. inthepricesofthesegoods.Thedecline In the business sector, investment in in imports was led by lower imports of equipment and software appeared to be non-oil industrial supplies, capital contracting at a faster rate in the fourth goods, and automotive products, alquarter than during the third quarter. though these declines were partly offset While the decline in the previous quar- by an increase in the value of oil ter was concentrated in computers and imports. transportation equipment, declines in Economic activity in most advanced spending in the fourth quarter were foreign economies contracted in the more widespread. Shipments of nonde- third quarter, driven by sharp declines fense capital goods excluding aircraft in investment and by significant negafell in October, and orders continued to tive contributions of net exports, as the decline sharply. Investment demand global recession took hold more seemed to be weighed down by weak strongly. Incoming data pointed to an fundamentals and increased uncertainty even weaker pace of activity in the about the state of the economy, while fourth quarter. In Canada, however, real prospects for future investment activity gross domestic product (GDP) inreflected in surveys of business condi- creased at a faster-than-expected pace tions and sentiment worsened in recent inthethirdquarter,thoughconsumption months. In addition, credit conditions and investment continued to soften. In remained tight. Real nonresidential the euro area and the United Kingdom, investment declined in the third quarter purchasing managers indexes fell in afternearlythreeyearsofrobustexpan- November to levels associated with sion, and nominal expenditures edged severe contractions in economic activdown further in October. Vacancy rates ity. Labor market conditions in the rose and property values fell in the first advanced economies deteriorated furthree quarters of the year. ther, with most countries experiencing Real nonfarm inventories (excluding rising unemployment rates. In Japan, motor vehicles), which had dropped real GDP fell in the third quarter as noticeably in the second quarter, fell domestic demand declined and private again in the third quarter. The book investment fell for the second consecuvalue of manufacturing and wholesale tive quarter. After peaking in the third trade inventories (excluding motor quarter, consumer price inflation modvehicles)showedafurtherdrawdownin erated in all advanced foreign econo- October. However, the ratio of these mies, primarily as a result of falling inventoriestosalesincreasednoticeably energy and food prices. Economic in September and October. The pur- activity in most emerging market chasing managers survey for November economies decelerated sharply in the indicated that many purchasing agents third quarter, though a surge in agriculsaw their customers’ inventories as too turaloutputhelpedtosupportactivityin high. Mexico, and the Brazilian economy The U.S. international trade deficit continued to expand rapidly. In Asia, widened in October, as a fall in imports output decelerated significantly, as the
Meetings of the FOMC, December 349 paceofrealactivitymoderatedinChina ness equipment spending and industrial and several other economies saw production had weakened in recent declines in real GDP. Recent readings months, and slowing economic activity on production, sales, and exports sug- in many foreign economies was dampgest that emerging market economies ing the prospects for U.S. exports. weakened further in the current quarter. Moreover, the intensification of finan- Headline inflation generally declined cial market turmoil was likely to exert acrossemergingmarketeconomies,pri- additional restraint on spending, partly marily because of lower food and byfurtherreducingtheabilityofhouseenergy prices and, in some cases, holds and businesses to obtain credit. weaker economic activity. The Committee noted that, in light of In the United States, headline con- the declines in the prices of energy and sumer prices declined in recent months othercommoditiesandtheweakerproswhile core consumer price inflation pects for economic activity, it expected slowed further. With energy prices fall- inflationtomoderateincomingquarters ing sharply and the rate of increase in to levels consistent with price stability. food prices moderating, headline PCE The Committee also noted that recent pricesfellinOctober,anddatafromthe policy actions, including the rate reducconsumer price index (CPI) indicated tion that was approved at the October that the decline extended into Novem- 28-29 meeting, coordinated interest rate ber. Core PCE prices were unchanged cuts by central banks, extraordinary in October, and based on the CPI, liquidity measures, and official steps to appeared to have been unchanged again strengthen financial systems, should in November. The recent slowing in help over time to improve credit condicoreconsumerpriceinflationwaswide- tions and promote a return to moderate spread and likely reflected not only the economic growth. Nevertheless, downweakpaceofeconomicactivitybutalso sideriskstoeconomicactivityremained theeasingofsomeearliercostpressures and the Committee indicated that it as the prices of crude oil, gasoline, and would monitor economic and financial other commodities declined. Excluding developments carefully and act as food and energy, producer prices rose needed to promote sustainable ecomodestly again in November, as prices nomic growth and price stability. atearlierstagesofprocessingcontinued Over the intermeeting period, investo retreat for the third consecutive torsmarkeddowntheirexpectationsfor month. Measures of inflation expecta- the path of monetary policy. Policy tions continued to fall or hold steady expectations were largely unaffected by during the intermeeting period. Mea- the outcome of the October 28-29 sures of nominal hourly labor compen- FOMC meeting, as the Committee’s sation continued to increase moderately decision to reduce the target federal in the third quarter. funds rate was broadly anticipated and At its October 28–29 meeting, the the accompanying statement was Federal Open Market Committee reportedlyinlinewithinvestorexpecta- (FOMC) lowered its target for the fed- tions. Subsequently, however, the eral funds rate 50 basis points to 1 per- expectedfuturepathofmonetarypolicy cent. The Committee’s statement noted dropped amid data releases that sugthat economic activity appeared to have gested a weaker outlook for economic slowed markedly, due importantly to a activity and lower inflation than had declineinconsumerexpenditures.Busi- been anticipated, along with continued
350 95th Annual Report, 2008 strains in financial markets that aswastheauctionofoptionsfor13-day weighed on investor sentiment. Yields Schedule 2 TSLF loans straddling the on nominal Treasury coupon securities end of the year. declined significantly over the inter- Conditions in markets for repurchase meeting period in response to safe- agreements, or repos, arranged using haven demands as well as the down- certain types of collateral deteriorated ward revisions in the economic outlook over the intermeeting period, and and the expected policy path. Mean- liquidity for repos backed by nonwhile, yields on inflation-indexed Trea- Treasury, non-agency collateral resury securities declined by smaller mained poor. Amid high demand for amounts, leaving inflation compensa- safe investments, the overnight Treation lower. Although the decline in sury general collateral (GC) repo rate inflation compensation occurred amid remained very low and fell to around sharp decreases in inflation measures zero late in the intermeeting period. and energy prices, it was likely ampli- Still, failures to deliver in the Treasury fied by increased investor preference market declined substantially from the for the greater liquidity of nominal levelsreachedinOctoberandovernight Treasury securities relative to that of securities lending from the System inflation-protected Treasury securities. Open Market Account portfolio fell Conditions in short-term funding sharply. Heavy demand for safe instrumarkets remained strained for most of mentswasalsoapparentintheTreasury the intermeeting period, though some bill market, where yields turned negasigns of improvement were evident. tive at times. During the intermeeting The spreads of London interbank of- period, the Treasury announced that it fered rates, or Libor, over com- would not roll over bills related to the parable-maturity overnight index swap Supplementary Financing Program in rates declined noticeably across most order to preserve flexibility in the conmaturities early in the intermeeting duct of debt management policy, and period; however, some of this decline uncertainty about supply reportedly was reversed once maturities began to exacerbated poor liquidity conditions in lengthen past year-end. Trading in the bill market. Despite the decline in longer-term interbank funding markets spreadsofagencyandmortgage-backed reportedly remained thin. Credit out- repo rates over Treasury GC rates later standing under the Federal Reserve’s intheperiod,strainsinthesemarketsre- Term Auction Facility (TAF) increased mained evident, with bid-asked spreads to about $448 billion because of and haircuts very elevated. expandedauctionsizes.Recentauctions In contrast, conditions in the comfor both 28-day and 84-day credit from mercial paper (CP) market improved theTAFwereundersubscribed,andbid- overtheintermeetingperiod,likelyasa ding for the two forward TAF auctions reflection of recent measures taken in duringtheintermeetingperiodwasvery support of this market. Spreads on light. Meanwhile, primary credit out- 30-day A1/P1 and asset-backed comstanding remained high, although it had mercialpaper(ABCP)continuedtonardeclined somewhat in recent weeks. row after the Commercial Paper Fund- Use of the Primary Dealer Credit Facil- ing Facility (CPFF) became operational ity dropped significantly. A number of on October 27, although spreads subsethe Term Securities Lending Facility quently reversed a portion of the (TSLF) auctions were oversubscribed, declines as maturities crossed over
Meetings of the FOMC, December 351 year-end. In contrast, spreads on com- impaired, and premiums for the on-themercial paper not eligible for purchase run ten-year nominal Treasury security under the CPFF remained elevated. The rose from levels that were already dollar amounts of unsecured financial elevated. The market for commercial CP and ABCP outstanding rebounded mortgage-backed securities experienced from their October lows, though issu- a particularly pronounced selloff. ance into the CPFF more than Reflecting investor concerns about accounted for this increase. Credit out- the conditions of financial institutions, standing under the Asset-Backed Com- spreads on credit default swaps for U.S. mercial Paper Money Market Mutual banks widened sharply, and those for Fund Liquidity Facility fell by more insurancecompaniesremainedelevated. than half over the intermeeting period. To support market stability, the U.S. The Money Market Investor Funding government on November 23 entered Facility program registered no activity. into an agreement with Citigroup to As financial market conditions wors- provide a package of capital, guaranened over the intermeeting period, in- tees, and liquidity access. In other vestors seemed to become more con- developments, banking organizations cerned about the likelihood of a deep began to take advantage of the Fedand prolonged recession. In addition, eral Deposit Insurance Corporation’s the Treasury Department’s announce- (FDIC) Temporary Liquidity Guarantee ment that funds from the Troubled Program; eleven institutions issued Asset Relief Program would not be bonds under the program. used to purchase securities backed by In view of the tightening of credit mortgage-related and other assets ap- conditions for consumers and small peared to prompt negative price reac- businesses, the Federal Reserve antionsinseveralfinancialmarkets.Stock nounced on November 25 the creation pricesoffinancialcorporationsfellcon- of the Term Asset-Backed Securities siderably, while broad equity indexes LoanFacilitytosupportthemarketsfor declined, on net, amid high volatility. asset-backed securities collateralized by Yields on investment-grade bonds student loans, auto loans, credit card moved lower, but risk spreads on these loans, and loans guaranteed by the instruments over comparable-maturity Small Business Administration. The Treasury securities widened substan- facility, developed jointly with the tially as yields on Treasury securities Treasury, was expected to be operafell more. Yields and risk spreads on tional by February 2009, and discusspeculative-grade bonds soared, and sions with market participants about credit default swap spreads on spec- operational details of this facility were ulative-grade, as well as investment- ongoing. grade, corporate bonds widened further. The Federal Reserve also announced Gross issuance of bonds by nonfinan- onNovember25that,tohelpreducethe cial investment-grade companies con- cost and increase the availability of tinued at a solid pace, but issuance of residential mortgage credit, it would speculative-grade bonds remained at initiate a program to purchase up to zero. Issuance of leveraged syndicated $100 billion in direct obligations of loans was also extremely weak. Strains housing-related government-sponsored were evident in a number of other enterprises (GSEs) and up to $500 bilfinancial markets as well. The function- lion in MBS backed by Fannie Mae, ing of Treasury markets remained Freddie Mac, and Ginnie Mae. Agency
352 95th Annual Report, 2008 debt spreads, which had widened early for an extended period. The dollar in the period, narrowed somewhat after declined on balance against the currenthe announcement. Subsequent pur- cies of major U.S. trading partners. chases of agency debt by the Open In the forecast prepared for the meet- Market Desk at the Federal Reserve ing, the staff revised down sharply its Bank of New York led to a further outlook for economic activity in 2009 reduction in agency spreads. Likely but continued to project a moderate reflecting in part these developments, recovery in 2010. Real GDP appeared conditions in the primary residential likely to decline substantially in the mortgagemarketimproved.Theinterest fourth quarter of 2008 as conditions in rate on 30-year fixed-rate conforming the labor market deteriorated more mortgages declined, which prompted a steeply than previously anticipated; the noticeable increase in mortgage refi- decline in industrial production intensinancing. fied; consumer and business spending M2 expanded at a considerably appeared to weaken; and financial slower rate in November than October. conditions, on balance, continued to Retail money funds contracted after a tighten. Rising unemployment, the surge in October that reflected safe- declines in stock market wealth, low haven inflows to Treasury-only funds. levels of consumer sentiment, weak- Small time deposits increased some- ened household balance sheets, and what more slowly than in October, restrictive credit conditions were likely althoughtherateofexpansionremained to continue to hinder household spendquite rapid as banks continued to bid ing over the near term. Homebuilding aggressively for these deposits. Flows was expected to contract further. Busiinto demand deposits covered by the ness expenditures were also likely to be FDIC’s new temporary guarantee pro- held back by a weaker sales outlook gram were significant and apparently and tighter credit conditions. Oil prices, reflected shifts out of savings accounts which dropped significantly during the as well as redirection of funds by intermeeting period, were assumed to banks’ customers away from other riseoverthenexttwoyearsinlinewith money market instruments. Currency the path indicated by futures market continueditsstrongincrease,apparently prices,buttoremainbelowthelevelsof boosted by solid foreign demand for October 2008. All told, real GDP was U.S. banknotes. expected to fall much more sharply in Liquidity conditions in the money the first half of 2009 than previously markets of major foreign economies anticipated, before slowly recovering improved but remained strained over over the remainder of the year as the the intermeeting period. Movements in stimulus from monetary and assumed stock prices were mixed in the ad- fiscal policy actions gained traction and vanced foreign economies, although the turmoil in the financial system equitypricesgenerallyroseinemerging began to recede. Real GDP was promarket economies. In response to evi- jected to decline for 2009 as a whole dence of a slowdown in economic and to rise at a pace slightly above the activityandarapidwaningofinflation- rate of potential growth in 2010. Amid ary pressures, central banks around the the weaker outlook for economic activworld eased policy sharply. Sovereign ity over the next year, the unemploybondyieldsfell,reflectingprospectsfor mentratewaslikelytorisesignificantly lower inflation and lower policy rates into 2010, to a level higher than pro-
Meetings of the FOMC, December 353 jected at the time of the October 28–29 nature of the economic slowdown were FOMC meeting. The disinflationary seen by some participants as suggesting effects of increased slack in resource the distinct possibility of a prolonged utilization, diminished pressures from contraction, although that was not energy and materials prices, declines in judged to be the most likely outcome. import prices, and further moderate Inflation pressures had diminished reductions in inflation expectations appreciably as energy and other comcaused the staff to reduce its forecast modity prices dropped and economic for both core and overall PCE inflation. activityslumped.Lookingforward,par- Core inflation was projected to slow ticipants agreed that inflationary presconsiderably in 2009 and then to edge sures looked set to moderate further in down further in 2010. coming quarters, reflecting recent de- In their discussion of the economic clines in commodity prices and rising situation and outlook, all meeting par- slack in resource markets, and several ticipants agreed that the economic saw risks that inflation could drop for a downturn had intensified over the fall. time below rates they viewed as most Althoughsomefinancialmarketsexhib- consistent over time with the Federal ited signs of improved functioning, Reserve’s dual mandate for maximum financial conditions generally remained employment and price stability. very strained. Credit conditions contin- Meeting participants observed that ued to tighten for both households and financial strains continued to exert a businesses, and ongoing declines in powerfuldragoneconomicactivityand equity prices further reduced household that the adverse feedback loop between wealth. Conditions in the housing mar- financial conditions and economic perket weakened again and house prices formance had intensified. Although declined further. Against this backdrop, improvements were evident in some measures of business and consumer markets, particularly those for highly confidencefelltonewlows,andprivate rated commercial paper and for interspending continued to contract. Em- bank funds, financial markets generally ployment and production indicators remained under severe stress. Equity weakened further as businesses re- prices continued to drop amid high sponded very rapidly to the fall-off in volatility, further reducing household demand. Participants expected eco- wealth.Risingriskspreadskeptthecost nomicactivitytocontractsharplyinthe of issuing corporate bonds at a high fourth quarter of 2008 and in early level—especially for lower-rated 2009. Most projected that the economy firms—even though Treasury yields would begin to recover slowly in the had declined sharply since the October second half of 2009, aided by substan- 28–29 meeting. Securitization markets, tial monetary policy easing and by which over recent years had been an anticipatedfiscalstimulus.Meetingpar- important channel in credit intermediaticipants generally agreed that the tion, remained largely dysfunctional, uncertainty surrounding the outlook with the exception of those for mortwas considerable and that downside gages guaranteed by the GSEs. The risks to even this weak trajectory for sharpdropsandunusualvolatilityinthe economic activity were a serious con- pricesofmanyfinancialassetssincethe cern. Indeed, the severe ongoing finan- beginning of the fourth quarter were cial market strains, the large reductions likely to cause more losses for financial in household wealth, and the global institutions, and a number of partici-
354 95th Annual Report, 2008 pants noted that loan delinquencies desirable in the longer term, could put wereincreasingsignificantlyinthecon- additional downward pressure on consumer sector, adding to pressures on sumerspendingincomingquarters.The banks’ balance sheets and reinforcing latest housing data suggested a continbanks’ cautious lending stance. As a ued substantial contraction in that secconsequence, credit conditions for both tor. The recent decline in mortgage businesses and households had tight- rates had sparked some refinancing and ened further, with banks generally purchase activity, but the extent of the adopting stricter lending standards and longer-term impact of lower rates on decliningtoreneworparingbackexist- housing demand remained uncertain. ing credit lines. Meeting participants noted that eco- Participants observed that the effects nomic conditions had deteriorated subof the financial turmoil, increased stantially in recent months in both uncertainty, and drops in confidence advanced and emerging market econoand demand were becoming increas- mies. As a consequence, demand for ingly evident in the business sector. U.S. exports had weakened, held back Business contacts across the country also by the strengthening of the dollar expected considerable near-term weak- since the summer. Going forward, gloness in sales and declining pricing bal demand was expected to remain power. Some meeting participants weak, and thus growth in exports was reported especially sharp drops in new unlikely to provide much support for orders in their Districts. Even sectors U.S. activity. However, the weakness in that had performed relatively well until the global economy was contributing to recently, such as mining and drilling, lower prices of energy and other comwere experiencing reduced activity, modities, which should boost real mostly due to the decline in commodity incomes and provide modest support to prices. Agricultural activity was also household spending. showing signs of weakness. Business Participants agreed that falling prices sentimenthaddeterioratedsharplysince for energy and other commodities and September, likely contributing to steep diminished economic activity had drops in employment and production. resulted in an appreciable reduction in Participants anticipated that, with the inflationary pressures. Those pressures deteriorating economic outlook and were seen as likely to continue to abate tightening of credit conditions, capital because of the emergence of substantial expenditures were likely to be soft in slack in resource utilization and dimincoming quarters. ishing pricing power. Participants were Many participants noted that the uncertain about the extent to which decline in household wealth resulting inflation would fall. Some saw inflation from large drops in equity and house leveling out near desired levels, while prices, together with tighter credit con- others expressed concern that inflation ditions, rapidly increasing unemploy- might decline below levels consistent ment, and deteriorating consumer senti- with price stability in the medium term. ment, was contributing to a sharp Participants generally agreed that inflacontraction in consumer spending. tion expectations were an important Some participants pointed out that determinant of future price dynamics. reduced consumer wealth and concerns Some noted that those expectations, about employment could lead to a fur- especially at longer horizons, appeared ther increase in saving, which, although well anchored. However, some survey
Meetings of the FOMC, December 355 evidence suggested that firms expected the importance of explicitly conditionpricestocontinuetodeclineastheyhad ing communication regarding future over the previous few months. Several policyontheevolutionoftheeconomic participants observed that monitoring outlook. Another possible form of commeasures of inflation expectations for munication that participants discussed signsofdisinflationarydynamicswould was a more explicit indication of their be especially important going forward. views on what longer-run rate of infla- InajointsessionoftheFederalOpen tion would best promote their goals of Market Committee and the Board of maximum employment and price stabil- Governors, meeting participants dis- ity. The added clarity in that regard cussed extensively how in current cir- might help forestall the development of cumstances the Committee could best expectations that inflation would support the resumption of sustainable decline below desired levels, and hence economic growth and promote the keep real interest rates low and support maintenance of price stability over the aggregate demand. medium term. Participants noted that Meeting participants also discussed verylowlevelsofthefederalfundsrate how best to employ the Federal hadthepotentialtohelpbuoyaggregate Reserve’s balance sheet to promote demand and economic activity, but they monetary policy goals. The Federal also had potential costs in terms of the Reserve had already adopted a series of functioning of certain financial markets programs that were providing liquidity and some financial institutions. Most support to a range of institutions and participants judged that the benefits in markets, and participants generally terms of support for the overall econ- agreed that a continued focus on the omy of federal funds rates close to, but quantityandthecompositionofFederal slightly above, zero probably out- Reserve assets would be necessary and weighed the adverse effects. With the desirable. Specifically, participants disfederal funds rate already trading at cussed the merits of purchasing large very low levels as a result of the large quantitiesoflonger-termsecuritiessuch volume of excess reserves associated as agency debt, agency mortgagewith the Federal Reserve’s liquidity backed securities, and Treasury securioperations, participants agreed that the ties. The available evidence indicated Committee would need to focus on thatsuchpurchaseswouldreduceyields other tools to impart additional mone- on those instruments, and lower yields tarystimulustotheeconomyinthenear onthosesecuritieswouldtendtoreduce term.Onebroadclassofsuchtoolswas borrowing costs for a range of private the use of FOMC communication with borrowers, although participants were the public to provide more information uncertain as to the likely size of such regarding future policy intentions. In effects. Participants also generally particular, participants judged that com- believed that the special liquidity and municating the Committee’s expecta- lending facilities implemented or tion that short-term interest rates were announced recently would support the likely to stay exceptionally low for availability of credit to businesses and some time could be useful because it households and thus help sustain ecocould lead to pricing of longer-term nomic activity. Many participants interest rates consistent with the path of thought that the Federal Reserve should monetary policy that policymakers saw continue to consider whether expanding as most likely. Participants emphasized someoftheexistingfacilitiesandcreat-
356 95th Annual Report, 2008 ing new facilities could be helpful. Par- the normal bank intermediation mechaticipants emphasized that the ultimate nism appeared to be impaired, and objective of special lending facilities banks may not be willing to lend their and asset purchases was to support excess reserves. Conversely, a decline overall market functioning, financial in excess reserves or the monetary base intermediation, and economic growth. would not necessarily be contractionary Participants acknowledged that the if it occurred in the context of improveffective federal funds rate probably ing financial market conditions. A few would need to remain very low for of those who supported quantitative some time. However, they also recog- base or reserve targets did so because nized that, as economic activity recov- they saw them as helping to coordinate ered and financial conditions normal- the actions of the Board of Governors, ized, the use of certain policy tools which is responsible for authorizing would need to be scaled back, the size most special liquidity and lending of the balance sheet and level of excess facilities, and the Committee, which is reserves would need to be reduced, and responsible for open market operations. the Committee’s policy framework Most participants, however, were of the wouldreturntofocusonthelevelofthe view that such coordination would best federal funds rate. be achieved by continued close coop- A number of participants observed eration and consultation between the that, under the approach of conducting Committee and the Board. Going formonetary policy by acquiring a variety ward, consideration will be given to of assets as needed to address financial whether various quantitative measures and macroeconomic strains, the quan- would be useful in calibrating and tity of excess reserves and the size of communicating the stance of monetary the Federal Reserve’s balance sheet policy. would be determined by the Federal In the discussion of monetary policy Reserve’sassetpurchasesandtheusage for the intermeeting period, Committee of its lending facilities. It was likely members recognized that the large volthat, during the period of financial tur- ume of excess reserves had already moil, the size of the Federal Reserve’s resulted in federal funds rates signifibalance sheet would need to be main- cantly below the target federal funds tained at a high level. Participants dis- rate and the interest rate on excess cussed the potential advantages and reserves. They agreed that maintaining disadvantages of setting quantitative a low level of short-term interest rates targets for bank reserves or the mone- and relying on the use of balance sheet tary base. Some were of the view that policies and communications about quantitative targets for an increasing monetary policy would be effective and reserve base could be effective in pre- appropriateinlightofthesharpdeterioventing deflationary dynamics and use- ration of the economic outlook and the ful in communicating to the public the appreciable easing of inflationary pres- Committee’s determination to take the sures. Maintaining that level of the fedsteps needed to avoid such an outcome. eralfundsrateimpliedasubstantialfur- Several other participants, however, therreductioninthetargetfederalfunds noted that increases in excess reserves rate. Even with the additional use of or the monetary base, by themselves, nontraditional policies, the economic might not have a significant stimulative outlook would remain weak for a time effectontheeconomyorpricesbecause and the downside risks to economic
Meetings of the FOMC, December 357 activitywouldbesubstantial.Moreover, were likely to warrant exceptionally inflation would continue to fall, reflect- low levels of the federal funds rate for ing both the drop in commodity prices some time. The members emphasized that had already occurred and the that their expectation about the path of buildupofeconomicslack;indeedsome the federal funds rate was conditioned members saw significant risks that on their view of the likely path of ecoinflation could decline and persist for a nomic activity. time at uncomfortably low levels. Members also discussed how best to Members debated how best to com- communicate the focus of the Federal municate their decisions regarding Reserve’s policy going forward. Memmonetarypolicyactions.Sincethelarge bers agreed that the statement should amountofexcessreservesinthesystem indicate that all available tools would would limit the Federal Reserve’s con- beemployedtopromotetheresumption trol over the federal funds rate, several of sustainable economic growth and to members thought that it might be pref- preserve price stability. They also erablenottosetaspecifictargetforthe agreed that the statement should note federal funds rate. Indeed, those mem- that it was the Committee’s intention to bers felt that lack of an explicit target sustainthesizeoftheFederalReserve’s could be helpful, in that it would focus balance sheet at a high level through attention on the shift in the policy open market operations and other meaframework from targeting the federal sures to support financial markets and funds rate to the use of balance sheet stimulate the economy. In addition to policies and communications about the already-announced asset purchases monetary policy as a way of providing and liquidity programs, members confurther monetary stimulus. A few mem- curred that the statement should indibers stressed that the absence of an cate that the Committee stands ready to explicit federal funds rate target would expand purchases of agency debt and give banks added flexibility in pricing agency mortgage-backed securities, and loans and deposits in the current envi- that it is evaluating the potential beneronment of unusually low interest rates. fits of purchasing longer-term Treasury However, other members noted that not securities. announcingatargetmightconfusemar- In light of the use of additional tools ket participants and lead investors to for implementing monetary policy, the believe that the Federal Reserve was Committee revised the form of the unable to control the federal funds rate directive to the Open Market Desk of whenitcould,infact,stillinfluencethe theFederalReserveBankofNewYork. effective federal funds rate through In addition to specifying that it now adjustments of the interest rate on seeks conditions in reserve markets excess reserves and the primary credit consistent with federal funds trading in rate. The members decided that it a range of 0 to 1⁄ 4 percent, the Commitwould be preferable for the Committee tee instructed the Desk to purchase up tocommunicateexplicitlythatitwanted to $100 billion in housing-related GSE federal funds to trade at very low rates; debt and up to $500 billion in agencyaccordingly, the Committee decided to guaranteed MBS by the end of the secannounce a target range for the federal ond quarter of 2009. Members agreed funds rate of 0 to 1⁄ 4 percent. Members that they should not specify the precise also agreed that the statement should timing of these purchases, but that they indicate that weak economic conditions should leave discretion to the Desk to
358 95th Annual Report, 2008 intervene depending on market and availabledataindicatethatconsumerspendbroader economic conditions. The ing,businessinvestment,andindustrialproduction have declined. Financial markets directivealsonotedthattheManagerof remain quite strained and credit conditions the System Open Market Account and tight. Overall, the outlook for economic the Secretary of the FOMC would keep activityhasweakenedfurther. the Committee informed of develop- Meanwhile, inflationary pressures have ments regarding the System’s balance diminished appreciably. In light of the sheet that could affect the attainment of declines in the prices of energy and other the Committee’s statutory objectives. commodities and the weaker prospects for economic activity, the Committee expects At the conclusion of the discussion, the inflation to moderate further in coming Committeevotedtoauthorizeanddirect quarters. theFederalReserveBankofNewYork, The Federal Reserve will employ all until it was instructed otherwise, to ex- availabletoolstopromotetheresumptionof ecute transactions in the System sustainable economic growth and to preserve price stability. In particular, the Com- Account in accordance with the followmittee anticipates that weak economic coning domestic policy directive: ditions are likely to warrant exceptionally The Federal Open Market Committee lowlevelsofthefederalfundsrateforsome seeksmonetaryandfinancialconditionsthat time. will foster price stability and promote sus- The focus of the Committee’s policy tainable growth in output. To further its going forward will be to support the funclong-run objectives, the Committee seeks tioning of financial markets and stimulate conditions in reserve markets consistent the economy through open market operawithfederalfundstradinginarangeof0to tions and other measures that sustain the 1⁄4percent.TheCommitteedirectstheDesk size of the Federal Reserve’s balance sheet to purchase GSE debt and agency- at a high level. As previously announced, guaranteed MBS during the intermeeting over the next few quarters the Federal period with the aim of providing support to Reserve will purchase large quantities of themortgageandhousingmarkets.Thetim- agencydebtandmortgage-backedsecurities ing and pace of these purchases should to provide support to the mortgage and depend on conditions in the markets for housing markets, and it stands ready to such securities and on a broader assessment expand its purchases of agency debt and of conditions in primary mortgage markets mortgage-backed securities as conditions and the housing sector. By the end of the warrant. The Committee is also evaluating second quarter of next year, the Desk is the potential benefits of purchasing longerexpected to purchase up to $100 billion in term Treasury securities. Early next year, housing-related GSE debt and up to $500 theFederalReservewillalsoimplementthe billioninagency-guaranteedMBS.TheSys- TermAsset-BackedSecuritiesLoanFacility temOpenMarketAccountManagerandthe tofacilitatetheextensionofcredittohouse- SecretarywillkeeptheCommitteeinformed holds and small businesses. The Federal ofongoingdevelopmentsregardingtheSys- Reserve will continue to consider ways of tem’s balance sheet that could affect the using its balance sheet to further support attainment over time of the Committee’s creditmarketsandeconomicactivity. objectives of maximum employment and Votes for this action: Mr. Bernanke, pricestability. Mses. Cumming and Duke, Messrs. The vote encompassed approval of Fisher, Kohn, and Kroszner, Ms. Pianthe statement below to be released at alto,Messrs.Plosser,Stern,andWarsh. Votes against this action: None. Ms. 2:15 p.m.: CummingvotedasthealternateforMr. The Federal Open Market Committee Geithner. decidedtodaytoestablishatargetrangefor The Committee also continued its thefederalfundsrateof0to1⁄4percent. SincetheCommittee’slastmeeting,labor discussion of possible refinements to marketconditionshavedeteriorated,andthe the Committee’s approach to projec-
Meetings of the FOMC, December 359 tions that could provide additional Notation Votes informationaboutparticipants’viewsof By notation vote completed on Novemlonger-run sustainable rates of ecober 18, 2008, the Committee unaninomic growth and unemployment and mously approved the minutes of the the measured rates of inflation that FOMCmeetingheldonOctober28–29, would be consistent with price stability, 2008. butitmadenodecisionsregardingthese By notation vote completed on issues. Finally, staff briefed the Com- November 26, 2008, the Committee mittee on the progress of plans for unanimously approved the extension implementing the Federal Reserve’s untilApril30,2009,ofitsauthorization Term Asset-Backed Securities Loan for the Federal Reserve Bank of New Facility, which had initially been York to engage in transactions with priannounced on November 25, 2008. mary dealers through the Term Securi- Itwasagreedthatthenextmeetingof ties Lending Facility, subject to the the Committee would be held on same collateral, interest rate, and other Tuesday–Wednesday, January 27–28, conditionspreviouslyestablishedbythe 2009. Committee. The meeting adjourned at 3:00 p.m. Brian F. Madigan on December 16, 2008. Secretary
361 Litigation During 2008, the Board of Governors and preliminary injunction. On Septemwasapartyinsevenlawsuitsorappeals ber 30, 2008, the plaintiff appealed the filed that year and in four other cases district court’s order to the United pending from previous years, for a total States Court of Appeals for the Second of eleven cases. In 2007, the Board had Circuit (No. 08-4810). beenapartyinatotalofeightcases.As Smithv.Bernanke,No.08-6353(U.S. of December 31, 2008, seven cases Supreme Court, filed September 3, were pending. 2008),wasapetitionforcertiorariseek- Murray v. Board of Governors, No. ing review of the Sixth Circuit’s affir- 08-cv-15147 (E.D. Michigan, filed mance of the dismissal of plaintiff’s December 15, 2008), is a challenge to complaintrelatingtohisconcernsabout the constitutionality of federal expendi- the closure of his bank account. On tures relating to American International October 23, 2008, the petition for cer- Group (AIG). tiorari was denied. Bumgarner v. Paulson, Bernanke, et Jones v. Greenspan, No. 08-5092 al., No. 08-cv-5245 (D. New Jersey, (D.C. Circuit, filed April 21, 2008), is amended complaint filed November 21, anappealofdistrictcourtordersinanem- 2008),challengestheimplementationof ployment discrimination case granting the Economic Emergency Stabilization the Board’s motions for summary judg- Act of 2008. ment and dismissal of the plaintiff’s Bloomberg, L.P. v. Board of Gover- claims (see 402 F. Supp. 2d 294, 445 F. nors, No. 08-cv-9595 (S.D. New York, Supp. 2d 52, and 493 F. Supp. 2d 18). filed November 7, 2008), is a case Interactive Media Entertainment and brought under the Freedom of Informa- Gaming Association, Inc. v. Federal tion Act. Reserve System, No. 07-2625 (D. New Cobble v. Bernanke, No. 3:08-cv- Jersey, filed June 5, 2007), was an 516-S (W.D. Kentucky, filed September action challenging the implementation 29, 2008), was a petition and request of the Unlawful Internet Gambling Enfor injunction barring congressional forcement Act of 2006. On March 5, consideration of federal legislation re- 2008, the court granted the governgarding the credit crisis. On October 6, ment’s motion to dismiss the action. 2008, the district court denied the in- Chandler v. Bernanke, No. 06-2082 junction, and on November 21, 2008, (D. District of Columbia, filed Decemthe court dismissed the action. ber 6, 2006), is an employment dis- Schulz v. United States Federal crimination action. Reserve System, No. 1:08-cv-991 (N.D. Barnes v. Greenspan, No. 04-CV- New York, filed September 18, 2008), 1989 (CKK) (D. District of Columbia, is an action relating to the Federal filed November 15, 2004), was a case Reserve’s loan to American Interna- under the Age Discrimination in Emtional Group. On September 25, 2008, ployment Act. The case was dismissed the district court denied plaintiff’s re- by stipulation of the parties on Novemquest for a temporary restraining order ber 5, 2008.
362 95th Annual Report, 2008 Artis v. Greenspan, No. 01-0400 (D. this action on August 15, 2001. On DistrictofColumbia,filedFebruary22, January 31, 2007, the District Court 2001), is an employment discrimination granted the Board’s renewed motion to action.Anidenticalaction,No.99-2073 dismiss the action. 474 F. Supp. 2d 16. (EGS) (D. District of Columbia, filed The plaintiffs’ motion to alter or amend August 3, 1999), was consolidated with judgment is pending. Á
Federal Reserve System Organization
Federal Reserve System Organization 365 Board of Governors December31,2008 Members Office of the Secretary Termexpires January31, JenniferJ.Johnson,Secretary BenS.Bernanke,Chairman1 ..... 2020 RobertdeV.Frierson,DeputySecretary DonaldL.Kohn,ViceChairman1 .. 2016 MargaretM.Shanks,Associate KevinM.Warsh .................. 2018 Secretary RandallS.Kroszner ............ 2008 ElizabethA.Duke ............... 2012 Division of Officers International Finance Office of Board Members D.NathanSheets,Director MichelleA.Smith,Director ThomasA.Connors,DeputyDirector LarickeD.Blanchard,Assistanttothe Board StevenB.Kamin,DeputyDirector WinthropP.Hambley,SeniorAdviser JosephE.Gagnon,AssociateDirector RosannaPianalto-Cameron,Assistantto MichaelP.Leahy,AssociateDirector theBoard RalphW.Tryon,AssociateDirector DavidW.Skidmore,AssistanttotheBoard TrevorA.Reeve,DeputyAssociate BrianJ.Gross,SpecialAssistanttothe Director BoardforCongressionalLiaison JohnRogers,DeputyAssociateDirector RobertM.Pribble,SpecialAssistantto ChristopherErceg,AssistantDirector theBoardforCongressionalLiaison LindaS.Kole,AssistantDirector Legal Division DaleW.Henderson,SeniorAdviser MarkS.Carey,Adviser ScottG.Alvarez,GeneralCounsel JaneHaltmaier,Adviser RichardM.Ashton,DeputyGeneral Counsel KathleenM.O’Day,DeputyGeneral Counsel Division of StephanieMartin,AssociateGeneral Monetary Affairs Counsel BrianF.Madigan,Director AnnMisback,AssociateGeneralCounsel JamesA.Clouse,DeputyDirector KatherineH.Wheatley,Associate GeneralCounsel DeborahJ.Danker,DeputyDirector KieranJ.Fallon,AssistantGeneral WilliamB.English,DeputyDirector Counsel CherylL.Edwards,SeniorAssociate StephenH.Meyer,AssistantGeneral Director Counsel AndrewT.Levin,AssociateDirector PatriciaA.Robinson,AssistantGeneral WilliamNelson,AssociateDirector Counsel SethB.Carpenter,DeputyAssociate MarkE.VanDerWeide,Assistant Director GeneralCounsel RobertoPerli,DeputyAssociate CaryK.Williams,AssistantGeneral Director Counsel GretchenC.Weinbach,Assistant Director 1. The designations as Chairman and Vice EgonZakrajsek,AssistantDirector Chairman expire on January 31, 2010, and June22,2010,respectively,unlesstheserviceof StephenA.Meyer,SeniorAdviser thesemembersoftheBoardterminatessooner. GretchenC.Weinbach,Adviser
366 95th Annual Report, 2008 Board of Governors—Continued Division of Research NorahM.Barger,DeputyDirector and Statistics PeterJ.Purcell,DeputyDirector DavidJ.Stockton,Director TimothyP.Clark,SeniorAdviser PatrickM.Parkinson,DeputyDirector NidaDavis,SeniorAdviser DavidW.Wilcox,DeputyDirector MichaelFoley,SeniorAdviser MyronL.Kwast,SeniorAssociate CharlesH.Holm,SeniorAdviser Director KevinJ.Clarke,Adviser LawrenceSlifman,SeniorAssociate WilliamF.Treacy,Adviser Director SarkisYoghourtdjian,Adviser J.NellieLiang,AssociateDirector BarbaraJ.Bouchard,AssociateDirector DavidL.Reifschneider,Associate BetsyCross,AssociateDirector Director GeraldA.Edwards,Jr.,Associate JaniceShack-Marquez,Associate Director Director JonD.Greenlee,AssociateDirector WilliamL.WascherIII,Associate JackP.JenningsII,AssociateDirector Director DavidS.Jones,AssociateDirector AlicePatriciaWhite,AssociateDirector ArthurW.Lindo,AssociateDirector GlennB.Canner,SeniorAdviser WilliamC.Schneider,Jr.,Associate MatthewJ.Eichner,SeniorAdviser Director StephenD.Oliner,SeniorAdviser WilliamG.Spaniel,AssociateDirector MichaelS.Gibson,DeputyAssociate CoryannStefansson,AssociateDirector Director MollyS.Wassom,AssociateDirector S.WaynePassmore,DeputyAssociate Director DavidM.Wright,AssociateDirector DanielE.Sichel,DeputyAssociate KevinM.Bertsch,DeputyAssociate Director Director JoyceK.Zickler,DeputyAssociate JamesA.Embersit,DeputyAssociate Director Director MichaelS.Cringoli,AssistantDirector PhilipAquilino,AssistantDirector KarenE.Dynan,AssistantDirector RobertT.Ashman,AssistantDirector DianaHancock,AssistantDirector LisaM.DeFerrari,AssistantDirector MichaelT.Kiley,AssistantDirector AdrienneT.Haden,AssistantDirector MichaelG.Palumbo,AssistantDirector RobertT.Maahs,AssistantDirector RobinA.Prager,AssistantDirector RichardA.NaylorII,AssistantDirector MaryM.West,AssistantDirector NinaA.Nichols,AssistantDirector SandraA.Cannon,AssistantDirector DanaE.Payne,AssistantDirector andChief NancyJ.Perkins,AssistantDirector DanielM.Covitz,AssistantDirectorand SabethI.Siddique,AssistantDirector Chief EricM.Engen,AssistantDirectorand Division of Consumer Chief and Community Affairs DavidE.Lebow,AssistantDirectorand Chief SandraF.Braunstein,Director GlennE.Loney,DeputyDirector Division of Banking Supervision AnnaAlvarez-Boyd,AssociateDirector and Regulation LeonardChanin,AssociateDirector RogerT.Cole,Director TondaE.Price,AssociateDirector DeborahP.Bailey,DeputyDirector MaryannF.Hunter,SeniorAdviser
Federal Reserve System Organization 367 Board of Governors—Continued AllenJ.Fishbein,Adviser ToddA.Glissman,SeniorAssociate TimothyR.Burniston,AssistantDirector Director JosephFirschein,AssistantDirector BillyJ.Sauls,SeniorAssociateDirector SuzanneG.Killian,AssistantDirector ChristineM.Fields,AssociateDirector JamesA.Michaels,AssistantDirector WilliamL.Mitchell,AssociateDirector JamesR.Riesz,AssociateDirector ElaineM.Boutilier,DeputyAssociate Division of Director Reserve Bank Operations CharlesF.O’Malley,DeputyAssociate and Payment Systems Director LouiseL.Roseman,Director KeithF.Bates,AssistantDirector DonaldV.Hammond,DeputyDirector JeffreyR.Peirce,AssistantDirector JeffreyC.Marquardt,DeputyDirector ChristopherJ.Suma,AssistantDirector PaulW.Bettge,SeniorAdviser TaraC.Tinsley-Pelitere,Assistant KennethD.Buckley,AssociateDirector Director DorothyLaChapelle,AssociateDirector TheresaA.Trimble,AssistantDirector JeffJ.Stehm,AssociateDirector CarolA.Sanders,Adviser JackK.WaltonII,AssociateDirector Division of GregoryL.Evans,DeputyAssociate Director Information Technology LisaK.Hoskins,DeputyAssociate MaureenT.Hannan,Director Director GearyL.Cunningham,DeputyDirector SusanV.Foley,AssistantDirector SharonL.Mowry,DeputyDirector MichaelJ.Lambert,AssistantDirector WayneA.Edmondson,AssociateDirector MichaelJ.Stan,AssistantDirector LisaM.Bell,AssistantDirector LeonardJ.Tanis,AssistantDirector TillenaG.Clark,AssistantDirector GlennS.Eskow,AssistantDirector Office of Staff Director PoKyungKim,AssistantDirector for Management SusanF.Marycz,AssistantDirector RaymondRomero,AssistantDirector StephenR.Malphrus,StaffDirectorfor Management KofiA.Sapong,AssistantDirector CharlesS.Struckmeyer,DeputyStaff Director Office of Inspector General SheilaClark,EqualEmployment ElizabethA.Coleman,Inspector OpportunityProgramsDirector General LynnS.Fox,SeniorAdviser AnthonyJ.Castaldo,AssistantInspector AdrienneD.Hurt,Adviser General LaurenceA.Froehlich,Assistant InspectorGeneral Management Division AndrewPatchan,Jr.,AssistantInspector H.FayPeters,Director General DonaldA.Spicer,DeputyDirector HarveyWitherspoon,AssistantInspector MichellC.Clark,DeputyDirector General
368 95th Annual Report, 2008 Federal Open Market Committee December31,2008 Members Officers BenS.Bernanke,Chairman,Boardof BrianF.Madigan,Secretaryand Governors Economist TimothyF.Geithner,ViceChairman, DeborahJ.Danker,DeputySecretary President,FederalReserveBankof MichelleA.Smith,AssistantSecretary NewYork DavidW.Skidmore,AssistantSecretary ElizabethA.Duke,BoardofGovernors ScottG.Alvarez,GeneralCounsel RichardW.Fisher,President,Federal ThomasC.Baxter,Jr.,DeputyGeneral ReserveBankofDallas Counsel DonaldL.Kohn,BoardofGovernors RichardM.Ashton,AssistantGeneral RandallS.Kroszner,Boardof Counsel Governors D.NathanSheets,Economist SandraPianalto,President,Federal DavidJ.Stockton,Economist ReserveBankofCleveland ThomasA.Connors,AssociateEconomist CharlesI.Plosser,President,Federal ReserveBankofPhiladelphia WilliamB.English,AssociateEconomist GaryH.Stern,President,Federal StevenB.Kamin,AssociateEconomist ReserveBankofMinneapolis LorettaJ.Mester,AssociateEconomist KevinM.Warsh,BoardofGovernors ArthurJ.Rolnick,AssociateEconomist HarveyRosenblum,AssociateEconomist LawrenceSlifman,AssociateEconomist Alternate Members MarkS.Sniderman,AssociateEconomist ChristineM.Cumming,FirstVice JosephS.Tracy,AssociateEconomist President,FederalReserveBankof DavidW.Wilcox,AssociateEconomist NewYork CharlesL.Evans,President,Federal WilliamC.Dudley,Manager,System OpenMarketAccount ReserveBankofChicago JeffreyM.Lacker,President,Federal The Federal Open Market Committee is ReserveBankofRichmond madeupofthesevenmembersoftheBoard DennisP.Lockhart,President,Federal of Governors; the president of the Federal ReserveBankofAtlanta ReserveBankofNewYork;andfourofthe JanetL.Yellen,President,Federal remaining eleven Reserve Bank presidents, ReserveBankofSanFrancisco who serve one-year terms on a rotating basis.During2008theFederalOpenMarket Committee held eight regularly scheduled meetings and six conference calls (see “Minutes of Federal Open Market CommitteeMeetings”inthisvolume).
Federal Reserve System Organization 369 Federal Advisory Council December31,2008 Members District 10—David C. Boyles, Chairman and Director, Columbine Capital Corp., District 1—Ellen Alemany, Chief Exec- BuenaVista,Colo. utive Officer, RBS Americas and Cit- District 11—James Goudge, Chairman izensFinancialGroup,Greenwich,Conn. and Chief Executive Officer, Broadway District 2—Robert P. Kelly, Chairman Bank,SanAntonio,Texas and Chief Executive Officer, The Bank District 12—Russell Goldsmith, ChairofNewYorkMellon,NewYork,N.Y. man and Chief Executive Officer, City District3—R.ScottSmith,Jr. Chairman, NationalBank,BeverlyHills,Calif. President, and Chief Executive Officer, Fulton Financial Corporation, Lancaster, Ohio Officers District 4—Henry L. Meyer III, Chair- WilliamDowne,President man, President, and Chief Executive LyleR.Knight,VicePresident Officer,KeyCorp,Cleveland,Ohio JamesE.Annable,Secretary District 5—Kenneth D. Lewis, Chairman, President, and Chief Executive Officer, The Federal Advisory Council—a statutory Bank of America Corporation, Charlotte, body established under the Federal Reserve N.C. Act—consults with, and advises, the Board District 6—Richard G. Hickson, Chair- of Governors on all matters within the man and Chief Executive Officer, Board’s jurisdiction. It is composed of one TrustmarkCorporation,Jackson,Miss. representative from each Federal Reserve District 7—William Downe, President District,chosenbytheReserveBankinthat and Chief Executive Officer, Bank of District. The Federal Reserve Act requires Montreal,Chicago,Ill. the council to meet in Washington, D.C., at District 8—Lewis F. Mallory, Jr., Chair- least four times a year. In 2008, it met on man and Chief Executive Officer, February 14–15, May 1–2, September 4–5, Cadence Financial Corporation, Stark- and December 4–5. The council met with ville,Miss. the Board on February 15, May 2, September5,andDecember5,2008. District 9—Lyle R. Knight, President and Chief Executive Officer, First InterstateBancSystem,Inc.,Billings,Mont.
370 95th Annual Report, 2008 Consumer Advisory Council December31,2008 Members AnnaMcDonaldRentschler,VicePresident, BSA Officer, Central Bancompany, Dorothy Bridges, President and Chief JeffersonCity,Mo. ExecutiveOfficer, CityFirstBankofDC, Washington,D.C. Kevin Rhein, Division President, Wells FargoCardServices,Minneapolis,Minn. Michael Calhoun, President, Center for ResponsibleLending,Durham,N.C. Faith Arnold Schwartz, Executive Director, Hope Now Alliance, The Fi- Alan Cameron, President and Chief nancial Services Roundtable, Wash- Executive Officer, Idaho Credit Union ington,D.C. League,Boise,Idaho Edward Sivak, Director of Policy and Jason Engel, Vice President and Chief Evaluation, Enterprise Corporation of the Regulatory Counsel, Experian, Costa Delta,Jackson,Miss. Mesa,Calif. Shanna Smith, President and Chief Exec- Kathleen Engel, Associate Professor of utive Officer, National Fair Housing Law, Cleveland-Marshall College of Alliance,Washington,D.C. Law,Cleveland,Ohio H. Cooke Sunoo, Director, Asian Pacific Joseph Falk, Consultant, Akerman Senter- Islander Small Business Program, Los fitt,Miami,Fla. Angeles,Calif. Louise Gissendaner, Senior Vice Pres- Jennifer Tescher, Director, Center for ident, Director of Community Devel- Financial Services Innovation, Chicago, opment, Fifth Third Bank, Cleveland, Ill. Ohio Stergios Theologides, Executive Vice Greta Harris, Vice President-Southeast President, General Counsel, Saxon Region, Local Initiatives Support Cor- Mortgage,Irving,Texas poration,Richmond,Va. Linda Tinney, Vice President, Community Patricia A. Hasson, President, Consumer Development, West Metro Region Credit Counseling Service of Delaware Manager,U.S.Bank,Denver,Colo. Valley,Inc.,Philadelphia,Pa. Luz Urrutia, Chief Executive Officer and Thomas P. James, Senior Assistant Attor- President, El Banco de Nuestra Comunney General-Consumer Counsel, Office idad,Roswell,Ga. of the Illinois Attorney General, Con- Alan White, Assistant Professor, ValsumerFraudBureau,Chicago,Ill. paraiso University Law School, Valpar- Lorenzo Littles, Dallas Director, Enteraiso,Ind. prise Community Partner, Inc., Dallas, Texas Officers Sarah Ludwig, Executive Director, Neigh- Tony T. Brown, Chair, President and borhood Economic Development Advo- Chief Executive Officer, Uptown ConcacyProject,NewYork,N.Y. sortium,Inc.,Cincinnati,Ohio Mark K. Metz, Senior Vice President and Edna Sawady, Vice Chair, Economic Deputy General Counsel, Wachovia Cor- Inclusion Consultant, New York, New poration,Charlotte,N.C. York Lance Morgan, President, Ho-Chunk, Incorporated, Winnebago Tribe of Ne- The Consumer Advisory Council—a statubraska,Winnebago,Neb. tory body established pursuant to the 1976 amendments to the Equal Credit Opportu- Saurab Narain, Chief Fund Advisor, nity Act—advises the Board of Governors National Community Investment Fund, onconsumerfinancialservices.Itsmembers, Chicago,Ill. who are appointed by the Board, are aca- Joshua Peirez, Chief Payment System demics,stateandlocalgovernmentofficials, Integrity Officer, MasterCard Worldwide, and representatives of the financial services Purchase,N.Y. industry and of consumer and community RonaldPhillips,President,CoastalEnter- interests. In 2008, the council met with the prises,Inc.,Wiscasset,Maine BoardonMarch6,June19,andOctober23.
Federal Reserve System Organization 371 Thrift Institutions Advisory Council December31,2008 Members Thomas C. Meuser, Chairman and Chief Executive Officer, El Dorado Savings F. Edward Broadwell, Jr., Chairman Bank,Placerville,Calif. and Chief Executive Officer, HomeTrust F. Weller Meyer, Vice Chairman of the Bank,Asheville,N.C. Board of Directors, Acacia Federal Robert M. Clements, Chairman and SavingsBank,FallsChurch,Va. Chief Executive Officer, EverBank FinancialCorp.,Jacksonville,Fla. William A. Donius, Chairman and Chief Officer Executive Officer, Pulaski Bank, St. F.WellerMeyer,President Louis,Mo. Joseph R. Ficalora, Chairman, President, The Thrift Institutions Advisory Council and Chief Executive Officer, New York was established by the Board of Governors CommunityBancorp,Westbury,N.Y. to consult with, and advise, the Board on Curtis L. Hage, Chairman and Chief Ex- issuespertainingtothethriftindustryandon ecutive Officer, Home Federal Bank, other matters within the Board’s jurisdic- SiouxFalls,S.D. tion.Itsmembers,whoareappointedbythe Christopher T. Jillson, President and Board, represent credit unions, savings and Chief Executive Officer, Sandia Lab- loan associations, and savings banks. In oratory Federal Credit Union, Albu- 2008, the council met with the Board on querque,N.M. February29,June27,andDecember19. Peter L. Judkins, President and Chief Executive Officer, Franklin Savings Bank, Farmington,Maine Harriet May, President and Chief Executive Officer, Government Employees CreditUnion,ElPaso,Texas
372 95th Annual Report, 2008 Federal Reserve Banks and Branches December31,2008 Officers Chair1 President Officer BANKorBranch DeputyChair FirstVicePresident inchargeofBranch BOSTON2 .............. LisaM.Lynch EricS.Rosengren HenriA.Termeer PaulM.Connolly NEWYORK2 .......... StephenFriedman TimothyF.Geithner DenisM.Hughes ChristineM. Cumming PHILADELPHIA ....... WilliamF.Hecht CharlesI.Plosser CharlesP.Pizzi WilliamH.Stone,Jr. CLEVELAND .......... TannyB.Crane SandraPianalto AlfredM.Rankin,Jr. R.ChrisMoore Cincinnati ............... JamesM.Anderson BarbaraB.Henshaw Pittsburgh ............... SunilT.Wadhwani RobertB.Schaub RICHMOND ........... ThomasJ.Mackell,Jr. JeffreyM.Lacker LemuelE.Lewis SarahG.Green Baltimore ............... CynthiaCollinsAllner DavidE.Beck Charlotte ................ ClaudeC.Lilly JeffreyS.Kane ATLANTA............... V.LarkinMartin DennisP.Lockhart D.ScottDavis PatrickK.Barron Birmingham............. JamesH.Sanford JuliusWeyman Jacksonville.............. FassilGabremariam ChristopherL.Oakley Miami.................... EdwinA.Jones,Jr. JuandelBusto Nashville................. RichardQ.Ford LeeC.Jones NewOrleans............. ChristelC.Slaughter RobertJ.Musso CHICAGO2 ............. JohnA.Canning,Jr. CharlesL.Evans WilliamC.Foote GordonWerkema Detroit................... TimothyM. RobertWiley Manganello ST.LOUIS............... IrlF.Engelhardt WilliamPoole StevenH.Lipstein DavidA.Sapenaro LittleRock............... CalMcCastlain RobertA.Hopkins Louisville................ GaryA.Ransdell MariaGerwing Hampton Memphis................. NickClark MarthaPerineBeard MINNEAPOLIS......... JamesJ.Hynes GaryH.Stern JohnW.Marvin JamesM.Lyon Helena................... DeanFolkvord R.PaulDrake
Federal Reserve System Organization 373 Officers—Continued Chair1 President Officer BANKorBranch DeputyChair FirstVicePresident inchargeofBranch KANSASCITY......... LuM.Cordova ThomasM.Hoenig PaulDeBruce RichardK.Rasdall,Jr. Denver................... KristyA.Schloss AlanBarkema(Acting BranchExecutive) OklahomaCity.......... RichardK.Ratcliffe ChadWilkerson Omaha................... CharlesR.Hermes JasonHenderson DALLAS................ JamesT.Hackett RichardW.Fisher HerbKelleher HelenE.Holcomb ElPaso................... RonC.Helm RobertW.Gilmer Houston.................. NancyT.Chang RobertSmithIII SanAntonio............. J.DanBates BlakeHastings SANFRANCISCO2.... DavidK.Y.Tang JanetL.Yellen T.GaryRogers JohnF.Moore LosAngeles............. AndrewJ.Sale MarkL.Mullinix Portland.................. JamesH.Rudd MaryE.Lee SaltLakeCity........... ClarkD.Ivory AndreaP.Wolcott Seattle.................... HelviK.Sandvik MarkA.Gould 1. ThechairmanofaFederalReserveBankserves,by Jersey;DesMoines,Iowa;MidwayatBedfordPark,Illistatute,asFederalReserveagent. nois;andPhoenix,Arizona. 2. Additional offices of these Banks are located at Windsor Locks, Connecticut; East Rutherford, New Conference of Chairs Conference of Presidents ThechairsoftheFederalReserveBanksare ThepresidentsoftheFederalReserveBanks organized into the Conference of Chairs, are organized into the Conference of Presiwhichmeetstoconsidermattersofcommon dents, which meets periodically to consider interest and to consult with and advise the matters of common interest and to consult Board of Governors. Such meetings, also withandadvisetheBoardofGovernors. attended by the deputy chairs, were held in Sandra Pianalto, president of the Federal Washington, D.C., on May 28 and 29, and Reserve Bank of Cleveland, served as chair onDecember3and4,2008. of the conference in 2008, and Jeffrey M. The members of the executive committee Lacker, president of the Federal Reserve of the Conference of Chairs during 2008 Bank of Richmond, served as vice chair. were, V. Larkin Martin, chair; Lisa M. Gregory L. Stefani, of the Federal Reserve Lynch, vice chair; and David K.Y. Tang, Bank of Cleveland, served as secretary, and member. Sandra Tormoen, of the Federal Reserve On December 4, the conference elected Bank of Richmond, served as assistant its executive committee for 2009, naming secretary. LisaM.Lynchaschair;LemuelE.Lewisas On October 21, 2008, the conference vice chair; and James J. Hynes as the third elected Jeffrey M. Lacker as chair for member. 2009−10 and Richard W. Fisher, president of the Federal Reserve Bank of Dallas, as vicechair.
374 95th Annual Report, 2008 Conference of be officers, directors, or employees of any First Vice Presidents bankorbankholdingcompany.Inaddition, ClassCdirectorsmaynotbestockholdersof The Conference of First Vice Presidents of anybankorbankholdingcompany. theFederalReserveBankswasorganizedin For the election of Class A and Class B 1969 to meet periodically for the consider- directors,thememberbanksofeachFederal ationofoperationsandothermatters. Reserve District are classified into three JamesM.Lyon,firstvicepresidentofthe groups.Eachgroup,whichcomprisesbanks Federal Reserve Bank of Minneapolis, with similar capitalization, elects one Class served as chair of the conference in 2008, A director and one Class B director. Annuand R. Chris Moore, first vice president of ally,theBoardofGovernorsdesignatesone the Federal Reserve Bank of Cleveland, oftheClassCdirectorsaschairoftheboard served as vice chair. Sheryl L. Britsch, of and Federal Reserve agent of each District the Federal Reserve Bank of Minneapolis, Bank, and it designates another Class C served as secretary, and Diana C. Starks, of directorasdeputychair. the Federal Reserve Bank of Cleveland, FederalReserveBrancheshaveeitherfive servedasassistantsecretary. or seven directors, a majority of whom are appointed by the parent Federal Reserve Directors Bank;theothersareappointedbytheBoard of Governors. One of the directors ap- EachFederalReserveBankhasaninemem- pointedbytheBoardisdesignatedannually ber board: three Class A and three Class B as chair of the board of that Branch in a directors, who are elected by the stockhold- manner prescribed by the parent Federal ingmemberbanks,andthreeClassCdirec- ReserveBank. tors, who are appointed by the Board of The chairs and deputy chairs of the Governors. Reserve Bank boards of directors, and the ClassAdirectorsrepresentthestockhold- chairsoftheBranches,arelistedinthepreing member banks in each Federal Reserve cedingtable,titled‘‘Officers.’’Thedirectors District. Class B and Class C directors rep- of the Banks and Branches are listed in the resent the public and are chosen with due, following table. For each director, the class butnotexclusive,considerationtotheinter- ofdirectorship,thedirector’sprincipalorgaests of agriculture, commerce, industry, ser- nizational affiliation, and the date the direcvices, labor, and consumers; they may not tor’stermexpiresareshown.
Federal Reserve System Organization 375 Directors December31,2008 BankorBranch,Category Termexpires Title Name Dec.31 DISTRICT1—BOSTON ReserveBank ClassA KathleenC.Marcum ....... PresidentandChiefExecutiveOfficer,Millbury 2008 NationalBank,Millbury,Massachusetts DavidA.Lentini ........... Chairman,President,andChiefExecutiveOfficer, 2009 TheConnecticutBankandTrustCompany,Hartford, Connecticut JamesC.Smith............. ChairmanandChiefExecutiveOfficer,Webster 2010 Bank,N.A.,Waterbury,Connecticut ClassB MichaelT.Wedge.......... FormerPresidentandChiefExecutiveOfficer, 2008 BJ’sWholesaleClub,Inc.,Natick,Massachusetts StuartH.Reese............. ChairmanandChiefExecutiveOfficer, 2009 MassMutualFinancialGroup,Springfield, Massachusetts RobertK.Kraft............. ChairmanandChiefExecutiveOfficer,TheKraft 2010 Group,Foxborough,Massachusetts ClassC HenriA.Termeer........... Chairman,President,andChiefExecutiveOfficer, 2008 GenzymeCorporation,Cambridge,Massachusetts LisaM.Lynch.............. DeanandProfessorofEconomics,TheHellerSchool 2009 forSocialPolicyandManagement,Brandeis University,Waltham,Massachusetts KirkA.Sykes .............. President,UrbanStrategyAmericaFund,L.P., 2010 Boston,Massachusetts DISTRICT2—NEWYORK ReserveBank ClassA CharlesV.Wait............. President,ChiefExecutiveOfficer,andChairman, 2008 TheAdirondackTrustCompany,SaratogaSprings, NewYork JamesDimon ............... ChairmanandChiefExecutiveOfficer,JPMorgan 2009 Chase&Co.,NewYork,NewYork RichardL.Carrión ......... Chairman,PresidentandChiefExecutiveOfficer, 2010 Popular,Inc.,SanJuan,PuertoRico ClassB JeffreyR.Immelt........... ChairmanandChiefExecutiveOfficer,General 2008 ElectricCompany,Fairfield,Connecticut IndraK.Nooyi ............. ChairmanandChiefExecutiveOfficer,PepsiCo,Inc., 2009 Purchase,NewYork Vacancy..................... 2010
376 95th Annual Report, 2008 Directors—Continued BankorBranch,Category Termexpires Title Name Dec.31 ClassC DenisM.Hughes........... President,NewYorkStateAFL-CIO,NewYork, 2008 NewYork LeeC.Bollinger............ President,ColumbiaUniversity,NewYork,NewYork 2009 StephenFriedman .......... Chairman,StonePointCapital,LLC,NewYork, 2010 NewYork DISTRICT3—PHILADELPHIA ReserveBank ClassA JohnG.Gerlach ............ President,PoconoCommunityBank,Stroudsburg, 2008 Pennsylvania AaronL.Groff,Jr. ......... Chairman,President,andChiefExecutiveOfficer, 2009 EphrataNationalBank,Ephrata,Pennsylvania TedT.Cecala............... ChairmanandChiefExecutiveOfficer,Wilmington 2010 TrustCorporation,Wilmington,Delaware ClassB MichaelF.Camardo........ RetiredExecutiveVicePresident,LockheedMartin 2008 ITS,CherryHill,NewJersey GarryL.Maddox........... PresidentandChiefExecutiveOfficer,A.Pomerantz& 2009 Company,Philadelphia,Pennsylvania KeithS.Campbell.......... Chairman,ManningtonMills,Inc.,Salem,NewJersey 2010 ClassC CharlesP.Pizzi............. PresidentandChiefExecutiveOfficer,TastyBaking 2008 Company,Philadelphia,Pennsylvania WilliamF.Hecht ........... RetiredChairman,President,andChiefExecutive 2009 Officer,PPLCorporation,Allentown,Pennsylvania JeremyNowak.............. PresidentandChiefExecutiveOfficer, 2010 TheReinvestmentFund,Philadelphia,Pennsylvania DISTRICT4—CLEVELAND ReserveBank ClassA BickWeissenrieder......... ChairmanandChiefExecutiveOfficer,HockingValley 2008 Bank,Athens,Ohio C.DanielDeLawder ....... ChairmanandChiefExecutiveOfficer,ParkNational 2009 Bank,Newark,Ohio JamesE.Rohr .............. ChairmanandChiefExecutiveOfficer,ThePNC 2010 FinancialServicesGroup,Inc.,Pittsburgh, Pennsylvania ClassB Vacancy..................... 2008 V.AnnHailey .............. RetiredExecutiveVicePresident,Corporate 2009 Development,LimitedBrands,Columbus,Ohio LesC.Vinney .............. SeniorAdvisorandImmediatePastPresident 2010 andChiefExecutiveOfficer,STERISCorporation, Mentor,Ohio
Federal Reserve System Organization 377 BankorBranch,Category Termexpires Title Name Dec.31 ClassC AlfredM.Rankin,Jr. ...... Chairman,President,andChiefExecutiveOfficer, 2008 NACCOIndustries,Inc.,Cleveland,Ohio TannyB.Crane............. PresidentandChiefExecutiveOfficer,CraneGroup 2009 Company,Columbus,Ohio RoyW.Haley .............. ChairmanandChiefExecutiveOfficer,WESCO 2010 International,Inc.,Pittsburgh,Pennsylvania CincinnatiBranch Appointedbythe FederalReserveBank JanetB.Reid ............... PrincipalPartner,GlobalLeadManagement 2008 Consulting,Cincinnati,Ohio GlennD.Leveridge ........ President,WinchesterMarket,CentralBankandTrust 2008 Company,Winchester,Kentucky CharlotteW.Martin ........ PresidentandChiefExecutiveOfficer,GreatLakes 2009 BankersBank,Gahanna,Ohio PaulR.Poston.............. Director,GreatLakesDistrict,NeighborWorkst 2010 America,Cincinnati,Ohio Appointedbythe BoardofGovernors JamesM.Anderson ........ PresidentandChiefExecutiveOfficer,Cincinnati 2008 Children’sHospitalMedicalCenter,Cincinnati, Ohio DanielB.Cunningham..... PresidentandChiefExecutiveOfficer,Long-Stanton 2009 ManufacturingCompanies,Cincinnati,Ohio PeterS.Strange ............ ChairmanandChiefExecutiveOfficer,Messer 2010 ConstructionCompany,Cincinnati,Ohio PittsburghBranch Appointedbythe FederalReserveBank HowardW.HannaIII ...... ChairmanandChiefExecutiveOfficer,HowardHanna 2008 RealEstateServices,Pittsburgh,Pennsylvania GeorgianaN.Riley......... PresidentandChiefExecutiveOfficer,TIGG 2008 Corporation,Bridgeville,Pennsylvania MargaretIrvineWeir....... President,NexTierBank,Butler,Pennsylvania 2009 ToddD.Brice .............. ChiefExecutiveOfficer,S&TBancorp,Inc., 2010 Indiana,Pennsylvania Appointedbythe BoardofGovernors SunilT.Wadhwani ......... Co-Chairman,iGATECorporation,Pittsburgh, 2008 Pennsylvania RobertA.Paul ............. ChairmanandChiefExecutiveOfficer,Ampco- 2009 PittsburghCorporation,Pittsburgh,Pennsylvania GlennR.Mahone .......... PartnerandAttorneyatLaw,ReedSmithLLP, 2010 Pittsburgh,Pennsylvania
378 95th Annual Report, 2008 Directors—Continued BankorBranch,Category Termexpires Title Name Dec.31 DISTRICT5—RICHMOND ReserveBank ClassA HunterR.Hollar ........... PresidentandChiefExecutiveOfficer,SandySpring 2008 BancorpandSandySpringBank,Olney,Maryland DwightV.Neese ........... Director,President,andChiefExecutiveOfficer, 2009 ProvidentCommunityBankandProvident CommunityBancshares,Inc.,RockHill, SouthCarolina RobertH.Gilliam,Jr. ...... PresidentandChiefExecutiveOfficer,TheFirst 2010 NationalBankofAltavista,Altavista,Virginia ClassB DanaS.Boole .............. PresidentandChiefExecutiveOfficer,Community 2008 AffordableHousingEquityCorporation,Raleigh, NorthCarolina KennethR.Sparks ......... PresidentandChiefExecutiveOfficer,KenSparks 2009 AssociatesLLC,WhiteStone,Virginia PatrickC.Graney,III ...... President,PetroleumProducts,Inc.,Belle, 2010 WestVirginia ClassC ThomasJ.Mackell,Jr. .... President,AssociationofBenefitAdministrators, 2008 Warrenton,Virginia LemuelE.Lewis ........... President,LocalWeather.com,Suffolk,Virginia 2009 MargaretE.McDermid .... SeniorVicePresidentandChiefInformationOfficer, 2010 DominionResources,Inc.,Richmond,Virginia BaltimoreBranch Appointedbythe FederalReserveBank BianaJ.Arentz ............. PresidentandChiefExecutiveOfficer,Hemingway’s 2008 Inc.,Stevensville,Maryland JamesT.Brady ............. ManagingDirector–Mid-Atlantic,Ballantrae 2009 International,Ltd.,Ijamsville,Maryland MichaelL.Middleton ...... ChairmanandPresident,CommunityBankof 2009 Tri-County,Waldorf,Maryland WilliamB.Grant........... ChairmanandChiefExecutiveOfficer,FirstUnited 2010 Corp.andFirstUnitedBank&Trust,Oakland, Maryland Appointedbythe BoardofGovernors CynthiaCollinsAllner ..... Principal,Miles&StockbridgeP.C.,Baltimore, 2008 Maryland RonaldBlackwell .......... ChiefEconomist,AFL-CIO,Washington,D.C. 2009 WilliamR.Roberts......... President–VerizonMaryland/DC,VerizonMaryland 2010 Inc.,Baltimore,Maryland
Federal Reserve System Organization 379 BankorBranch,Category Termexpires Title Name Dec.31 CharlotteBranch Appointedbythe FederalReserveBank JamesH.Speed,Jr. ........ PresidentandChiefExecutiveOfficer,NorthCarolina 2008 MutualLifeInsuranceCompany,Durham, NorthCarolina MichaelC.Miller .......... ChairmanandPresident,FNBUnitedCorp.and 2009 CommunityONEBank,N.A.,Asheboro, NorthCarolina Vacancy..................... 2009 BarryL.Slider ............. PresidentandChiefExecutiveOfficer,FirstSouth 2010 Bancorp,Inc.andFirstSouthBank,Spartanburg, SouthCarolina Appointedbythe BoardofGovernors LindaL.Dolny ............. President,PMLAssociates,Inc.,Greenwood, 2008 SouthCarolina DavidJ.Zimmerman....... President,SouthernShows,Inc.,Charlotte, 2009 NorthCarolina ClaudeC.Lilly ............. Dean,ClemsonUniversity,CollegeofBusinessand 2010 BehavioralScience,Clemson,SouthCarolina DISTRICT6—ATLANTA ReserveBank ClassA JamesM.WellsIII ......... ChairmanandChiefExecutiveOfficer,SunTrust 2008 Banks,Inc.,Atlanta,Georgia RudyE.Schupp ............ PresidentandChiefExecutiveOfficer,1stUnited 2009 Bank,WestPalmBeach,Florida JamesH.McKillopIII ..... PresidentandChiefExecutiveOfficer,Independent 2010 Bankers’BankofFlorida,LakeMary,Florida ClassB EgbertL.J.Perry ........... ChairmanandChiefExecutiveOfficer,TheIntegral 2008 Group,LLC,Atlanta,Georgia TeriG.Fontenot............ PresidentandChiefExecutiveOfficer,Woman’s 2009 Hospital,BatonRouge,Louisiana LeeM.Thomas ............ Chairman,President,andChiefExecutiveOfficer, 2010 Rayonier,Jacksonville,Florida ClassC V.LarkinMartin ........... ManagingPartner,MartinFarm,Courtland,Alabama 2008 D.ScottDavis.............. ChairmanandChiefExecutiveOfficer,United 2009 ParcelService,Atlanta,Georgia CarolB.Tomé.............. ChiefFinancialOfficerandExecutiveVicePresident, 2010 TheHomeDepot,Atlanta,Georgia BirminghamBranch Appointedbythe FederalReserveBank JohnH.HolcombIII ....... ViceChairman,RBCBank(USA),Birmingham, 2008 Alabama
380 95th Annual Report, 2008 Directors—Continued BankorBranch,Category Termexpires Title Name Dec.31 SamuelF.Dodson.......... Consultant,InternationalUnionofOperating 2009 Engineers–Local312,Birmingham,Alabama BobbyA.Bradley .......... ManagingPartner,LewisProperties,LLCand 2009 AndersonInvestments,LLC,Huntsville,Alabama C.RichardMoore,Jr. ...... Chairman,PresidentandChiefExecutiveOfficer, 2010 PeoplesSouthernBank,Clanton,Alabama Appointedbythe BoardofGovernors JamesH.Sanford........... ChairmanoftheBoard,HOMEPlaceFarms,Inc., 2008 Prattville,Alabama F.MichaelReilly ........... Chairman,PresidentandChiefExecutiveOfficer, 2009 Randall-ReillyPublishingCo.,Tuscaloosa,Alabama MaryamB.Head ........... President,RamToolandSupplyCompany,Inc., 2010 Birmingham,Alabama JacksonvilleBranch Appointedbythe FederalReserveBank AlanRowe.................. PresidentandChiefExecutiveOfficer,First 2008 CommercialBankofFlorida,Orlando, Florida WendellA.Sebastian ...... PresidentandChiefExecutiveOfficer,GTEFederal 2009 CreditUnion,Tampa,Florida EllenS.Titen............... President,E.T.Consultants,WinterPark,Florida 2009 JackB.Healan,Jr. ........ President,AmeliaIslandPlantationCompany,Amelia 2010 Island,Florida Appointedbythe BoardofGovernors FassilGabremariam ........ PresidentandFounder,US–AfricaFreeEnterprise 2008 EducationFoundation,Tampa,Florida LindaH.Sherrer ........... PresidentandChiefExecutiveOfficer,Prudential 2009 NetworkRealty,Jacksonville,Florida H.BrittLandrum,Jr. ...... PresidentandChiefExecutiveOfficer,Landrum 2010 HumanResourceCompanies,Inc.,Pensacola, Florida MiamiBranch Appointedbythe FederalReserveBank ThomasH.Shea............ ChiefExecutiveOfficer,FloridaCaribbeanRegion, 2008 RightManagement,FortLauderdale,Florida WalterBanks ............... President,LagoMarResortandClub,FortLauderdale, 2008 Florida LeonardL.Abess .......... Chairman,President,andChiefExecutiveOfficer,City 2009 NationalBankofFlorida,Miami,Florida DennisS.Hudson,III ...... ChairmanandChiefExecutiveOfficer,Seacoast 2010 BankingCorporationofFlorida,Stuart,Florida
Federal Reserve System Organization 381 BankorBranch,Category Termexpires Title Name Dec.31 Appointedbythe BoardofGovernors EdwinA.Jones,Jr. ........ President,AngusInvestments,Inc.,PortSt.Lucie, 2008 Florida MarvinO’Quinn............ PresidentandChiefExecutiveOfficer,JacksonHealth 2009 System,Miami,Florida GayRebelThompson ...... PresidentandChiefExecutiveOfficer,Cement 2010 Industries,Inc.,FortMyers,Florida NashvilleBranch Appointedbythe FederalReserveBank MichaelB.Swain .......... Chairman,FirstNationalBank,Oneida,Tennessee 2008 DanielA.Gaudette......... RetiredSeniorVicePresident,NorthAmerican 2009 ManufacturingandSupplyChainManagement, NissanNorthAmerica,Inc.,Smyrna,Tennessee CordiaW.Harrington ...... PresidentandChiefExecutiveOfficer,TennesseeBun 2009 Company,Nashville,Tennessee PaulG.Willson ............ ChairmanandChiefExecutiveOfficer,Citizens 2010 NationalBank,Athens,Tennessee Appointedbythe BoardofGovernors RichardQ.Ford ............ President,HylantGroupofNashville,Nashville, 2008 Tennessee DavidWilliamsII .......... ViceChancellorandGeneralCounsel,Vanderbilt 2009 University,Nashville,Tennessee DebraK.London........... PresidentandChiefExecutiveOfficer,Mercy 2010 HealthPartners,Knoxville,Tennessee NewOrleansBranch Appointedbythe FederalReserveBank R.KingMilling ............ ViceChairman,WhitneyHoldingCorporation& 2008 WhitneyNationalBank,NewOrleans,Louisiana MatthewG.Stuller,Sr...... ChairmanandChiefExecutiveOfficer,Stuller,Inc., 2009 Lafayette,Louisiana AnthonyJ.Topazi.......... PresidentandChiefExecutiveOfficer,Mississippi 2009 Power,Gulfport,Mississippi GerardR.Host ............. PresidentandChiefOperatingOfficer,Trustmark 2010 NationalBank,Jackson,Mississippi Appointedbythe BoardofGovernors EarlL.Shipp ............... GroupPresident–BasicChemicals,TheDowChemical 2008 Company,Dubai,UnitedArabEmirates RobertS.Boh .............. PresidentandChiefExecutiveOfficer,BohBros. 2009 ConstructionCo.,LLC,NewOrleans,Louisiana ChristelC.Slaughter ....... Partner,SSAConsultants,LLC,BatonRouge, 2010 Louisiana
382 95th Annual Report, 2008 Directors—Continued BankorBranch,Category Termexpires Title Name Dec.31 DISTRICT7—CHICAGO ReserveBank ClassA DennisJ.Kuester........... Chairman,Marshall&IlsleyCorporation,Milwaukee, 2008 Wisconsin MichaelL.Kubacki ........ Chairman,President,andChiefExecutiveOfficer, 2009 LakelandFinancialCorporation,Warsaw, Indiana MarkC.Hewitt............. PresidentandChiefExecutiveOfficer,ClearLake 2010 Bank&TrustCompany,ClearLake,Iowa ClassB AnthonyK.Anderson...... ViceChairandMidwestManagingPartner, 2008 Ernst&YoungLLP,Chicago,Illinois MarkT.Gaffney............ President,MichiganAFL-CIO,Lansing,Michigan 2009 AnnD.Murtlow............ PresidentandChiefExecutiveOfficer,Indianapolis 2010 Power&LightCompany,Indianapolis,Indiana ClassC JohnA.Canning,Jr. ....... Chairman,MadisonDearbornPartners,LLC,Chicago, 2008 Illinois WilliamC.Foote........... ChairmanandChiefExecutiveOfficer,USG 2009 Corporation,Chicago,Illinois ThomasJ.Wilson .......... Chairman,PresidentandChiefExecutiveOfficer,The 2010 AllstateCorporation,Northbrook,Illinois DetroitBranch Appointedbythe FederalReserveBank RogerA.Cregg ............ ExecutiveVicePresident,andChiefFinancialOfficer, 2008 PulteHomes,Inc.,BloomfieldHills,Michigan TommiA.White ........... ChiefExecutiveOfficer,ER-One,Inc.,Livonia, 2008 Michigan WilliamR.Hartman........ Chairman,President,andChiefExecutiveOfficer, 2009 CitizensRepublicBancorp,Flint,Michigan MichaelM.Magee,Jr. .... PresidentandChiefExecutiveOfficer,Independent 2010 BankCorporation,Ionia,Michigan Appointedbythe BoardofGovernors TimothyM.Manganello ... ChairmanandChiefExecutiveOfficer,BorgWarner 2008 Incorporated,AuburnHills,Michigan LindaS.Likely............. DirectorofHousingandCommunityDevelopment, 2009 KentCountyCommunityDevelopmentDepartment andHousingCommission,GrandRapids, Michigan CarlT.Camden ............ PresidentandChiefExecutiveOfficer,Kelly 2010 Services,Inc.,Troy,Michigan
Federal Reserve System Organization 383 BankorBranch,Category Termexpires Title Name Dec.31 DISTRICT8—ST.LOUIS ReserveBank ClassA J.ThomasMay ............. ChairmanandChiefExecutiveOfficer,SimmonsFirst 2008 NationalCorporation,PineBluff,Arkansas DavidR.Pirsein............ PresidentandChiefExecutiveOfficer,FirstNational 2009 BankinPinckneyville,Pinckneyville,Illinois RobertG.Jones ............ PresidentandChiefExecutiveOfficer,OldNational 2010 Bancorp,Evansville,Indiana ClassB GregoryM.Duckett........ SeniorVicePresidentandCorporateCounsel,Baptist 2008 MemorialHealthCareCorporation,Memphis, Tennessee A.RogersYarnell,II....... President,YarnellIceCreamCo.,Inc.,Searcy, 2009 Arkansas PaulT.Combs.............. President,BakerImplementCompany,Kennett, 2010 Missouri ClassC WardM.Klein ............. ChiefExecutiveOfficer,EnergizerHoldings,Inc., 2008 Town&Country,Missouri StevenH.Lipstein ......... PresidentandChiefExecutiveOfficer,BJC 2009 HealthCare,St.Louis,Missouri IrlF.Engelhardt ............ Chairman,PatriotCoalCorporation,St.Louis, 2010 Missouri LittleRockBranch Appointedbythe FederalReserveBank RobertA.Young,III ....... Chairman,ArkansasBestCorporation,FortSmith, 2008 Arkansas PhillipN.Baldwin ......... PresidentandChiefExecutiveOfficer, 2008 SouthernBancorp,Arkadelphia,Arkansas WilliamC.Scholl .......... PresidentandChiefExecutiveOfficer,FirstSecurity 2009 Bancorp,Searcy,Arkansas SharonPriest ............... ExecutiveDirector,DowntownLittleRockPartnership, 2010 LittleRock,Arkansas Appointedbythe BoardofGovernors CalMcCastlain ............. Partner,Pender&McCastlain,P.A.,LittleRock, 2008 Arkansas C.SamWalls............... ChiefExecutiveOfficer,ArkansasCapitalCorporation, 2009 LittleRock,Arkansas SonjaYatesHubbard....... ChiefExecutiveOfficer,E-ZMartStores,Inc., 2010 Texarkana,Texas
384 95th Annual Report, 2008 Directors—Continued BankorBranch,Category Termexpires Title Name Dec.31 LouisvilleBranch Appointedbythe FederalReserveBank L.ClarkTaylor,Jr. ......... ChiefExecutiveOfficer,EphraimMcDowellHealth, 2008 Danville,Kentucky JohnC.Schroeder.......... President,WabashPlastics,Inc.,Evansville,Indiana 2008 GordonB.Guess ........... GeneralManager,MarionBaseballClub,LLC, 2009 Marion,Kentucky StevenE.Trager ........... ChairmanandChiefExecutiveOfficer,RepublicBank 2010 &TrustCompany,Louisville,Kentucky Appointedbythe BoardofGovernors JohnL.Huber .............. Consultant,Louisville,Kentucky 2008 BarbaraAnnPopp.......... ChiefExecutiveOfficer,SchulerBauerRealEstate 2009 Services,NewAlbany,Indiana GaryA.Ransdell........... President,WesternKentuckyUniversity,Bowling 2010 Green,Kentucky MemphisBranch Appointedbythe FederalReserveBank SusanS.Stephenson ....... Co-ChairmanandPresident,IndependentBank, 2008 Memphis,Tennessee HunterSimmons ........... PresidentandChiefExecutiveOfficer,FirstSouth 2008 Bank,Jackson,Tennessee DavidP.Rumbarger,Jr..... PresidentandChiefExecutiveOfficer,Community 2009 DevelopmentFoundation,Tupelo,Mississippi ThomasG.Miller .......... President,SouthernHardwareCompany,Inc.,West 2010 Helena,Arkansas Appointedbythe BoardofGovernors MeredithB.Allen .......... VicePresident,Marketing,StapleCottonCooperative 2008 Association,Greenwood,Mississippi NickClark .................. Partner,Clark&Clark,Memphis,Tennessee 2009 CharlesS.Blatteis.......... Partner,Burch,Porter&JohnsonPLLC,Memphis, 2010 Tennessee DISTRICT9—MINNEAPOLIS ReserveBank ClassA PeterJ.Haddeland ......... PresidentandChiefExecutiveOfficer,FirstNational 2008 Bank,Mahnomen,Minnesota ThomasW.Scott ........... ChairmanoftheBoard,FirstInterstateBancSystem, 2009 Inc.,Billings,Montana DorothyJ.Bridges ......... PresidentandChiefExecutiveOfficer,Franklin 2010 NationalBank,Minneapolis,Minnesota
Federal Reserve System Organization 385 BankorBranch,Category Termexpires Title Name Dec.31 ClassB RandyPeterson............. FacilityDirector,LakeSuperiorStateUniversity,Sault 2008 Ste.Marie,Michigan WilliamJ.Shorma ......... President,Shur-Co.,Yankton,SouthDakota 2009 ToddL.Johnson............ Chairman,President,andChiefExecutiveOfficer, 2010 ReubenJohnson&Son,Inc.andAffiliated Companies,Superior,Wisconsin ClassC JohnW.Marvin ............ ChairmanandChiefExecutiveOfficer,Marvin 2008 WindowsandDoors,Warroad,Minnesota JamesJ.Hynes ............. ExecutiveAdministrator,TwinCityPipeTrades 2009 ServiceAssociation,St.Paul,Minnesota MaryK.Brainerd .......... PresidentandChiefExecutiveOfficer,HealthPartners, 2010 Minneapolis,Minnesota HelenaBranch Appointedbythe FederalReserveBank JohnL.Franklin............ PresidentandChiefExecutiveOfficer,1stBank, 2008 Sidney,Montana TimothyJ.Bartz ........... ChiefExecutiveOfficer,AndersonZurMuehlen& 2009 Company,P.C.,Helena,Montana KayClevidence............. President,FarmersStateBank,Victor,Montana 2010 Appointedbythe BoardofGovernors DeanFolkvord.............. GeneralManagerandChiefExecutiveOfficer,Wheat 2008 MontanaFarmsandBakery,ThreeForks,Montana JosephF.McDonald ....... President,SalishKootenaiCollege,Pablo,Montana 2009 DISTRICT10—KANSASCITY ReserveBank ClassA RickL.Smalley ............ ChiefExecutiveOfficer,DickinsonFinancial 2008 Corporation,KansasCity,Missouri MarkW.Schifferdecker.... PresidentandChiefExecutiveOfficer,GirardNational 2009 Bank,Girard,Kansas RobertC.Fricke............ PresidentandChiefExecutiveOfficer,Farmers& 2010 MerchantsNationalBank,Ashland,Nebraska ClassB DanL.Dillingham ......... ChiefExecutiveOfficer,DillinghamInsurance,Enid, 2008 Oklahoma KevinK.Nunnink.......... Chairman,IntegraRealtyResources,Westwood, 2009 Kansas Vacancy..................... 2010
386 95th Annual Report, 2008 Directors—Continued BankorBranch,Category Termexpires Title Name Dec.31 ClassC LuM.Cordova ............. ChiefExecutiveOfficer,CorlundIndustries,LLC; 2008 PresidentandGeneralManager,AlmacenStorage Group,Boulder,Colorado PaulDeBruce............... ChiefExecutiveOfficerandChairman/Founder, 2009 DeBruceGrain,Inc.,KansasCity,Missouri TerryL.Moore ............. President,OmahaFederationofLabor,Omaha, 2010 Nebraska DenverBranch Appointedbythe FederalReserveBank BruceK.Alexander ........ PresidentandChiefExecutiveOfficer,VectraBank 2008 Colorado,Denver,Colorado JohnD.Pearson ............ President,PearsonRealEstateCo.,Inc.,Buffalo, 2009 Wyoming CharlesH.BrownIII....... President,C.H.BrownCo.,Wheatland,Wyoming 2009 Vacancy..................... 2010 Appointedbythe BoardofGovernors DianeLeavesley............ President,MercyLoanFund,Denver,Colorado 2008 BarbaraMowry............. President,ChiefExecutiveOfficer,andBoard 2009 Member,SilverCreekSystems,Westminster, Colorado KristyA.Schloss........... PresidentandChiefExecutiveOfficer,Schloss 2010 EngineeredEquipment,Inc.,Aurora,Colorado OklahomaCityBranch Appointedbythe FederalReserveBank FredM.Ramos............. President,RGF,Inc.,OklahomaCity,Oklahoma 2008 Vacancy..................... 2009 TerryM.Almon ............ President,OklahomaCommunityCapitalCorporation, 2010 BrokenArrow,Oklahoma DouglasE.Tippens ........ PresidentandChiefExecutiveOfficer,CanadianState 2010 Bank,Yukon,Oklahoma Appointedbythe BoardofGovernors JamesD.Dunn ............. ChairmanoftheBoard,MillCreekLumber& 2008 SupplyCompany,Tulsa,Oklahoma RichardK.Ratcliffe........ Chairman,Ratcliffe’sInc.,Weatherford,Oklahoma 2009 StevenC.Agee............. President,AgeeEnergy,LLC,OklahomaCity, 2010 Oklahoma
Federal Reserve System Organization 387 BankorBranch,Category Termexpires Title Name Dec.31 OmahaBranch Appointedbythe FederalReserveBank MarkA.Sutko ............. PresidentandChiefExecutiveOfficer,PlatteValley 2008 StateBank,Kearney,Nebraska RodrigoLopez.............. PresidentandChiefExecutiveOfficer,AmeriSphere 2009 MultifamilyFinance,LLC,Omaha,Nebraska ToddS.Adams ............. ChiefExecutiveOfficerandTrustOfficer,Adams 2009 Bank&Trust,Ogallala,Nebraska JoAnnM.Martin........... PresidentandChiefExecutiveOfficer,Ameritas 2010 LifeInsuranceCorp.,Lincoln,Nebraska Appointedbythe BoardofGovernors JamesA.Timmerman...... ChiefFinancialOfficer,TimmermanandSonsFeeding 2008 Co.,Springfield,Nebraska CharlesR.Hermes ......... President,Dutton-LainsonCompany,Hastings, 2009 Nebraska LynWallinZiegenbein..... ExecutiveDirector,PeterKiewitFoundation,Omaha, 2010 Nebraska DISTRICT11—DALLAS ReserveBank ClassA RichardW.Evans,Jr. ..... ChairmanandChiefExecutiveOfficer,Cullen/Frost 2008 Bankers,Inc.,SanAntonio,Texas PeteCook................... PresidentandChiefExecutiveOfficer,FirstNational 2009 BankofAlamogordo,Alamogordo,NewMexico JoeKimKing .............. PresidentandChairmanoftheBoard,Texas 2010 CountryBancshares,Inc.,Brady,Texas ClassB JamesB.Bexley............ Professor,Finance,SamHoustonStateUniversity, 2008 Huntsville,Texas MargaretH.Jordan......... PresidentandChiefExecutiveOfficer,DallasMedical 2009 Resource,Dallas,Texas RobertA.Estrada .......... Chairman,EstradaHinojosa&Company,Inc.,Dallas, 2010 Texas ClassC JamesT.Hackett ........... Chairman,President,andChiefExecutiveOfficer, 2008 AnadarkoPetroleumCorporation,Houston,Texas MyronE.UllmanIII ....... ChairmanoftheBoard,J.C.PenneyCompany,Inc. 2009 Plano,Texas HerbKelleher .............. FounderandChairmanEmeritus,SouthwestAirlines, 2010 Dallas,Texas ElPasoBranch Appointedbythe FederalReserveBank FredJ.Loya ................ Chairman,FredLoyaInsurance,ElPaso,Texas 2008
388 95th Annual Report, 2008 Directors—Continued BankorBranch,Category Termexpires Title Name Dec.31 LauraM.Conniff........... QualifyingBroker,MathersRealty,Inc.,LasCruces 2008 NewMexico GeraldJ.Rubin............. Chairman,President,andChiefExecutiveOfficer, 2009 HelenofTroyLimited,ElPaso,Texas LarryL.Patton ............. PresidentandChiefExecutiveOfficer,Bankofthe 2010 West,ElPaso,Texas Appointedbythe BoardofGovernors RonC.Helm ............... Owner,HelmLandandCattleCompany,VanHorn, 2008 Texas D.KirkEdwards ........... President,MacLondonRoyaltyCompany,Odessa, 2009 Texas CindyJ.Ramos-Davidson.. PresidentandChiefExecutiveOfficer,ElPaso 2010 HispanicChamberofCommerce,ElPaso,Texas HoustonBranch Appointedbythe FederalReserveBank S.ReedMorian............. Chairman,President,andChiefExecutiveOfficer,DX 2008 ServiceCompany,Inc.,Houston,Texas PeterG.Traber,M.D. ..... PresidentandChiefExecutiveOfficer,BaylorCollege 2008 ofMedicine,Houston,Texas TimothyN.Bryan.......... ChairmanandChiefExecutiveOfficer,TheFirst 2009 NationalBankofBryan,Bryan,Texas JodieL.Jiles ............... ManagingDirector,RBCCapitalMarkets,Houston, 2010 Texas Appointedbythe BoardofGovernors LupeFraga ................. ChairmanandChiefExecutiveOfficer,TejasOffice 2008 Products,Inc.,Houston,Texas NancyT.Chang ............ President,ApexEnterprises,Inc.,Houston,Texas 2009 DouglasL.Foshee ......... PresidentandChiefExecutiveOfficer,ElPaso 2010 Corporation,Houston,Texas SanAntonioBranch Appointedbythe FederalReserveBank MattF.Gorges ............. ChairmanandChiefExecutiveOfficer,U.S.Packers& 2008 Processors,Harlingen,Texas GuillermoF.Trevino....... President,SouthernDistributing,Laredo,Texas 2008 StevenR.Vandegrift ....... FounderandPresident,SRVHoldings,Austin,Texas 2009 G.P.Singh .................. ChiefExecutiveOfficer,GurParsaadProperties,Ltd., 2010 SanAntonio,Texas Appointedbythe BoardofGovernors ElizabethChuRichter...... ChairmanandChiefExecutiveOfficer,Richter 2008 Architects,CorpusChristi,Texas J.DanBates ................ President,SouthwestResearchInstitute,SanAntonio, 2009 Texas RicardoRomo .............. President,TheUniversityofTexasatSanAntonio, 2010 SanAntonio,Texas
Federal Reserve System Organization 389 BankorBranch,Category Termexpires Title Name Dec.31 DISTRICT12—SANFRANCISCO ReserveBank ClassA CandaceH.Wiest .......... PresidentandChiefExecutiveOfficer,WestValley 2008 NationalBank,Avondale,Arizona KennethP.Wilcox ......... PresidentandChiefExecutiveOfficer,SVBFinancial 2009 Group,SantaClara,California ArnoldT.Grisham ......... PresidentandChiefExecutiveOfficer,AltaAlliance 2010 Bank,Oakland,California ClassB KarlaS.Chambers ......... VicePresidentandCo-Owner,StahlbushIslandFarms, 2008 Inc.,Corvallis,Oregon BlakeW.Nordstrom ....... President,Nordstrom,Inc.,Seattle,Washington 2009 WilliamD.Jones........... PresidentandChiefExecutiveOfficer,CityLink 2010 InvestmentCorporation,SanDiego,California ClassC DouglasW.Shorenstein.... ChairmanandChiefExecutiveOfficer,Shorenstein 2008 PropertiesLLC,SanFrancisco,California T.GaryRogers ............. ChairmanoftheBoard,LeviStraussandCo., 2009 SanFrancisco,California DavidK.Y.Tang ........... ManagingPartner,Asia,K&LGates,Seattle, 2010 Washington LosAngelesBranch Appointedbythe FederalReserveBank PeterM.Thomas ........... ManagingPartner,Thomas&MackCo.,LasVegas, 2008 Nevada EricL.Holoman ........... President,MagicJohnsonEnterprises, 2009 BeverlyHills,California JamesL.Sanford........... Consultant,NorthropGrummanCorporation, 2009 LosAngeles,California DominicNg ................ Chairman,President,andChiefExecutiveOfficer,East 2010 WestBank,Pasadena,California Appointedbythe BoardofGovernors AnnE.Sewill .............. President,CommunityFoundationLandTrust, 2008 CaliforniaCommunityFoundation,LosAngeles, California AndrewJ.Sale ............. Partner,Ernst&YoungLLP,LosAngeles,California 2009 GraceEvansCherashore ... PresidentandChiefExecutiveOfficer,EvansHotels, 2010 SanDiego,California PortlandBranch Appointedbythe FederalReserveBank GeorgeJ.Puentes .......... President,DonPanchoAuthenticMexicanFoods,Inc., 2008 Salem,Oregon PeggyY.Fowler............ ChiefExecutiveOfficerandPresident,Portland 2008 GeneralElectric,Portland,Oregon
390 95th Annual Report, 2008 Directors—Continued BankorBranch,Category Termexpires Title Name Dec.31 RobertD.Sznewajs ........ PresidentandChiefExecutiveOfficer,WestCoast 2009 Bancorp,LakeOswego,Oregon AlanV.Johnson ............ RegionalPresident,WellsFargoBank,Portland,Oregon 2010 Appointedbythe BoardofGovernors WilliamD.Thorndike,Jr... ChairmanandPresident,MedfordFabrication, 2008 Medford,Oregon DavidY.Chen.............. ManagingDirector,EquilibriumCapitalGroupLLC, 2009 Portland,Oregon JamesH.Rudd ............. ChiefExecutiveOfficerandPrincipal,Ferguson 2010 WellmanCapitalManagement,Inc.,Portland, Oregon SaltLakeCityBranch Appointedbythe FederalReserveBank A.ScottAnderson.......... PresidentandChiefExecutiveOfficer,ZionsBank, 2008 SaltLakeCity,Utah DeborahS.Bayle........... PresidentandChiefExecutiveOfficer,UnitedWayof 2008 SaltLake,SaltLakeCity,Utah CarolCarter ................ PresidentandChiefExecutiveOfficer,Industrial 2009 CompressorProducts,Inc.,SaltLakeCity,Utah MichaelM.Mooney ....... President,IdahoRegion,BankoftheCascades,Boise, 2010 Idaho Appointedbythe BoardofGovernors ClarkD.Ivory.............. ChiefExecutiveOfficer,IvoryHomes,Ltd., 2008 SaltLakeCity,Utah EdwinE.Dahlberg ......... PresidentandChiefExecutiveOfficer,St.Luke’s 2009 HealthSystem,Boise,Idaho ScottL.Hymas............. ChiefExecutiveOfficer,RCWilley,SaltLakeCity, 2010 Utah SeattleBranch Appointedbythe FederalReserveBank KennethM.Kirkpatrick.... President,WashingtonState,U.S.Bank,Seattle, 2008 Washington H.StewartParker .......... PresidentandChiefExecutiveOfficer,Targeted 2008 GeneticsCorporation,Seattle,Washington CarolK.Nelson ............ PresidentandChiefExecutiveOfficer,Cascade 2009 FinancialCorporation,Everett,Washington RichardGalanti............. ExecutiveVicePresidentandChiefFinancialOfficer, 2010 CostcoWholesaleCorporation,Issaquah,Washington Appointedbythe BoardofGovernors JamesR.Gill ............... President,PacificNorthwestTitleHoldingCo., 2008 Seattle,Washington HelviK.Sandvik........... President,NANADevelopmentCorporation, 2009 Anchorage,Alaska WilliamS.Ayer ............ Chairman,President,andChiefExecutiveOfficer, 2010 AlaskaAirGroup,Seattle,Washington
Federal Reserve System Organization 391 Members of the Board of Governors, 1913–2008 Appointed Members Federal Reserve Date initially took Name Otherdates1 District oathofoffice CharlesS.Hamlin Boston Aug.10,1914 Reappointedin1916and1926.Served untilFeb.3,1936.2 PaulM.Warburg NewYork Aug.10,1914 TermexpiredAug.9,1918. FredericA.Delano Chicago Aug.10,1914 ResignedJuly21,1918. W.P.G.Harding Atlanta Aug.10,1914 TermexpiredAug.9,1922. AdolphC.Miller SanFrancisco Aug.10,1914 Reappointedin1924.Reappointedin 1934fromtheRichmondDistrict.Served untilFeb.3,1936.2 AlbertStrauss NewYork Oct.26,1918 ResignedMar.15,1920. HenryA.Moehlenpah Chicago Nov.10,1919 TermexpiredAug.9,1920. EdmundPlatt NewYork June8,1920 Reappointedin1928.ResignedSept.14, 1930. DavidC.Wills Cleveland Sept.29,1920 TermexpiredMar.4,1921. JohnR.Mitchell Minneapolis May12,1921 ResignedMay12,1923. MiloD.Campbell Chicago Mar.14,1923 DiedMar.22,1923. DanielR.Crissinger Cleveland May1,1923 ResignedSept.15,1927. GeorgeR.James St.Louis May14,1923 Reappointedin1931.ServeduntilFeb.3, 1936.3 EdwardH.Cunningham Chicago May14,1923 DiedNov.28,1930. RoyA.Young Minneapolis Oct.4,1927 ResignedAug.31,1930. EugeneMeyer NewYork Sept.16,1930 ResignedMay10,1933. WaylandW.Magee KansasCity May18,1931 TermexpiredJan.24,1933. EugeneR.Black Atlanta May19,1933 ResignedAug.15,1934. M.S.Szymczak Chicago June14,1933 Reappointedin1936and1948.Resigned May31,1961. J.J.Thomas KansasCity June14,1933 ServeduntilFeb.10,1936.2 MarrinerS.Eccles SanFrancisco Nov.15,1934 Reappointedin1936,1940,and1944. ResignedJuly14,1951. JosephA.Broderick NewYork Feb.3,1936 ResignedSept.30,1937. JohnK.McKee Cleveland Feb.3,1936 ServeduntilApr.4,1946.2 RonaldRansom Atlanta Feb.3,1936 Reappointedin1942.DiedDec.2,1947. RalphW.Morrison Dallas Feb.10,1936 ResignedJuly9,1936. ChesterC.Davis Richmond June25,1936 Reappointedin1940.ResignedApr.15, 1941. ErnestG.Draper NewYork Mar.30,1938 ServeduntilSept.1,1950.2 RudolphM.Evans Richmond Mar.14,1942 ServeduntilAug.13,1954.2 JamesK.Vardaman,Jr. St.Louis Apr.4,1946 ResignedNov.30,1958. LawrenceClayton Boston Feb.14,1947 DiedDec.4,1949. ThomasB.McCabe Philadelphia Apr.15,1948 ResignedMar.31,1951. EdwardL.Norton Atlanta Sept.1,1950 ResignedJan.31,1952. OliverS.Powell Minneapolis Sept.1,1950 ResignedJune30,1952. Wm.McC.Martin,Jr. NewYork Apr.2,1951 Reappointedin1956.Termexpired Jan.31,1970. A.L.Mills,Jr. SanFrancisco Feb.18,1952 Reappointedin1958.ResignedFeb.28, 1965. J.L.Robertson KansasCity Feb.18,1952 Reappointedin1964.ResignedApr.30, 1973. C.CanbyBalderston Philadelphia Aug.12,1954 ServedthroughFeb.28,1966. PaulE.Miller Minneapolis Aug.13,1954 DiedOct.21,1954.
392 95th Annual Report, 2008 Appointed Members—Continued Federal Reserve Date initially took Name Otherdates1 District oathofoffice Chas.N.Shepardson Dallas Mar.17,1955 RetiredApr.30,1967. G.H.King,Jr. Atlanta Mar.25,1959 Reappointedin1960.ResignedSept.18, 1963. GeorgeW.Mitchell Chicago Aug.31,1961 Reappointedin1962.Serveduntil Feb.13,1976.2 J.DeweyDaane Richmond Nov.29,1963 ServeduntilMar.8,1974.2 ShermanJ.Maisel SanFrancisco Apr.30,1965 ServedthroughMay31,1972. AndrewF.Brimmer Philadelphia Mar.9,1966 ResignedAug.31,1974. WilliamW.Sherrill Dallas May1,1967 Reappointedin1968.ResignedNov.15, 1971. ArthurF.Burns NewYork Jan.31,1970 TermbeganFeb.1,1970.Resigned Mar.31,1978. JohnE.Sheehan St.Louis Jan.4,1972 ResignedJune1,1975. JeffreyM.Bucher SanFrancisco June5,1972 ResignedJan.2,1976. RobertC.Holland KansasCity June11,1973 ResignedMay15,1976. HenryC.Wallich Boston Mar.8,1974 ResignedDec.15,1986. PhilipE.Coldwell Dallas Oct.29,1974 ServedthroughFeb.29,1980. PhilipC.Jackson,Jr. Atlanta July14,1975 ResignedNov.17,1978. J.CharlesPartee Richmond Jan.5,1976 ServeduntilFeb.7,1986.2 StephenS.Gardner Philadelphia Feb.13,1976 DiedNov.19,1978. DavidM.Lilly Minneapolis June1,1976 ResignedFeb.24,1978. G.WilliamMiller SanFrancisco Mar.8,1978 ResignedAug.6,1979. NancyH.Teeters Chicago Sept.18,1978 ServedthroughJune27,1984. EmmettJ.Rice NewYork June20,1979 ResignedDec.31,1986. FrederickH.Schultz Atlanta July27,1979 ServedthroughFeb.11,1982. PaulA.Volcker Philadelphia Aug.6,1979 ResignedAug.11,1987. LyleE.Gramley KansasCity May28,1980 ResignedSept.1,1985. PrestonMartin SanFrancisco Mar.31,1982 ResignedApr.30,1986. MarthaR.Seger Chicago July2,1984 ResignedMar.11,1991. WayneD.Angell KansasCity Feb.7,1986 ServedthroughFeb.9,1994. ManuelH.Johnson Richmond Feb.7,1986 ResignedAug.3,1990. H.RobertHeller SanFrancisco Aug.19,1986 ResignedJuly31,1989. EdwardW.Kelley,Jr. Dallas May26,1987 ResignedDec.31,2001. AlanGreenspan NewYork Aug.11,1987 ResignedJan.31,2006. JohnP.LaWare Boston Aug.15,1988 ResignedApr.30,1995. DavidW.Mullins,Jr. St.Louis May21,1990 ResignedFeb.14,1994. LawrenceB.Lindsey Richmond Nov.26,1991 ResignedFeb.5,1997. SusanM.Phillips Chicago Dec.2,1991 ServedthroughJune30,1998. AlanS.Blinder Philadelphia June27,1994 TermexpiredJan.31,1996. JanetL.Yellen SanFrancisco Aug.12,1994 ResignedFeb.17,1997. LaurenceH.Meyer St.Louis June24,1996 TermexpiredJan.31,2002. AliceM.Rivlin Philadelphia June25,1996 ResignedJuly16,1999. RogerW.Ferguson,Jr. Boston Nov.5,1997 ResignedApr.28,2006. EdwardM.Gramlich Richmond Nov.5,1997 ResignedAug.31,2005. SusanS.Bies Chicago Dec.7,2001 ResignedMar.30,2007. MarkW.Olson Minneapolis Dec.7,2001 ResignedJune20,2006. BenS.Bernanke Atlanta Aug.5,2002 ResignedJune21,2005. DonaldL.Kohn KansasCity Aug.5,2002 Ben.S.Bernanke Atlanta Feb.1,2006 KevinM.Warsh NewYork Feb.24,2006 RandallS.Kroszner Richmond Mar.1,2006 FredericS.Mishkin Boston Sept.5,2006 ResignedAug.31,2008. ElizabethA.Duke Philadelphia Aug.5,2008
Federal Reserve System Organization 393 AppointedMembers—Continued Name Term Chairmen3 CharlesS.Hamlin Aug.10,1914–Aug.9,1916 W.P.G.Harding Aug.10,1916–Aug.9,1922 DanielR.Crissinger May1,1923–Sept.15,1927 RoyA.Young Oct.4,1927–Aug.31,1930 EugeneMeyer Sept.16,1930–May10,1933 EugeneR.Black May19,1933–Aug.15,1934 MarrinerS.Eccles Nov.15,1934–Jan.31,19484 ThomasB.McCabe Apr.15,1948–Mar.31,1951 Wm.McC.Martin,Jr. Apr.2,1951–Jan.31,1970 ArthurF.Burns Feb.1,1970–Jan.31,1978 G.WilliamMiller Mar.8,1978–Aug.6,1979 PaulA.Volcker Aug.6,1979–Aug.11,1987 AlanGreenspan Aug.11,1987–Jan.31,20065 BenBernanke Feb.1,2006– ViceChairmen3 FredericA.Delano Aug.10,1914–Aug.9,1916 PaulM.Warburg Aug.10,1916–Aug.9,1918 AlbertStrauss Oct.26,1918–Mar.15,1920 EdmundPlatt July23,1920–Sept.14,1930 J.J.Thomas Aug.21,1934–Feb.10,1936 RonaldRansom Aug.6,1936–Dec.2,1947 C.CanbyBalderston Mar.11,1955–Feb.28,1966 J.L.Robertson Mar.1,1966–Apr.30,1973 GeorgeW.Mitchell May1,1973–Feb.13,1976 StephenS.Gardner Feb.13,1976–Nov.19,1978 FrederickH.Schultz July27,1979–Feb.11,1982 PrestonMartin Mar.31,1982–Apr.30,1986 ManuelH.Johnson Aug.4,1986–Aug.3,1990 DavidW.Mullins,Jr. July24,1991–Feb.14,1994 AlanS.Blinder June27,1994–Jan.31,1996 AliceM.Rivlin June25,1996–July16,1999 RogerW.Ferguson,Jr. Oct.5,1999–Apr.28,2006 DonaldL.Kohn June23,2006– Note: Under the original Federal Reserve Act, the officeonAug.23,1935,continuetoserveuntilFeb.1, FederalReserveBoardwascomposedoffiveappointed 1936,oruntiltheirsuccessorswereappointedandhad members,theSecretaryoftheTreasury(exofficiochair- qualified; and that thereafter the terms of members be manoftheBoard),andtheComptrolleroftheCurrency. fourteenyearsandthatthedesignationofChairmanand Theoriginaltermofofficewastenyears;thefiveoriginal ViceChairmanoftheBoardbeforfouryears. appointedmembershadtermsoftwo,four,six,eight,and 1. Datefollowing‘‘Resigned’’and‘‘Retired’’denotes tenyears.In1922thenumberofappointedmemberswas finaldayofservice. increasedtosix,andin1933thetermofofficewasraised 2. Successortookofficeonthisdate. totwelveyears.TheBankingActof1935changedthe 3. BeforeAug.23,1935,ChairmenandViceChairnametotheBoardofGovernorsoftheFederalReserve menweredesignatedGovernorandViceGovernor. System and provided that the Board be composed of 4. Served as Chairman Pro Tempore from Feb. 3, sevenappointedmembers;thattheSecretaryoftheTrea- 1948,toApr.15,1948. sury and the Comptroller of the Currency continue to 5. Served as Chairman Pro Tempore from Mar. 3, serveuntilFeb.1,1936;thattheappointedmembersin 1996,toJune20,1996.
394 95th Annual Report, 2008 ExOfficioMembers Name Term SecretariesoftheTreasury W.G.McAdoo Dec.23,1913–Dec.15,1918 CarterGlass Dec.16,1918–Feb.1,1920 DavidF.Houston Feb.2,1920–Mar.3,1921 AndrewW.Mellon Mar.4,1921–Feb.12,1932 OgdenL.Mills Feb.12,1932–Mar.4,1933 WilliamH.Woodin Mar.4,1933–Dec.31,1933 HenryMorgenthau,Jr. Jan.1,1934–Feb.1,1936 ComptrollersoftheCurrency JohnSkeltonWilliams Feb.2,1914–Mar.2,1921 DanielR.Crissinger Mar.17,1921–Apr.30,1923 HenryM.Dawes May1,1923–Dec.17,1924 JosephW.McIntosh Dec.20,1924–Nov.20,1928 J.W.Pole Nov.21,1928–Sept.20,1932 J.F.T.O’Connor May11,1933–Feb.1,1936
Statistical Tables
396 95th Annual Report, 2008 1. FederalReserveOpenMarketTransactions,2008 Millionsofdollars Typeofsecurityandtransaction Jan. Feb. Mar. Apr. U.S.TreasurySecurities1 Outrighttransactions2 Treasurybills Grosspurchases............................................ 0 0 0 0 Grosssales ................................................ 0 0 81,398 0 Exchanges ................................................. 35,011 58,896 23,501 20,060 Fornewbills ............................................ 35,011 58,896 23,501 20,060 Redemptions............................................... 27,481 0 25,977 22,667 Otherswithin1year Grosspurchases............................................ 0 0 0 0 Grosssales ................................................ 0 0 0 0 Maturityshifts ............................................. 0 0 0 0 Exchanges ................................................. 0 0 0 0 Redemptions............................................... 0 0 0 0 1to5years Grosspurchases............................................ 0 0 0 0 Grosssales ................................................ 0 0 14,958 20,001 Maturityshifts ............................................. 0 0 0 0 Exchanges ................................................. 0 0 0 0 5to10years Grosspurchases............................................ 0 0 0 0 Grosssales ................................................ 0 0 0 0 Maturityshifts ............................................. 0 0 0 0 Exchanges ................................................. 0 0 0 0 Morethan10years Grosspurchases............................................ 0 0 0 0 Grosssales ................................................ 0 0 0 0 Maturityshifts ............................................. 0 0 0 0 Exchanges ................................................. 0 0 0 0 Allmaturities Grosspurchases............................................ 0 0 0 0 Grosssales ................................................ 0 0 96,356 20,001 Redemptions............................................... 27,481 0 25,977 22,667 NetchangeinU.S.Treasurysecurities .................... –27,481 0 –122,333 –42,668 Fornotesseeendoftable.
Statistical Tables 397 1.—Continued May June July Aug. Sept. Oct. Nov. Dec. Total 0 0 0 0 0 0 0 0 0 13,719 1,510 0 0 0 0 0 0 96,627 0 5,361 7,320 12,859 19,944 23,596 28,197 27,578 262,323 0 5,361 7,320 12,859 19,944 23,596 28,197 27,578 262,323 26,529 6,819 0 0 3,317 0 0 0 112,790 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,926 0 0 0 0 0 0 0 1,926 0 0 0 0 0 0 0 0 0 15,000 0 0 0 0 0 0 0 49,959 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4,999 0 0 0 0 0 0 0 4,999 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 33,718 1,510 0 0 0 0 0 0 151,585 28,455 6,819 0 0 3,317 0 0 0 114,716 –62,173 –8,329 0 0 –3,317 0 0 0 –266,302
398 95th Annual Report, 2008 1. FederalReserveOpenMarketTransactions,2008—Continued Millionsofdollars Typeofsecurityandtransaction Jan. Feb. Mar. Apr. FederalAgencyObligations Outrighttransactions2 Grosspurchases .............................................. 0 0 0 0 Grosssales................................................... 0 0 0 0 Redemptions ................................................. 0 0 0 0 Netchangeinfederalagencyobligations.................. 0 0 0 0 TemporaryTransactions Repurchaseagreements3 Grosspurchases .............................................. 203,500 256,250 233,750 386,500 Grosssales................................................... 224,500 220,000 219,500 347,000 Reverserepurchaseagreements4 Grosspurchases .............................................. 830,931 770,268 861,490 875,902 Grosssales................................................... 826,520 773,973 862,311 872,505 Netchangeintemporarytransactions ..................... –16,589 32,545 13,429 42,897 TotalnetchangeinSystemOpenMarketAccount........... –44,069 32,545 –108,905 229 Note: Sales, redemptions, and negative figures 2. Excludes the effect of temporary transactions— reduceholdingsoftheSystemOpenMarketAccount;all repurchase agreements and reverse repurchase agreeother figures increase such holdings. Components may ments(RRPs). notsumtototalsbecauseofrounding. 3. Cashvalueofagreements,whicharecollateralized 1. Transactionsexcludechangesincompensationfor byU.S.governmentandfederalagencysecurities. the effects of inflation on the principal of inflation- 4. Cashvalueofagreements,whicharecollateralized indexed securities. Transactions include the rollover of byU.S.Treasurysecurities. inflationcompensationintonewsecurities.
Statistical Tables 399 1.—Continued May June July Aug. Sept. Oct. Nov. Dec. Total 0 0 0 0 14,500 0 0 15,031 29,531 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 14,500 0 0 15,031 29,531 345,500 347,250 353,000 276,000 450,500 120,000 80,000 100,000 3,152,250 347,250 346,500 348,500 277,500 477,000 123,000 80,000 100,000 3,110,750 813,259 850,374 940,787 912,593 1,142,836 2,057,805 1,777,834 1,957,897 13,791,976 811,255 855,495 942,387 909,781 1,178,163 2,074,400 1,781,862 1,972,690 13,861,342 253 –4,372 2,900 1,312 –61,827 –19,595 –4,027 –14,794 –27,868 –61,920 –12,700 2,900 1,312 –50,644 –19,595 –4,027 237 –264,637
400 95th Annual Report, 2008 2. FederalReserveBankHoldingsofU.S.TreasuryandFederalAgencySecurities, December31,2006–2008 Millionsofdollars December31 Change Description 2007to 2006to 2008 2007 2006 2008 2007 U.S.TreasurySecurities Heldoutright1 .................................... 475,921 740,611 778,915 –264,690 –38,304 Byremainingmaturity Bills 1–90days....................................... 18,423 153,829 193,034 –135,406 –39,205 91daysto1year................................ 0 74,012 83,985 –74,012 –9,973 Notesandbonds 1yearorless ................................... 85,011 101,447 129,594 –16,432 –28,147 Morethan1yearthrough5years ................ 173,328 240,562 224,177 –67,234 16,385 Morethan5yearsthrough10years .............. 97,325 81,947 67,645 15,378 14,302 Morethan10years.............................. 101,834 88,814 80,479 13,020 8,335 Bytype Bills .............................................. 18,423 227,841 277,019 –209,418 –49,178 Notes ............................................. 334,779 401,776 402,367 –66,997 –591 Bonds............................................. 122,719 110,995 99,528 11,724 11,467 FederalAgencySecurities Heldoutright1 .................................... 19,708 0 0 19,708 0 Byremainingmaturity 1yearorless...................................... 4,707 0 0 4,707 0 Morethan1yearthrough5years .................. 11,361 0 0 11,361 0 Morethan5yearsthough10years ................. 3,640 0 0 3,640 0 Morethan10years ................................ 0 0 0 0 0 Byissuer FederalHomeLoanMortgageCorporation.......... 9,556 0 0 9,556 0 FederalNationalMortgageAssociation ............. 7,091 0 0 7,091 0 FederalHomeLoanBanks ......................... 3,061 0 0 3,061 0 TemporaryTransactions Repurchaseagreements2 .......................... 80,000 46,500 40,750 33,500 5,750 Reverserepurchaseagreements3 .................. 88,352 43,985 29,615 44,367 14,370 Foreignofficialandinternationalaccounts ........ 88,352 43,985 29,615 44,367 14,370 Dealers ......................................... 0 0 0 0 0 Note: Componentsmaynotsumtototalsbecauseof 2. Cashvalueofagreements,whicharecollateralized rounding. byU.S.governmentandfederalagencysecurities. 1. Excludes the effect of temporary transactions— 3. Cashvalueofagreements,whicharecollateralized repurchase agreements and reverse repurchase agree- byU.S.Treasurysecurities. ments(RRPs).
Statistical Tables 401 3. FederalReserveBankInterestRatesonLoanstoDepositoryInstitutions Percent A.RatesonSelectedLoansasofDecember31,20081 ReserveBank Primarycredit Secondarycredit Seasonalcredit AllBanks ................................. .50 1.00 1.05 1. Fordetailsonratechangesoverthecourseof2008, creditisavailableinappropriatecircumstancestodeposiseethesectionondiscountratesinthechapter“Record tory institutions that do not qualify for primary credit. ofPolicyActionsoftheBoardofGovernors.”Primary Seasonal credit is available to help relatively small creditisavailableforveryshorttermsasabackupsource depository institutions meet regular seasonal needs for ofliquiditytodepositoryinstitutionsthatareingenerally funds that arise from a clear pattern of intra-yearly soundfinancialconditioninthejudgmentofthelending movementsintheirdepositsandloans.Thediscountrate Federal Reserve Bank. On March 16, 2008, the Board on seasonal credit takes into account rates charged by announced a temporary change to the Reserve Banks’ marketsourcesoffundsandisreestablishedonthefirst discountwindowlendingpracticestoallowtheprovision business day of each two-week reserve maintenance of term financing for as long as 90 days. Secondary period. B.RatesonTermAuctionFacilityLoansOutstandingonDecember31,20082 ReserveBank Auctiondate Rate AllBanks ................................. Oct.6,2008 1.390 Nov.3,2008 0.600 Nov.10,2008 0.528 Nov.24,2008 0.380 Dec.1,2008 0.420 Dec.15,2008 0.280 2. UndertheTermAuctionFacility(TAF),theFederal eligible to borrow under the primary credit program. Reserve auctions term funds to depository institutions Loans from six auctions were outstanding on Decemthat are in generally sound financial condition and are ber31,2008.
402 95th Annual Report, 2008 4. ReserveRequirementsofDepositoryInstitutions,December31,2008 Requirements Typeofdeposit Percentageofdeposits Effectivedate Nettransactionaccounts1 $0million–$9.3million2 ............................... 0 12-20-07 Morethan$9.3million–$43.9million3 ................. 3 12-20-07 Morethan$43.9million ............................... 10 12-20-07 Nonpersonaltimedeposits ............................. 0 12-27-90 Eurocurrencyliabilities ................................ 0 12-27-90 Note:Requiredreservesmustbeheldintheformof Foramoredetaileddescriptionofthesedeposittypes, vaultcashand,ifvaultcashisinsufficient,alsointhe seeFormFR2900atwww.federalreserve.gov/boarddocs/ formofadepositwithaFederalReserveBank.Aninsti- reportforms/. tutionthatisamemberoftheFederalReserveSystem 2. Theamountofnettransactionaccountssubjecttoa mustholdthatdepositdirectlywithaReserveBank;an reserve requirement ratio of 0 percent (the “exemption institutionthatisnotamemberoftheSystemcanmain- amount”)isadjustedeachyearbystatute.Theexemption tain that deposit directly with a Reserve Bank or with amountisadjustedupwardby80percentoftheprevious another institution in a pass-through relationship. Re- year’s(June30toJune30)rateofincreaseintotalreserve requirements are imposed on commercial banks, servable liabilities at all depository institutions. No savings banks, savings and loan associations, credit adjustment is made in the event of a decrease in such unions, U.S. branches and agencies of foreign banks, liabilities. Edgecorporations,andagreementcorporations. 3. Theamountofnettransactionaccountssubjecttoa 1. Totaltransactionaccountsconsistsofdemandde- reserverequirementratioof3percentisthe“lowreserve posits,automatictransferservice(ATS)accounts,NOW tranche.”Bystatute,theupperlimitofthelowreserve accounts, share draft accounts, telephone or preautho- trancheisadjustedeachyearby80percentoftheprerizedtransferaccounts,ineligiblebanker’sacceptances, vious year’s (June 30 to June 30) rate of increase or andaffiliate-issuedobligationsmaturinginsevendaysor decreaseinnettransactionaccountsheldbyalldeposiless. Net transaction accounts are total transaction toryinstitutions. accountslessamountsduefromotherdepositoryinstitutionsandlesscashitemsintheprocessofcollection.
Statistical Tables 403 5. BankingOfficesandBanksAffiliatedwithBankHoldingCompaniesintheUnited States,December31,2007and2008 Commercialbanks1 Statechartered Typeofoffice Total Member savings Total Nonmember banks Total National State Allbankingoffices Banks Number,Dec.31,2007 .. 7,601 7,241 2,489 1,615 874 4,752 360 Changesduring2008 Newbanks .............. 101 99 23 11 12 76 2 Banksconverted intobranches ....... –244 –238 –111 –66 –45 –127 –6 Ceasedbanking operations2 ......... –57 –50 –20 –14 –6 –30 –7 Other3................... 0 –3 –3 –25 22 0 3 Netchange ............ –200 –192 –111 –94 –17 –81 –8 Number,Dec.31,2008 .. 7,401 7,049 2,378 1,521 857 4,671 352 Branchesand AdditionalOffices Number,Dec.31,2007 .. 82,050 78,873 56,064 42,002 14,062 22,809 3,177 Changesduring2008 Newbranches............ 3,021 2,952 2,233 1,868 365 719 69 Branchesconverted frombanks.......... 244 239 133 75 58 106 5 Discontinued2............ –2,848 –2,760 –2,305 –1,900 –405 –455 –88 Other3................... 0 93 –233 –366 133 326 –93 Netchange ............ 417 524 –172 –323 151 696 –107 Number,Dec.31,2008 .. 82,467 79,397 55,892 41,679 14,213 23,505 3,070 Banksaffiliatedwithbankholdingcompanies Banks Number,Dec.31,2007 .. 6,120 5,995 2,203 1,426 777 3,792 125 Changesduring2008 BHC-affiliated newbanks .......... 120 115 27 16 11 88 5 Banksconverted intobranches ....... –222 –218 –107 –64 –43 –111 –4 Ceasedbanking operations2 ......... –44 –42 –20 –14 –6 –22 –2 Other3................... 0 –2 –8 –22 14 6 2 Netchange ............ –146 –147 –108 –84 –24 –39 1 Number,Dec.31,2008 .. 5,974 5,848 2,095 1,342 753 3,753 126 Note:Includesbanks,bankingoffices,andbankhold- acceptsdemanddepositsandisengagedinthebusiness ingcompaniesinU.S.territoriesandpossessions(affili- of making commercial loans or any institution that is atedinsularareas). definedasaninsuredbankinsection3(h)oftheFDIC 1. For purposes of this table, banks are entities that Act. aredefinedasbanksintheBankHoldingCompanyAct, 2. Institutions that no longer meet the Regulation Y asamended,whichisimplementedbyFederalReserve definitionofabank. Regulation Y. Generally, a bank is any institution that 3. Interclasschangesandsalesofbranches.
404 95th Annual Report, 2008 6A. ReservesofDepositoryInstitutions,FederalReserveBankCredit,andRelatedItems, Year-End1984–2008andMonth-End2008 Millionsofdollars Factorssupplyingreservefunds FederalReserveBankcreditoutstanding Special Period drawing Treasury S o e u c h t u r e i r l g i d t h i t e 1 s a R g e re p e u m rc e h n a t s s e 2 e a x n t L c e d r n o e o s a d i n t o i h s t n e s r 3 Float R F a O e e s d s t s h e e e r e r t v s a r e l Total s G to o c ld k c a e r c r i t c g i o f h i u c ts n a t te s c t u an o rr d u e i t n n - c g y 4 1984...... 167,612 2,015 3,577 833 12,347 186,384 11,096 4,618 16,418 1985...... 186,025 5,223 3,060 988 15,302 210,598 11,090 4,718 17,075 1986...... 205,454 16,005 1,565 1,261 17,475 241,760 11,084 5,018 17,567 1987...... 226,459 4,961 3,815 811 15,837 251,883 11,078 5,018 18,177 1988...... 240,628 6,861 2,170 1,286 18,803 269,748 11,060 5,018 18,799 1989...... 233,300 2,117 481 1,093 39,631 276,622 11,059 8,518 19,628 1990r...... 241,431 18,354 190 2,222 39,897 302,091 11,058 10,018 20,402 1991r...... 272,531 15,898 218 731 34,567 323,945 11,059 10,018 21,014 1992r...... 300,423 8,094 675 3,253 30,020 342,464 11,056 8,018 21,447 1993r...... 336,654 13,212 94 909 33,035 383,904 11,053 8,018 22,095 1994r...... 368,156 10,590 223 –716 33,634 411,887 11,051 8,018 22,994 1995r...... 380,831 13,862 135 107 33,303 428,239 11,050 10,168 24,003 1996r...... 393,132 21,583 85 4,296 32,896 451,992 11,048 9,718 24,966 1997r...... 431,420 23,840 2,035 719 31,452 489,466 11,047 9,200 25,543 1998r...... 452,478 30,376 17 1,636 36,966 521,475 11,046 9,200 26,270 1999r...... 478,144 140,640 233 –237 35,321 654,100 11,048 6,200 28,013 2000r...... 511,833 43,375 110 901 36,467 592,686 11,046 2,200 31,643 2001r...... 551,685 50,250 34 –23 37,658 639,604 11,045 2,200 33,017 2002r...... 629,416 39,500 40 418 39,083 708,457 11,043 2,200 34,597 2003r...... 666,665 43,750 62 –319 40,848 751,006 11,043 2,200 35,468 2004r...... 717,819 33,000 43 925 42,219 794,007 11,045 2,200 36,434 2005r...... 744,215 46,750 72 885 39,611 831,532 11,043 2,200 36,540 2006r...... 778,915 40,750 67 –333 39,895 859,294 11,041 2,200 38,206 2007r...... 740,611 46,500 72,636 –19 41,945 901,674 11,041 2,200 38,681 2008...... 495,629 80,000 1,605,848 –1,494 43,568 2,223,552 11,041 2,200 38,674 Fornotesseeendoftable.
Statistical Tables 405 6A.—Continued Factorsabsorbingreservefunds Reserve c C ir u c r u i r l n e a n ti c o y n a r g e R r p e e u e v r m c e h e rs n a e s ts e 5 h T o r l c e d a a i s s n h u g r s y 6 T g r e e n a e s r u a r D l y epo s s o u i t t p h s T p e w r r l e e i t a m t h s h a u e n n F ry t e r a d e r e s y e ra rv l e R F b e o s a r e l e a r i v n g e c n e B s anks, Other R b c a l e e l q a a u n r i i c r n e e g s d l R i F a O e e b a d s t i n h e l e i d r e r t v i a r e e l s b R F B a e e w l a d s a i n e n e t r k h r c v a s e e l s account financing capital account 183,796 0 513 5,316 ... 253 867 1,126 5,952 20,693 197,488 0 550 9,351 ... 480 1,041 1,490 5,940 27,141 211,995 0 447 7,588 ... 287 917 1,812 6,088 46,295 230,205 0 454 5,313 ... 244 1,027 1,687 7,129 40,097 247,649 0 395 8,656 ... 347 548 1,605 7,683 37,742 260,456 0 450 6,217 ... 589 1,298 1,618 8,486 36,713 286,963 0 561 8,960 ... 369 528 1,960 8,147 36,081 307,756 0 636 17,697 ... 968 1,869 3,946 8,113 25,051 334,701 0 508 7,492 ... 206 653 5,897 7,984 25,544 365,271 0 377 14,809 ... 386 636 6,332 9,292 27,967 403,843 0 335 7,161 ... 250 1,143 4,196 11,959 25,061 424,244 0 270 5,979 ... 386 2,113 5,167 12,342 22,960 450,648 0 249 7,742 ... 167 1,178 6,601 13,829 17,310 482,327 0 225 5,444 ... 457 1,171 6,684 15,500 23,447 517,484 0 85 6,086 ... 167 1,869 6,780 16,354 19,164 628,359 0 109 28,402 ... 71 1,644 7,481 17,256 16,039 593,694 0 450 5,149 ... 216 2,478 6,332 17,962 11,295 643,301 0 425 6,645 ... 61 1,356 8,525 17,083 8,469 687,518 21,091 367 4,420 ... 136 1,266 10,534 18,977 11,988 724,187 25,652 321 5,723 ... 162 995 11,829 19,793 11,055 754,877 30,783 270 5,912 ... 80 1,285 9,963 26,378 14,137 794,014 30,505 202 4,573 ... 83 2,144 8,651 30,466 10,678 820,176 29,615 252 4,708 ... 98 972 6,842 36,231 11,847 828,938 43,985 259 16,120 ... 96 1,830 6,614 41,622 14,132 889,898 88,352 259 106,123 259,325 1,365 21,221 4,387 48,921 855,614
406 95th Annual Report, 2008 6A. ReservesofDepositoryInstitutions,FederalReserveBankCredit,andRelatedItems, Year-End1984–2008andMonth-End2008—Continued Millionsofdollars Factorssupplyingreservefunds FederalReserveBankcreditoutstanding Special Period drawing Treasury S o e u c h t u r e i r l g i d t h i t e 1 s a R g e re p e u m rc e h n a t s s e 2 e a x n t L c e d r n o e o s a d i n t o i h s t n e s r 3 Float R F a O e e s d s t s h e e e r e r t v a s r e l Total s G to o c ld k c a e r c r i t c g i o f h i u c ts n a t te s c t u an o rr d u e i t n n - c g y 4 2008 Jan...... 713,382 25,500 84,038 –2,352 44,548 865,117 11,041 2,200 38,680 Feb ..... 713,353 61,750 60,770 –1,085 41,357 876,145 11,041 2,200 38,680 Mar..... 591,234 76,000 172,035 –555 43,524 882,237 11,041 2,200 38,679 Apr ..... 548,692 115,500 165,763 –1,724 43,761 871,992 11,041 2,200 38,735 May..... 486,901 113,750 236,449 –1,150 41,926 877,876 11,041 2,200 38,805 Jun...... 478,841 114,500 267,613 –638 40,323 900,639 11,041 2,200 38,677 Jul...... 479,240 119,000 258,629 –2,178 43,813 898,503 11,041 2,200 38,676 Aug..... 479,702 117,500 260,352 –1,470 39,897 895,980 11,041 2,200 38,675 Sep ..... 491,127 83,000 878,541 –954 40,915 1,492,629 11,041 2,200 38,675 Oct ..... 490,087 80,000 1,454,137 –1,290 42,517 2,065,451 11,041 2,200 38,674 Nov..... 488,622 80,000 1,514,182 –898 40,124 2,122,030 11,041 2,200 38,674 Dec ..... 495,629 80,000 1,605,848 –1,494 43,568 2,223,552 11,041 2,200 38,674
Statistical Tables 407 6A.—Continued Factorsabsorbingreservefunds Reserve DepositswithFederalReserveBanks, otherthanreservebalances Other balances Federal with Currency Reverse Treasury Required Reserve Federal circu i l n ation a r g e r p e u e r m ch en as ts e 5 hol c d a i s n h gs6 T g r e e n a e s r u a r l y sup T p r l e e a m su en ry tary Foreign Other b c a le la a n ri c n e g s liab a i n li d ties R B e a s n er k v s e account financing capital account 810,821 39,574 288 5,773 ... 114 315 6,812 42,497 10,845 815,028 43,279 261 4,424 ... 96 258 6,750 44,347 13,622 815,219 44,101 331 5,552 ... 98 238 7,047 45,043 16,527 814,089 40,704 281 4,955 ... 106 285 7,091 43,179 13,279 822,884 38,700 282 4,620 ... 99 248 7,070 44,332 11,687 826,362 43,822 279 4,978 ... 211 284 7,053 45,439 24,129 831,862 45,422 318 5,256 ... 103 327 7,016 43,981 16,135 835,129 42,610 281 4,681 ... 99 298 7,086 44,968 12,744 838,253 77,937 270 32,988 299,491 121 26,277 7,566 47,168 214,474 859,150 94,531 272 43,998 558,851 184 14,639 5,999 44,432 495,311 872,317 98,559 241 66,385 434,107 187 6,504 4,956 53,352 637,336 889,898 88,352 259 106,123 259,325 1,365 21,221 4,387 48,921 855,614 Note:Componentsmaynotsumtototalsbecauseof 4. Includescurrencyandcoin(otherthangold)issued rounding. directlybytheU.S.Treasury.Thelargestcomponentsare 1. IncludesU.S.Treasuryandfederalagencysecuri- fractionalanddollarcoins.Fordetailsreferto“U.S.Curties. U.S. Treasury securities include securities lent to rency and Coin Outstanding and in Circulation,” Treadealers,whicharefullycollateralizedbyU.S.Treasury suryBulletin. securities, federal agency securities, and other highly 5. Cashvalueofagreements,whicharecollateralized rated debt securities. Federal agency securities are byU.S.Treasurysecurities. includedatfacevalue. 6. CoinandpapercurrencyheldbytheTreasury,as 2. Cashvalueofagreements,whicharecollateralized wellasgoldinexcessofthegoldcertificatesissuedto byU.S.Treasuryandfederalagencysecurities. theReserveBank. 3. Refertotable6Bfordetail. ... Notapplicable. r Revised.
408 95th Annual Report, 2008 6B. LoansandOtherCreditExtensions,byType,Year-End1984–2008and Month-End2008 Millionsofdollars Primary, Primary Central secondary, Term MMIFF Period Total s c e r a a e s n d o d i n t1 al F D C ac e r i e a l d i l t e i y t r 2 a c u r c e t d io it n AMLF3 AIG4 C a P n F d F5 L O L th C e s r 6 li s q b w u a i a n d p k i s ty 1984 ...... 3,577 3,577 ... ... ... ... ... ... ... 1985 ...... 3,060 3,060 ... ... ... ... ... ... ... 1986 ...... 1,565 1,565 ... ... ... ... ... ... ... 1987 ...... 3,815 3,815 ... ... ... ... ... ... ... 1988 ...... 2,170 2,170 ... ... ... ... ... ... ... 1989 ...... 481 481 ... ... ... ... ... ... ... 1990 ...... 190 190 ... ... ... ... ... ... ... 1991 ...... 218 218 ... ... ... ... ... ... ... 1992 ...... 675 675 ... ... ... ... ... ... ... 1993 ...... 94 94 ... ... ... ... ... ... ... 1994 ...... 223 223 ... ... ... ... ... ... ... 1995 ...... 135 135 ... ... ... ... ... ... ... 1996 ...... 85 85 ... ... ... ... ... ... ... 1997 ...... 2,035 2,035 ... ... ... ... ... ... ... 1998 ...... 17 17 ... ... ... ... ... ... ... 1999 ...... 233 233 ... ... ... ... ... ... ... 2000 ...... 110 110 ... ... ... ... ... ... ... 2001 ...... 34 34 ... ... ... ... ... ... ... 2002 ...... 40 40 ... ... ... ... ... ... ... 2003 ...... 62 62 ... ... ... ... ... ... ... 2004 ...... 43 43 ... ... ... ... ... ... ... 2005 ...... 72 72 ... ... ... ... ... ... ... 2006 ...... 67 67 ... ... ... ... ... ... ... 2007 ...... 72,636 8,636 ... 40,000 ... ... ... ... 24,000 2008 ...... 1,605,848 93,791 37,404 450,219 23,765 38,914 334,102 73,925 553,728
Statistical Tables 409 6B.—Continued Millionsofdollars Primary, Primary Central secondary, Term MMIFF Period Total s c e r a a e s n d o d i n t1 al F D C ac e r i e a l d i l t e i y t r 2 a c u r c e t d io it n AMLF3 AIG4 C a P n F d F5 L O L th C e s r 6 li s q b w u a i a n d p k i s ty 2008 Jan...... 84,038 38 ... 60,000 ... ... ... ... 24,000 Feb ..... 60,770 770 ... 60,000 ... ... ... ... 0 Mar..... 172,035 11,291 39,743 100,000 ... ... ... ... 21,000 Apr ..... 165,763 11,988 17,775 100,000 ... ... ... ... 36,000 May..... 236,449 16,300 8,150 150,000 ... ... ... ... 62,000 Jun...... 267,613 24,189 1,455 150,000 ... ... ... 29,970 62,000 Jul...... 258,629 17,529 0 150,000 ... ... ... 29,099 62,000 Aug..... 260,352 19,104 0 150,000 ... ... ... 29,247 62,000 Sep ..... 878,541 51,020 148,701 149,000 151,070 61,080 ... 29,407 288,263 Oct ..... 1,454,137 112,694 79,137 301,363 94,539 79,453 226,539 26,848 533,564 Nov..... 1,514,182 91,533 57,072 406,508 52,842 55,943 295,338 48,127 506,819 Dec ..... 1,605,848 93,791 37,404 450,219 23,765 38,914 334,102 73,925 553,728 Note:Componentsmaynotsumtototalsbecauseof 4. CreditextendedtoAmericanInternationalGroup, rounding. Inc.ExcludescreditextendedtoconsolidatedLLCs. 1. Priorto2003,categorywas“Adjustment,extended, 5. MoneyMarketInvestorFundingFacilityandComandseasonalcredit.” mercialPaperFundingFacility,netportfolioholdingsof 2. Includes credit extended through the Primary theLLCs.NocreditwasextendedthroughtheMMIFFin Dealer Credit Facility and credit extended to certain 2008. otherbroker-dealers. 6. IncludesthenetportfolioholdingsofMaidenLane 3. Asset-Backed Commercial Paper Money Market LLC,MaidenLaneIILLC,andMaidenLaneIIILLC. MutualFundLiquidityFacility. ... Notapplicable.
410 95th Annual Report, 2008 6C. ReservesofDepositoryInstitutions,FederalReserveBankCredit,andRelatedItems, Year-End1918–1983 Millionsofdollars Factorssupplyingreservefunds FederalReserveBankcreditoutstanding Special Period drawing Treasury S o e u c h t u r e i r l g i d t h i t e 1 s R a c g e h r p a e u s e e r - - Loans Float3 ot A he ll r4 R F O e e d s th e e r e r v a r e l Total s G to o c l k d 6 c a e r c r i t c g i o f h i u c ts n a t te s c t u an o rr d u e i t n n - c g y 7 ments2 assets5 1918...... 239 0 1,766 199 294 0 2,498 2,873 ... 1,795 1919r..... 300 0 2,215 201 575 0 3,292 2,707 ... 1,707 1920...... 287 0 2,687 119 262 0 3,355 2,639 ... 1,709 1921...... 234 0 1,144 40 146 0 1,563 3,373 ... 1,842 1922...... 436 0 618 78 273 0 1,405 3,642 ... 1,958 1923...... 80 54 723 27 355 0 1,238 3,957 ... 2,009 1924...... 536 4 320 52 390 0 1,302 4,212 ... 2,025 1925...... 367 8 643 63 378 0 1,459 4,112 ... 1,977 1926...... 312 3 637 45 384 0 1,381 4,205 ... 1,991 1927...... 560 57 582 63 393 0 1,655 4,092 ... 2,006 1928...... 197 31 1,056 24 500 0 1,809 3,854 ... 2,012 1929...... 488 23 632 34 405 0 1,583 3,997 ... 2,022 1930...... 686 43 251 21 372 0 1,373 4,306 ... 2,027 1931...... 775 42 638 20 378 0 1,853 4,173 ... 2,035 1932...... 1,851 4 235 14 41 0 2,145 4,226 ... 2,204 1933...... 2,435 2 98 15 137 0 2,688 4,036 ... 2,303 1934...... 2,430 0 7 5 21 0 2,463 8,238 ... 2,511 1935...... 2,430 1 5 12 38 0 2,486 10,125 ... 2,476 1936...... 2,430 0 3 39 28 0 2,500 11,258 ... 2,532 1937...... 2,564 0 10 19 19 0 2,612 12,760 ... 2,637 1938...... 2,564 0 4 17 16 0 2,601 14,512 ... 2,798 1939...... 2,484 0 7 91 11 0 2,593 17,644 ... 2,963 1940r..... 2,184 0 3 80 8 0 2,274 21,995 ... 3,087 1941...... 2,254 0 3 94 10 0 2,361 22,737 ... 3,247 1942...... 6,189 0 6 471 14 0 6,679 22,726 ... 3,648 1943r..... 11,543 0 5 681 10 0 12,239 21,938 ... 4,094 1944...... 18,846 0 80 815 4 0 19,745 20,619 ... 4,131 1945r..... 24,262 0 249 578 2 0 25,091 20,065 ... 4,339 1946...... 23,350 0 163 580 1 0 24,093 20,529 ... 4,562 1947...... 22,559 0 85 535 1 0 23,181 22,754 ... 4,562 1948...... 23,333 0 223 541 1 0 24,097 24,244 ... 4,589 1949r..... 18,885 0 78 534 2 0 19,499 24,427 ... 4,598 1950...... 20,725 53 67 1,368 3 0 22,216 22,706 ... 4,636 1951...... 23,605 196 19 1,184 5 0 25,009 22,695 ... 4,709 1952...... 24,034 663 156 967 4 0 25,825 23,187 ... 4,812 1953...... 25,318 598 28 935 2 0 26,880 22,030 ... 4,894 1954...... 24,888 44 143 808 1 0 25,885 21,713 ... 4,985 1955...... 24,391 394 108 1,585 29 0 26,507 21,690 ... 5,008 1956...... 24,610 305 50 1,665 70 0 26,699 21,949 ... 5,066 1957...... 23,719 519 55 1,424 66 0 25,784 22,781 ... 5,146 1958...... 26,252 95 64 1,296 49 0 27,755 20,534 ... 5,234 1959...... 26,607 41 458 1,590 75 0 28,771 19,456 ... 5,311 Fornotesseeendoftable.
Statistical Tables 411 6C.—Continued Factorsabsorbingreservefunds Memberbank Depositswith reserves9 FederalReserveBanks, Other Cur- otherthanreservebalances Other Federal rency Treasury Required Federal Reserve in cash clearing cir ti c o u n la- holdings8 Treasury Foreign Other a R cc e o s u e n rv ts e 5 balances l c ia a b a p i n i l t i d a ti l e 5 s R F W e e d se i e t r r h v a e l Cu a rr n e d ncy qu R ire e d - 11 ces E s x 11 - ,12 coin10 Banks 4,951 288 51 96 25 118 0 0 1,636 ... 1,585 51 5,091 385 31 73 28 208 0 0 1,890 ... 1,822 68 5,325 218 57 5 18 298 0 0 1,781 ... ... ... 4,403 214 96 12 15 285 0 0 1,753 ... 1,654 99 4,530 225 11 3 26 276 0 0 1,934 ... ... ... 4,757 213 38 4 19 275 0 0 1,898 ... 1,884 14 4,760 211 51 19 20 258 0 0 2,220 ... 2,161 59 4,817 203 16 8 21 272 0 0 2,212 ... 2,256 244 4,808 201 17 46 19 293 0 0 2,194 ... 2.250 256 4,716 208 18 5 21 301 0 0 2,487 ... 2,424 63 4,686 202 23 6 21 348 0 0 2,389 ... 2,430 241 4,578 216 29 6 24 393 0 0 2,355 ... 2,428 273 4,603 211 19 6 22 375 0 0 2,471 ... 2,375 96 5,360 222 54 79 31 354 0 0 1,961 ... 1,994 233 5,388 272 8 19 24 355 0 0 2,509 ... 1,933 576 5,519 284 3 4 128 360 0 0 2,729 ... 1,870 859 5,536 3,029 121 20 169 241 0 0 4,096 ... 2,282 1,814 5,882 2,566 544 29 226 253 0 0 5,587 ... 2,743 2,844 6,543 2,376 244 99 160 261 0 0 6,606 ... 4,622 1,984 6,550 3,619 142 172 235 263 0 0 7,027 ... 5,815 1,212 6,856 2,706 923 199 242 260 0 0 8,724 ... 5,519 3,205 7,598 2,409 634 397 256 251 0 0 11,653 ... 6,444 5,209 8,732 2,213 368 1,133 599 284 0 0 14,026 ... 7,411 6,615 11,160 2,215 867 774 586 291 0 0 12,450 ... 9,365 3,085 15,410 2,193 799 793 485 256 0 0 13,117 ... 11,129 1,988 20,449 2,303 579 1,360 356 339 0 0 12,886 ... 11,650 1,236 25,307 2,375 440 1,204 394 402 0 0 14,373 ... 12,748 1,625 28,515 2,287 977 862 446 495 0 0 15,915 ... 14,457 1,458 28,952 2,272 393 508 314 607 0 0 16,139 ... 15,577 562 28,868 1,336 870 392 569 563 0 0 17,899 ... 16,400 1,499 28,224 1,325 1,123 642 547 590 0 0 20,479 ... 19,277 1,202 27,600 1,312 821 767 750 706 0 0 16,568 ... 15,550 1,018 27,741 1,293 668 895 565 714 0 0 17,681 ... 16,509 1,172 29,206 1,270 247 526 363 746 0 0 20,056 ... 19,667 389 30,433 1,270 389 550 455 777 0 0 19,950 ... 20,520 2570 30,781 761 346 423 493 839 0 0 20,160 ... 19,397 763 30,509 796 563 490 441 907 0 0 18,876 ... 18,618 258 31,158 767 394 402 554 925 0 0 19,005 ... 18,903 102 31,790 775 441 322 426 901 0 0 19,059 ... 19,089 230 31,834 761 481 356 246 998 0 0 19,034 ... 19,091 257 32,193 683 358 272 391 1,122 0 0 18,504 ... 18,574 270 32,591 391 504 345 694 841 0 0 18,174 310 18,619 2135
412 95th Annual Report, 2008 6C. ReservesofDepositoryInstitutions,FederalReserveBankCredit,andRelatedItems, Year-End1918–1983—Continued Millionsofdollars Factorssupplyingreservefunds FederalReserveBankcreditoutstanding Special Period drawing Treasury S o e u c h t u r e i r l g i d t h i t e 1 s R a c g e h r p a e u s e e r - - Loans Float3 ot A he ll r4 R F O e e d s th e e r e r v a r e l Total s G to o c l k d 6 c a e r c r i t c g i o f h i u c ts n a t te s c t u an o rr d u e i t n n - c g y 7 ments2 assets5 1960...... 26,984 400 33 1,847 74 0 29,338 17,767 ... 5,398 1961r..... 28,722 159 130 2,300 51 0 31,362 16,889 ... 5,585 1962r..... 30,478 342 38 2,903 110 0 33,871 15,978 ... 5,567 1963...... 33,582 11 63 2,600 162 0 36,418 15,513 ... 5,578 1964...... 36,506 538 186 2,606 94 0 39,930 15,388 ... 5,405 1965...... 40,478 290 137 2,248 187 0 43,340 13,733 ... 5,575 1966...... 43,655 661 173 2,495 193 0 47,177 13,159 ... 6,317 1967r..... 48,980 170 141 2,576 164 0 52,031 11,982 ... 6,784 1968...... 52,937 0 186 3,443 58 0 56,624 10,367 ... 6,795 1969r..... 57,154 0 183 3,440 64 2,743 63,584 10,367 ... 6,852 1970r..... 62,142 0 335 4,261 57 1,123 67,918 10,732 400 7,147 1971...... 69,481 1,323 39 4,343 261 1,068 76,515 10,132 400 7,710 1972...... 71,119 111 1,981 3,974 106 1,260 78,551 10,410 400 8,313 1973...... 80,395 100 1,258 3,099 68 1,152 86,072 11,567 400 8,716 1974r..... 84,760 954 299 2,001 999 3,195 92,208 11,652 400 9,253 1975...... 92,789 1,335 211 3,688 1,126 3,312 102,461 11,599 500 10,218 1976...... 100,062 4,031 25 2,601 991 3,182 110,892 11,598 1,200 10,810 1977...... 108,922 2,352 265 3,810 954 2,442 118,745 11,718 1,250 11,331 1978...... 117,374 1,217 1,174 6,432 587 4,543 131,327 11,671 1,300 11,831 1979...... 124,507 1,660 1,454 6,767 704 5,613 140,705 11,172 1,800 13,083 1980...... 128,038 2,554 1,809 4,467 776 8,739 146,383 11,160 2,518 13,427 1981...... 136,863 3,485 1,601 1,762 195 9,230 153,136 11,151 3,318 13,687 1982r..... 144,544 4,293 717 2,735 1,480 9,890 163,659 11,148 4,618 13,786 1983...... 159,203 1,592 918 1,605 418 8,728 172,464 11,121 4,618 15,732 Note: Foradescriptionoffiguresanddiscussionof 4. Principallyacceptancesand,untilAugust21,1959, theirsignificance,seeBankingandMonetaryStatistics, industrialloans,theauthorityforwhichexpiredonthat 1941–1970(BoardofGovernorsoftheFederalReserve date. System,1976),pp.507–23. 5. FortheperiodbeforeApril16,1969,includesthe Components may not sum to totals because of total of Federal Reserve capital paid in, surplus, other rounding. capital accounts, and other liabilities and accrued divi- 1. In1969andthereafter,includessecuritiesloaned— dends,lessthesumofbankpremisesandotherassets, fullyguaranteedbyU.S.governmentsecuritiespledged and is reported as ‘‘Other Federal Reserve accounts’’; with Federal Reserve Banks—and excludes securities thereafter, ‘‘Other Federal Reserve assets’’ and ‘‘Other sold and scheduled to be bought back under matched Federal Reserve liabilities and capital’’ are shown sale–purchasetransactions.OnSeptember29,1971,and separately. thereafter,includesfederalagencyissuesboughtoutright. 6. BeforeJanuary30,1934,includesgoldheldinFed- 2. On December 1, 1966, and thereafter, includes eralReserveBanksandincirculation. federal agency obligations held under repurchase 7. Includescurrencyandcoin(otherthangold)issued agreements. directly by the Treasury. The largest components are 3. In 1960 and thereafter, figures reflect a minor fractional and dollar coins. For details see ‘‘U.S. Curchangeinconcept;seeFederalReserveBulletin,vol.47 rency and Coin Outstanding and in Circulation,’’ Trea- (February1961),p.164. suryBulletin.
Statistical Tables 413 6C.—Continued Factorsabsorbingreservefunds Memberbank Depositswith reserves9 FederalReserveBanks, Cur- Other otherthanreservebalances rency Other Federal Treasury Required in Federal Reserve cash clearing c c u i l r a - - holdings8 a R cc e o s u e n rv ts e 5 balances liab a i n li d ties F W ed i e t r h al Currency Re- Extion Treasury Foreign Other capital5 Reserve and quired11 cess11,12 coin10 Banks 32,869 377 485 217 533 941 0 0 17,081 2,544 18,988 637 33,918 422 465 279 320 1,044 0 0 17,387 2,823 20,114 96 35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,071 645 37,692 361 880 171 291 1,065 0 0 17,049 4,099 20,677 471 39,619 612 820 229 321 1,036 0 0 18,086 4,151 21,663 574 42,056 760 668 150 355 211 0 0 18,447 4,163 22,848 2238 44,663 1,176 416 174 588 2147 0 0 19,779 4,310 24,321 2232 47,226 1,344 1,123 135 653 2773 0 0 21,092 4,631 25,905 2182 50,961 695 703 216 747 21,353 0 0 21,818 4,921 27,439 2700 53,950 596 1,312 134 807 0 0 1,919 22,085 5,187 28,173 2901 57,093 431 1,156 148 1,233 0 0 1,986 24,150 5,423 30,033 2460 61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 32,496 1,035 66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 32,044 9812 72,497 317 2,542 251 1,41913 0 0 2,669 27,060 6,781 35,268 21,360 79,743 185 3,113 418 1,27513 0 0 2,935 25,843 7,370 37,011 23,798 86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,197 21,10314 93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,461 21,535 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 21,265 114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,694 2893 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 22,835 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 21,442 154,908 429 5,033 328 1,033 0 436 4,990 26,053 16,666 41,391 1,328 171,935 479 3,661 191 851 0 1,013 5,392 20,413 17,821 39,179 2945 8. CoinandpapercurrencyheldbytheTreasury,as 1973—Q1, $279; Q2, $172; Q3, $112; Q4, $84; wellasanygoldinexcessofthegoldcertificatesissued 1974—Q1, $67; Q2, $58. The transition period ended totheReserveBank. withthesecondquarterof1974. 9. InNovember1979andthereafter,includesreserves 13. FortheperiodbeforeJuly1973,includescertain ofmemberbanks,EdgeActcorporations,andU.S.agen- deposits of domestic nonmember banks and foreigncies and branches of foreign banks. On November 13, ownedbankinginstitutionsheldwithmemberbanksand 1980,andthereafter,includesreservesofalldepository redepositedinfullwithFederalReserveBanksinconinstitutions. nectionwithvoluntaryparticipationbynonmemberinsti- 10. Between December 1, 1959, and November 23, tutionsintheFederalReserveSystemprogramofcredit 1960, part was allowed as reserves; thereafter, all was restraint. allowed. As of December 12, 1974, the amount of voluntary 11. Estimatedthrough1958.Before1929,datawere nonmemberbankandforeign-agencyandbranchdeposavailableonlyoncalldates(in1920and1922thecall its at Federal Reserve Banks that are associated with datewasDecember29).SinceSeptember12,1968,the marginal reserves is no longer reported. However, two amounthasbeenbasedonclose-of-businessfiguresfor amounts are reported: (1) deposits voluntarily held as thereserveperiodtwoweeksbeforethereportdate. reservesbyagenciesandbranchesofforeignbanksoper- 12. For the week ending November 15, 1972, and atingintheUnitedStatesand(2)Eurodollarliabilities. thereafter,includes$450millionofreservedeficiencies 14. Adjusted to include waivers of penalties for onwhichFederalReserveBanksareallowedtowaive reservedeficiencies,inaccordancewithchangeinBoard penaltiesforatransitionperiodinconnectionwithbank policy,effectiveNovember19,1975. adaptationtoRegulationJasamended,effectiveNovem- ... Notapplicable. ber 9, 1972. Allowable deficiencies are as follows r Revised. (beginning with first statement week of quarter, in millions):
414 95th Annual Report, 2008 7. PrincipalAssetsandLiabilitiesofInsuredCommercialBanks,byClassofBank, June30,2008and2007 Millionsofdollars,exceptasnoted Memberbanks Nonmember Item Total banks Total National State 2008 Assets Loansandinvestments ................... 7,696,410 6,110,998 4,971,837 1,139,161 1,585,412 Loans,gross .......................... 6,065,989 4,785,065 3,904,207 880,858 1,280,923 Net................................. 6,063,817 4,783,606 3,902,936 880,670 1,280,210 Investments ........................... 1,630,421 1,325,933 1,067,630 258,303 304,489 U.S.Treasuryandfederalagency securities....................... 183,365 99,129 59,023 40,105 84,236 Other............................... 1,447,056 1,226,804 1,008,606 218,198 220,253 Cashassets,total ........................ 299,881 235,910 199,720 36,190 63,971 Liabilities Deposits,total ........................... 5,815,572 4,428,354 3,590,980 837,373 1,387,219 Interbank ............................. 98,816 81,379 71,385 9,994 17,436 Othertransactions ..................... 638,674 462,024 372,790 89,234 176,650 Othernontransactions.................. 5,078,082 3,884,950 3,146,805 738,146 1,193,132 Equitycapital............................ 1,146,522 947,198 781,605 165,593 199,324 Numberofbanks ........................ 7,174 2,445 1,582 863 4,729 2007 Assets Loansandinvestments ................... 7,206,325 5,627,944 4,530,621 1,097,323 1,578,381 Loans,gross .......................... 5,605,635 4,349,029 3,514,019 835,010 1,256,607 Net................................. 5,602,798 4,346,962 3,512,160 834,802 1,255,836 Investments ........................... 1,600,690 1,278,915 1,016,602 262,313 321,774 U.S.Treasuryandfederalagency securities....................... 258,877 142,091 90,999 51,092 116,785 Other............................... 1,341,813 1,136,824 925,603 211,221 204,989 Cashassets,total ........................ 263,536 210,387 173,716 36,671 53,149 Liabilities Deposits,total ........................... 5,462,123 4,080,697 3,266,189 814,508 1,381,427 Interbank ............................. 80,119 65,673 53,472 12,201 14,446 Othertransactions ..................... 635,390 457,450 365,720 91,731 177,939 Othernontransactions.................. 4,746,614 3,557,573 2,846,997 710,576 1,189,041 Equitycapital............................ 1,041,028 831,338 675,049 156,288 209,691 Numberofbanks ........................ 7,322 2,553 1,673 880 4,769 Note:IncludesU.S.-insuredcommercialbankslocated ponentsreportedonaconsolidatedbasisonly).Compoin the United States but not U.S.-insured commercial nentsmaynotsumtototalsbecauseofrounding.Data banks operating in U.S. territories or possessions. Data for2007havebeenrevised. aredomesticassetsandliabilities(exceptforthosecom-
Statistical Tables 415 8. InitialMarginRequirementsunderRegulationsT,U,andX Percentofmarketvalue Margin Convertible Shortsales, Effectivedate stocks bonds Tonly1 1934,Oct.1............... 25–45 ... ... 1936,Feb.1............... 25–55 ... ... Apr.1............... 55 ... ... 1937,Nov.1 .............. 40 ... 50 1945,Feb.5............... 50 ... 50 July5............... 75 ... 75 1946,Jan.21 .............. 100 ... 100 1947,Feb.1............... 75 ... 75 1949,Mar.3 .............. 50 ... 50 1951,Jan.17 .............. 75 ... 75 1953,Feb.20 ............. 50 ... 50 1955,Jan.4 ............... 60 ... 60 Apr.23 ............. 70 ... 70 1958,Jan.16 .............. 50 ... 50 Aug.5 .............. 70 ... 70 Oct.16 ............. 90 ... 90 1960,July28.............. 70 ... 70 1962,July10.............. 50 ... 50 1963,Nov.6 .............. 70 ... 70 1968,Mar.11 ............. 70 50 70 June8 .............. 80 60 80 1970,May6 .............. 65 50 65 1971,Dec.6 .............. 55 50 55 1972,Nov.24 ............. 65 50 65 1974,Jan.3 ............... 50 50 50 Note: These regulations, adopted by the Board of adoptedeffectiveOctober1,1934;RegulationU,effec- Governors pursuant to the Securities Exchange Act of tiveMay1,1936;andRegulationX,effectiveNovem- 1934,limittheamountofcreditthatmaybeextendedfor ber 1, 1971. The former Regulation G, which was the purpose of purchasing or carrying ‘‘margin securi- adopted effective March 11, 1968, was merged into ties’’(asdefinedintheregulations)whentheloaniscol- RegulationU,effectiveApril1,1998. lateralized by such securities. The margin requirement, 1. From October 1, 1934, to October 31, 1937, the expressedasapercentage,isthedifferencebetweenthe requirementwasthemargin‘‘customarilyrequired’’by marketvalueofthesecuritiesbeingpurchasedorcarried brokersanddealers. (100 percent) and the maximum loan value of the ... Notapplicable. collateralasprescribedbytheBoard.RegulationTwas
416 95th Annual Report, 2008 9A. StatementofConditionoftheFederalReserveBanks,byBank, December31,2008and2007 Millionsofdollars Total Boston Item 2008 2007 2008 2007 Assets Goldcertificateaccount ................................ 11,037 11,037 424 449 Specialdrawingrightscertificateaccount ............... 2,200 2,200 115 115 Coin .................................................. 1,688 1,179 56 36 Loansandsecurities Termauctioncredit .................................... 450,220 40,000 16,150 ... Primary,secondary,andseasonalloans.................. 93,790 8,636 243 178 Primarydealercreditfacility1 .......................... 37,404 ... ... ... Asset-backedcommercialpapermoneymarket mutualfundliquidityfacility ...................... 23,765 ... 23,765 ... CreditextendedtoAmericanInternationalGroup,Inc.2.. 38,914 ... ... ... Securitiespurchasedunderagreementsto resell(tri-party)3 .................................. 80,000 46,500 3,356 2,143 Federalagencyandgovernment-sponsoredenterprise obligationsboughtoutright ........................ 19,708 ... 827 ... U.S.Treasurysecuritiesboughtoutright4................ 475,921 740,611 19,962 34,132 Totalloansandsecurities ............................ 1,219,722 835,748 64,302 36,453 Netportfolioholdingsofconsolidatedvariable interestentities:5 CommercialPaperFundingFacilityLLC6 ............ 334,910 ... ... ... MaidenLaneLLC7.................................. 30,635 ... ... ... MaidenLaneIILLC7 ............................... 19,195 ... ... ... MaidenLaneIIILLC7............................... 27,256 ... ... ... MoneyMarketInvestorFundingFacilityLLCs8 ...... 0 ... ... ... Denominatedinforeigncurrencies9..................... 24,804 22,914 1,411 592 Centralbankliquidityswaps10.......................... 553,728 24,000 31,498 629 Otherassets Itemsinprocessofcollection........................... 1,377 2,220 41 82 Bankpremises......................................... 2,194 2,144 123 120 Allother11 ............................................ 19,789 16,944 842 823 Interdistrictsettlementaccount ......................... 0 0 –10,264 –1,356 Totalassets ........................................... 2,248,534 918,384 88,547 37,942 Liabilities FederalReservenotesoutstanding(issuedtoBank)...... 1,022,850 1,010,262 38,282 38,832 Less:NotesheldbyFederalReserveBank............ 169,682 218,571 5,409 5,886 FederalReservenotes,net.............................. 853,168 791,691 32,872 32,946 Securitiessoldunderagreementstorepurchase3 ......... 88,352 43,985 3,706 2,027 Deposits Depositoryinstitutions ................................. 860,000 20,767 49,810 531 U.S.Treasury,generalaccount.......................... 106,123 16,120 ... ... U.S.Treasury,supplementaryfinancingaccount12 ....... 259,325 ... ... ... Foreign,officialaccounts............................... 1,365 96 2 1 Other13................................................ 21,226 2,020 246 31 Totaldeposits ....................................... 1,248,039 39,003 50,057 563 Deferredcredititems................................... 2,868 2,227 69 92 Consolidatedvariableinterestentities-otherliabilities .. 5,813 ... ... ... Otherliabilitiesandaccrueddividends14 ................ 8,143 4,577 154 215 Totalliabilities........................................ 2,206,382 881,484 86,859 35,843 CapitalAccounts Capitalpaidin......................................... 21,076 18,450 844 1,049 Surplus(includingaccumulatedother comprehensiveloss)............................... 21,076 18,450 844 1,049 Totalliabilitiesandcapitalaccounts .................. 2,248,534 918,384 88,547 37,942 Fornotesseeendoftable.
Statistical Tables 417 9A.—Continued NewYork Philadelphia Cleveland Richmond 2008 2007 2008 2007 2008 2007 2008 2007 3,935 4,053 453 455 423 428 891 869 874 874 83 83 104 104 147 147 76 55 137 88 136 113 233 134 220,434 33,957 38,300 ... 15,575 12 75,130 775 80,231 5,888 329 0 48 841 452 130 37,404 ... ... ... ... ... ... ... 0 ... ... ... ... ... ... ... 38,914 ... ... ... ... ... ... ... 28,464 16,838 3,493 2,057 3,034 1,903 7,254 4,029 7,012 ... 860 ... 747 ... 1,787 ... 169,330 268,173 20,779 32,765 18,047 30,308 43,156 64,168 581,788 324,856 63,762 34,822 37,450 33,064 127,779 69,102 334,910 ... ... ... ... ... ... ... 30,635 ... ... ... ... ... ... ... 19,195 ... ... ... ... ... ... ... 27,256 ... ... ... ... ... ... ... 0 ... ... ... ... ... ... ... 6,209 5,573 2,438 2,707 1,736 1,625 6,717 6,120 138,622 5,570 54,424 2,877 38,749 1,727 149,945 6,505 ... 42 237 317 164 268 41 154 212 216 65 64 147 153 233 186 8,791 6,707 812 716 693 752 1,919 1,454 110,091 –12,606 –66,458 794 16,708 –741 –163,991 –1,177 1,262,593 335,338 55,952 42,924 96,310 37,494 123,914 83,494 357,738 356,941 41,218 41,729 46,503 39,353 80,772 80,552 46,609 74,297 5,013 7,564 7,240 7,130 11,552 13,767 311,129 282,644 36,205 34,165 39,263 32,223 69,220 66,785 31,435 15,927 3,858 1,946 3,350 1,800 8,012 3,811 509,858 9,158 10,565 2,664 49,963 447 34,057 1,780 106,123 16,120 ... ... ... ... ... ... 259,325 ... ... ... ... ... ... ... 1,335 66 4 5 3 3 11 11 20,536 698 15 92 3 12 82 503 897,177 26,042 10,584 2,760 49,969 461 34,150 2,294 0 51 515 215 456 200 172 112 5,813 ... ... ... ... ... ... ... 5,823 1,437 160 211 168 228 401 500 1,251,378 326,101 51,322 39,297 93,206 34,912 111,954 73,502 5,607 4,619 2,315 1,813 1,552 1,291 5,980 4,996 5,607 4,619 2,315 1,813 1,552 1,291 5,980 4,996 1,262,593 335,338 55,952 42,924 96,310 37,494 123,914 83,494
418 95th Annual Report, 2008 9A. StatementofConditionoftheFederalReserveBanks,byBank, December31,2008and2007—Continued Millionsofdollars Atlanta Chicago Item 2008 2007 2008 2007 Assets Goldcertificateaccount ................................ 1,221 1,117 913 903 Specialdrawingrightscertificateaccount ............... 166 166 212 212 Coin .................................................. 214 153 194 137 LoansandSecurities Termauctioncredit .................................... 17,222 25 5,094 1,080 Primary,secondary,andseasonalloans.................. 483 0 1,828 1,259 Primarydealercreditfacility1 .......................... ... ... ... ... Asset-backedcommercialpapermoneymarket mutualfundliquidityfacility ...................... ... ... ... ... CreditextendedtoAmericanInternationalGroup,Inc.2.. ... ... ... ... Securitiespurchasedunderagreementsto resell(tri-party)3 .................................. 7,960 4,313 7,061 3,900 Federalagencyandgovernment-sponsoredenterprise obligationsboughtoutright ........................ 1,961 ... 1,739 ... U.S.Treasurysecuritiesboughtoutright4................ 47,353 68,690 42,005 62,120 Totalloansandsecurities 74,979 73,028 57,726 68,359 Netportfolioholdingsofconsolidatedvariable interestentities:5 CommercialPaperFundingFacilityLLC6 ............ ... ... ... ... MaidenLaneLLC7.................................. ... ... ... ... MaidenLaneIILLC7 ............................... ... ... ... ... MaidenLaneIIILLC7............................... ... ... ... ... MoneyMarketInvestorFundingFacilityLLCs8 ...... ... ... ... ... Denominatedinforeigncurrencies9..................... 1,910 1,908 1,100 1,283 Centralbankliquidityswaps10.......................... 42,641 2,028 24,559 1,364 Otherassets Itemsinprocessofcollection........................... 325 229 111 155 Bankpremises......................................... 225 230 209 205 Allother11 ............................................ 1,578 1,475 1,316 1,260 Interdistrictsettlementaccount ......................... 20,108 3,909 34,760 6,133 Totalassets ........................................... 143,366 84,243 121,100 80,010 Liabilities FederalReservenotesoutstanding(issuedtoBank)...... 129,432 111,626 83,073 86,265 Less:NotesheldbyFederalReserveBank............ 24,156 36,017 12,938 13,560 FederalReservenotes,net.............................. 105,276 75,609 70,135 72,705 Securitiessoldunderagreementstorepurchase3 ......... 8,791 4,080 7,798 3,689 Deposits Depositoryinstitutions ................................. 25,593 975 41,013 910 U.S.Treasury,generalaccount.......................... ... ... ... ... U.S.Treasury,supplementaryfinancingaccount12 ....... ... ... ... ... Foreign,officialaccounts............................... 3 3 2 2 Other13................................................ 13 166 133 161 Totaldeposits ....................................... 25,610 1,144 41,147 1,073 Deferredcredititems................................... 158 143 323 516 Consolidatedvariableinterestentities-otherliabilities .. ... ... ... ... Otherliabilitiesandaccrueddividends14 ................ 307 418 290 396 Totalliabilities........................................ 140,143 81,393 119,693 78,381 CapitalAccounts Capitalpaidin......................................... 1,612 1,425 703 814 Surplus(includingaccumulatedother comprehensiveloss)............................... 1,612 1,425 703 814 Totalliabilitiesandcapitalaccounts .................. 143,366 84,243 121,100 80,010
Statistical Tables 419 9A.—Continued St.Louis Minneapolis KansasCity Dallas SanFrancisco 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 344 326 199 203 349 335 636 613 1,249 1,286 71 71 30 30 66 66 98 98 234 234 43 50 54 45 114 72 180 130 252 165 4,698 1,050 5,737 ... 2,740 ... 4,335 1,400 44,805 1,701 454 0 123 3 4,570 7 692 0 4,338 330 ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 2,765 1,486 1,510 928 2,937 1,505 3,318 2,043 8,849 5,355 681 ... 372 ... 724 ... 818 ... 2,180 ... 16,446 23,671 8,985 14,777 17,475 23,974 19,742 32,540 52,642 85,293 25,044 26,207 16,727 15,708 28,446 25,486 28,905 35,983 112,814 92,680 ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 242 249 477 412 261 264 489 317 1,815 1,864 5,401 264 10,641 438 5,825 280 10,908 336 40,517 1,981 17 13 76 97 14 214 152 126 199 522 132 115 112 113 273 269 251 257 213 218 538 515 327 317 566 513 661 690 1,746 1,722 3,210 3,742 –9,656 2,140 5,080 5,239 11,155 –2,425 49,257 –3,651 35,041 31,551 18,987 19,503 40,993 32,740 53,434 36,124 208,296 97,021 29,317 32,982 17,523 19,219 29,868 33,316 55,888 57,270 113,237 112,177 3,405 3,770 2,839 2,790 3,536 3,212 20,767 24,860 26,219 25,719 25,912 29,212 14,684 16,429 26,332 30,103 35,121 32,410 87,018 86,459 3,053 1,406 1,668 878 3,244 1,424 3,665 1,933 9,773 5,066 5,446 289 1,614 1,104 10,769 449 13,533 635 107,779 1,823 ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 0 0 1 1 0 0 1 1 3 3 14 55 38 38 14 45 104 59 29 161 5,460 344 1,652 1,143 10,784 495 13,638 695 107,810 1,987 47 38 235 223 102 157 296 129 495 353 ... ... ... ... ... ... ... ... ... ... 150 192 99 122 116 172 172 230 302 456 34,622 31,192 18,338 18,794 40,578 32,352 52,892 35,397 205,398 94,321 210 180 324 355 208 194 271 363 1,449 1,350 210 180 324 355 208 194 271 363 1,449 1,350 35,041 31,551 18,987 19,503 40,993 32,740 53,434 36,124 208,296 97,021
420 95th Annual Report, 2008 9A. StatementofConditionoftheFederalReserveBanks,byBank, December31,2008and2007—Continued Note:Componentsmaynotsumtototalsbecauseof 10. Dollarvalueofforeigncurrencyheldunderthese rounding. agreementsvaluedattheexchangeratetobeusedwhen 1. Includescreditextendedtoprimarydealersandcer- the foreign currency is returned to the foreign central tainLondon-basedprimarydealeraffiliates. bank. This exchange rate equals the market exchange 2. ExcludescreditextendedtoMaidenLaneIILLC rateusedwhentheforeigncurrencywasacquiredfrom andMaidenLaneIIILLC. theforeigncentralbank. 3. Contractamountoftheagreements. 11. Includesaccruedinterest,premiumonsecurities, 4. Includes securities loaned—fully collateralized by anddepositoryinstitutionoverdrafts,intheamountsof U.S. Treasury securities, other investment-grade securi- $7,279million,$8,049million,and$4million,respecties,andcollateraleligiblefortri-partyrepurchaseagree- tively,for2008;and$6,410million,$7,988million,and ments pledged with Federal Reserve Banks—and $6million,respectively,for2007. excludessecuritiespurchasedunderagreementstoresell. 12. Represents amounts deposited by the U.S. Trea- 5. TheFederalReserveBankofNewYorkisthepri- surythatresultfromatemporarysupplementaryprogram marybeneficiaryofCommercialPaperFundingFacility that offsets, in part, the reserve impact of the Reserve LLC,MaidenLaneLLC,MaidenLaneIILLC,Maiden Banks’lendingandliquidityinitiatives. LaneIIILLCandMoneyMarketInvestorFundingFacil- 13. Includesdepositsofgovernment-sponsoredenterity LLCs and, as a result, the accounts and results of prises of $20,020 million and $5 million for 2008 and operationsoftheseentitiesareincludedinthecombined 2007, respectively, and international organizations of financialstatementsoftheFederalReserveBanks. $146 million and $144 million for 2008 and 2007, 6. Book value, which includes amortized cost and respectively. These deposits are primarily held by the relatedfees. FederalReserveBankofNewYork. 7. Fairvalue. 14. Includesotherentities’beneficialinterestsinthe 8.Therewerenomaterialtransactionsinthemoney consolidatedvariableinterestentitiesof$2,824millionat market investor funding facility for the period ended December31,2008. December31,2008. ... Notapplicable. 9. Valueddailyatmarketexchangerates.
Statistical Tables 421 9B. StatementofConditionoftheFederalReserveBanks,December31,2008and2007 SupplementalInformation—CollateralHeldagainstFederalReserveNotes: FederalReserveAgents’Accounts Millionsofdollars Item 2008 2007 FederalReservenotesoutstanding .......................... 1,022,850 1,010,262 Less:NotesheldbyFederalReserveBanksnotsubject tocollateralization .................................... 169,682 218,571 CollateralizedFederalReservenotes...................... 853,168 791,691 CollateralforFederalReservenotes Goldcertificateaccount .................................... 11,037 11,037 Specialdrawingrightscertificateaccount ................... 2,200 2,200 U.S.Treasury,federalagency,andgovernment-sponsored enterprisesecurities1 .................................. 496,733 743,063 Othereligibleassets ....................................... 343,198 35,391 Totalcollateral............................................ 853,168 791,691 1. Includes face value of U.S. Treasury, federal agency, and mortgage-backed securities held outright; compensationtoadjustfortheeffectofinflationonthe original face value of inflation-indexed securities; cash valueofrepurchaseagreements;andparvalueofreverse repurchaseagreements.
422 95th Annual Report, 2008 10. IncomeandExpensesoftheFederalReserveBanks,byBank,2008 Thousandsofdollars Item Total Boston NewYork Philadelphia Cleveland CurrentIncome Termauction,primary, secondary,andseasonal credit .................... 3,816,527 83,827 2,441,981 54,619 131,399 Otherloans1................... 3,347,774 470,165 2,877,609 ... ... U.S.Treasury,federalagency, andgovernment-sponsored enterprisesecurities2 ...... 27,522,160 1,195,251 9,854,409 1,207,368 1,073,264 Foreigncurrencies ............. 623,313 33,862 155,675 62,282 43,666 Centralbankliquidityswaps3... 3,606,068 202,346 902,113 356,203 252,431 Pricedservices ................ 773,354 ... 60,740 ... ... Compensationreceivedfor servicesprovided4......... 511,857 31,219 10,670 39,739 68,367 Securitieslendingfees.............. 765,339 32,338 272,663 33,449 29,193 Other ......................... 79,190 845 66,858 448 994 Total.......................... 41,045,582 2,049,852 16,642,718 1,754,108 1,599,313 CurrentExpenses Personnel Salariesandotherpersonnel expenses.................. 1,548,408 83,950 324,685 75,095 92,313 Retirementandotherbenefits... 496,406 23,647 100,718 26,059 36,562 Netperiodicpensionexpense5.. 160,486 1,441 148,157 767 569 Interestexpenseonsecurities soldunderagreementsto repurchase ................ 737,276 32,150 264,184 32,362 28,846 Interestonreserves6 ........... 816,738 55,147 457,314 8,527 27,857 Earningscreditcosts........... 84,619 4,368 27,228 2,940 4,174 Fees .......................... 132,057 3,809 17,716 2,825 4,400 Travel......................... 72,223 3,080 10,502 2,723 4,183 Postageandothershipping costs ..................... 72,993 1,202 1,464 2,098 6,043 Communications............... 45,612 930 4,017 552 983 Materialsandsupplies ......... 67,727 3,724 8,245 5,870 5,987 Building Taxesonrealestate............ 37,571 5,603 4,829 1,640 2,028 Propertydepreciation .......... 108,250 7,643 16,888 4,582 11,678 Utilities ....................... 43,968 4,631 9,108 2,981 2,842 Rent.......................... 42,958 1,013 15,048 660 155 Other ......................... 43,769 1,335 6,446 2,605 3,266 Equipment/Software Purchases ..................... 29,419 2,180 5,406 1,017 1,021 Rentals........................ 3,289 229 1,256 424 64 Depreciation................... 95,236 4,753 8,751 6,868 4,631 Repairsandmaintenance....... 74,659 4,324 7,486 4,650 5,210 Software ...................... 160,942 4,095 23,113 8,726 23,864 Compensationpaidforservice costsincurred4 ............ 511,857 ... 29,835 ... ... Other ......................... 89,296 17,234 73,802 12,856 13,900 Recoveries .................... –122,959 –16,786 –15,686 –4,264 –4,031 Expensescapitalized7 .......... –21,191 –2,388 –10,154 –548 –762 Total.......................... 5,331,610 247,312 1,540,355 202,015 275,783 Reimbursements............. –461,236 –26,820 –114,357 –32,443 –62,707 Netexpenses.............. 4,870,374 220,493 1,425,998 169,573 213,075 Fornotesseeendoftable.
Statistical Tables 423 10.—Continued Richmond Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco 388,963 141,995 77,617 48,452 46,588 35,910 56,789 308,388 ... ... ... ... ... ... ... ... 2,455,841 2,671,804 2,385,849 925,459 530,178 967,664 1,165,875 3,089,196 168,598 48,322 28,243 6,136 11,915 6,607 11,976 46,029 976,162 278,254 160,980 35,270 69,186 38,020 70,508 264,596 ... 649,143 63,470 ... ... ... ... ... 47,699 428 57,173 15,230 76,023 66,538 42,599 56,174 69,169 75,765 67,298 26,299 14,510 27,854 31,887 84,915 2,657 428 676 170 62 230 222 5,601 4,109,089 3,866,139 2,841,306 1,057,016 748,463 1,142,823 1,379,856 3,854,900 221,564 144,017 113,206 76,972 80,253 97,054 88,289 151,009 73,797 48,459 35,818 26,081 25,069 22,601 30,873 46,721 1,295 1,264 1,093 883 707 1,446 674 2,190 65,661 71,360 63,775 24,710 14,237 25,785 31,310 82,899 133,125 20,400 28,502 3,330 1,722 9,288 9,396 62,130 15,975 4,803 7,097 1,618 1,627 2,192 2,451 10,145 61,207 11,481 8,384 8,326 1,817 6,191 2,236 3,664 10,753 7,969 7,798 4,212 3,321 4,795 4,001 8,886 3,021 39,217 4,048 1,658 2,365 2,275 4,532 5,069 27,494 1,936 1,802 1,339 1,613 1,520 1,648 1,778 7,011 7,517 6,990 2,566 4,041 4,289 5,131 6,356 2,361 3,250 2,852 575 3,373 3,500 3,631 3,928 10,276 10,662 12,547 5,409 3,901 6,756 9,178 8,729 4,302 4,284 2,208 1,918 2,039 2,184 4,076 3,396 17,853 484 2,042 1,736 284 2,316 204 1,164 4,119 3,779 5,829 2,032 2,079 1,245 8,034 3,000 4,465 5,434 1,351 1,101 1,556 1,860 1,928 2,101 216 462 291 126 8 74 30 108 33,463 9,723 4,073 2,324 1,932 5,726 6,085 6,909 16,955 8,378 5,695 2,361 2,684 3,424 5,355 8,137 59,343 7,407 4,298 5,287 4,527 5,457 8,712 7,607 ... 471,099 10,924 ... ... ... ... ... –285,645 52,969 55,041 75,439 22,847 10,529 21,838 18,485 –33,552 –11,236 –9,177 –2,737 –1,275 –5,405 –11,873 –6,938 –1,934 –1,225 –449 –628 –1,884 –840 –605 266 453,125 923,894 376,038 246,637 178,845 214,263 237,135 436,206 –31,490 –13,868 –4,487 –110,184 –27,256 –10,413 –15,319 –11,892 421,635 910,026 371,551 136,453 151,589 203,850 221,816 424,314
424 95th Annual Report, 2008 10. IncomeandExpensesoftheFederalReserveBanks,byBank,2008—Continued Thousandsofdollars Item Total Boston NewYork Philadelphia Cleveland ProfitandLoss Currentnetincome 36,175,209 1,829,359 15,216,720 1,584,535 1,386,238 Additionsto(+)anddeductions from(-)currentnetincome ProfitsonsalesofU.S.Treasury, federalagency,and government-sponsored enterprisesecurities ....... 3,769,021 168,418 1,356,717 166,005 150,411 Profitsonforeignexchange transactions ............... 1,266,386 55,565 313,236 135,003 89,116 Otheradditions8 ............... 88 2 28 2 2 Totaladditions .............. 5,035,495 223,985 1,669,981 301,010 239,530 Netlossfromconsolidated variableinterestentities9... –1,693,955 ... –1,693,955 ... ... Provisionforloanlosses ....... 0 0 0 0 0 Otherdeductions10 ............. –906 0 −461 0 0 Totaldeductions .......... –1,694,862 0 –1,694,416 0 0 Netadditionto(+)or deductionfrom(–) currentnetincome ........ 3,340,634 223,984 –24,436 301,010 239,529 CostofunreimbursedTreasury services................... 6 0 6 0 0 AssessmentsbyBoard Boardexpenditures11........... 352,291 18,518 88,125 36,435 24,687 Costofcurrency............... 500,372 28,441 110,293 29,271 24,452 Netincomebeforedistributions. 38,663,174 2,006,386 14,993,861 1,819,839 1,576,629 Changeinfundedstatusof benefitplans12 ............ –3,158,808 –6,666 –3,133,423 –4,723 909 Comprehensiveincomebefore distributions .............. 35,504,366 1,999,719 11,860,438 1,815,116 1,577,537 Dividendspaid ................ 1,189,626 54,587 301,216 127,551 84,464 PaymentstoU.S.Treasury (interestonFederal Reservenotes) ............ 31,688,688 2,150,331 10,570,502 1,185,837 1,232,048 Transferredto/fromsurplusand changeinaccumulated othercomprehensive income ................... 2,626,053 –205,198 988,720 501,729 261,026 Surplus,January1 ............. 18,449,821 1,049,471 4,618,706 1,813,329 1,291,070 Surplus,December31.......... 21,075,873 844,272 5,607,427 2,315,058 1,552,095 Note: Componentsmaynotsumtototalsbecauseof Systemrevenuefortheseservices.TheFederalReserve rounding. BankofNewYorkhasoverallresponsibilityformanag- 1. Representsinterestincomeonprimarydealercredit ingtheReserveBanks’provisionofFedwirefundstransfacility, asset-backed commercial paper money market fer and securities transfer services and recognizes the mutual fund liquidity facility, and credit extended to total System revenue for these services. The Federal AmericanInternationalGroup,Inc. ReserveBankofChicagohasoverallresponsibilityfor 2. Includes interest income on securities purchased managing the Reserve Banks’ provision of electronic underagreementstoresell. accessservicestodepositoryinstitutionsandrecognizes 3. Represents interest income recognized on swap thetotalSystemrevenuefortheseservices.TheFederal agreementswithforeigncentralbanks. ReserveBankofAtlanta,theFederalReserveBankof 4. The Federal Reserve Bank of Atlanta has overall New York, and the Federal Reserve Bank of Chicago responsibility for managing the Reserve Banks’ provi- compensate the other Reserve Banks for the costs sion of check and ACH services and recognizes total incurredinprovidingtheseservices.
Statistical Tables 425 10.—Continued Richmond Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco 3,687,455 2,956,112 2,469,756 920,562 596,873 938,973 1,158,040 3,430,585 331,702 358,174 321,720 123,770 73,832 127,548 162,468 428,256 340,971 100,852 62,346 12,931 23,687 13,845 21,825 97,010 14 14 3 3 6 2 2 11 672,686 459,039 384,069 136,705 97,525 141,395 184,294 525,277 ... ... ... ... ... ... ... ... 0 0 0 0 0 0 0 0 0 0 0 –444 0 0 –1 0 0 0 0 –444 0 0 −1 0 672,686 459,039 384,069 136,261 97,525 141,395 184,293 525,276 0 0 0 0 0 0 0 0 94,372 27,280 17,514 3,374 6,481 3,697 6,303 25,507 45,512 70,937 43,952 18,709 13,097 23,106 18,514 74,088 4,220,257 3,316,935 2,792,359 1,034,741 674,821 1,053,565 1,317,516 3,856,267 3,108 2,455 –4,562 –2,665 –3,803 –5,861 –380 –3,197 4,223,366 3,319,389 2,787,796 1,032,076 671,018 1,047,704 1,317,137 3,853,069 317,735 93,984 65,778 11,154 19,859 12,224 17,045 84,027 2,921,456 3,038,572 2,833,018 991,185 681,319 1,021,626 1,392,550 3,670,247 984,175 186,833 –110,999 29,737 –30,160 13,854 –92,459 98,795 4,995,979 1,424,838 814,459 179,950 354,533 194,068 363,431 1,349,988 5,980,154 1,611,672 703,459 209,686 324,373 207,922 270,972 1,448,783 5. Reflects the effect of the Financial Accounting 8. IncludesreimbursementfromtheU.S.Treasuryfor Standards Board’s Statement of Financial Accounting uncutsheetsofFederalReservenotesandstaleReserve StandardsNo.87,Employers’AccountingforPensions Bankchecksthatarewrittenoff (SFAS87).TheSystemRetirementPlanforemployees 9. Representstheportionoftheconsolidatedvariable isrecordedonbehalfoftheSystemonthebooksofthe interestentities’netincome(loss)recordedbytheFed- FederalReserveBankofNewYork.Netpensionexpense eral Reserve Bank of New York. The amount includes for the System, which was $137,599 thousand, is re- interestincome,interestexpense,realizedandunrealized cordedinthebooksoftheFederalReserveBankofNew gainsandlosses,andprofessionalfees. York.TheRetirementBenefitEqualizationPlanandthe 10. IncludeslossesonsaleofReserveBankbuildings. SupplementalEmployeeRetirementPlanarerecordedby 11. For additional details, see Board of Governors eachFederalReserveBank. Financial Statements in the “Federal Reserve System 6. InOctober2008,theReserveBanksbegantopay Audits”section. interesttodepositoryinstitutionsonqualifyingbalances 12. ThefundedstatusoftheSystemRetirementPlan heldattheFederalReserveBanks. decreasedin2008duetoareductioninassetvaluesand 7. Includesexpensesforlaborandmaterialscapital- an increase in the projected benefits obligation, which izedanddepreciatedoramortizedaschargestoactivities resultedfromplanamendments. intheperiodsbenefited. ... Notapplicable.
426 95th Annual Report, 2008 11. IncomeandExpensesoftheFederalReserveBanks,1914–2008 Thousandsofdollars Assessmentsby Netadditions BoardofGovernors Changein FederalReserve Current Net or fundedstatus Bankandperiod income expenses deductions ofbenefit (2)1 Board Costs plans expenditures ofcurrency AllBanks 1914–15........... 2,173 2,018 6 302 ... ... 1916............... 5,218 2,082 2193 192 ... ... 1917............... 16,128 4,922 21,387 238 ... ... 1918............... 67,584 10,577 23,909 383 ... ... 1919............... 102,381 18,745 24,673 595 ... ... 1920............... 181,297 27,549 23,744 710 ... ... 1921............... 122,866 33,722 26,315 741 ... ... 1922............... 50,499 28,837 24,442 723 ... ... 1923............... 50,709 29,062 28,233 703 ... ... 1924............... 38,340 27,768 26,191 663 ... ... 1925............... 41,801 26,819 24,823 709 ... ... 1926............... 47,600 24,914 23,638 722 1,714 ... 1927............... 43,024 24,894 22,457 779 1,845 ... 1928............... 64,053 25,401 25,026 698 806 ... 1929............... 70,955 25,810 24,862 782 3,099 ... 1930............... 36,424 25,358 293 810 2,176 ... 1931............... 29,701 24,843 311 719 1,479 ... 1932............... 50,019 24,457 21,413 729 1,106 ... 1933............... 49,487 25,918 212,307 800 2,505 ... 1934............... 48,903 26,844 24,430 1,372 1,026 ... 1935............... 42,752 28,695 21,737 1,406 1,477 ... 1936............... 37,901 26,016 486 1,680 2,178 ... 1937............... 41,233 25,295 21,631 1,748 1,757 ... 1938............... 36,261 25,557 2,232 1,725 1,630 ... 1939............... 38,501 25,669 2,390 1,621 1,356 1940............... 43,538 25,951 11,488 1,704 1,511 ... 1941............... 41,380 28,536 721 1,840 2,588 ... 1942............... 52,663 32,051 21,568 1,746 4,826 ... 1943............... 69,306 35,794 23,768 2,416 5,336 ... 1944............... 104,392 39,659 3,222 2,296 7,220 ... 1945............... 142,210 41,666 2830 2,341 4,710 ... 1946............... 150,385 50,493 2626 2,260 4,482 ... 1947............... 158,656 58,191 1,973 2,640 4,562 ... 1948............... 304,161 64,280 234,318 3,244 5,186 ... 1949............... 316,537 67,931 212,122 3,243 6,304 ... 1950............... 275,839 69,822 36,294 3,434 7,316 ... 1951............... 394,656 83,793 22,128 4,095 7,581 ... 1952............... 456,060 92,051 1,584 4,122 8,521 ... 1953............... 513,037 98,493 21,059 4,100 10,922 ... 1954............... 438,486 99,068 2134 4,175 6,490 ... 1955............... 412,488 101,159 2265 4,194 4,707 ... 1956............... 595,649 110,240 223 5,340 5,603 ... 1957............... 763,348 117,932 27,141 7,508 6,374 ... 1958............... 742,068 125,831 124 5,917 5,973 ... 1959............... 886,226 131,848 98,247 6,471 6,384 ... Fornotesseeendoftable.
Statistical Tables 427 11.—Continued PaymentstoU.S.Treasury Transferred to/fromsurplus Dividends Transferred andchangein paid Statutory Intereston to/fromsurplus3 accumulatedother transfers2 FederalReserve comprehensive notes income6 217 ... ... ... ... 1,743 ... ... ... ... 6,804 1,134 ... ... 1,134 5,541 ... ... ... 48,334 5,012 2,704 ... ... 70,652 5,654 60,725 ... ... 82,916 6,120 59,974 ... ... 15,993 6,307 10,851 ... ... 2660 6,553 3,613 ... ... 2,546 6,682 114 ... ... 23,078 6,916 59 ... ... 2,474 7,329 818 ... ... 8,464 7,755 250 ... ... 5,044 8,458 2,585 ... ... 21,079 9,584 4,283 ... ... 22,536 10,269 17 ... ... 22,298 10,030 ... ... ... 27,058 9,282 2,011 ... ... 11,021 8,874 ... ... ... 2917 8,782 ... ... 260 6,510 8,505 298 ... 28 607 7,830 227 ... 103 353 7,941 177 ... 67 2,616 8,019 120 ... 2419 1,862 8,110 25 ... 2426 4,534 8,215 82 ... 254 17,617 8,430 141 ... 24 571 8,669 198 ... 50 3,554 8,911 245 ... 135 40,327 9,500 327 ... 201 48,410 10,183 248 ... 262 81,970 10,962 67 ... 28 81,467 11,523 36 75,284 87 8,366 11,920 ... 166,690 ... 18,523 12,329 ... 193,146 ... 21,462 13,083 ... 196,629 ... 21,849 13,865 ... 254,874 ... 28,321 14,682 ... 291,935 ... 46,334 15,558 ... 342,568 ... 40,337 16,442 ... 276,289 ... 35,888 17,712 ... 251,741 ... 32,710 18,905 ... 401,556 ... 53,983 20,081 ... 542,708 ... 61,604 21,197 ... 524,059 ... 59,215 22,722 ... 910,650 ... 293,601
428 95th Annual Report, 2008 11. IncomeandExpensesoftheFederalReserveBanks,1914–2008—Continued Thousandsofdollars Assessmentsby Netadditions BoardofGovernors Changein FederalReserve Current Net or fundedstatus Bankandperiod income expenses deductions ofbenefit (2)1 Board Costs plans expenditures ofcurrency 1960............... 1,103,385 139,894 13,875 6,534 7,455 ... 1961............... 941,648 148,254 3,482 6,265 6,756 ... 1962............... 1,048,508 161,451 256 6,655 8,030 ... 1963............... 1,151,120 169,638 615 7,573 10,063 ... 1964............... 1,343,747 171,511 726 8,655 17,230 ... 1965............... 1,559,484 172,111 1,022 8,576 23,603 ... 1966............... 1,908,500 178,212 996 9,022 20,167 ... 1967............... 2,190,404 190,561 2,094 10,770 18,790 ... 1968............... 2,764,446 207,678 8,520 14,198 20,474 ... 1969............... 3,373,361 237,828 2558 15,020 22,126 ... 1970............... 3,877,218 276,572 11,442 21,228 23,574 ... 1971............... 3,723,370 319,608 94,266 32,634 24,943 ... 1972............... 3,792,335 347,917 249,616 35,234 31,455 ... 1973............... 5,016,769 416,879 280,653 44,412 33,826 ... 1974............... 6,280,091 476,235 278,487 41,117 30,190 ... 1975............... 6,257,937 514,359 2202,370 33,577 37,130 ... 1976............... 6,623,220 558,129 7,311 41,828 48,819 ... 1977............... 6,891,317 568,851 2177,033 47,366 55,008 ... 1978............... 8,455,309 592,558 2633,123 53,322 60,059 ... 1979............... 10,310,148 625,168 2151,148 50,530 68,391 ... 1980............... 12,802,319 718,033 2115,386 62,231 73,124 ... 1981............... 15,508,350 814,190 2372,879 63,163 82,924 ... 1982............... 16,517,385 926,034 268,833 61,813 98,441 ... 1983............... 16,068,362 1,023,678 2400,366 71,551 152,135 ... 1984............... 18,068,821 1,102,444 2412,943 82,116 162,606 ... 1985............... 18,131,983 1,127,744 1,301,624 77,378 173,739 ... 1986............... 17,464,528 1,156,868 1,975,893 97,338 180,780 ... 1987............... 17,633,012 1,146,911 1,796,594 81,870 170,675 ... 1988............... 19,526,431 1,205,960 2516,910 84,411 164,245 ... 1989............... 22,249,276 1,332,161 1,254,613 89,580 175,044 ... 1990............... 23,476,604 1,349,726 2,099,328 103,752 193,007 ... 1991............... 22,553,002 1,429,322 405,729 109,631 261,316 ... 1992............... 20,235,028 1,474,531 2987,788 128,955 295,401 ... 1993............... 18,914,251 1,657,800 2230,268 140,466 355,947 ... 1994............... 20,910,742 1,795,328 2,363,862 146,866 368,187 ... 1995............... 25,395,148 1,818,416 857,788 161,348 370,203 ... 1996 .............. 25,164,303 1,947,861 21,676,716 162,642 402,517 ... 1997 .............. 26,917,213 1,976,453 22,611,570 174,407 364,454 ... 1998 .............. 28,149,477 1,833,436 1,906,037 178,009 408,544 ... 1999 .............. 29,346,836 1,852,162 2533,557 213,790 484,959 ... 2000 .............. 33,963,992 1,971,688 21,500,027 188,067 435,838 ... 2001 .............. 31,870,721 2,084,708 21,117,435 295,056 338,537 ... 2002 .............. 26,760,113 2,227,078 2,149,328 205,111 429,568 ... 2003 .............. 23,792,725 2,462,658 2,481,127 297,020 508,144 ... 2004 .............. 23,539,942 2,238,705 917,870 272,331 503,784 ... 2005 .............. 30,729,357 2,889,544 23,576,903 265,742 477,087 ... 2006 .............. 38,410,427 3,263,844 2158,846 301,014 491,962 ... 2007 .............. 42,576,025 3,510,206 198,417 296,125 576,306 324,481 2008 .............. 41,045,582 4,870,374 3,340,628 352,291 500,372 −3,158,808 Total,1914–2008.. 794,511,249 61,727,836 7,580,841 5,353,216 9,908,690 −2,834,327
Statistical Tables 429 11.—Continued PaymentstoU.S.Treasury Transferred to/fromsurplus Dividends Transferred andchangein paid Intereston to/fromsurplus3 accumulatedother Statutory FederalReserve comprehensive transfers2 notes income6 23,948 ... 896,816 ... 42,613 25,570 ... 687,393 ... 70,892 27,412 ... 799,366 ... 45,538 28,912 ... 879,685 ... 55,864 30,782 ... 1,582,119 ... 2465,823 32,352 ... 1,296,810 ... 27,054 33,696 ... 1,649,455 ... 18,944 35,027 ... 1,907,498 ... 29,851 36,959 ... 2,463,629 ... 30,027 39,237 ... 3,019,161 ... 39,432 41,137 ... 3,493,571 ... 32,580 43,488 ... 3,356,560 ... 40,403 46,184 ... 3,231,268 ... 50,661 49,140 ... 4,340,680 ... 51,178 52,580 ... 5,549,999 ... 51,483 54,610 ... 5,382,064 ... 33,828 57,351 ... 5,870,463 ... 53,940 60,182 ... 5,937,148 ... 45,728 63,280 ... 7,005,779 ... 47,268 67,194 ... 9,278,576 ... 69,141 70,355 ... 11,706,370 ... 56,821 74,574 ... 14,023,723 ... 76,897 79,352 ... 15,204,591 ... 78,320 85,152 ... 14,228,816 ... 106,663 92,620 ... 16,054,095 ... 161,996 103,029 ... 17,796,464 ... 155,253 109,588 ... 17,803,895 ... 91,954 117,499 ... 17,738,880 ... 173,771 125,616 ... 17,364,319 ... 64,971 129,885 ... 21,646,417 ... 130,802 140,758 ... 23,608,398 ... 180,292 152,553 ... 20,777,552 ... 228,356 171,763 ... 16,774,477 ... 402,114 195,422 ... 15,986,765 ... 347,583 212,090 ... 20,470,011 ... 282,122 230,527 ... 23,389,367 ... 283,075 255,884 5,517,716 14,565,624 ... 635,343 299,652 20,658,972 0 ... 831,705 343,014 17,785,942 8,774,994 ... 731,575 373,579 ... 25,409,736 ... 479,053 409,614 ... 25,343,892 ... 4,114,865 428,183 ... 27,089,222 ... 517,580 483,596 ... 24,495,490 ... 1,068,598 517,705 ... 22,021,528 ... 466,796 582,402 ... 18,078,003 ... 2,782,587 780,863 ... 21,467,545 ... 1,271,672 871,255 ... 29,051,678 ... 4,271,828 992,353 ... 34,598,401 ... 3,125,533 1,189,626 ... 31,688,688 ... 2,626,053 10,920,756 44,113,958 640,215,049 −4 27,018,2624
430 95th Annual Report, 2008 11. IncomeandExpensesoftheFederalReserveBanks,1914–2008—Continued Thousandsofdollars Assessmentsby Netadditions BoardofGovernors Changein FederalReserve Current Net or fundedstatus Bankandperiod income expenses deductions ofbenefit (2)1 Board Costs plans expenditures ofcurrency Aggregateforeach Bank,1914–2008 Boston ............. 41,806,512 3,787,169 146,460 233,312 578,384 –3,070 NewYork .......... 281,528,702 10,475,0975 640,996 1,330,501 3,014,949 –2,904,855 Philadelphia ........ 29,996,655 3,072,341 582,136 269,354 436,425 201 Cleveland........... 45,975,609 3,654,296 598,493 388,375 562,942 6,254 Richmond .......... 62,692,353 5,269,152 1,721,186 840,715 822,497 25,628 Atlanta ............. 48,739,538 8,356,244 759,949 402,946 809,823 8,171 Chicago ............ 91,737,928 7,152,719 954,372 559,527 1,105,699 10,149 St.Louis ........... 26,615,072 2,848,658 145,598 121,698 359,988 872 Minneapolis ........ 13,868,849 2,837,702 226,770 152,265 184,209 6,824 KansasCity......... 27,983,635 3,781,396 213,274 153,881 368,313 –2,314 Dallas .............. 35,625,178 3,854,592 475,375 229,126 486,971 13,156 SanFrancisco....... 87,941,218 6,638,471 1,116,232 671,516 1,178,492 4,657 Total ............... 794,511,249 61,727,836 7,580,841 5,353,216 9,908,690 –2,834,327 Note: Componentsmaynotsumtototalsbecauseof 2. Representstransfersmadeasafranchisetaxfrom rounding. 1917through1932;transfersmadeundersection13bof 1. For1987andsubsequentyears,includesthecostof the Federal Reserve Act from 1935 through 1947; and services provided to the Treasury by Federal Reserve transfers made under section 7 of the Federal Reserve Banksforwhichreimbursementwasnotreceived. Actfor1996and1997.
Statistical Tables 431 11.—Continued PaymentstoU.S.Treasury Transferredto/from surplusandchange Dividends Transferred paid Statutory Fed In e t r e a r l e R st e o se n rve to/fromsurplus3 ina c c o c m um pr u e l h a e t n ed siv o e ther transfers2 notes income6 499,946 2,579,504 33,233,050 135 1,038,401 2,730,899 17,307,161 236,368,535 –433 8,038,135 643,766 1,312,118 22,363,737 291 2,480,961 799,631 2,827,043 36,487,524 –10 1,860,555 1,984,830 3,083,928 45,377,319 –72 7,060,798 789,709 2,713,230 34,503,372 5 1,932,330 1,035,232 4,593,811 77,133,320 12 1,122,130 229,858 1,833,837 21,034,097 –27 333,432 296,210 416,227 9,733,301 65 482,465 271,373 1,249,703 22,039,597 –9 330,341 384,875 1,510,802 29,208,319 55 438,968 1,254,425 4,686,594 72,732,880 –17 1,899,745 10,920,756 44,113,958 640,215,049 –4 27,018,2624 3. Transfersaremadeundersection13boftheFed- bytransferof$11,131thousandfromreservesforcontineralReserveAct. gencies(1955);leavingabalanceof$21,075,873thou- 4. The $27,018,262 thousand transferred to surplus sandonDecember31,2008. was reduced by direct charges of $500 thousand for 5. This amount is reduced by $2,952,824 thousand charge-offonBankpremises(1927);$139,300thousand forexpensesoftheSystemRetirementPlan.Seenote5, forcontributionstocapitaloftheFederalDepositInsur- table10. anceCorporation(1934);$4thousandnetuponelimina- 6. Transfersaremadeundersection7oftheFederal tion of section 13b surplus (1958); $106,000 thousand ReserveAct.Beginningin2006,accumulatedothercom- (1996),$107,000thousand(1997),and$3,752,000thou- prehensiveincomeisreportedasacomponentofsurplus. sand (2000) transferred to the Treasury as statutorily . . . Notapplicable. required;and$1,848,716thousandrelatedtotheimplementationofSFASNo.158(2006),andwasincreased
432 95th Annual Report, 2008 12. OperationsinPrincipalDepartmentsoftheFederalReserveBanks,2005–2008 Operation 2008 2007 2006 2005 Millionsofpieces Currencyprocessed ............................ 33,256 35,653 37,694 36,463 Currencydestroyed ............................ 6,517 6,509 6,766 6,551 Coinreceived ................................. 64,438 63,255 59,705 56,080 Checkshandled U.S.governmentchecks1 .................... 269 214 222 216 Postalmoneyorders ......................... 146 164 171 176 Allother.................................... 9,545 10,001 11,083 12,228 Securitiestransfers2 ............................ 25 24 22 22 Fundstransfers ................................ 131 135 134 132 Automatedclearinghousetransactions Commercial................................. 10,040 9,363 8,231 7,339 Government................................. 1,132 1,027 992 964 Millionsofdollars Currencyprocessed ............................ 604,882 642,168 664,592 639,832 Currencydestroyed ............................ 148,460 104,082 84,742 83,187 Coinreceived ................................. 6,286 6,124 5,779 5,412 Checkshandled U.S.governmentchecks1 .................... 316,713 256,994 269,073 252,192 Postalmoneyorders ......................... 25,544 31,626 28,066 28,395 Allother.................................... 15,216,147 14,841,2493 16,442,820 15,684,615 Securitiestransfers2 ............................ 419,347,256 435,577,505 377,258,592 368,896,819 Fundstransfers ................................ 754,974,633 670,665,569 572,645,790 518,546,733 Automatedclearinghousetransactions Commercial................................. 15,662,805 14,547,234 13,124,434 12,801,914 Government................................. 4,008,022 3,716,928 3,474,364 3,156,556 1. Includesgovernmentcheckshandledelectronically remainedthesame.Therefore,thedataarecomparable (electronicchecks). withdatareportedinpreviousyears. 2. In 2006, the title of this category changed from 3. Restatement. previous years, but the composition of the category
Statistical Tables 433 13. NumberandAnnualSalariesofOfficersandEmployeesoftheFederalReserveBanks, December31,2008 President1 Otherofficers Employees Total FederalReserve Bank(including Number Branches) Salary Num- Salaries Salaries Num- Salaries (dollars)2 ber (dollars)2 Full- Part- (dollars)2 ber (dollars)2 time time Boston .......... 306,400 67 12,419,036 763 39 60,411,988 870 73,137,424 NewYork3 ...... 411,200 311 69,392,898 2,385 45 223,220,934 2,742 293,025,032 Philadelphia ..... 294,400 55 9,207,852 892 31 55,785,600 979 65,287,852 Cleveland ....... 298,200 59 9,866,600 1,322 20 75,244,815 1,402 85,409,615 Richmond ....... 327,500 74 12,099,500 1,548 34 99,858,199 1,657 112,285,199 Atlanta.......... 293,000 78 14,645,730 1,702 27 109,592,118 1,808 124,530,848 Chicago ......... 294,400 86 14,847,011 1,224 51 89,501,375 1,362 104,642,786 St.Louis ........ 266,800 78 12,883,520 856 29 55,642,777 964 68,793,097 Minneapolis ..... 398,400 47 7,654,580 1,030 59 63,551,296 1,137 71,604,276 KansasCity ..... 361,000 75 13,426,560 1,135 18 69,259,897 1,229 83,047,457 Dallas........... 329,100 63 10,431,790 1,128 18 67,523,960 1,210 78,284,850 SanFrancisco ... 392,600 73 14,735,945 1,592 28 121,356,540 1,694 136,485,085 FederalReserve Information Technology.. ... 42 7,022,145 822 3 75,264,665 867 82,286,810 Officeof Employee Benefits .... ... 9 1,989,000 35 0 3,164,077 44 5,153,077 Total............ 3,973,000 1,117 210,622,167 16,434 402 1,169,378,242 17,965 1,383,973,408 Note: Componentsmaynotsumtototalsbecauseof reviewsReserveBankofficersalaryrangesandReserve rounding. Bank placement in the salary tiers annually. In 2008, 1. Under current policies, appointment salaries for NewYorkandSanFranciscowereintier1,whichhada FederalReserveBankpresidentsarenormally85percent midpoint for presidents’ salaries of $413,300. Boston, of the salary-range midpoint (an 85 compa-ratio), with Philadelphia,Chicago,Minneapolis,andDallaswerein theexceptionoftheNewYorkReserveBankpresident, tier2,whichhadamidpointforpresidents’salariesof whoseappointmentsalarynormallyissetata95compa- $346,400.Cleveland,Richmond,Atlanta,St.Louis,and ratio.TheBoardhasdiscretiontoapproveahigherstart- Kansas City were in tier 3, which had a midpoint for ing salary if requested by a Reserve Bank’s board of presidents’ salaries of $319,900. Salaries for Reserve directors. Bankofficers,includingpresidents,arelimitedbycom- OnJanuary1ofeachyear,allpresidentsreceivesal- pensationcapsestablishedforeachtier.In2008,thecaps aryincreasesequaltothepercentageincreaseinthemid- were $411,200 for tier 1; $400,000 for tier 2; and point of their respective salary ranges. In addition, on $392,400fortier3. everythird-yearanniversaryofhisorherinitialappoint- 2. Annualized salary liability (excluding outside ment(throughyear9),eachpresidentreceivesasalary agency costs) based on salaries in effect on December increasethatresultsinacompa-ratioasfollows:year3, 31,2008. 95 (for the New York Bank, 105); year 6, 105 (New 3. InJanuary2009,theBoardofGovernors,atthe York,115);year9,115(NewYork,125). request of the Federal Reserve Bank of New York’s TherecontinuetobetieredsalaryrangesforReserve board of directors, approved a special separation pay- Bankofficers,includingpresidents,reflectingdifferences mentof$434,686toBankpresidentTimothyGeithner. inthecostsoflaborinthehead-officecities.TheBoard ... Notapplicable.
434 95th Annual Report, 2008 14. AcquisitionCostsandNetBookValueofthePremisesoftheFederalReserveBanks andBranches,December31,2008 Thousandsofdollars Acquisitioncosts FederalReserve Net Other Bankor Buildings Buildingma- book real Branch Land (including chineryand Total2 value estate3 vaults)1 equipment BOSTON ............. 27,293 144,564 30,073 201,929 123,212 ... NEWYORK .......... 20,103 271,973 69,961 362,036 212,000 ... PHILADELPHIA...... 7,343 93,389 15,254 115,985 64,669 CLEVELAND......... 4,219 123,401 29,050 156,671 107,505 ... Cincinnati ............. 2,806 29,468 14,858 47,132 19,938 ... Pittsburgh ............. 2,360 19,640 15,807 37,808 19,690 ... RICHMOND .......... 25,902 141,602 45,906 213,410 153,488 ... Baltimore ............. 9,393 35,988 11,690 57,070 37,319 ... Charlotte .............. 3,130 47,389 7,859 58,377 41,889 ... ATLANTA ............ 22,847 150,034 17,181 190,061 160,138 ... Birmingham ........... 5,347 12,766 1,465 19,578 12,327 ... Jacksonville ........... 1,779 22,215 4,078 28,072 17,237 ... Miami................. 4,254 24,975 5,469 34,697 21,152 ... Nashville.............. 603 6,126 3,542 10,271 4,572 ... NewOrleans .......... 3,785 9,651 5,174 18,609 9,560 ... CHICAGO ............ 4,512 179,653 22,807 206,972 121,339 ... Detroit ................ 10,138 73,057 10,690 93,885 87,218 ... ST.LOUIS ............ 9,377 127,271 14,763 151,411 118,899 ... Memphis .............. 2,472 14,127 5,162 21,761 13,125 ... MINNEAPOLIS ....... 15,826 106,497 14,293 136,615 102,534 ... Helena ................ 2,890 10,000 1,050 13,940 9,383 ... KANSASCITY ....... 38,322 198,440 27,570 264,332 259,564 ... Denver................ 3,511 9,170 4,622 17,303 7,713 ... Omaha ................ 3,559 7,303 1,673 12,535 6,098 ... DALLAS.............. 36,185 112,124 24,689 172,998 117,738 ... ElPaso................ 262 3,426 1,843 5,531 1,084 ... Houston............... 23,699 104,515 8,756 136,970 126,395 7,204 SanAntonio........... 826 8,407 2,491 11,724 5,687 ... SANFRANCISCO .... 20,988 103,483 23,938 148,409 84,844 ... LosAngeles........... 6,306 72,900 14,807 94,013 56,762 ... SaltLakeCity......... 1,294 4,800 1,455 7,549 2,891 ... Seattle ................ 12,329 52,552 4,915 69,797 68,212 9,633 Total.................. 333,657 2,320,905 462,890 3,117,452 2,194,183 16,837 Note: Componentsmaynotsumtototalsbecauseof 3. Includes real estate held for future Bank use and rounding. Bankpremisesformerlyoccupiedandbeingheldpend- 1. Includes expenditures for construction at some ingsale. offices,pendingallocationtoappropriateaccounts. ... Notapplicable. 2. Excludes charge-offs of $17,699 thousand before 1952.
Federal Reserve System Audits
437 Audits of the Federal Reserve System The Board of Governors, the Federal The Reserve Banks’ financial state- ReserveBanks,andtheFederalReserve ments are audited annually by an inde- System as a whole are all subject to pendent outside auditor retained by the several levels of audit and review. The Board of Governors. In addition, the Board’s financial statements, and its Reserve Banks are subject to annual compliance with laws and regulations examinationbytheBoard.Asdiscussed affecting those statements, are audited inthechapter“FederalReserveBanks,” annually by an outside auditor retained the Board’s examination includes a bytheBoard’sOfficeofInspectorGen- wide range of ongoing oversight activieral. The Office of Inspector General tiesconductedonsiteandoffsitebystaff also conducts audits, reviews, and in- of the Board’s Division of Reserve vestigations relating to the Board’s pro- BankOperationsandPaymentSystems. grams and operations as well as to Federal Reserve operations are also Board functions delegated to the subject to review by the Government Reserve Banks. Accountability Office. Á
439 Board of Governors Financial Statements The financial statements of the Board Governors for 2008 and 2007 were audited by Deloitte & Touche LLP, independent auditors. INDEPENDENTAUDITORS’REPORT TheBoardofGovernorsoftheFederalReserveSystem: WehaveauditedtheaccompanyingbalancesheetsoftheBoardofGovernorsoftheFederal ReserveSystem(the“Board”)asofDecember31,2008and2007,andtherelatedstatements ofrevenuesandexpensesandchangesinthecumulativeresultsofoperations,andcashflows for the years then ended. These financial statements are the responsibility of the Board’s management.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbased onouraudits. We conducted our audits in accordance with auditing standards generally accepted in the UnitedStatesofAmericaandthestandardsapplicabletofinancialauditscontainedinGovernmentAuditingStandardsissuedbytheComptrollerGeneraloftheUnitedStates.Those standardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceabout whether the respective financial statements are free of material misstatement. An audit includesconsiderationofinternalcontroloverfinancialreportingasabasisfordesigning auditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheBoard’sinternalcontroloverfinancialreporting. Accordingly,weexpressnosuchopinion.Anauditalsoincludesexamining,onatestbasis, evidence supporting the amounts and disclosures in the respective financial statements, assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,as wellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatouraudits provideareasonablebasisforouropinion. Inouropinion,suchfinancialstatementspresentfairly,inallmaterialrespects,thefinancial positionoftheBoardofGovernorsoftheFederalReserveSystemasofDecember31,2008 and2007,andtheresultsofitsoperationsanditscashflowsfortheyearsthenendedinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica. InaccordancewithGovernmentAuditingStandards,wehavealsoissuedourreportdated March23,2009,onourconsiderationoftheBoard’sinternalcontroloverfinancialreporting andourtestsofitscompliancewithcertainprovisionsoflaws,regulations,contracts,and grantagreementsandothermatters.Thepurposeofthatreportistodescribethescopeofour testingofinternalcontroloverfinancialreportingandcomplianceandtheresultsofthattesting,andnottoprovideanopinionontheinternalcontroloverfinancialreportingoroncompliance.ThatreportisanintegralpartofanauditperformedinaccordancewithGovernment AuditingStandardsandshouldbeconsideredinassessingtheresultsofouraudit. McLean,VA March23,2009
440 95th Annual Report, 2008 BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM BALANCESHEETS AsofDecember31, 2008 2007 Assets CurrentAssets: Cash ..................................................................... $ 58,255,990 $ 44,613,728 Accountsreceivable ...................................................... 2,975,478 2,996,318 Prepaidexpensesandotherassets ......................................... 4,817,719 4,653,684 Totalcurrentassets ................................................ 66,049,187 52,263,730 NoncurrentAssets: Propertyandequipment,net(Note4) ...................................... 148,875,490 153,350,880 Otherassets .............................................................. 2,187,395 166,119 Totalnoncurrentassets ............................................. 151,062,885 153,516,999 Totalassets........................................................ $217,112,072 $205,780,729 LiabilitiesandCumulativeResultsofOperations CurrentLiabilities: Accountspayableandaccruedliabilities ................................... $ 13,312,600 $ 20,400,282 Accruedpayrollandrelatedtaxes.......................................... 9,313,237 5,647,053 Accruedannualleave ..................................................... 22,234,106 18,429,601 Capitalleasepayable(currentportion)(Note4)............................. 471,266 108,755 Unearnedrevenuesandotherliabilities .................................... 1,843,058 702,122 Totalcurrentliabilities ............................................. 47,174,267 45,287,813 Long-termLiabilities: Capitalleasepayable(non-currentportion)(Note4) ........................ 1,183,466 0 Accumulatedretirementbenefitobligation(Note5)......................... 10,866,659 2,201,675 Accumulatedpostretirementbenefitobligation(Note6)..................... 8,527,800 7,972,469 Accumulatedpostemploymentbenefitobligation(Note7)................... 13,900,000 8,855,613 Otherlong-termliabilities ................................................. 648,534 0 Totallong-termliabilities .......................................... 35,126,459 19,029,757 Totalliabilities .................................................... 82,300,726 64,317,570 CumulativeResultsofOperations: Workingcapital .......................................................... 19,346,186 7,084,672 Unfundedlong-termliabilities ............................................. (24,020,297) (17,542,943) Netinvestmentinnoncurrentassets........................................ 148,759,619 153,408,244 Accumulatedothercomprehensiveincome(loss)(Note8) .................. (9,274,162) (1,486,814) Totalcumulativeresultsofoperations............................... 134,811,346 141,463,159 Totalliabilitiesandcumulativeresultsofoperations ................. $217,112,072 $205,780,729 Seeaccompanyingnotestofinancialstatements.
Board of Governors Financial Statements 441 BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM STATEMENTSOFREVENUESANDEXPENSES ANDCHANGESINCUMULATIVERESULTSOFOPERATIONS FortheyearsendedDecember31, 2008 2007 BoardOperatingRevenues: AssessmentsleviedonFederalReserveBanksforBoard operatingexpensesandcapitalexpenditures........................ $352,290,700 $296,124,700 Otherrevenues........................................................ 9,059,232 10,365,414 Totaloperatingrevenues........................................ 361,349,932 306,490,114 BoardOperatingExpenses: Salaries............................................................... 219,752,842 197,656,442 Retirementandinsurance.............................................. 48,394,723 39,451,541 Contractualservicesandprofessionalfees.............................. 29,901,374 36,300,185 Depreciation,amortization,andnetlossesondisposals.................. 13,782,449 13,557,498 Utilities............................................................... 9,977,809 8,998,496 Travel................................................................ 9,414,877 8,619,615 Software.............................................................. 7,277,995 6,678,514 Postageandsupplies................................................... 5,802,368 8,836,143 Repairsandmaintenance............................................... 3,214,203 3,890,191 Printingandbinding................................................... 1,825,119 1,976,765 Otherexpenses........................................................ 10,870,638 7,861,901 Totaloperatingexpenses........................................ 360,214,397 333,827,291 ResultsofOperations ................................................ 1,135,535 (27,337,177) CurrencyCosts: AssessmentsleviedonFederalReserveBanks forcurrencycosts................................................. 500,356,895 576,306,073 Expensesforcostsrelatedtocurrency (Note9) ......................................................... 500,356,895 576,306,073 CurrencyAssessmentsover(under)Expenses........................ 0 0 TotalResultsofOperations ......................................... 1,135,535 (27,337,177) CumulativeResultsofOperations,Beginningofperiod .............. 141,463,159 168,631,344 OtherComprehensiveIncome(Note8) Priorservicecredit(cost)arisingduringtheyear ....................... (5,059,307) 0 Amortizationofpriorservice(credit)cost.............................. 73,867 (23,831) Amortizationofnetactuarial(gain)loss ............................... 131,578 113,142 Netactuarialgain(loss)arisingduringtheyear ........................ (3,183,688) 79,681 Curtailmenteffects-priorservicecredit(cost) ......................... 250,202 0 TotalOtherComprehensiveIncome(Loss) ...................... (7,787,348) 168,992 CumulativeResultsofOperations,Endofperiod..................... $134,811,346 $141,463,159 Seeaccompanyingnotestofinancialstatements.
442 95th Annual Report, 2008 BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM STATEMENTSOFCASHFLOWS FortheyearsendedDecember31, 2008 2007 CashFlowsfromOperatingActivities ResultsofOperations ................................................. $ 1,135,535 $(27,337,177) Adjustmentstoreconcileresultsofoperations tonetcashprovidedby(usedin)operatingactivities: Depreciation .......................................................... 13,946,960 13,433,306 Netloss(gain)ondisposalofpropertyandequipment .................. (164,511) 124,192 Decrease(increase)inassets: Accountsreceivable,prepaidexpensesandotherassets.................. (2,164,471) (929,708) Increase(decrease)inliabilities: Accountspayableandaccruedliabilities ................................ (7,087,682) 9,449,812 Accruedpayrollandrelatedtaxes ...................................... 3,666,184 225,387 Accruedannualleave.................................................. 3,804,505 2,095,089 Unearnedrevenuesandotherliabilities ................................. 1,140,936 335,818 Accumulatedretirementbenefitobligation .............................. 8,664,984 847,013 Accumulatedpostretirementbenefitobligation .......................... 555,331 (139,360) Accumulatedpostemploymentbenefitobligation ........................ 5,044,387 2,340,312 Otherlong-termliabilities.............................................. 648,534 0 Accumulatedothercomprehensiveincome ................................ (7,787,348) 168,992 Netcashprovidedby(usedin)operatingactivities ................. 21,403,344 613,676 CashFlowsfromInvestingActivities Proceedsfromdisposals.................................................. 0 65,988 Capitalexpenditures ..................................................... (9,307,059) (15,768,979) Netcashprovidedby(usedin)investingactivities ................. (9,307,059) (15,702,991) CashFlowsfromFinancingActivities Capitalleasepayments ................................................... 1,545,977 (327,663) Netcashprovidedby(usedin)financingactivities ................. 1,545,977 (327,663) NetIncrease(Decrease)inCash ........................................ 13,642,262 (15,416,978) CashBalance,Beginningofperiod........................................ 44,613,728 60,030,706 CashBalance,Endofperiod ............................................. $58,255,990 $44,613,728 Seeaccompanyingnotestofinancialstatements.
Board of Governors Financial Statements 443 BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM NOTESTOFINANCIALSTATEMENTS Revenues—TheBoardassessestheFederalReserve ASOFANDFORTHEYEARSENDED Banksforoperatingexpensesandadditionstoproperty, DECEMBER31,2008AND2007 whicharebasedonexpectedcashneeds. CurrencyCosts—FederalReserveBanksissuenew and fit currency to the public and destroy currency (1) Structure alreadyincirculationasitbecomesunfitorwhenanew TheFederalReserveSystem(System)wasestablished designisissued.Eachyear,theBoardordersnewcurbyCongressin1913andconsistsoftheBoardofGov- rencyfromtheU.S.DepartmentofTreasury’sBureauof ernors(Board),theFederalOpenMarketCommittee,the EngravingandPrinting.TheBoardincursexpensesand twelve regional Federal Reserve Banks, the Federal assessestheFederalReserveBanksforcostsrelatedto AdvisoryCouncil,andtheprivatecommercialbanksthat currency. These expenses and assessments are reported are members of the System. The Board, unlike the separatelyfromtheBoard’soperatingtransactionsinthe ReserveBanks,wasestablishedasafederalgovernment Board’s Statement of Revenues and Expenses and agencyandissupportedbyWashington,DCbasedstaff ChangesinCumulativeResultsofOperations. numbering approximately 2,000, as it carries out its AllowanceforDoubtfulAccounts—Accountsreceivresponsibilitiesinconjunctionwithothercomponentsof able considered uncollectible are charged against the theFederalReserveSystem. allowanceaccountintheyeartheyaredeemeduncollect- TheBoardisrequiredbytheFederalReserveActto ible. The allowance for doubtful accounts is adjusted reportitsoperationstotheSpeakeroftheHouseofRep- monthly,baseduponareviewofoutstandingreceivables. resentatives.TheActalsorequirestheBoard,eachyear, Property, Equipment, and Software — The Board’s toorderafinancialauditofeachFederalReserveBank property,buildings,equipment,andsoftwarearestatedat and to publish each week a statement of the financial cost less accumulated depreciation and amortization. conditionofeachsuchReserveBankandaconsolidated Depreciation and amortization are calculated on a statementforalloftheReserveBanks.Accordingly,the straight-linebasisovertheestimatedusefullivesofthe Boardbelievesthatthebestfinancialdisclosureconsis- assets,whichrangefromthreetotenyearsforfurniture tent with law is achieved by issuing separate financial andequipment,tentofiftyyearsforbuildingequipment statements for the Board and for the Reserve Banks. andstructures,andtwototenyearsforsoftware.Upon Therefore, the accompanying financial statements thesaleorotherdispositionofadepreciableasset,the includeonlytheresultsofoperationsandactivitiesofthe cost and related accumulated depreciation or amortiza- Board. Combined financial statements for the Federal tionareremovedfromtheaccountsandanygainorloss ReserveBanksareincludedintheBoard’sannualreport isrecognized. totheSpeakeroftheHouseofRepresentatives. TheBoardcomplieswithStatementofPosition98-1, Accounting for the Costs of Computer Software DevelopedorObtainedforInternalUse,whichrequiresthat (2) OperationsandServices certaincostsincurredinthedevelopmentofinternaluse TheBoard’sresponsibilitiesrequirethoroughanalysis softwarebecapitalizedandamortizedoveritsusefullife. of domestic and international financial and economic ArtCollections—TheBoardhascollectionsofworks developments.TheBoardcarriesoutthoseresponsibili- ofart,historicaltreasures,andsimilarassets.ThesecoltiesinconjunctionwithothercomponentsoftheFederal lectionsaremaintainedandheldforpublicexhibitionin ReserveSystem.TheBoardalsosupervisesandregulates furtheranceofpublicservice.Proceedsfromanysalesof the operations of the Federal Reserve Banks, exercises collections are used to acquire other items for collecbroadresponsibilityinthenation’spaymentssystem,and tions.AspermittedbyStatementofFinancialAccountadministers most of the nation’s laws regarding con- ingStandards(SFAS)No.116,AccountingforContribusumer credit protection. Policy regarding open market tions Received and Contributions Made, the cost of operations is established by the Federal Open Market collectionspurchasedbytheBoardischargedtoexpense Committee.However,theBoardhassoleauthorityover intheyearpurchasedanddonatedcollectionitemsare changesinreserverequirements,anditmustapproveany not recorded. The value of the Board’s collections has changeinthediscountrateinitiatedbyaFederalReserve notbeendetermined. Bank. Estimates—Thepreparationoffinancialstatements TheBoardalsoplaysamajorroleinthesupervision in conformity with accounting principles generally andregulationoftheU.S.bankingsystem.Ithassuper- accepted in the United States requires management to visoryresponsibilitiesforstate-charteredbanksthatare makeestimatesandassumptionsthataffectthereported members of the Federal Reserve System, bank holding amountsofassetsandliabilitiesatthedateofthefinancompanies,foreignactivitiesofmemberbanks,andU.S. cialstatementsandthereportedamountsofrevenuesand activitiesofforeignbanks. expenses during the reporting period. Actual results coulddifferfromthoseestimates. (3) SignificantAccountingPolicies (4) PropertyandEquipment BasisofAccounting—TheBoardpreparesitsfinan- Thefollowingisasummaryofthecomponentsofthe cialstatementsinaccordancewithaccountingprinciples Board’spropertyandequipment,atcost,netofaccumugenerallyacceptedintheUnitedStates. lateddepreciationandamortization.
444 95th Annual Report, 2008 AsofDecember31, (5) AccumulatedRetirementBenefits 2008 2007 SubstantiallyalloftheBoard’semployeesparticipate Land ................... $ 18,640,314 $ 18,640,314 in the Retirement Plan for Employees of the Federal Buildingsand Reserve System (System Plan). The System Plan proimprovements...... 150,602,767 149,968,504 videsretirementbenefitsonlytoemployeesoftheBoard, Furnitureand theFederalReserveBanks,andtheOfficeofEmployee equipment ......... 56,104,247 55,625,014 BenefitsoftheFederalReserveSystem(OEB).TheFed- Softwareinuse ......... 14,514,315 14,745,157 eralReserveBankofNewYork(FRBNY),onbehalfof Softwareinprocess ..... 3,832,516 2,064,438 theSystem,recognizesthenetassetandcostsassociated Constructionin with the System Plan in its financial statements. Costs process ............ 3,818,295 1,550,565 associatedwiththeSystemPlanarenotredistributedto 247,512,454 242,593,992 otherparticipatingemployers. Lessaccumulated EmployeesoftheBoardwhobecameemployedprior depreciationand to1984arecoveredbyacontributorydefinedbenefits amortization ....... (98,636,964) (89,243,112) programundertheSystemPlan.EmployeesoftheBoard Propertyandequipment, whobecameemployedafter1983arecoveredbyanonnet ................ $148,875,490 $153,350,880 contributorydefinedbenefitsprogramundertheSystem Plan. Contributions to the System Plan are actuarially determined and funded by participating employers. Construction in process includes costs incurred in Based on actuarial calculations, it was determined that 2008and2007forlong-termsecurityprojectsandbuild- employerfundingcontributionswerenotrequiredforthe ingenhancements. years2008and2007,andtheBoardwasnotassesseda InMay2008,theBoardreceivedanassetcontribution contributionfortheseyears.Inlate2008,theCommittee fromafederalgovernmentagencywithanestimatedfair on Plan Administration reviewed the System Plan’s marketvalue(FMV)of$80,000.TheBoardrecognized fundingstatusandrecommendedadditionalcontributions the FMV as revenue and capitalized the asset in June during2009.TheSystembeganmakingcontributionsto 2008. the Plan of $20 million per month starting in January The Board entered into capital leases for printing 2009;thesecontributionswillcontinuetobemadeeach equipmentduring2003,whichterminatedinMay2008. monthandmaybeadjusteduponcompletionofthe2009 TheBoardsubsequentlyenteredintonewcapitalleases actuarialvaluation. in2008.Underthenewcommitments,thecapitallease EffectiveJanuary1,1996,Boardemployeescovered term extends through 2012. Furniture and equipment undertheSystemPlanarealsocoveredunderaBenefits includes$1,923,000and$1,230,000in2008and2007, Equalization Plan (BEP). Benefits paid under the BEP respectively,forcapitalizedleases.Accumulateddepre- arelimitedtothosebenefitsthatcannotbepaidfromthe ciationincludes$280,000and$1,123,000forcapitalized System Plan due to limitations imposed by sections leasesasof2008and2007,respectively.TheBoardpaid 401(a)(17), 415(b) and 415(e) of the Internal Revenue interestrelatedtothesecapitalleasesintheamountof Codeof1986.ActivityfortheBEPfor2008and2007is $26,000and$31,000asofDecember31,2008and2007, summarizedinthefollowingtables: respectively. AsofDecember31, The future minimum lease payments required under thecapitalleasesandthepresentvalueofthenetmini- 2008 2007 mum lease payments as of December 31, 2008, are as ChangeinProjected follows: BenefitObligation Benefitobligation, YearEnding beginningofyear .. $2,201,675 $1,354,662 December31 Amount Servicecost ............ 589,094 329,282 2009 $868,164 Interestcost ............ 213,714 87,837 2010 868,164 Planparticipants’ 2011 868,164 contributions....... 0 0 2012 362,597 Actuarial(gain)/loss..... 1,137,486 453,526 Totalminimumlease Grossbenefitspaid ..... (35,016) (23,632) payments .............. 2,967,089 Planamendments ....... 484,421 0 Less:Amountrepresenting Benefitobligation, maintenance ........... (1,247,549) endofyear ........ $4,591,374 $2,201,675 Netminimumlease Accumulatedbenefit payments .............. 1,719,540 obligation, Less:Amountrepresenting endofyear ........ $1,267,005 $ 685,170 interest ................ (64,808) Presentvalueofnetminimum Weighted-average leasepayments......... 1,654,732 assumptionsusedto Less:Currentmaturitiesof determinebenefit capitalleasepayments.. (471,266) obligationasof Long-termcapitallease December31: obligations............. $1,183,466 Discountrate ........... 6.00% 6.25% Rateofcompensation increase............ 5.00% 5.00%
Board of Governors Financial Statements 445 AsofDecember31, AsofDecember31, 2008 2007 2008 2007 ChangeinPlanAssets Priorservice(credit)/ Fairvalueofplanassets, cost ............... (5,902) (14,013) beginningofyear .. $ 0 $ 0 Netperiodicbenefitcost Employercontributions.. 35,016 23,632 (credit) ............ $ 909,380 $430,761 Planparticipants’ contributions....... 0 0 Grossbenefitspaid ..... (35,016) (23,632) Weighted-average Fairvalueofplanassets, assumptionsusedto endofyear ........ $ 0 $ 0 determinenetperiodic benefitcost: Discountrate ........... 6.25%* 6.00% FundedStatus Rateofcompensation Reconciliationoffunded increase............ 5.00% 4.50% statusatendofyear: *In2008,amendmentstotheSystemPlanwereapproved. Fairvalueofplanassets. $ 0 $ 0 Asaresult,theactuariallydeterminednetperiodicbenefit Benefitobligations...... 4,591,374 2,201,675 expensesfortheyearendedDecember31,2008werere- Fundedstatus........... (4,591,374) (2,201,675) measuredwithadiscountrateof7.75%asofNovember1. Amountrecognized, endofyear ........ $(4,591,374) $(2,201,675) OtherChangesinPlan AssetsandBenefit ObligationsRecognized Amountsrecognized inOtherComprehensive inthestatementsof Income** financialposition Currentyearpriorservice consistof: (credit)/cost........ $ 484,421 $ 0 Asset................... $ 0 $ 0 Currentyearactuarial Liability................ (4,591,374) (2,201,675) (gain)/loss ......... 1,137,486 453,526 Netamountrecognized.. $(4,591,374) $(2,201,675) Amortizationofprior servicecredit/(cost). 5,902 14,013 Amortizationofactuarial Amountsrecognized gain/(loss) ......... (112,474) (27,655) inaccumulatedother comprehensiveincome Totalrecognizedinother consistof: comprehensive Netactuarialloss/(gain) . $2,031,269 $1,006,257 income ............ $1,515,335 $439,884 Priorservicecost/ Totalrecognizedinnet (credit) ............ 256,919 (233,404) periodicbenefit Deferredcurtailment costandother (gain)/loss ......... 0 0 comprehensive $2,288,188 $ 772,853 income............. $2,424,715 $870,645 **ForBenefitEqualizationPlan,OtherChangestoAssets ExpectedCashFlows andBenefitsRecognizedinOtherComprehensiveIncome Expectedemployer willbereflectedinnetperiodiccost. contributions: 2009 ................... $ 117,485 Estimatedamountsthat willbeamortizedfrom Expectedbenefit accumulatedother payments: comprehensiveincome 2009 ................... 117,485 intonetperiodicbenefit 2010 ................... 139,030 cost(credit)in2009are 2011 ................... 158,747 shownbelow: 2012 ................... 176,977 Netactuarial(gain)/loss . $ 159,893 2013 ................... 193,778 Priorservice(credit)/ 2014-2018.............. $1,277,706 cost ............... 35,257 Total ................... $ 195,150 Componentsofnet periodicbenefitcost: On October 30, 2008, the Board approved a non- Servicecost ............ $ 589,094 $ 329,282 qualifiedplanforOfficersoftheBoard.Theretirement Interestcost ............ 213,714 87,837 Expectedreturnonplan benefits covered under the Supplemental Employee assets.............. 0 0 RetirementPlan(BSERP)increasesthepensionbenefit Amortization: calculation from 1.8 percent above the Social Security Actuarial(gain)/loss .. 112,474 27,655 integrationlevelto2.0percent.ActivityfortheBSERP for 2008 is summarized in the following tables:
446 95th Annual Report, 2008 AsofDecember31, AsofDecember31, 2008 2008 ChangeinProjectedBenefit Obligation: ExpectedCashFlows Benefitobligation, Expectedemployer beginningofyear ........ $ 0 contributions: Servicecost .................. 37,190 2009......................... $ 0 Interestcost .................. 56,010 Expectedbenefitpayments: Planparticipants’ 2009......................... $ 0 contributions............. 0 2010......................... 70,754 Actuarial(gain)/loss .......... 1,607,199 2011......................... 103,843 Grossbenefitspaid ........... 0 2012......................... 140,233 Planamendments............. 4,574,886 2013......................... 180,946 Benefitobligation, 2014-2018 ................... 1,655,909 endofyear .............. $6,275,285 Componentsofnetperiodic Accumulatedbenefit benefitcost: obligation,endofyear ... $4,530,540 Servicecost ................. $ 37,190 Interestcost ................. 56,010 Weighted-average Expectedreturnonplan assumptionsusedto assets ................... 0 determinebenefit Amortization: obligationasof Actuarial(gain)/loss........ 0 December31: Priorservice(credit)/cost ... 92,199 Discountrate................. 6.00% Rateofcompensation Netperiodicbenefitcost increase ................. 5.00% (credit) .................. $ 185,399 Weighted-average ChangeinPlanAssets assumptionsusedto Fairvalueofplanassets, determinenetperiodic beginningofyear ........ $ 0 benefitcost: Employercontributions ....... 0 Discountrate................. 7.75% Planparticipants’ Rateofcompensation contributions............. 0 increase ................. 5.00% Grossbenefitspaid ........... 0 Fairvalueofplanassets, OtherChangesinPlan endofyear .............. $ 0 AssetsandBenefit ObligationsRecognizedin FundedStatus OtherComprehensive Reconciliationoffunded Income statusatendofyear: Currentyearpriorservice Fairvalueofplanassets ...... $ 0 (credit)/cost.............. $4,574,886 Benefitobligations ........... 6,275,285 Currentyearactuarial(gain)/ loss ..................... 1,607,199 Fundedstatus ................ (6,275,285) Amortizationofpriorservice Amountrecognized, credit/(cost).............. (92,199) endofyear .............. $(6,275,285) Amortizationofactuarialgain/ (loss).................... 0 Totalrecognizedinother Amountsrecognizedinthe comprehensiveincome ... $6,089,886 statementsoffinancialpositionconsistof: Totalrecognizedinnetperiodic Asset ........................ $ 0 benefitcostandother Liability ..................... (6,275,285) comprehensiveincome. .. $6,275,285 Netamountrecognized ....... $(6,275,285) ForBoardSupplementalRetirementPlan,OtherChanges inAssetsandBenefitsRecognizedinOtherComprehensive Amountsrecognizedinaccu- Incomewillbereflectedinnetperiodiccost. mulatedothercomprehensive Estimatedamountsthat incomeconsistof: willbeamortizedfrom Netactuarialloss/(gain)....... $1,607,199 accumulatedother Priorservicecost/(credit) ..... 4,482,687 comprehensiveincomeinto Deferredcurtailment(gain)/ netperiodicbenefitcost loss ..................... 0 (credit)in2009areshown $6,089,886 below: Netactuarial(gain)/loss....... $ 118,461 Priorservice(credit)/cost ..... 553,191 Total......................... $ 671,652
Board of Governors Financial Statements 447 The total accumulated retirement benefit obligation AsofDecember31, for both the Benefits Equalization Plan (BEP) and 2008 2007 SupplementalRetirementPlan(BSERP)areasfollows: ChangeinPlanAssets AsofDecember31, Fairvalueofplanassets, beginningofyear .. $ 0 $ 0 2008 2007 Employercontributions.. 315,611 284,846 Accumulatedretirement Planparticipants’ benefitobligation contributions....... 0 0 Benefitobligation, Grossbenefitspaid ..... (315,611) (284,846) BEP............... $ 4,591,374 $2,201,675 Fairvalueofplanassets, Benefitobligation, endofyear ........ $ 0 $ 0 BSERP ............ 6,275,285 0 Totalaccumulated retirementbenefit FundedStatus obligation.......... $10,866,659 $2,201,675 Reconciliationoffunded statusatendofyear: ArelativelysmallnumberofBoardemployeespartici- Fairvalueofplanassets. $ 0 $ 0 pateintheCivilServiceRetirementSystem(CSRS)or Benefitobligations...... 8,527,800 7,972,469 the Federal Employees’ Retirement System (FERS). Fundedstatus........... (8,527,800) (7,972,469) ThesedefinedbenefitplansareadministeredbytheU.S. Amountrecognized, OfficeofPersonnelManagement,whichdeterminesthe endofyear ........ $(8,527,800) $(7,972,469) requiredemployercontributionlevels.TheBoard’scontributionstotheseplanstotaled$305,000and$316,000 Amountsrecognizedin in2008and2007,respectively.TheBoardhasnoliabil- thestatementsof ityforfuturepaymentstoretireesundertheseprograms financialposition andisnotaccountablefortheassetsoftheplans. consistof: Employees of the Board may also participate in the Asset................... $ 0 $ 0 Federal Reserve System’s Thrift Plan or Roth 401(k). Liability................ (8,527,800) (7,972,469) Board contributions to members’ accounts are based Netamountrecognized.. $(8,527,800) $(7,972,469) uponafixedpercentageofeachmember’sbasiccontribution and were $11,815,000 and $9,542,000 in 2008 Amountsrecognizedin and2007,respectively. accumulatedother comprehensiveincome (6) AccumulatedPostretirementBenefits consistof: The Board provides certain life insurance programs Netactuarialloss/ foritsactiveemployeesandretirees.Activityfor2008 (gain).............. $1,223,601 $ 803,702 and2007issummarizedinthefollowingtables: Priorservicecost/ (credit) ............ (327,513) (89,741) AsofDecember31, Deferredcurtailment 2008 2007 (gain)/loss ......... 0 0 ChangeinProjected $ 896,088 $ 713,961 BenefitObligation ExpectedCashFlows Benefitobligation, Expectedemployer beginningofyear .. $7,972,469 $8,111,829 contributions: Servicecost ............ 176,450 198,791 2009 ................... $ 321,938 Interestcost ............ 505,691 479,903 Planparticipants’ Expectedbenefit contributions....... 0 0 payments: Actuarial(gain)/loss..... 439,003 (533,208) 2009 ................... $ 321,938 Grossbenefitspaid ..... (315,611) (284,846) 2010 ................... 349,910 Planamendments ....... 0 0 2011 ................... 368,338 Curtailments............ (250,202) 0 2012 ................... 385,498 Benefitobligation, 2013 ................... 412,373 endofyear ........ $8,527,800 $7,972,469 2014-2018.............. 2,452,672 Weighted-average Componentsofnet assumptionsusedto periodicbenefitcost: determinebenefit Servicecost ............ $ 176,450 $ 198,791 obligationasof Interestcost ............ 505,691 479,902 Expectedreturnonplan December31: Discountrate ........... 6.00% 6.25% assets.............. 0 0
448 95th Annual Report, 2008 AsofDecember31, (8) AccumulatedOtherComprehensiveIncome 2008 2007 Followingisareconciliationofbeginningandending Amortization: balancesofaccumulatedothercomprehensiveincome. Actuarial(gain)/loss .. 19,104 85,487 Priorservice(credit)/ Amount Amount cost ............... (12,430) (9,818) RelatedTo RelatedTo Defined Postretirement Netperiodicbenefitcost Benefit Benefits (credit) ............ $688,815 $754,362 Retirement Otherthan Plans Pensions Weighted-average assumptionsusedto BalanceatJanuary1, determinenetperiodic 2007 ................... $ 332,969 $1,322,837 benefitcost: Discountrate ........... 6.25%* 5.75% Changeinfundedstatus ofbenefitplans: *In2008,amendmentstotheplanwereapproved.Asa Priorservice(credit)cost result,theactuariallydeterminednetperiodicbenefit arisingduringthe expensesfortheyearendedDecember31,2008werereyear ............... 0 0 measuredwithadiscountrateof7.75%asofNovember1. Amortizationofprior servicecredit OtherChangesinPlan (costs) ............. 14,013 9,818 AssetsandBenefit Amortizationofnet ObligationsRecognized actuarialgain inOtherComprehensive (loss) .............. (27,655) (85,487) Income Netactuarial(gain)loss Currentyearpriorservice arisingduringthe (credit)/cost........ $ 0 $ 0 year ............... 0 0 Currentyearactuarial Curtailmenteffects-prior (gain)/loss ......... 439,003 (533,209) service(credit) Amortizationofprior cost ............... 453,526 (533,207) servicecredit/ (cost).............. 12,430 9,818 Amortizationofactuarial Changeinfundedstatus gain/(loss) ......... (19,104) (85,487) ofbenefitplans- Curtailmenteffects-prior othercomprehensive service(credit)/ income(loss) ........... 439,884 (608,876) cost ............... (250,202) 0 Totalrecognizedinother BalanceatDecember31, comprehensive 2007............... $ 772,853 $ 713,961 income ............ $182,127 $(608,878) Changeinfundedstatus Estimatedamountsthat ofbenefitplans: willbeamortizedfrom Priorservice(credit)cost accumulatedother arisingduringthe comprehensiveincome year ............... 5,059,307 0 intonetperiodicbenefit Amortizationofprior cost(credit)in2009are servicecredit shownbelow: (costs) ............. (86,297) 12,430 Netactuarial(gain)/loss . $ 48,178 Amortizationofnet Priorservice(credit)/ actuarialgain cost ............... (25,490) (loss) .............. (112,474) (19,104) Total ................... $ 22,688 Netactuarial(gain)loss arisingduringthe (7) AccumulatedPostemploymentBenefits year ............... 2,744,685 439,003 TheBoardprovidescertainpostemploymentbenefits Curtailmenteffects—prior toeligibleformerorinactiveemployeesandtheirdepen- service(credit) dents during the period subsequent to employment but cost ............... 0 (250,202) priortoretirement.PostemploymentcostswereactuariallydeterminedusingaDecember31measurementdate Changeinfundedstatus anddiscountratesof2.50percentand5.75percentasof ofbenefitplans- December 31, 2008 and December 31, 2007, respec- othercomprehensive tively.Theaccruedpostemploymentbenefitcostsrecog- income(loss) ........... 7,605,221 182,127 nizedbytheBoardasofDecember31,2008andDecember 31, 2007, were $5,974,000 and $3,055,000, BalanceatDecember31, respectively. 2008............... $8,378,074 $ 896,088
Board of Governors Financial Statements 449 Total (9) FederalReserveBanks Accumulated TheBoardperformscertainfunctionsfortheReserve Other BanksinconjunctionwithitsresponsibilitiesfortheSys- Comprehensive tem,andtheReserveBanksprovidecertainadministra- Income(Loss) tivefunctionsfortheBoard.ActivityrelatedtotheBoard BalanceatJanuary1, andReserveBanksissummarizedinthefollowingtable: 2007............... $(1,655,806) AsofDecember31, Changeinfundedstatus 2008 2007 ofbenefitplans: ReserveBankexpenses Priorservice(credit)cost chargedtotheBoard arisingduringthe Dataprocessingand year ............... 0 communication..... $ 2,368,144 $ 2,064,110 Amortizationofprior Contingencysite........ 1,265,618 1,152,166 servicecredit (costs) ............. (23,831) TotalReserveBank Amortizationofnet expensescharged actuarialgain totheBoard ....... $ 3,633,762 $ 3,216,276 (loss) .............. 113,142 Netactuarial(gain)loss Boardexpensescharged arisingduringthe totheReserveBanks year ............... 0 Assessmentsforcurrency Curtailmenteffects-prior costs service(credit) Printing .............. $477,927,083 $555,100,837 cost ............... 79,681 Shipping ............. 14,984,564 13,710,396 Retirement ........... 3,722,146 3,995,424 Changeinfundedstatus Researchand ofbenefitplans- Development....... 3,723,101 3,499,416 othercomprehensive Assessmentsforoperating income(loss) ........... 168,992 expensesofthe Board ............. 352,290,700 296,124,700 BalanceatDecember31, Dataprocessing......... 601,957 704,840 2007............... $(1,486,814) TotalBoardexpenses chargedtothe ReserveBanks ..... $853,249,551 $873,135,613 Changeinfundedstatus ofbenefitplans: Accountsreceivabledue Priorservice(credit)cost fromtheReserve arisingduringthe Banks ............. $ 1,016,688 $ 1,270,582 year ............... (5,059,307) Accountspayabledue Amortizationofprior totheReserve servicecredit Banks ............. 295,848 10 (costs) ............. 73,867 Amortizationofnet TheBoardcontractedforauditservicesonbehalfof actuarialgain entitiesthatareincludedinthecombinedfinancialstate- (loss) .............. 131,578 ments of the Federal Reserve Banks. The entities will Netactuarial(gain)loss reimburse the Board for the cost of the audit services. arisingduringthe The Board accrued liabilities of $313,000 in audit seryear ............... (3,183,688) vices and recorded receivables of $313,000 from the Curtailmenteffects-prior entitiesasofDecember31,2008. service(credit) cost ............... 250,202 (10) FederalFinancialInstitutionsExamination Council Changeinfundedstatus TheBoardisoneofthefivememberagenciesofthe ofbenefitplans- Council, and currently performs certain management othercomprehensive functionsfortheCouncil.Thefiveagencieswhichare income(loss) ........... (7,787,348) represented on the Council are the Board, Federal Deposit Insurance Corporation, National Credit Union BalanceatDecember31, Administration, Office of the Comptroller of the Cur- 2008............... $(9,274,162) rency, and Office of Thrift Supervision. The Board’s financialstatementsdonotincludefinancialdataforthe Additionaldetailregardingtheclassificationofaccu- Council. Activity related to the Board and Council for mulatedothercomprehensiveincomeisincludedinnotes 2008and2007issummarizedinthefollowingtable: 5and6.
450 95th Annual Report, 2008 AsofDecember31, 2009 ................................. $ 2,268,850 2008 2007 2010 ................................. 6,297,594 2011 ................................. 6,335,714 Councilexpensescharged 2012 ................................. 6,414,807 totheBoard After2012 ........................... 49,023,488 Assessmentsforoperating expenses .......... $ 164,889 $ 108,163 $70,340,453 CentralData Repository ......... 1,352,390 1,167,449 Rental expenses under the operating leases were UniformBank $2,207,000and$539,000asofDecember31,2008and Performance 2007,respectively. Report............. 185,833 192,026 DeferredLeases TotalCouncilexpenses chargedtothe The amount of additional deferred rent is $537,000 Board ............. $1,703,112 $1,467,638 and $318,000 for the years ended December 31, 2008 and2007,respectively. Boardexpensescharged Commitments totheCouncil The Board has entered into an agreement with the Dataprocessingrelated FederalDepositInsuranceCorporationandtheOfficeof services............ $4,683,363 $4,457,647 the Comptroller of the Currency, through the Federal Administrativeservices.. 190,400 190,800 FinancialInstitutionsExaminationCouncil(theCouncil) TotalBoardexpenses tofundaportionofenhancementsandmaintenancefees chargedtothe foracentraldatarepositoryprojectthrough2010withan Council............ $4,873,763 $4,648,447 option to extend maintenance through 2013. The esti- Accountsreceivabledue matedBoardexpensetosupportthiseffortis$7.9milfromtheCouncil... $ 650,672 $ 384,142 lionforthebaseperiodand$2.6millionfortheoption Accountspayabledue period. totheCouncil...... 373,466 64,087 In 2007, the Council began a rewrite of the Home Mortgage Disclosure Act processing system, for which (11) TheOfficeofEmployeeBenefitsofthe the Board provides data processing services. The esti- FederalReserveSystem mated total expense to the Council of the rewrite is The Office of Employee Benefits of the Federal $3.2 million through 2010. The estimated total Board ReserveSystem(OEB)administerscertainSystembene- expense to support this effort with the maintenance fit programs on behalf of the Board and the Reserve extensionoptionis$533,000. Banks,andcostsassociatedwiththeOEB’sactivitiesare LitigationandContingentLiabilities assessed to the Board and Reserve Banks. The Board wasassessed$2,867,208and$2,866,676asofDecem- The Board is subject to contingent liabilities which ber31,2008andDecember31,2007,respectively. arisefromlitigationcasesandvariousbusinesscontracts. Thesecontingentliabilitiesariseinthenormalcourseof (12) BureauofEngravingandPrinting operations and their ultimate disposition is unknown. The Bureau of Engraving and Printing (BEP) is the Basedoninformationcurrentlyavailabletomanagement, principal supplier for currency printing and retirement itismanagement’sopinionthattheexpectedoutcomeof services. The currency costs incurred and outstanding thesematters,individuallyorintheaggregate,willnot balances owed to BEP as of December 31, 2008 and have a materially adverse effect on the financial state- 2007,arereflectedinthefollowingtable: ments. One case alleges employment discrimination under AsofDecember31, TitleVIIoftheCivilRightsActof1964,asamended, 2008 2007 andtheAgeDiscriminationinEmploymentActandis Currencyexpenses pending in the United States Court of Appeals for the chargedtotheBoard District of Columbia Circuit. A second action alleges Printing ................ $477,927,083 $555,100,837 discriminationonbehalfofaclassofAfricanAmerican Retirement ............. 3,722,146 3,995,424 secretariesattheBoardandwasdismissedbytheUnited Totalcurrencyexpenses States District Court for the District of Columbia on chargedtothe January31,2007,andtheplaintiffs’motiontoalteror Board ............. $481,649,229 $559,096,261 amendjudgmentwasdeniedbythatcourtonMarch2, 2009.TheplaintiffshaveuntilMay1,2009,toappeal (13) CommitmentsandContingencies the matter to the United States Court of Appeals. The Boardhassubstantialdefensesforbothcasesandintends Leases todefendthemattersvigorously.Managementbelieves TheBoardhasenteredintoseveraloperatingleasesto thatthelikelihoodofanadversejudgmentforbothcases secure office, training and warehouse space. Minimum issmall. annual payments under the operating leases having an Theestimatedcontingentliabilitiesrelatedtobusiness initialorremainingnoncancelableleaseterminexcessof contractswere$69,720and$0asofDecember31,2008 oneyearatDecember31,2008,areasfollows: andDecember31,2007,respectively.
Board of Governors Financial Statements 451 INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE AND ON INTERNALCONTROLOVERFINANCIALREPORTINGBASEDONAN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCOR- DANCEWITHGOVERNMENTAUDITINGSTANDARDS TotheBoardofGovernorsoftheFederalReserveSystem: WehaveauditedthefinancialstatementsofTheBoardofGovernorsoftheFederalReserve System(the“Board”)asofandfortheyearendedDecember31,2008,andhaveissuedour reportthereondatedMarch23,2009.Weconductedourauditinaccordancewithauditing standardsgenerallyacceptedintheUnitedStatesofAmericaandthestandardsapplicableto financial audits contained in Government Auditing Standards, issued by the Comptroller GeneraloftheUnitedStates. InternalControloverFinancialReporting Inplanningandperformingouraudit,weconsideredtheBoard’sinternalcontroloverfinancialreportinginordertodetermineourauditingproceduresforthepurposeofexpressingour opiniononthefinancialstatementsandnottoprovideassuranceontheinternalcontrolover financialreporting.Ourconsiderationoftheinternalcontroloverfinancialreportingwould notnecessarilydiscloseallmattersintheinternalcontrolthatmightbematerialweaknesses. Amaterialweaknessisaconditioninwhichthedesignoroperationofoneormoreofthe internalcontrolcomponentsdoesnotreducetoarelativelylowleveltheriskthatmisstatementsinamountsthatwouldbematerialinrelationtothefinancialstatementsbeingaudited mayoccurandnotbedetectedwithinatimelyperiodbyemployeesinthenormalcourseof performingtheirassignedfunctions.Wenotednomattersinvolvingtheinternalcontrolover financialreportinganditsoperationthatweconsidertobematerialweaknesses. Wehavecommunicatedtomanagement,inaseparateletterdatedMarch23,2009,other mattersthatweidentifiedduringouraudit. Compliance AspartofobtainingreasonableassuranceaboutwhethertheBoard’sfinancialstatementsare freeofmaterialmisstatement,weperformedtestsofitscompliancewithcertainprovisions oflaws,regulations,contracts,andgrants,noncompliancewithwhichcouldhaveadirectand materialeffectonthedeterminationoffinancialstatementamounts.However,providingan opiniononcompliancewiththoseprovisionswasnotanobjectiveofouraudit,andaccordingly,wedonotexpresssuchanopinion.Theresultsofourtestsdisclosednoinstancesof noncomplianceorothermattersthatarerequiredtobereportedunderGovernmentAuditing Standards. Distribution ThisreportisintendedsolelyfortheinformationanduseoftheBoard,management,and otherswithintheorganization,OfficeofInspectorGeneral,theUnitedStatesCongress,and isnotintendedtobeandshouldnotbeusedbyanyoneotherthanthesespecifiedparties. McLean,VA March23,2009
453 Federal Reserve Banks Combined Financial Statements The combined financial statements of the Federal Reserve Banks were audited by Deloitte & Touche LLP, independent auditors, for the years ended December 31, 2008 and 2007. REPORTOFINDEPENDENTAUDITORS TotheBoardofGovernorsoftheFederalReserveSystem andtheBoardofDirectorsoftheFederalReserveBanks: WehaveauditedtheaccompanyingcombinedstatementsofconditionoftheFederalReserve Banks(the“ReserveBanks”)asofDecember31,2008and2007andtherelatedcombined statementsofincomeandcomprehensiveincomeandchangesincapitalfortheyearsthen ended,whichhavebeenpreparedinconformitywithaccountingprinciplesestablishedbythe BoardofGovernorsoftheFederalReserveSystem.Thesecombinedfinancialstatementsare the responsibility of the Reserve Banks’ management. Our responsibility is to express an opiniononthesecombinedfinancialstatementsbasedonouraudits. WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformthe audittoobtainreasonableassuranceaboutwhetherthecombinedfinancialstatementsarefree ofmaterialmisstatement.Anauditincludesconsiderationofinternalcontroloverfinancial reportingasabasisfordesigningauditproceduresthatareappropriateinthecircumstances, but not for the purpose of expressing an opinion on the effectiveness of the combined ReserveBanks’internalcontroloverfinancialreporting.Accordingly,weexpressnosuch opinion.Anauditalsoincludesexamining,onatestbasis,evidencesupportingtheamounts anddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatement presentation.Webelievethatourauditsprovideareasonablebasisforouropinion. AsdescribedinNote4tothecombinedfinancialstatements,theReserveBankshavepreparedthesecombinedfinancialstatementsinconformitywithaccountingprinciplesestablishedbytheBoardofGovernorsoftheFederalReserveSystem,assetforthintheFinancial Accounting Manual for Federal Reserve Banks, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.Theeffectsonsuchcombinedfinancialstatementsofthedifferencesbetweenthe accountingprinciplesestablishedbytheBoardofGovernorsoftheFederalReserveSystem and accounting principles generally accepted in the United States of America are also describedinNote4. In our opinion, the combined financial statements referred to above present fairly, in all materialrespects,thecombinedfinancialpositionoftheReserveBanksasofDecember31, 2008and2007,andthecombinedresultsoftheiroperationsfortheyearsthenended,onthe basisofaccountingdescribedinNote4. April20,2009
454 95th Annual Report, 2008 FEDERALRESERVEBANKS COMBINEDSTATEMENTSOFCONDITION (inmillions) AsofDecember31, 2008 2007 Assets Goldcertificates ........................................................ $ 11,037 $ 11,037 Specialdrawingrightscertificates....................................... 2,200 2,200 Coin .................................................................... 1,688 1,179 Itemsinprocessofcollection ........................................... 979 1,804 Loanstodepositoryinstitutions ......................................... 544,010 48,636 Otherloans ............................................................. 100,082 0 SystemOpenMarketAccount: Securitiespurchasedunderagreementstoresell ...................... 80,000 46,500 U.S.government,federalagency,andgovernment-sponsored enterprisesecurities,net............................................ 502,189 745,629 Investmentsdenominatedinforeigncurrencies ....................... 24,804 22,914 Centralbankliquidityswaps ......................................... 553,728 24,000 Consolidatedvariableinterestentities: Investmentsheldbyconsolidatedvariableinterestentities(ofwhich $74,570ismeasuredatfairvalueatDecember31,2008).......... 411,996 0 Bankpremises,equipment,andsoftware,net ........................... 2,572 2,539 PrepaidinterestonFederalReservenotesduefromU.S.Treasury ...... 2,425 0 Accruedinterestreceivable.............................................. 7,389 6,438 Otherassets ............................................................. 629 1,900 Totalassets ........................................................... $2,245,728 $914,776 LiabilitiesandCapital FederalReservenotesoutstanding,net.................................. $ 853,168 $791,691 SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase....................... 88,352 43,985 Consolidatedvariableinterestentities: Beneficialinterestinconsolidatedvariableinterestentities ........... 2,824 0 Otherliabilities ....................................................... 5,813 0 Deposits: Depositoryinstitutions................................................ 860,000 20,767 U.S.Treasury,generalaccount........................................ 106,123 16,120 U.S.Treasury,supplementaryfinancingaccount ...................... 259,325 0 Otherdeposits ........................................................ 21,671 363 Deferredcredititems.................................................... 2,471 1,811 InterestonFederalReservenotesduetoU.S.Treasury ................. 0 1,532 Interestduetodepositoryinstitutions ................................... 88 0 Accruedbenefitcosts ................................................... 3,374 1,281 Otherliabilities ......................................................... 367 326 Totalliabilities........................................................ 2,203,576 877,876 Capitalpaid-in .......................................................... 21,076 18,450 Surplus(includingaccumulatedothercomprehensivelossof $4,683millionand$1,524millionatDecember31,2008 and2007,respectively) ............................................ 21,076 18,450 Totalcapital .......................................................... 42,152 36,900 Totalliabilitiesandcapital............................................ $2,245,728 $914,776 Theaccompanyingnotesareanintegralpartofthesecombinedfinancialstatements.
Federal Reserve Banks Combined Financial Statements 455 FEDERALRESERVEBANKS COMBINEDSTATEMENTSOFINCOME ANDCOMPREHENSIVEINCOME (inmillions) Fortheyearended December31, 2008 2007 Interestincome: Loanstodepositoryinstitutions ......................................... $ 3,817 $ 71 Otherloans ............................................................. 3,348 0 SystemOpenMarketAccount: Securitiespurchasedunderagreementstoresell ...................... 1,891 1,591 U.S.government,federalagency,andgovernment-sponsored enterprisesecurities ................................................ 25,631 38,707 Investmentsdenominatedinforeigncurrencies ....................... 623 547 Centralbankliquidityswaps ......................................... 3,606 28 Consolidatedvariableinterestentities: Investmentsheldbyconsolidatedvariableinterestentities............ 4,087 0 Totalinterestincome ................................................. 43,003 40,944 Interestexpense: SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase....................... 737 1,688 Depositoryinstitutionsdeposits ......................................... 817 0 Otherinterestexpense................................................... 463 0 Totalinterestexpense................................................. 2,017 1,688 Netinterestincome................................................... 40,986 39,256 Non-interestincome(loss): SystemOpenMarketAccount: U.S.government,federalagencyandgovernment-sponsored enterprisesecuritiesgains,net...................................... 3,769 0 Foreigncurrencygains,net........................................... 1,266 1,886 Investmentsheldbyconsolidatedvariableinterestentities(losses),net . (5,237) 0 Incomefromservices ................................................... 773 878 Reimbursableservicestogovernmentagencies ......................... 461 458 Otherincome ........................................................... 899 166 Totalnon-interestincome(loss) ...................................... 1,931 3,388 Operatingexpenses: Salariesandotherbenefits............................................ 2,184 2,093 Occupancyexpense................................................... 275 247 Equipmentexpense ................................................... 200 203 AssessmentsbytheBoardofGovernors.............................. 853 872 Professionalfeesrelatedtoconsolidatedvariableinterestentities..... 80 0 Otherexpenses ....................................................... 662 838 Totaloperatingexpenses ........................................... 4,254 4,253 Netincomepriortodistribution......................................... 38,663 38,391 Changeinfundedstatusofbenefitplans (3,159) 325 Comprehensiveincomepriortodistribution .......................... $35,504 $38,716 Distributionofcomprehensiveincome: Dividendspaidtomemberbanks ..................................... $ 1,189 $ 992 Transferredtosurplusandchangeinaccumulatedother comprehensiveloss ................................................ 2,626 3,126 PaymentstoU.S.TreasuryasinterestonFederalReservenotes...... 31,689 34,598 Totaldistribution ................................................ $35,504 $38,716 Theaccompanyingnotesareanintegralpartofthesecombinedfinancialstatements.
456 95th Annual Report, 2008 FEDERALRESERVEBANKS COMBINEDSTATEMENTSOFCHANGESINCAPITAL fortheyearsendedDecember31,2008andDecember31,2007 (inmillions,exceptsharedata) Surplus Accumulated Net Other Capital Income Comprehensive Total Total Paid-In Retained Loss Surplus Capital BalanceatJanuary1,2007 (306millionshares) ............. $15,324 $17,173 $(1,849) $15,324 $30,648 Netchangeincapitalstockissued (63millionshares)............... 3,126 0 0 0 3,126 Transferredtosurplusand changeinaccumulatedother comprehensiveloss................. 0 2,801 325 3,126 3,126 BalanceatDecember31,2007 (369millionshares) ............. $18,450 $19,974 $(1,524) $18,450 $36,900 Netchangeincapitalstockissued (53millionshares)............... 2,626 0 0 0 2,626 Transferredtosurplusand changeinaccumulatedother comprehensiveloss................. 0 5,785 (3,159) 2,626 2,626 BalanceatDecember31,2008 (422millionshares) ............. $21,076 $25,759 $(4,683) $21,076 $42,152 Theaccompanyingnotesareanintegralpartofthesecombinedfinancialstatements. NotestotheCombinedFinancialStatementsoftheFederalReserveBanks (1) Structure The System also consists, in part, of the Board of Governors and the Federal Open Market Committee ThetwelveFederalReserveBanks(“ReserveBanks”) (“FOMC”). The Board of Governors, an independent arepartoftheFederalReserveSystem(“System”)crefederal agency, is charged by the Federal Reserve Act atedbyCongressundertheFederalReserveActof1913 with a number of specific duties, including general (“Federal Reserve Act”), which established the central supervisionovertheReserveBanks.TheFOMCiscombankoftheUnitedStates.TheReserveBanksarecharposedofmembersoftheBoardofGovernors,thepresiteredbythefederalgovernmentandpossessauniqueset dent of the Federal Reserve Bank of New York ofgovernmental,corporate,andcentralbankcharacter- (“FRBNY”),andonarotatingbasisfourotherReserve istics. Bankpresidents. InaccordancewiththeFederalReserveAct,supervisionandcontrolofeachReserveBankisexercisedbya (2) OperationsandServices boardofdirectors.TheFederalReserveActspecifiesthe composition of the board of directors for each of the TheReserveBanksperformavarietyofservicesand ReserveBanks.Eachboardiscomposedofninemem- operations. Functions include participation in formulatbersservingthree-yearterms:threedirectors,including ingandconductingmonetarypolicy;participationinthe thosedesignatedaschairmananddeputychairman,are payments system, including large-dollar transfers of appointed by the Board of Governors of the Federal funds,automatedclearinghouse(“ACH”)operations,and ReserveSystem(“BoardofGovernors”)torepresentthe checkcollection;distributionofcoinandcurrency;perpublic,andsixdirectorsareelectedbymemberbanks. formance of fiscal agency functions for the U.S. Trea- Banks that are members of the System include all sury,certainfederalagencies,andotherentities;serving nationalbanksandanystate-charteredbanksthatapply as the federal government’s bank; provision of shortandareapprovedformembershipintheSystem.Mem- termloanstodepositoryinstitutions;provisionofloans berbanksaredividedintothreeclassesaccordingtosize. toindividuals,partnerships,andcorporationsinunusual Memberbanksineachclasselectonedirectorrepresent- and exigent circumstances; service to consumers and ing member banks and one representing the public. In communities by providing educational materials and anyelectionofdirectors,eachmemberbankreceivesone informationregardingconsumerlaws;andsupervisionof vote,regardlessofthenumberofsharesofReserveBank bankholdingcompanies,statememberbanks,andU.S. stockitholds. officesofforeignbankingorganizations.Certainservices
Federal Reserve Banks Combined Financial Statements 457 are provided to foreign and international monetary whichprimarydealerspledgeU.S.Treasuryandagency authorities,primarilybytheFRBNY. securities and agency Mortgage-Backed Securities TheFOMC,intheconductofmonetarypolicy,estab- (“MBS”)ascollateral.TheFRBNYcanelecttoincrease lishespolicyregardingdomesticopenmarketoperations, the size of the term repurchase program if conditions overseestheseoperations,andannuallyissuesauthoriza- warrant. The repurchase transactions are reported as tions and directives to the FRBNY to execute transac- “System Open Market Account: Securities purchased tions. The FRBNY is authorized and directed by the underagreementstoresell”intheCombinedStatements FOMC to conduct operations in domestic markets, ofCondition. includingthedirectpurchaseandsaleofsecuritiesofthe TheGSEandAgencySecuritiesandMBSPurchase U.S. government, federal agencies, and government- Program was announced on November 25, 2008. The sponsored enterprises (“GSEs”); the purchase of these primarygoaloftheprogramistoprovidesupporttothe securities under agreements to resell; the sale of these mortgage and housing markets and to foster improved securitiesunderagreementstorepurchase;andthelend- conditionsinfinancialmarkets.Underthisprogram,the ingofthesesecurities.TheFRBNYexecutesthesetrans- FRBNYwillpurchasethedirectobligationsofhousingactions at the direction of the FOMC and holds the relatedGSEsandMBSbackedbytheFederalNational resulting securities and agreements in the portfolio MortgageAssociation(“FannieMae”),theFederalHome knownastheSystemOpenMarketAccount(“SOMA”). Loan Mortgage Corporation (“Freddie Mac”), and the Inadditiontoauthorizinganddirectingoperationsin Government National Mortgage Association (“Ginnie thedomesticsecuritiesmarket,theFOMCauthorizesand Mae”). Purchases of the direct obligations of housingdirectstheFRBNYtoexecuteoperationsinforeignmar- relatedGSEsbeganinNovember2008,andpurchasesof kets in order to counter disorderly conditions in GSE and agency MBS began in January 2009. There exchangemarketsortomeetotherneedsspecifiedbythe werenopurchasesofGSEandagencyMBSduringthe FOMCincarryingouttheSystem’scentralbankrespon- periodendedDecember31,2008.Theprogramwasinisibilities. The FRBNY is authorized by the FOMC to tiallyauthorizedtopurchaseupto$100billioninGSE holdbalancesof,andtoexecutespotandforwardforeign direct obligations and up to $500 billion in MBS. In exchange and securities contracts for, fourteen foreign March2009,theFOMCauthorizedtheFRBNYtopurcurrenciesandtoinvestsuchforeigncurrencyholdings, chase up to an additional $750 billion of GSE and ensuringadequateliquidityismaintained.TheFRBNYis agencymortgage-backedsecurities,$100billionofGSE alsoauthorizedanddirectedbytheFOMCtomaintain directobligations,and$300billioninlonger-termTrealiquidity currency arrangements with fourteen central surysecurities. banksandto“warehouse”foreigncurrenciesfortheU.S. TheFRBNYholdstheresultingsecuritiesandagree- Treasury and Exchange Stabilization Fund (“ESF”) mentsintheSOMAportfolio,andtheactivitiesofboth throughtheReserveBanks. programsareallocatedtotheotherReserveBanks. AlthoughtheReserveBanksareseparatelegalenti- CentralBankLiquiditySwaps ties,theycollaborateinthedeliveryofcertainservicesto achieve greater efficiency and effectiveness. This col- TheFOMCauthorizedtheFRBNYtoestablishtemlaboration takes the form of centralized operations and porary liquidity currency swap arrangements (central product or function offices that have responsibility for bank liquidity swaps) with the European Central Bank thedeliveryofcertainservicesonbehalfoftheReserve andtheSwissNationalBankonDecember12,2007,to Banks.Variousoperationalandmanagementmodelsare helpprovideliquidityinU.S.dollarstooverseasmarkets. usedandaresupportedbyserviceagreementsbetween Subsequently, the FOMC authorized liquidity currency the Reserve Banks providing the service and the other swaparrangementswithadditionalforeigncentralbanks. Reserve Banks. In some cases, costs incurred by a Sucharrangementsarenowauthorizedwiththefollow- Reserve Bank for services provided to other Reserve ing central banks: the Reserve Bank of Australia, the Banksarenotshared;inothercases,theReserveBanks BancoCentraldoBrasil,theBankofCanada,Danmarks reimburseotherReserveBanksforservicesprovidedto Nationalbank,theBankofEngland,theEuropeanCenthem. tral Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, (3) RecentFinancialStabilityActivities Norges Bank, the Monetary Authority of Singapore, Sveriges Riksbank, and the Swiss National Bank. The TheSystemhasimplementedanumberofprograms activityrelatedtotheprogramisallocatedtotheother designedtosupporttheliquidityoffinancialinstitutions ReserveBanks.Themaximumamountofborrowingperandtofosterimprovedconditionsinfinancialmarkets. missible under the swap arrangement varies by central These new programs, which are set forth below, have bank.Thecentralbankliquidityswaparrangementsare resultedinsignificantchangestothecombinedfinancial authorizedthroughOctober30,2009. statements. LendingtoDepositoryInstitutions ExpandedOpenMarketOperationsandSupportfor The Term Auction Facility (“TAF”) program was Mortgage-RelatedSecurities announcedonDecember12,2007.ThegoalofTAFisto The Single-Tranche Open Market Operations Pro- help promote the efficient dissemination of liquidity, gram,announcedonMarch7,2008,allowsprimarydeal- whichisachievedbytheReserveBanksinjectingterm erstoinitiateaseriesoftermrepurchasetransactionsthat funds through a broader range of counterparties and are expected to accumulate to $100 billion in total. against a broader range of collateral than open market Undertheprovisionsoftheprogram,thesetransactions operations.UndertheTAFprogram,ReserveBanksaucareconductedas28-daytermrepurchaseagreementsfor tiontermfundstodepositoryinstitutionsagainstawide
458 95th Annual Report, 2008 varietyofcollateral.Alldepositoryinstitutionsthatare includedin“Otherloans”intheCombinedStatementsof eligible to borrow under the Reserve Banks’ primary Condition. creditprogramareeligibletoparticipateinTAFauctions. OtherLendingFacilities Alladvancesmustbefullycollateralized.Theloansare reported as “Loans to depository institutions” in the TheAsset-BackedCommercialPaperMoneyMarket CombinedStatementsofCondition. Mutual Fund Liquidity Facility (“AMLF”), announced onSeptember19,2008,isalendingfacilitythatprovides LendingtoPrimaryDealers fundingundercertainconditionstoU.S.depositoryinsti- The Term Securities Lending Facility (“TSLF”) tutionsandbankholdingcompaniestofinancethepurannouncedonMarch11,2008,promotesliquidityinthe chase of high-quality asset-backed commercial paper financingmarketsforU.S.Treasurysecuritiesandother (“ABCP”) from money market mutual funds. The procollateral.UndertheTSLF,theFRBNYwilllendupto gram is intended to assist money market mutual funds an aggregate amount of $200 billion of U.S. Treasury that hold such paper to meet the demands for investor securitiestoprimarydealersforatermof28days.Secu- redemptionsandtofosterliquidityintheABCPmarket ritiesloanedarecollateralizedbyapledgeofothersecu- and in money markets more generally. The Federal rities,includingfederalagencydebt,federalagencyresi- Reserve Bank of Boston (“FRBB”) administers the dentialmortgage-backedsecurities(“RMBS”),andnon- AMLFandisauthorizedtoextendtheseloanstoeligible agency AAA/Aaa-rated private-label residential borrowers on behalf of the other Reserve Banks. All mortgage-backedsecuritiesandareawardedtoprimary loansextendedundertheAMLFarerecordedasassets dealers through a competitive single-price auction. In bytheFRBBand,iftheborrowinginstitutionsettlestoa February 2009, the System announced the extension depositoryaccountinanotherFederalReserveDistrict, throughOctober30,2009,ofTSLF.Thefeesrelatedto the funds are credited to the institution’s depository these securities lending transactions are reported as a accountandsettledbetweentheReserveBanksthrough component of “Non-interest income (loss): Other the interdistrict settlement account. The credit risk income” in the Combined Statements of Income and related to the AMLF is assumed by the FRBB. The ComprehensiveIncome. FRBBisauthorizedtofinancethepurchaseofcommer- The Primary Dealer Credit Facility (“PDCF”) was cialpaperthroughOctober30,2009. announcedonMarch16,2008.ThegoalofthePDCFis TheCommercialPaperFundingFacility(the“CPFF to improve the ability of primary dealers to provide Program”), announced on October 7, 2008, provides financing to participants in the securitization markets. liquiditytothecommercialpapermarketintheU.S.by Primarydealersmayobtainsecuredovernightfinancing increasing the availability of term commercial paper underthePDCF,intheformofrepurchasetransactions. fundingtoissuersandbyprovidinggreaterassuranceto Eligiblecollateralisthatwhichiseligibleforpledgein bothissuersandinvestorsthatissuerswillbeabletoroll tri-party funding arrangements. The program became over their maturing commercial paper. The CPFF ProoperationalonSeptember12,2008,andtheinterestrate grambecameoperationalonOctober27,2008,andwas charged on the secured financing is the FRBNY’s pri- originally authorized to purchase commercial paper marycreditrate.Participantspayafrequency-basedfee throughApril30,2009,withauthorizationsubsequently iftheyaccesstheprogramonmorethan45businessdays extended through October 30, 2009. The Commercial PaperFundingFacilityLLC(“CPFF”)isalimitedliabilduringthetermoftheprogram.Securedfinancingmade ity company that was formed on October 14, 2008, in under the PDCF is made with recourse to the primary connection with the implementation of the CPFF Prodealer.FinancingprovidedunderthePDCFisincluded gram to purchase eligible three-month unsecured and in“Otherloans”intheConsolidatedStatementsofConasset-backedcommercialpaper(“ABCP”)directlyfrom dition. In February 2009, the System announced the eligibleissuersusingtheproceedsofloansmadetothe extensionofthefacilitythroughOctober30,2009. CPFF. The CPFF is a single-member limited liability The Term Securities Lending Facility Options Procompany with the FRBNY as the sole and managing gram (“TOP”) announced on July 30, 2008, offers pri- member.TheFRBNYwillcontinuetoprovidefunding marydealerstheoptiontodrawuponshort-term,fixed- to the CPFF after such date, if necessary, until the rateTSLFloansinexchangeforeligiblecollateral.The CPFF’sunderlyingassetsmature. optionsareawardedthroughacompetitiveauction.The AllloansmadebytheFRBNYtotheCPFFareona programisintendedtoenhancetheeffectivenessofthe fullrecoursebasisandalltheassetsintheCPFFserveas TSLF by ensuring additional securities liquidity during collateral.Therateofinterestontheloanisthetarget periodsofheightenedcollateralmarketpressures,suchas federal funds rate and is fixed through the life of the around quarter-end dates. TOP auction dates are deter- loan.Ifthetargetfederalfundsrateisarange,thenthe mined by the FRBNY, and the program authorization rateofinterestissetatthemaximumratewithinsuch endsconcurrentlywiththeTSLF. range.Principalandaccruedinterestarepayable,infull, The Transitional Credit Extensions, announced on atthematuritydateofthecommercialpaper.TheFRB- September 21, 2008, provides liquidity support to NY’sloantotheCPFFiseliminatedduringconsolidabroker-dealersthatwereintheprocessoftransitioningto tion. the bank holding company structure. The credit exten- TobeeligibleforpurchasesbytheCPFF,commercial sionsunderthisprogramareaimedatprovidingthefirms papermust,amongotherthings,be(i)issuedbyaU.S. withincreasedliquidityandarecollateralizedsimilarto issuer(whichincludesU.S.issuerswithaforeignparent loans made under either the FRBNY’s primary credit companyandU.S.branchesofforeignbanks)and(ii)be programsorthroughtheexistingPDCF.Financingpro- ratedatleastA-1/P-1/F1byanationallyrecognizedstavided under the Transitional Credit Extensions are tistical rating organizations (“NRSRO”) or, if rated by
Federal Reserve Banks Combined Financial Statements 459 multipleNRSROs,atleastA-1/P-1/F1bytwoormore. funds,andcollectiveinvestmentfunds.Additionally,the The commercial paper must also be U.S. dollar- Systemauthorizedtheadjustmentofseveraloftheecodenominatedandhaveathree-monthmaturity.Commer- nomicparametersoftheMMIFF,includingtheminimum cial paper purchased by the CPFF is discounted when yieldonassetseligibletobesoldtotheMMIFF.InFebpurchasedandcarriedatamortizedcost.Themaximum ruary 2009, the System announced the extension of amount of a single issuer’s commercial paper that the MMIFFthroughOctober30,2009. CPFFmayownatanytime(the“maximumfacevalue”) The Board of Governors announced the creation of willbethegreatestamountofU.S.dollar-denominated the Term Asset-Backed Securities Loan Facility commercialpapertheissuerhadoutstandingonanyday (“TALF”)onNovember25,2008.ThegoaloftheTALF betweenJanuary1andAugust31,2008.TheCPFFwill is to help market participants meet the credit needs of notpurchaseadditionalcommercialpaperfromanissuer householdsandsmallbusinessesbysupportingtheissuwhosetotalcommercialpaperoutstandingtoallinves- anceofasset-backedsecurities(“ABS”)collateralizedby tors(includingtheCPFF)equalsorexceedstheissuer’s student loans, auto loans, credit card loans, and loans maximumfacevaluelimit. guaranteed by the Small Business Administration All issuers must pay a non-refundable facility fee (“SBA”).UndertheTALF,theFRBNYwilllendupto uponregistrationwiththeCPFFequalto10basispoints $200billiononanon-recoursebasistoholdersofcertain oftheissuer’smaximumfacevalue.CPFFProgrampar- AAA-rated ABS backed by newly and recently origiticipants that issue unsecured commercial paper to the natedconsumerandsmallbusinessloans.ABSaccepted CPFFarerequiredtopayasurchargeof100basispoints ascollateralfortheloansextendedbytheFRBNYare perannumofthefacevalue.TheCPFFisauthorizedto assignedalendingvalue(fairvaluereducedbyamargin) reinvest cash in short-term and highly liquid assets, deemedappropriatebytheFRBNY.TheTreasury,under which includes U.S. Treasury and agency securities the Troubled Assets Relief Program (“TARP”) of the (excluding mortgage-backed securities), money market Emergency Economic Stabilization Act of 2008, will funds, repurchase agreements collateralized by U.S. provide$20billionofcreditprotectiontotheFRBNYin Treasury and agency securities as well as U.S. dollar- connectionwiththeTALF.AllU.S.personsthatownelidenominated overnight deposits. In January 2009, the giblecollateralmayparticipateintheTALF.TheTALF FRBNYannouncedthatABCPissuersthatwereinactive will cease making new loans on December 31, 2009, priortothecreationoftheCPFFProgramareineligible unlesstheBoardofGovernorsagreestoextendit.There forparticipationintheprogram.Anissuerisconsidered werenotransactionsduringtheperiodendedDecember inactiveifitdidnotissueABCPtoinstitutionsotherthan 31,2008.OnFebruary10,2009,theBoardofGovernors thesponsoringinstitutionforanyconsecutiveperiodof announcedthatitispreparedtoexpandthesizeofthe three months or longer between January 1 and August TALFtoasmuchas$1trillionandpotentiallybroaden 31,2008. theeligiblecollateraltoencompassothertypesofnewly The Money Market Investor Funding Facility issued AAA-rated ABS, such as ABS backed by com- (“MMIFF”),announcedonOctober21,2008,supportsa mercialmortgagesorprivate-labelABSbackedbyresiprivate-sectorinitiativedesignedtoprovideliquidityto dentialmortgages.IfthesizeoftheTALFisexpanded, U.S. money market investors. Under the MMIFF, the theU.S.Treasurywillincreaseitscreditprotectiontothe FRBNYprovidesseniorsecuredfundingtoaseriesof FRBNY.OnMarch23,2009,theU.S.Treasury,inconlimitedliabilitycompanies(“LLC”)thatwereestablished junctionwiththeFederalDepositInsuranceCorporation bytheprivatesectortofinancethepurchaseofeligible (“FDIC”) and Federal Reserve, announced the Publicassetsfromeligibleinvestors.EligibleassetsincludeU.S. PrivateInvestmentProgramforLegacyAssets.Onepart dollar-denominated certificates of deposit and commer- of the program, the Legacy Securities Program, would cial paper issued by highly-rated financial institutions involve an expansion of the TALF program to include with remaining maturities of 90 days or less. During theprovisionofnon-recourseloanstofundpurchasesof 2008, only U.S. money market mutual funds were eli- eligible legacy securitization assets, including certain gible investors. The MMIFF will purchase these assets non-agencyRMBSthatwereoriginallyratedAAAand byissuingsubordinatedABCPequalto10percentofthe certain collateralized mortgage-backed securities asset’s purchase price and by borrowing, on a secured (“CMBS”)andotherABSthatareratedAAA. basis,90percentoftheprice.TheMMIFFmaypurchase SupportforSpecificInstitutions upto$600billioninmoneymarketinstruments,withup to$540billionofthefundingprovidedbytheFRBNY. InconnectionwithandtofacilitatethemergerofThe MMIFF purchases will be recorded at amortized cost. Bear Stearns Companies, Inc. (“Bear Stearns”) and Although there were no material transactions in the JPMorganChase&Co.(“JPMC”),theFRBNYformed MMIFF for the period ended December 31, 2008, the MaidenLaneLLC(“ML”).CreditwasextendedtoML MMIFFLLCsareconsolidatedontheFRBNY’sfinan- on June 26, 2008. ML is a limited liability company cialstatements.InJanuary2009,theSystemannounced formedbytheFRBNYtoacquirecertainassetsofBear that the set of institutions eligible to participate in Stearnsandtomanagethoseassetsovertime,inorderto MMIFF would be expanded from U.S. money market maximizetherepaymentofcreditextendedtoMLandto mutualfundstoalsoincludeanumberofothermoney minimizedisruptiontothefinancialmarkets.Theassets marketinvestors.Thenewlyeligibleparticipantsinclude acquiredbyMLwerevaluedat$29.9billionasofMarch U.S.-based securities-lending cash-collateral reinvest- 14, 2008, the date that the FRBNY committed to the mentfunds,portfolios,andaccounts(securitieslenders) transaction, and largely consisted of mortgage-related andU.S.-basedinvestmentfundsthatoperateinaman- securities, mortgage loans and the associated hedges, nersimilartomoneymarketmutualfunds,suchascer- which included credit and interest rate derivatives, as tain local government investment pools, common trust wellasmortgagecommitments(“ToBeAnnounced”or
460 95th Annual Report, 2008 “TBAs”).TheFRBNYextendedapproximatelya$28.8 purchaseRMBSfromthereinvestmentpoolofthesecubillion senior loan and JPMC extended a $1.15 billion rities lending portfolio of several regulated U.S. insursubordinated loan to finance the acquisition of assets. ancesubsidiariesofAIG.MLIIborrowed$19.5billion TheloansarecollateralizedbyalloftheassetsofML. fromtheFRBNYand(aftercertainadjustmentsinclud- The FRBNY is the sole and managing member of the ingpaymentsontheRMBStotaling$0.3billionbetween ML.TheFRBNYisthecontrollingpartyoftheassetsof October31,2008,andDecember12,2008)usedthepro- ML and will remain as such as long as the FRBNY ceedstopurchasefromAIG’sdomesticinsurancesubretains an economic interest. The interest rate on the sidiariesRMBS,whichhadanapproximatefairvalueof seniorloanistheprimarycreditrateineffectfromtime $20.8billionasofOctober31,2008.TheFRBNY’sloan to time. JPMC will bear the first $1.2 billion of any andthefixeddeferredpurchasepriceoftheAIGsubsidlossesassociatedwiththeportfoliothroughitssubordi- iariesarecollateralizedbyalloftheassetsofMLII.The nated loan and any realized gains will accrue to the FRBNYisthesoleandmanagingmemberofMLII.The FRBNY.TheinterestontheJPMCsubordinatedloanis FRBNYisthecontrollingpartyoftheassetsofMLII theFRBNY’sprimarycreditrateplus450basispoints. andwillremainassuchaslongastheFRBNYretainsan TheFRBNYconsolidatesML. economicinterest.NetproceedsreceivedbyMLIIwill TheBoardofGovernorsannouncedonSeptember16, beappliedtopaytheFRBNY’sseniorloanplusinterest 2008,thattheFRBNYwasauthorizedtolendtoAmeri- atarateoftheone-monthLIBORplus100basispoints. can International Group, Inc. (“AIG”). Initially, the As part of the agreement, the AIG subsidiaries also FRBNYprovidedAIGwithalineofcreditcollateralized becameentitledtoreceivefromMLIIafixeddeferred by the pledge of a substantial portion of the assets of purchasepriceofupto$1billion,plusinterestonany AIG.Undertheprovisionsoftheoriginalagreement,the suchfixeddeferredpurchasepriceoutstandingatarate FRBNYwasauthorizedtolendupto$85billiontoAIG oftheone-monthLIBORplus300basispoints,payable fortwoyearsatarateofthethree-monthLondonInter- from net proceeds received by ML II and only to the bankOfferedRate(“LIBOR”)plus850basispoints.In extent that the FRBNY’s senior loan has been paid in addition,AIGwasassessedaone-timecommitmentfee full.AfterMLIIhaspaidtheFRBNY’sseniorloanand of200basispointsonthefullamountofthecommitment the fixed deferred purchase price in full, including andafeeof850basispointsperannumontheundrawn accruedandunpaidinterest,theFRBNYwillbeentitled creditline.Aconditionofthecreditagreementwasthat to receive five-sixths of any additional net proceeds AIG would issue to a trust, for the sole benefit of the received by ML II as contingent interest on the senior federaltreasury,preferredsharesconvertibletoapproxi- loan,andAIGwillbeentitledtoreceiveone-sixthofany matelyseventy-eightpercentoftheissuedandoutstand- netproceedsreceivedbyMLIIasvariabledeferredpuringsharesofthecommonstockofAIG.TheAIGCredit chaseprice.AsaresultoftheformationofMLII,the FacilityTrustwasformedonJanuary16,2009,andthe FRBNY’s lending in connection with AIG’s securities preferred shares were issued to the Trust on March 4, lendingprogram,initiatedonOctober8,2008,waster- 2009.TheTrusthasthreeindependenttrusteeswhocon- minated.TheFRBNYconsolidatesMLII. trol the trust’s voting and consent rights. The FRBNY OnNovember25,2008,theFRBNYextendedcredit cannotexercisevotingorconsentrights. toMaidenLaneIIILLC(“MLIII”),alimitedliability On October 8, 2008, the FRBNY began providing companyformedtopurchaseasset-backedsecuritiescolcash collateral to certain AIG insurance subsidiaries in lateralizeddebtobligations(“ABSCDOs”)fromcertain connection with AIG’s domestic securities lending third-party counterparties of AIG Financial Products program. Corp. (“AIGFP”). In connection with the acquisitions, On November 10, 2008, the FRBNY and the U.S. the third-party counterparties agreed to terminate their Treasuryannouncedarestructuringofthegovernment’s related credit derivative contracts with AIGFP. In confinancialsupporttoAIG.Aspartoftherestructuring,the nection with the credit agreement, on November 25, U.S.Treasurypurchased$40billionofnewlyissuedAIG 2008,MLIIIborrowedapproximately$15.1billionfrom preferred shares under the Troubled Asset Relief Pro- theFRBNY,andAIGprovidedanequitycontributionof gram(“TARP”).TARPfundswereusedtopaydownthe $5billiontoMLIII.Theproceedswereusedtopurchase majorityofAIG’sdebttotheFRBNY,andthetermsof CDOswithafairvalueof$21.1billionasofOctober31, theoriginalagreementweremodified.Therestructuring 2008. The counterparties received $20.1 billion net of alsoreducedthelineofcreditto$60billion,reducedthe principal,interestreceived,andfinancechargespaid. interestratetothethree-monthLIBOR(subjecttoafloor Subsequently, on December 18, 2008, ML III borof350basispoints),reducedthefeeonundrawnfunds rowed an additional $9.2 billion from the FRBNY to to75basispoints,andextendedthelengthoftheagree- fundtheacquisitionofadditionalABSCDOswithafair menttofiveyears.Theothermaterialtermsofthefund- value of $8.5 billion as of October 31, 2008. The net ing were unchanged. These revised terms were more paymenttocounterpartiesforthissubsequenttransaction consistentwithtermsgrantedtootherentitieswithsimi- was$6.7billion.MLIIIalsomadeapaymenttoAIGFP larcreditrisk.Financingprovidedunderthelineofcredit of$2.5billionrepresentingtheover-collateralizationpreisincludedin“Otherloans”intheCombinedStatements viouslypostedbyAIGFPandretainedbycounterparties ofCondition. inrespectoftheterminatedcreditdefaultswaps(“CDS”) Concurrent with the November 10, 2008, announce- as compared to ML III’s fair value acquisition prices mentoftherestructuringofitsfinancialsupporttoAIG, calculated as of October 31, 2008. The FRBNY is the the FRBNY announced the planned formation of two soleandmanagingmemberofMLIII.TheFRBNYis special purpose vehicles (“SPVs”). On December 12, the controlling party of the assets of ML III and will 2008, the FRBNY extended credit to Maiden Lane II remain as such as long as the FRBNY retains an eco- LLC (“ML II”), a limited liability company formed to nomicinterestinMLIII.NetproceedsreceivedbyML
Federal Reserve Banks Combined Financial Statements 461 IIIwillbeappliedtopaytheFRBNY’sseniorloanplus U.S.governmentwouldprovidefinancialsupporttoCitiinterestatarateoftheone-monthLIBORplus100basis group,Inc.(“Citigroup”).Theagreementprovidesfundpoints.TheFRBNY’sseniorloaniscollateralizedbyall ingsupportforpossiblefutureprincipallossesonupto oftheassetsofMLIII.Afterpaymentofprincipaland $301billionofCitigroup’sassets.Itextendsfortenyears interest on the FRBNY’s senior loan in full, including for residential assets and five years for non-residential accrued and unpaid interest, AIG is entitled to receive assets.Undertheagreement,alossonaportfolioasset fromMLIIIrepaymentofitsequitycontributionof$5 includes a charge-off or realized loss upon collection, billion,plusinterestatarateoftheone-monthLIBOR throughapermitteddispositionorexchange,orupona plus 300 basis points, payable from net proceeds foreclosureorshort-saleloss,butnotthroughachangein receivedbyMLIII.AfterMLIIIhaspaidtheFRBNY’s Citigroup’s mark-to-market accounting for the asset or senior loan and AIG’s equity contribution in full, the the creation or increase of a related loss reserve. The FRBNY will be entitled to receive two-thirds of any FRBNY’s commitment to lend under the agreement is additionalnetproceedsreceivedbyMLIIIascontingent triggeredatthetimethatqualifyinglossesof$56.2bilinterestontheseniorloan,andAIGwillbeentitledto lionhavebeenrecognizedinthecoveredassetspool.At receiveone-thirdofanynetproceedsreceivedbyMLIII that point, if Citigroup makes a proper election, the as contingent distributions on its equity interest. The FRBNYwouldmakeasinglenon-recourseloantoCiti- FRBNYconsolidatesMLIII. groupinanamountequaltotheaggregateadjustedbase- On March 2, 2009, the FRBNY and U.S. Treasury linevalueoftheremainingcoveredassets,asdefinedin announcedtheirintenttorestructurethefinancialassis- the relevant agreements. The loan would be collateraltanceprovidedtoAIG.Therestructuringisexpectedto ized by the remaining covered asset pool. The interest furthertheU.S.government’scommitmenttotheorderly rateontheloanwouldbeequaltotherateonthethreerestructuringofAIGovertimeinthefaceofcontinuing monthovernightindexswaprate(“OISrate”)plus300 market dislocations and economic deterioration and to basispoints.Citigroupwouldberequiredtomakemanprovideevidenceofitscommitmenttocontinuetowork datoryprincipalprepaymentsoftheloaninanamount withAIGtoensurethatthecompanycanmeetitsobli- equalto10percentofanyfurthercoveredlossesonthe gations as they come due. Under the proposed new remaining covered assets, and that obligation plus the agreement, the line of credit would be reduced in interest on the loan is with recourse to Citigroup. The exchangeforpreferredinterestintwoSPVscreatedto loan matures in 2018 (or 2019 if extended by the holdalloftheoutstandingcommonstockofAmerican FRBNY). LifeInsuranceCompany(ALICO)andAmericanInter- TheBoardofGovernors,theU.S.Treasury,andthe nationalAssuranceCompanyLtd.(AIA),twolifeinsur- FDIC jointly announced on January 15, 2009, that the anceholdingcompanysubsidiariesofAIG.Althoughthe U.S. government would provide financial support to FRBNYwouldhavecertaingovernancerightstoprotect Bank of America Corporation (“Bank of America”). its interests, AIG would retain control of ALICO and Under this arrangement, the Federal Reserve Bank of AIA. The initial valuation of the FRBNY’s preferred Richmond(FRBR)willprovidefundingsupportforposinterests,whichmaybeupto$26billion,willbeaper- siblefutureprincipallossesrelatingtoadesignatedpool centage of the fair market value of ALICO and AIA of up to $118 billion of financial instruments. The based on measurements of value acceptable to the FRBR’s commitment under the arrangement is to pro- FRBNY.TheSystemisevaluatingtheaccountingimpli- videanon-recourseloantoBankofAmericaifandwhen cationsofthesechangesonthe2009combinedfinancial qualifyinglossesof$18billionhavebeenrecordedinthe statements. pool.InterestandfeeswouldbewithrecoursetoBankof Inaddition,theFRBNYhasbeenauthorizedtomake America. This arrangement extends for a maximum of loansofupto$8.5billiontoSPVsthatmaybeestab- ten years for residential assets and five years for nonlishedbythedomesticlifeinsurancesubsidiariesofAIG. residentialassets.Becausethedetailsofthearrangement TheSPVswouldrepaytheloansfromthenetcashflows have not been finalized, the FRBR has not determined they receive from designated blocks of existing life theaccountingtreatmentforthistransaction. insurancepoliciesheldbytheparentinsurancecompa- (4) SignificantAccountingPolicies nies. The proceeds of the FRBNY’s loans would pay down an equivalent amount of outstanding debt under Accounting principles for entities with the unique thelineofcredit.Theamountslent,thesizeofthehair- powers and responsibilities of a nation’s central bank cutstakenbytheFRBNY,andothertermsoftheloans havenotbeenformulatedbyaccountingstandard-setting wouldbedeterminedbasedonvaluationsacceptableto bodies.TheBoardofGovernorshasdevelopedspecialtheFRBNY.Inaddition,theinterestrateonthelineof izedaccountingprinciplesandpracticesthatitconsiders creditwouldbemodified,removingtheexistingflooron tobeappropriateforthenatureandfunctionofacentral theLIBORrate,andthetotalamountavailableunderthe bank. These accounting principles and practices are lineofcreditwouldbereducedfrom$60billiontono documented in the Financial Accounting Manual for lessthan$25billion.Thelinewouldcontinuetobecol- FederalReserveBanks(“FinancialAccountingManual” lateralized by a lien on a substantial portion of AIG’s or“FAM”),whichisissuedbytheBoardofGovernors. assets, including the equity interest in businesses AIG AlloftheReserveBanksarerequiredtoadoptandapply planstoretain.Theothermaterialtermsofthelineof accountingpoliciesandpracticesthatareconsistentwith creditwouldremainunchanged.AsofApril2,2009,the the FAM and the combined financial statements have agreementsnecessarytoeffectthisrestructuringhadnot beenpreparedinaccordancewiththeFAM. beenexecuted. Differences exist between the accounting principles TheBoardofGovernors,theU.S.Treasury,andthe and practices in the FAM and generally accepted FDICjointlyannouncedonNovember23,2008,thatthe accounting principles in the United States (“GAAP”),
462 95th Annual Report, 2008 primarilyduetotheuniquenatureoftheReserveBanks’ itistheprimarybeneficiaryofaVIE,theReserveBank powersandresponsibilitiesaspartofthenation’scentral evaluates the VIEs’ design, capital structure, and the bank. The primary difference is the presentation of all relationships among the variable interest holders. The SOMAsecuritiesholdingsatamortizedcost,ratherthan ReserveBankreconsiderswhetheritistheprimarybeneusingthefairvaluepresentationasrequiredbyGAAP. ficiaryofaVIEwhencertaineventsoccurasrequiredby U.S.government,federalagency,andGSEsecuritiesand FIN 46R. Intercompany balances and transactions are investmentsdenominatedinforeigncurrenciescompris- eliminatedinconsolidation. ingtheSOMAarerecordedatcost,onasettlement-date (b) GoldandSpecialDrawingRightsCertificates basis,andareadjustedforamortizationofpremiumsor accretionofdiscountsonastraight-linebasis.Amortized The Secretary of the U.S. Treasury is authorized to cost more appropriately reflects the Reserve Banks’ issue gold and special drawing rights (“SDR”) certifisecuritiesholdings,giventheSystem’suniqueresponsi- catestotheReserveBanks. bilitytoconductmonetarypolicy.Althoughapplication Payment for the gold certificates by the Reserve of fair value measurements to the securities holdings Banksismadebycreditingequivalentamountsindollars mayresultinvaluessubstantiallyaboveorbelowtheir into the account established for the U.S. Treasury. The carryingvalues,theseunrealizedchangesinvaluewould goldcertificatesheldbytheReserveBanksarerequired havenodirecteffectonthequantityofreservesavailable tobebackedbythegoldoftheU.S.Treasury.TheU.S. to the banking system or on the prospects for future Treasurymayreacquirethegoldcertificatesatanytime ReserveBankearningsorcapital.Boththedomesticand and the Reserve Banks must deliver them to the U.S. foreigncomponentsoftheSOMAportfoliomayinvolve Treasury. At such time, the U.S. Treasury’s account is transactionsthatresultingainsorlosseswhenholdings charged, and the Reserve Banks’ gold certificate aresoldpriortomaturity.Decisionsregardingsecurities accountsarereduced.Thevalueofgoldforpurposesof and foreign currency transactions, including their pur- backingthegoldcertificatesissetbylawat$422/9a chaseandsale,aremotivatedbymonetarypolicyobjec- fine troy ounce. The Board of Governors allocates the tives rather than profit. Accordingly, fair values, earn- goldcertificatesamongtheReserveBanksonceayear ings,andanygainsorlossesresultingfromthesaleof basedontheaverageFederalReservenotesoutstanding suchsecuritiesandcurrenciesareincidentaltotheopen ineachReserveBank. marketoperationsanddonotmotivatedecisionsrelated SDRcertificatesareissuedbytheInternationalMonetopolicyoropenmarketactivities. taryFund(the“Fund”)toitsmembersinproportionto Inaddition,theBoardofGovernorsandtheReserve eachmember’squotaintheFundatthetimeofissuance. BankshaveelectednottopresentaStatementofCash SDRcertificatesserveasasupplementtointernational Flows because the liquidity and cash positions of the monetary reserves and may be transferred from one Reserve Banks are not a primary concern given their national monetary authority to another. Under the law unique powers and responsibilities. Other information providingforU.S.participationintheSDRsystem,the regardingtheReserveBanks’activitiesisprovidedin,or SecretaryoftheU.S.TreasuryisauthorizedtoissueSDR maybederivedfrom,theCombinedStatementsofCon- certificates somewhat like gold certificates to the dition,IncomeandComprehensiveIncome,andChanges ReserveBanks.WhenSDRcertificatesareissuedtothe in Capital. There are no other significant differences ReserveBanks,equivalentamountsindollarsarecredbetweenthepoliciesoutlinedintheFAMandGAAP. itedtotheaccountestablishedfortheU.S.Treasury,and Preparing the consolidated financial statements in the Reserve Banks’ SDR certificate accounts are conformitywiththeFAMrequiresmanagementtomake increased.TheReserveBanksarerequiredtopurchase certainestimatesandassumptionsthataffectthereported SDRcertificates,atthedirectionoftheU.S.Treasury,for amountsofassetsandliabilities,thedisclosureofcontin- thepurposeoffinancingSDRacquisitionsorforfinancgentassetsandliabilitiesatthedateoftheconsolidated ingexchangestabilizationoperations.AtthetimeSDR financialstatements,andthereportedamountsofincome transactions occur, the Board of Governors allocates andexpensesduringthereportingperiod.Actualresults SDR certificate transactions among the Reserve Banks coulddifferfromthoseestimates.Certainamountsrelat- baseduponeachReserveBank’sFederalReservenotes ingtotheprioryearhavebeenreclassifiedtoconformto outstandingattheendoftheprecedingyear.Therewere thecurrent-yearpresentation.Uniqueaccountsandsig- noSDRtransactionsin2008or2007. nificantaccountingpoliciesareexplainedbelow. (c) LoanstoDepositoryInstitutionsandOtherLoans (a) Consolidation Loansarereportedattheiroutstandingprincipalbal- The combined financial statements include the ances net of unamortized commitment fees. Interest accountsandresultsofoperationsoftheReserveBanks incomeisrecognizedonanaccrualbasis.Loancommitas well as several variable interest entities (“VIEs”), ment fees are generally deferred and amortized on a whichincludeML,MLII,MLIII,andCPFF.Thecon- straight-linebasisoverthecommitmentperiod,whichis solidationoftheVIEswasassessedinaccordancewith notmateriallydifferentfromtheinterestmethod. FASBInterpretationNo.46(revised),Consolidationof Outstandingloansareevaluatedtodeterminewhether VariableInterestEntities(“FIN46R”),whichrequiresa an allowance for loan losses is required. The Reserve variableinterestentitytobeconsolidatedbyitsprimary Banks have developed procedures for assessing the beneficiary. adequacyoftheallowanceforloanlossesthatreflectthe AReserveBankconsolidatesaVIEifitistheprimary assessmentofcreditriskconsideringallavailableinforbeneficiarybecauseitwillabsorbamajorityoftheenti- mation.Thisassessmentincludesmonitoringinformation ty’s expected losses, receive a majority of the entity’s obtainedfrombankingsupervisors,borrowers,andother expectedresidualreturns,orboth.Todeterminewhether sourcestoassessthecreditconditionoftheborrowers.
Federal Reserve Banks Combined Financial Statements 463 Loansareconsideredtobeimpairedwhenitisprob- eign currencies comprising the SOMA is accrued on a able that the Reserve Banks will not receive principal straight-linebasis.Gainsandlossesresultingfromsales andinterestdueinaccordancewiththecontractualterms ofsecuritiesaredeterminedbyspecificissuebasedon oftheloanagreement.Theamountoftheimpairmentis average cost. Foreign-currency-denominated assets are thedifferencebetweentherecordedamountoftheloan revalued daily at current foreign currency market andtheamountexpectedtobecollectedafterconsider- exchangeratesinordertoreporttheseassetsinU.S.dolationofthefairvalueofthecollateral.Recognitionof lars.Realizedandunrealizedgainsandlossesoninvestinterest income is discontinued for any loans that are mentsdenominatedinforeigncurrenciesarereportedas consideredtobeimpaired.Cashpaymentsmadebybor- “Foreign currency gains, net” in the Combined Staterowersonimpairedloansareappliedtoprincipaluntil mentsofIncomeandComprehensiveIncome. thebalanceisreducedtozero;subsequentpaymentsare Activity related to U.S. government, federal agency, recordedasrecoveriesofamountspreviouslychargedoff andGSEsecurities,includingthepremiums,discounts, andthentointerestincome. and realized gains and losses, is allocated to each Reserve Bank on a percentage basis derived from an (d) SecuritiesPurchasedUnderAgreementstoResell, annualsettlementoftheinterdistrictsettlementaccount SecuritiesSoldUnderAgreementstoRepurchase, that occurs in April of each year. The settlement also andSecuritiesLending equalizesReserveBankgoldcertificateholdingstoFed- The FRBNY may engage in tri-party purchases of eralReservenotesoutstandingineachDistrict.Activity securities under agreements to resell (“tri-party agree- relatedtoinvestmentsdenominatedinforeigncurrencies, ments”). Tri-party agreements are conducted with two including the premiums, discounts, and realized and commercialcustodialbanksthatmanagetheclearingand unrealizedgainsandlosses,isallocatedtoeachReserve settlementofcollateral.Collateralisheldinexcessofthe BankbasedontheratioofeachReserveBank’scapital contract amount. Acceptable collateral under tri-party andsurplustoaggregatecapitalandsurplusatthepreagreements primarily includes U.S. government securi- cedingDecember31. ties; pass-through mortgage securities of Fannie Mae, Warehousing is an arrangement under which the FreddieMac,andGinnieMae;STRIPsecuritiesofthe FOMC agrees to exchange, at the request of the U.S. U.S.government;and“stripped”securitiesofothergov- Treasury,U.S.dollarsforforeigncurrenciesheldbythe ernment agencies. The tri-party agreements are U.S.TreasuryorESFoveralimitedperiodoftime.The accounted for as financing transactions and the associ- purposeofthewarehousingfacilityistosupplementthe ated interest income is accrued over the life of the U.S.dollarresourcesoftheU.S.TreasuryandESFfor agreement. financing purchases of foreign currencies and related Securities sold under agreements to repurchase are internationaloperations. accountedforasfinancingtransactions,andtheassoci- Warehousing agreements are designated as held for ated interest expense is recognized over the life of the tradingpurposesandarevalueddailyatcurrentmarket transaction.Thesetransactionsarereportedattheircon- exchange rates. Activity related to these agreements is tractualamountsintheCombinedStatementsofCondi- allocated to each Reserve Bank based on the ratio of tion,andtherelatedaccruedinterestpayableisreported each Reserve Bank’s capital and surplus to aggregate asacomponentof“Otherliabilities.” capitalandsurplusattheprecedingDecember31. U.S.governmentsecuritiesheldintheSOMAarelent (f) CentralBankLiquiditySwaps toprimarydealerstofacilitatetheeffectivefunctioning ofthedomesticsecuritiesmarket.Overnightsecurities- Attheinitiationofeachcentralbankliquidityswap lendingtransactionsarefullycollateralizedbyotherU.S. transaction,theforeigncentralbanktransfersaspecified governmentsecurities.TSLFtransactionsarefullycol- amountofitscurrencytotheFRBNYinexchangefor lateralizedwithinvestment-gradedebtsecurities,collat- U.S.dollarsattheprevailingmarketexchangerate.Coneraleligiblefortri-partyrepurchaseagreementsarranged currentwiththistransaction,theFRBNYandtheforeign bytheOpenMarketTradingDesk,orboth.Thecollat- centralbankagreetoasecondtransactionthatobligates eraltakeninbothovernightandTSLFtransactionsisin theforeigncentralbanktoreturntheU.S.dollarsandthe excess of the fair value of the securities loaned. The FRBNY to return the foreign currency on a specified FRBNYchargestheprimarydealerafeeforborrowing futuredateatthesameexchangerate.Theforeigncursecurities,andthesefeesarereportedasacomponentof rencyamountsthattheFRBNYacquiresarereportedas “Non-interestincome(loss):Otherincome”intheCom- “Centralbankliquidityswaps”ontheCombinedStatebinedStatementsofIncomeandComprehensiveIncome. mentsofCondition.Becausetheswaptransactionwillbe Activity related to securities purchased under agree- unwound at the same exchange rate used in the initial ments to resell, securities sold under agreements to transaction, the recorded value of the foreign currency repurchase,andsecuritieslendingareallocatedtoeach amounts is not affected by changes in the market oftheReserveBanksonapercentagebasisderivedfrom exchangerate. an annual settlement of the interdistrict settlement TheforeigncentralbankpaysinteresttotheFRBNY account. based on the foreign currency amounts held by the FRBNY.TheFRBNYrecognizesinterestincomeduring (e) U.S.Government,FederalAgency,andGovernmentthetermoftheswapagreementandreportstheinterest SponsoredEnterprisesSecurities;Investments income as a component of “Interest income: Central DenominatedinForeignCurrenciesandWarehousbank liquidity swaps” in the Combined Statements of ingAgreements IncomeandComprehensiveIncome. InterestincomeonU.S.government,federalagency, Activityrelatedtotheseswaptransactions,including andGSEsecuritiesandinvestmentsdenominatedinfor- therelatedinterestincome,isallocatedtoeachReserve
464 95th Annual Report, 2008 BankbasedontheratioofeachReserveBank’scapital ananticipatedrecoveryinfairvalue.If,afteranalyzandsurplustoaggregatecapitalandsurplusatthepre- ingeachoftheabovefactors,theFRBNYdetermines ceding December 31. Similar to other investments thattheimpairmentisotherthantemporary,thecost denominatedinforeigncurrencies,theforeigncurrency basisoftheindividualsecurityiswrittendowntofair holdings associated with these central bank liquidity value,andtheamountofthewrite-downisreportedin swaps are revalued at current market exchange rates. “Non-interestincome(loss):Investmentsheldbycon- Becausetheswaparrangementwillbeunwoundatthe solidatedvariableinterestentities(losses),net”inthe sameexchangeratethatwasusedintheinitialtransac- CombinedStatementsofIncomeandComprehensive tion,theobligationtoreturntheforeigncurrencyisalso Income. revalued at current foreign currency market exchange • MLfollowstheguidanceinSFAS115whenaccountratesandisrecordedinacurrencyexchangevaluation ingforinvestmentsindebtsecurities.MLclassifiesits accountbytheFRBNY.Thisreevaluationmethodelimidebtsecuritiesasavailableforsaleandhaselectedthe natestheeffectsofthechangesinmarketexchangerates. fairvalueoptionforalleligibleassetsinaccordance AsofDecember31,2008,theFRBNYbeganallocating this currency exchange valuation account to the other withStatementofFinancialAccountingStandardsNo. Reserve Banks. The balance in the currency exchange 159,“TheFairValueOptionforFinancialAssetsand valuationaccountatDecember31,2007was$353mil- Liabilities” (SFAS 159) and Statement of Financial lion and was reclassified from “Other liabilities” to AccountingStandardsNo.157,“FairValueMeasure- “Central bank liquidity swaps” in the Combined State- ments” (SFAS 157). Other financial instruments, mentsofCondition. includingderivativescontractsinML,arerecordedat fair value in accordance with Statement of Financial (g) InvestmentsHeldbyConsolidatedVariableInterest Accounting Standards No. 133 “Accounting for Entities Derivative Instruments and Hedging Activities,” as Investments held by the consolidated VIEs include amended (SFAS 133). ML II and ML III qualify as commercialpaper,agencyandnon-agencycollateralized non-registeredinvestmentcompaniesundertheprovimortgage obligations (“CMOs”), commercial and resi- sions of the American Institute of Certified Public dentialrealmortgageloans,MBS,CDOs,otherinvest- Accountants’AuditandAccountingGuideforInvestmentsecurities,andderivativesandassociatedhedging ment Companies and, therefore, all investments are activities.Theseinvestmentsareaccountedforandclas- recordedatfairvalueinaccordancewithSFAS157. sifiedasfollows: • Interestincome,accretionofdiscounts,amortizationof • CommercialpaperheldbytheCPFFisdesignatedas premiums on investments, and paydown gains and held-to-maturity under Statement of Financial losses on RMBS, ABS CDOs, and CMOSs held by AccountingStandardsNo.115,“AccountingforCer- consolidated variable interest entities are reported in tain Instruments in Debt and Equity Securities” “Interest income: Investments held by consolidated (“SFAS115”)accordingtothetermsoftheprogram. variableinterestentities”intheCombinedStatements The CPFF has the positive intent and the ability to ofIncomeandComprehensiveIncome.Realizedand holdthesecuritiestomaturity,andthereforethecom- unrealized gains (losses) on investments in consolimercialpaperisrecordedatamortizedcost.Theamor- datedvariableinterestentitiesthatarerecordedatfair tizedcostisadjustedforamortizationofpremiumsand value are reported as “Non-interest income (loss): accretionofdiscountsonastraight-linebasisthatthe Investmentsheldbyconsolidatedvariableinterestenti- CPFF believes is not materially different from the ties (losses), net” in the Combined Statements of interest method. Interest income on the commercial IncomeandComprehensiveIncome. paperisreportedas“Interestincome:Investmentsheld (h) BankPremises,Equipment,andSoftware byconsolidatedvariableinterestentities”intheCombined Statements of Income and Comprehensive Bankpremisesandequipmentarestatedatcostless Income.AllotherinvestmentsheldbytheCPFFare accumulateddepreciation.Depreciationiscalculatedon classifiedastradingsecuritiesunderSFAS115andare astraight-linebasisovertheestimatedusefullivesofthe recordedatfairvalue.Gainsandlossesonthesetrad- assets,whichrangefromtwotofiftyyears.Majoraltering securities are recorded as “Non-interest income ations,renovations,andimprovementsarecapitalizedat (loss):Investmentsheldbyconsolidatedvariableinter- costasadditionstotheassetaccountsandaredepreciestentities(losses),net”intheCombinedStatements ated over the remaining useful life of the asset or, if ofIncomeandComprehensiveIncome. appropriate,overtheuniqueusefullifeofthealteration, TheFRBNYconductsquarterlyreviewstoidentify renovation, or improvement. Maintenance, repairs, and andevaluateCPFFinvestmentsheldatamortizedcost minorreplacementsarechargedtooperatingexpensein that have indications of possible impairment. An theyearincurred. investmentisimpairedifitsfairvaluefallsbelowits Costs incurred for software during the application recordedvalueandthedeclineisconsideredotherthan development stage, whether developed internally or temporary. Impairment of investments is evaluated acquired for internal use, are capitalized based on the using numerous factors, the relative significance of cost of direct services and materials associated with whichvariesonacasebycasebasis.Factorsconsid- designing, coding, installing, and testing the software. ered include collectability, collateral, the length of Capitalized software costs are amortized on a straighttimeandextenttowhichthefairvaluehasbeenless linebasisovertheestimatedusefullivesofthesoftware thancost,thefinancialconditionandnear-termpros- applications,whichrangefromtwotofiveyears.Mainpectsoftheissuerofasecurity,andtheCPFF’sintent tenancecostsrelatedtosoftwarearechargedtoexpense andabilitytoretainthesecurityinordertoallowfor intheyearincurred.
Federal Reserve Banks Combined Financial Statements 465 Capitalized assets, including software, buildings, andMLIIIeachelectedtomeasuretheseobligationsat leasehold improvements, furniture, and equipment, are fairvalueinaccordancewithSFAS159.Principal,interevaluatedforimpairment,andanadjustmentisrecorded estandchangesinfairvalueontheseniordebt,which when events or changes in circumstances indicate that wereextendedbytheFRBNY,areeliminatedinconsolithe carrying amount of assets or asset groups is not dation.Thesubordinateddebtisrecordedatfairvalueas recoverable and significantly exceeds the assets’ fair “Beneficialinterestinconsolidatedvariableinterestentivalue. ties”intheCombinedStatementsofCondition.Interest expense and changes in fair value of the subordinated (i) FederalReserveNotes debt are recorded in “Interest expense: Other interest expenserelatedtoconsolidatedvariableinterestentities” FederalReservenotesarethecirculatingcurrencyof and “Non-interest income (loss): Investments held by the United States. These notes are issued through the consolidated variable interest entities (losses), net,” various Federal Reserve agents (the chairman of the respectively,intheCombinedStatementsofIncomeand boardofdirectorsofeachReserveBankandtheirdesig- ComprehensiveIncome. nees) to the Reserve Banks upon deposit with such agentsofspecifiedclassesofcollateralsecurity,typically (k) U.S.TreasurySupplementalFinancingAccountand U.S.governmentsecurities.Thesenotesareidentifiedas OtherDeposits issuedtoaspecificReserveBank.TheFederalReserve Actprovidesthatthecollateralsecuritytenderedbythe The U.S. Treasury initiated a temporary supplemen- ReserveBanktotheFederalReserveagentmustbeat tary program that consists of a series of Treasury bill leastequaltothesumofthenotesappliedforbysuch auctionsinadditiontotheTreasury’sstandardborrowing ReserveBank. program. The proceeds of this debt are held in an Assets eligible to be pledged as collateral security accountattheFederalReservethatisseparatefromthe includealloftheReserveBanks’assets.Thecollateral Treasury’sgeneralaccount.Theeffectofplacingfunds value is equal to the book value of the collateral ten- inthisaccountistodrainreservesfromthebankingsysdered, with the exception of securities, for which the tem and partially offset the reserve impact of the Syscollateralvalueisequaltotheparvalueofthesecurities tem’slendingandliquidityinitiatives.Thenewaccount tendered.Theparvalueofsecuritiespledgedforsecuri- isdefinedasthe“U.S.Treasury,supplementaryfinancing tiessoldunderagreementstorepurchaseisdeducted. account”intheCombinedStatementsofCondition. TheBoardofGovernorsmay,atanytime,callupona Otherdepositsrepresentamountsheldinaccountsat ReserveBankforadditionalsecuritytoadequatelycol- the Reserve Banks by GSEs and foreign central banks lateralizetheoutstandingFederalReservenotes.Tosat- andgovernments. isfytheobligationtoprovidesufficientcollateralforoutstandingFederalReservenotes,theReserveBankshave (l) ItemsinProcessofCollectionandDeferredCredit enteredintoanagreementthatprovidesforcertainassets Items oftheReserveBankstobejointlypledgedascollateral “Items in process of collection” in the Combined for the Federal Reserve notes issued to all Reserve Statements of Condition primarily represents amounts Banks.Intheeventthatthiscollateralisinsufficient,the attributabletochecksthathavebeendepositedforcol- FederalReserveActprovidesthatFederalReservenotes lectionandthat,asofthebalancesheetdate,havenotyet becomeafirstandparamountlienonalltheassetsofthe beenpresentedtothepayingbank.Deferredcredititems ReserveBanks.Finally,FederalReservenotesareobli- arethecounterpartliabilitytoitemsinprocessofcollecgationsoftheUnitedStatesgovernment.AtDecember tion,andtheamountsinthisaccountarisefromdeferring 31,2008and2007,allFederalReservenotesissuedto creditfordepositeditemsuntiltheamountsarecollected. theReserveBankswerefullycollateralized. Thebalancesinbothaccountscanvarysignificantly. “FederalReservenotesoutstanding,net”intheCombined Statements of Condition represents the Federal (m) CapitalPaid-in Reserve notes outstanding, reduced by the Reserve TheFederalReserveActrequiresthateachmember Banks’ currency holdings of $169,681 million and banksubscribetothecapitalstockoftheReserveBank $218,571 million at December 31, 2008 and 2007, inanamountequalto6percentofthecapitalandsurplus respectively. ofthememberbank.Thesesharesarenonvotingwitha AtDecember31,2008,allFederalReservenoteswere parvalueof$100andmaynotbetransferredorhypothfully collateralized. All gold certificates, all special ecated.Asamemberbank’scapitalandsurpluschanges, drawingrightcertificates,$496,733millionofdomestic its holdings of Reserve Bank stock must be adjusted. securitiesandsecuritiespurchasedunderagreementsto Currently,onlyone-halfofthesubscriptionispaid-inand resell, and $343,198 million of loans were pledged as theremainderissubjecttocall.Amemberbankisliable collateral. At December 31, 2008, no investments forReserveBankliabilitiesuptotwicetheparvalueof denominated in foreign currencies were pledged as stocksubscribedbyit. collateral. By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 percent on the (j) BeneficialInterestInConsolidatedVariableInterest paid-in capital stock. This cumulative dividend is paid Entities semiannually.ToreflecttheFederalReserveActrequire- ML,MLII,andMLIIIhaveissuedseniorandsubor- mentthatannualdividendsbedeductedfromnetearndinateddebt,inclusiveofafixeddeferredpurchaseprice ings,dividendsarepresentedasadistributionofcomprein ML II and an equity contribution in ML III. Upon hensiveincomeintheCombinedStatementsofIncome issuanceoftheseniorandsubordinateddebt,ML,MLII, andComprehensiveIncome.
466 95th Annual Report, 2008 (n) Surplus (r) AssessmentsbytheBoardofGovernors TheBoardofGovernorsrequirestheReserveBanks TheBoardofGovernorsassessestheReserveBanks to maintain a surplus equal to the amount of capital to fund its operations based on each Reserve Bank’s paid-inasofDecember31ofeachyear.Thisamountis capital and surplus balances as of December 31 of the intendedtoprovideadditionalcapitalandreducethepos- prior year. The Board of Governors also assesses each sibilitythattheReserveBankswillberequiredtocallon Reserve Bank for the expenses incurred for the U.S. memberbanksforadditionalcapital. Treasury to prepare and retire Federal Reserve notes Accumulatedothercomprehensiveincomeisreported based on each Reserve Bank’s share of the number of asacomponentofsurplusintheCombinedStatements notes comprising the System’s net liability for Federal ofConditionandtheCombinedStatementsofChanges ReservenotesonDecember31oftheprioryear. inCapital.Thebalanceofaccumulatedothercomprehen- (s) Taxes siveincomeiscomprisedofexpenses,gains,andlosses relatedtotheSystemretirementplanandotherpostre- The Reserve Banks are exempt from federal, state, tirementbenefitplansthat,underaccountingstandards, andlocaltaxes,exceptfortaxesonrealpropertyand,in are included in other comprehensive income, but somestates,salestaxesonconstruction-relatedmaterials. excluded from net income. Additional information Realpropertytaxeswere$38millionand$33millionfor the years ended December 31, 2008 and 2007, respecregardingtheclassificationsofaccumulatedothercomtively,andarereportedasacomponentof“Occupancy prehensiveincomeisprovidedinNotes12,13,and14. expense” in the Combined Statements of Income and ComprehensiveIncome. (o) InterestonFederalReserveNotes (t) RestructuringCharges TheBoardofGovernorsrequirestheReserveBanks totransferexcessearningstotheU.S.Treasuryasinter- The Reserve Banks recognize restructuring charges est on Federal Reserve notes, after providing for the forexitordisposalcostsincurredaspartoftheclosure costsofoperations,paymentofdividends,andreserva- ofbusinessactivitiesinaparticularlocation,therelocationofanamountnecessarytoequatesurpluswithcapi- tionofbusinessactivities,orafundamentalreorganizatalpaid-in.Thisamountisreportedas“PaymentstoU.S. tion that affects the nature of operations. Restructuring Treasury as interest on Federal Reserve notes” in the charges may include costs associated with employee Combined Statements of Income and Comprehensive separations, contract terminations, and asset impair- Income and is reported as a liability, or as an asset if ments.Expensesarerecognizedintheperiodinwhich overpaidduringtheyear,intheCombinedStatementsof theReserveBankscommittoaformalizedrestructuring Condition. Weekly payments to the U.S. Treasury may planorexecutethespecificactionscontemplatedinthe varysignificantly. plan and all criteria for financial statement recognition Intheeventoflossesoranincreaseincapitalpaid-in havebeenmet. at a Reserve Bank, payments to the U.S. Treasury are Note 15 describes the Reserve Banks’ restructuring suspendedandearningsareretaineduntilthesurplusis initiativesandprovidesinformationaboutthecostsand equaltothecapitalpaid-in. liabilitiesassociatedwithemployeeseparationsandcon- Intheeventofadecreaseincapitalpaid-in,theexcess tractterminations.Thecostsassociatedwiththeimpairsurplus, after equating capital paid-in and surplus at ment of certain of the Reserve Banks’ assets are dis- December31,isdistributedtotheU.S.Treasuryinthe cussedinNote10.Costsandliabilitiesassociatedwith followingyear. enhancedpensionbenefitsinconnectionwiththerestructuringactivitiesforalloftheReserveBanksarerecorded (p) InterestonDepositoryInstitutionsDeposits onthebooksoftheFRBNY.Costsandliabilitiesassociatedwithenhancedpostretirementbenefitsarediscussed Beginning October 9, 2008, the Reserve Banks pay inNote13. interesttodepositoryinstitutionsonqualifyingbalances heldattheBanks.Authorizationforpaymentofinterest (u) RecentlyIssuedAccountingStandards onthesebalanceswasgrantedbyTitleIIoftheFinan- InDecember2008,FASBissuedFASBStaffPosition cialServicesRegulatoryReliefActof2006,whichhad (FSP)FAS140-4andFIN46(R)-8,“DisclosuresbyPubaneffectivedateof2011.Section128oftheEmergency lic Entities (Enterprises) about Transfers of Financial EconomicStabilizationActof2008,enactedonOctober Assets and Interests in Variable Interest Entities.” FSP 3,2008,madethatauthorityimmediatelyeffective.The FAS 140-4 and FIN 46(R)-8 amends FASB Statement interest rates paid on required reserve balances and No.140torequirepublicentitiestoprovideadditional excessbalancesarebasedonanFOMCestablishedtardisclosures about transfers of financial assets. It also getrangefortheeffectivefederalfundsrate. amendsFASBInterpretationNo.46(R)torequirepublic entities,includingsponsorsthathaveavariableinterest (q) IncomeandCostsRelatedtoU.S.TreasuryServices in a VIE, to provide additional disclosures about their The Reserve Banks are required by the Federal involvement with VIEs. FSP FAS 140-4 and FIN ReserveActtoserveasfiscalagentanddepositoriesof 46(R)-8waseffectiveforthecombinedfinancialstatethe United States government. By statute, the Depart- mentsfortheyearendedDecember31,2008.TheadopmentoftheTreasuryhasappropriationstopayforthese tion of the additional disclosure requirements of FSP services.DuringtheyearsendedDecember31,2008and FAS 140-4 and FIN 46(R)-8 did not materially impact 2007, the Reserve Banks were reimbursed for substan- theReserveBanks’combinedfinancialstatements. tiallyallservicesprovidedtotheDepartmentoftheTrea- In December 2008, FASB issued FSP 132(R)-1, suryasitsfiscalagent. “Employers’ Disclosures about Postretirement Benefit
Federal Reserve Banks Combined Financial Statements 467 PlanAssets.”FSP132(R)-1providesrulesforthedisclo- on their initial transaction date. The Reserve Banks sureofinformationaboutassetsheldinadefinedbene- adoptedSFAS159onJanuary1,2008,andtheeffectof fitplaninthefinancialstatementsoftheemployerspon- theReserveBanks’electionforcertainassetsandliabilisoringthatplan.ThisFSPappliesSFAS157todefined tiesisreflectedinNote9. benefit plans and provides rules for additional disclo- InSeptember2006,FASBissuedSFASNo.157,“Fair suresaboutassetcategoriesandconcentrationsofrisk.It ValueMeasurements”(“SFAS157”),whichestablishesa iseffectiveforfinancialstatementswithfiscalyearsend- singleauthoritativedefinitionoffairvalueandaframeing after December 15, 2009. The provisions of FSP workformeasuringfairvalue,andexpandstherequired 132(R)-1willbeappliedprospectivelyeffectiveJanuary disclosures for assets and liabilities measured at fair 1, 2009, and are not expected to materially affect the value.SFAS157waseffectiveforfiscalyearsbeginning ReserveBanks’combinedfinancialstatements. afterNovember15,2007,withearlyadoptionpermitted. InOctober2008,FASBissuedFSP157-3,“Determin- The Reserve Banks adopted SFAS 157 on January 1, ingtheFairValueofaFinancialAssetWhentheMarket 2008,andtheeffectoftheReserveBanks’adoptionof thisstandardisreflectedinNote9. forThatAssetIsNotActive”withaneffectivedateof October 10, 2008. FSP 157-3 clarifies how SFAS 157 (5) Loans shouldbeappliedwhenvaluingsecuritiesinmarketsthat arenotactive.Foradditionalinformationontheeffects The loan amounts outstanding to depository institutionsandothersatDecember31wereasfollows(inmilof the adoption of this accounting pronouncement, see lions): Note9. 2008 2007 InSeptember2008,FASBissuedFSP133-1andFIN Primary,secondary,and 45-4,“DisclosuresaboutCreditDerivativesandCertain seasonalcredit.......... $ 93,790 $ 8,636 Guarantees:AnAmendmentofFASBStatementNo.133 TAF...................... 450,220 40,000 andFASBInterpretationNo.45;andClarificationofthe EffectiveDateofFASBStatementNo.161.”ThisFSP Totalloanstodepository requires expanded disclosures about credit derivatives institutions........... 544,010 48,636 andguarantees.Theexpandeddisclosurerequirementsof AMLF ................... 23,765 0 theFSP,whichareeffectivefortheReserveBanks’com- PDCF .................... 37,403 0 binedfinancialstatementsfortheyearendingDecember Other(AIG) .............. 38,914 0 31,2008,areincorporatedintheaccompanyingnotes. Totalotherloans ....... $100,082 $ 0 InMarch2008,FASBissuedSFASNo.161,“DisclosuresaboutDerivativeInstrumentsandHedgingActivi- LoanstoDepositoryInstitutions ties”(“SFAS161”),whichrequiresexpandedqualitative, quantitative,andcredit-riskdisclosuresaboutderivatives TheReserveBanksofferprimary,secondary,andseaandhedgingactivitiesandtheireffectsonacompany’s sonalcredittoeligibleborrowers.Eachprogramhasits financialposition,financialperformance,andcashflows. owninterestrate.Interestisaccruedusingtheapplicable SFAS161iseffectivefortheReserveBanks’combined interestrateestablishedatleasteveryfourteendaysby financialstatementsfortheyearbeginningonJanuary1, theboardsofdirectorsofeachReserveBank,subjectto 2009,andisnotexpectedtomateriallyaffecttheReserve review and determination by the Board of Governors. Banks’combinedfinancialstatements. Primaryandsecondarycreditsareextendedonashort- In February 2008, FASB issued FSP FAS 140-3, termbasis,typicallyovernight,whereasseasonalcredit “Accounting for Transfers of Financial Assets and maybeextendedforaperioduptoninemonths. Repurchase Financing Transactions.” FSP FAS 140-3 Primary,secondary,andseasonalcreditlendingiscolrequiresthataninitialtransferofafinancialassetanda lateralized to the satisfaction of the Reserve Banks to repurchasefinancingthatwasenteredintocontempora- reduce credit risk. Assets eligible to collateralize these neouslywith,orincontemplationof,theinitialtransfer loansincludeconsumer,business,andrealestateloans; beevaluatedtogetherasalinkedtransactionunderSFAS U.S.Treasurysecurities;federalagencysecurities;GSE 140, unless certain criteria are met. FSP FAS 140-3 is obligations;foreignsovereigndebtobligations;municieffective for the Reserve Banks’ combined financial palorcorporateobligations;stateandlocalgovernment statements for the year beginning on January 1, 2009, obligations; asset-backed securities; corporate bonds; andearlieradoptionisnotpermitted.Theprovisionsof commercialpaper;andbank-issuedassets,suchascerthis standard will be applied prospectively and are not tificatesofdeposit,banknotes,anddepositnotes.Collatexpected to materially affect the Reserve Banks’ com- eralisassignedalendingvaluedeemedappropriateby binedfinancialstatements. eachReserveBank,whichistypicallyfairvalueorface InFebruary2007,FASBissuedSFASNo.159,“The valuereducedbyamargin. Fair Value Option for Financial Assets and Financial Depository institutions that are eligible to borrow Liabilities,includinganamendmentofFASBStatement under the Reserve Banks’ primary credit program are No.115”(“SFAS159”),whichprovidescompanieswith also eligible to participate in the temporary TAF proanirrevocableoptiontoelectfairvalueasthemeasure- gram.UndertheTAFprogram,theReserveBanksconment for selected financial assets, financial liabilities, ductauctionsforafixedamountoffunds,withtheinterunrecognizedfirmcommitments,andwrittenloancom- estratedeterminedbytheauctionprocess,subjecttoa mitments that are not subject to fair value under other minimumbidrate.TAFloansareextendedonashortaccounting standards. There was a one-time election term basis, with terms of either 28 or 84 days. All available to apply this standard to existing financial advances under the TAF must be fully collateralized. instruments as of January 1, 2008; otherwise, the fair Assets eligible to collateralize TAF loans include the valueoptionwillbeavailableforfinancialinstruments completelistnotedaboveforloanstodepositoryinstitu-
468 95th Annual Report, 2008 tions.Similartotheprocessusedforprimary,secondary, Theremainingmaturitydistributionofloansoutstandandseasonalcredit,alendingvalueisassignedtoeach ingatDecember31,2008,wasasfollows(inmillions): assetacceptedascollateralforTAFloans. Primary, Loans to depository institutions are monitored on a Secondary, dailybasistoensurethatborrowerscontinuetomeeteliandSeagibility requirements for these programs. The financial sonalCredit TAF condition of borrowers is monitored by the Reserve Within15days ......... $85,846 $235,424 Banks and, if a borrower no longer qualifies for these 16daysto90days...... 7,944 214,796 programs,theReserveBankswillgenerallyrequestfull Over1yearto5years .. 0 0 repaymentoftheoutstandingloanormayconvertaprimarycreditloantoasecondarycreditloan. Totalloans ........... $93,790 $450,220 Collaterallevelsarerevieweddailyagainstoutstand- Otherloans ingobligations,andborrowersthatnolongerhavesuffi- Within15days ......... $ 47,086 cientcollateraltosupportoutstandingloansarerequired 16daysto90days...... 14,083 toprovideadditionalcollateralortomakepartialorfull Over1yearto5years .. 38,913 repayment. Totalloans ........... $100,082 OtherLoans TheFRBBadministerstheAMLFandisauthorizedto AllowancesforLoanLosses extendloanstoeligibleborrowersonbehalfoftheother AtDecember31,2008and2007,noloanswerecon- ReserveBanks.AllloansextendedundertheAMLFare sidered to be impaired, and the Reserve Banks deterrecorded as assets by the FRBB and, if the borrowing minedthatnoallowanceforloanlosseswasrequired. institution settles to a depository account in another ReserveBankDistrict,thefundsarecreditedtotheinsti- (6) U.S.Government,FederalAgency,and tution’s depository account by the appropriate Reserve Government-SponsoredEnterpriseSecurities; BankandsettledbetweentheReserveBanksthroughthe SecuritiesPurchasedUnderAgreementsTo interdistrict settlement account. The loans extended Resell;SecuritiesSoldUnderAgreementsTo undertheAMLFarenonrecourse,sothattheFRBBhas Repurchase;andSecuritiesLending recourseonlytothecollateralpledgedbytheborrowers. ThecreditriskrelatedtotheAMLFisassumedbythe TheFRBNY,onbehalfoftheReserveBanks,holds FRBB, and any losses are not recorded by the other securitiesboughtoutrightintheSOMA. Reserve Banks. No losses were incurred on loans The securities held in the SOMA at December 31 extendedin2008.Eligiblecollateralundertheprogram wereasfollows(inmillions): islimitedtoU.S.dollar-denominatedABCPthatisrated 2008 2007 notlowerthanA-1/P-1/F1andmustbepurchasedfrom an eligible money market mutual fund. The terms of U.S.governmentsecurities: loans under the AMLF are limited to 120 days if the Bills ..................... $ 18,423 $227,840 borrowerisabankor270daysfornon-bankborrowers. Notes .................... 334,779 401,776 TheinterestrateforadvancesmadeundertheAMLFis Bonds.................... 122,719 110,995 equal to the FRBB’s primary credit rate offered to FederalagencyandGSE depositoryinstitutionsatthetimetheadvanceismade. securities ............ 19,708 0 The loans extended under the AMLF are reported as Totalparvalue ......... 495,629 740,611 “Otherloans”intheCombinedStatementsofCondition. The PDCF provides secured overnight financing to Unamortizedpremiums.... 8,049 7,988 primarydealersinexchangeforaspecifiedrangeofcol- Unaccreteddiscounts...... (1,489) (2,970) lateral,includingU.S.Treasurysecurities,federalagency Total................... $502,189 $745,629 securities, agency MBS, investment-grade corporate securities,municipalsecurities,mortgage-backedsecuri- AtDecember31,2008and2007,thefairvalueofthe ties,andotherasset-backedsecuritiesforwhichaprice U.S. government, federal agency, and GSE securities is available. Interest on PDCF secured financing is held in the SOMA, excluding accrued interest, was accruedusingtheprimarycreditrateofferedtodeposi- $566,427millionand$777,141million,respectively,as tory institutions. The secured financing is reported as determined by reference to quoted prices for identical “Otherloans”intheCombinedStatementsofCondition. securities. Thefrequency-basedfeesarereportedas“Otherincome” Although the fair value of security holdings can be intheCombinedStatementsofIncomeandComprehen- substantiallygreaterthanorlessthantherecordedvalue siveIncome. atanypointintime,theseunrealizedgainsorlosseshave The$38.9billionextendedtoAIGundertherevolv- noeffectontheabilityoftheReserveBanks,ascentral inglineofcreditisnetofunamortizeddeferredcommit- bank,tomeettheirfinancialobligationsandresponsibiliment fees and includes unpaid commitment fees and ties and do not represent a risk to the Reserve Banks, accruedinterest.Unamortizeddeferredcommitmentfees theirshareholders,orthepublic.Thefairvalueisprewere $1.5 billion, and unpaid commitment fees and sentedsolelyforinformationalpurposes. accrued interest were $1.7 billion and $1.9 billion, Financial information related to securities purchased respectively, at December 31, 2008. The AIG loan is under agreements to resell and securities sold under reportedas“Otherloans”intheCombinedStatementsof agreementstorepurchasefortheyearsendedDecember Condition. 31, 2008 and 2007, were as follows (in millions):
Federal Reserve Banks Combined Financial Statements 469 Securitiespurchasedunder Securities Securities agreementstoresell purchased soldunder 2008 2007 under agreements agreements torepur- Contractamount toresell chase outstanding, (Contract (Contract endofyear........... $ 80,000 $46,500 amount) amount) Weightedaverage amountoutstanding, Within15days ........... $40,000 $88,352 duringtheyear ....... 97,037 35,073 16daysto90days........ 40,000 0 Maximummonth-end 91daysto1year ......... 0 0 balanceoutstanding, Over1yearto5years .... 0 0 duringtheyear ....... 119,000 51,500 Over5yearsto10years .. 0 0 Securitiespledged, Over10years ............ 0 0 endofyear........... 0 0 Total................... $80,000 $88,352 Securitiessoldunder agreementstorepurchase At December 31, 2008 and 2007, U.S. government 2008 2007 securities with par values of $180,765 million and Contractamount $16,649 million, respectively, were loaned from the outstanding, SOMA. endofyear........... $88,352 $43,985 Weightedaverage (7) InvestmentsDenominatedinForeign amountoutstanding, Currencies duringtheyear ....... 65,461 34,846 Maximummonth-end TheFRBNY,onbehalfoftheReserveBanks,holds balanceoutstanding, foreigncurrencydepositswithforeigncentralbanksand duringtheyear ....... 98,559 43,985 withtheBankforInternationalSettlementsandinvests Securitiespledged, in foreign government debt instruments. These investendofyear........... 78,896 44,048 mentsareguaranteedastoprincipalandinterestbythe issuingforeigngovernments. Thecontractamountsforsecuritiespurchasedunder Totalinvestmentsdenominatedinforeigncurrencies, agreementstoresellandsecuritiessoldunderagreements includingaccruedinterest,valuedatamortizedcostand torepurchaseapproximatefairvalue. foreigncurrencymarketexchangeratesatDecember31, The remaining maturity distribution of U.S. govern- wereasfollows(inmillions): ment, federal agency, and GSE securities bought outright, securities purchased under agreements to resell, 2008 2007 andsecuritiessoldunderagreementstorepurchasethat EuropeanUnioneuro: wereheldintheSOMAatDecember31,2008,wasas Foreigncurrencydeposits.... $ 5,563 $ 7,181 follows(inmillions): Securitiespurchasedunder Federal agreementstoresell ....... 4,076 2,548 U.S.gov- agency Governmentdebtinstruments.. 4,609 4,666 ernment andGSE securities securities Japaneseyen: (Parvalue) (Parvalue) Foreigncurrencydeposits.... 3,483 2,811 Within15days ........... $ 19,138 $ 450 Governmentdebtinstruments.. 7,073 5,708 16daysto90days........ 20,965 3,281 Total ..................... $24,804 $22,914 91daysto1year ......... 63,330 976 Over1yearto5years .... 173,328 11,361 Over5yearsto10years .. 97,325 3,640 At December 31, 2008 and 2007, the fair value of Over10years ............ 101,835 0 totalSysteminvestmentsdenominatedinforeigncurrencies,includingaccruedinterest,was$25,021millionand Total................... $475,921 $19,708 $22,892million,respectively.Thefairvalueofgovernment debt instruments was determined by reference to Total: quotedpricesforidenticalsecurities.Thecostbasisof U.S.government, foreigncurrencydepositsandsecuritiespurchasedunder Federalagency, agreements to resell, adjusted for accrued interest, andGSEsecurities approximatesfairvalue.SimilartotheU.S.government, (Parvalue) federalagency,andGSEsecuritiesdiscussedinNote6, Within15days ........... $ 19,588 unrealizedgainsorlosseshavenoeffectontheabilityof 16daysto90days........ 24,246 a Reserve Bank, as central bank, to meet its financial 91daysto1year ......... 64,306 obligationsandresponsibilities. Over1yearto5years .... 184,689 The remaining maturity distribution of investments Over5yearsto10years .. 100,965 denominatedinforeigncurrenciesatDecember31,2008, Over10years ............ 101,835 wasasfollows(inmillions): Total................... $495,629
470 95th Annual Report, 2008 European Japanese 2007 Euro Yen Total Within15days ......... $ 7,594 $ 3,484 Norwegiankrone.. 0 16daysto90days...... 1,169 630 Swedishkrona.... 0 91daysto1year ....... 1,749 1,986 Swissfranc....... 4,000 Over1yearto5years .. 3,736 4,456 U.K.pound....... 0 Total................. $14,248 $10,556 Total........... $24,000 Total Within15days ......... $11,078 (9) InvestmentsHeldByConsolidatedVariable 16daysto90days...... 1,799 InterestEntities 91daysto1year ....... 3,735 Over1yearto5years .. 8,192 (a) SummaryInformationforConsolidatedVariable Total................. $24,804 InterestEntities AtDecember31,2008and2007,theauthorizedware- ThetotalassetsofconsolidatedVIEs,includingcash, housingfacilitywas$5billion,withnobalanceoutstanding. cashequivalents,andaccruedinterest,atDecember31, Inconnectionwithitsforeigncurrencyactivities,the 2008,wereasfollows(inmillions): FRBNYmayenterintotransactionsthatcontainvarying degreesofoff-balance-sheetmarketriskthatresultfrom TotalAssets theirfuturesettlementandcounter-partycreditrisk.The CPFF ................................ $334,910 FRBNYcontrolscreditriskbyobtainingcreditapprovals, ML .................................. 30,635 establishing transaction limits, in some cases receiving MLII ................................ 19,195 collateral,andperformingdailymonitoringprocedures. MLIII ............................... 27,256 Total............................... $411,996 (8) CentralBankLiquiditySwaps The FRBNY’s maximum exposure to loss on these Centralbankliquidityswaparrangementsarecontracassets was $405.4 billion and incorporates potential tualagreementsbetweentwoparties,theFRBNYandan lossesassociatedwithassetsrecordedontheCombined authorized foreign central bank, whereby the parties StatementsofCondition,netofthefairvalueofsubordiagree to exchange their currencies up to a prearranged natedinterests. maximumamountandforanagreed-uponperiodoftime. The net income (loss) attributable to consolidated At the end of that period of time, the currencies are VIEsfortheperiodendedDecember31,2008,wasas returnedattheoriginalcontractualexchangerate,andthe follows(inmillions): foreigncentralbankpaysinteresttotheFederalReserve ML MLII MLIII at an agreed-upon rate. These arrangements give the Interestincome: authorizedforeigncentralbanktemporaryaccesstoU.S. Portfoliointerestincome .. $1,561 $ 302 $ 517 dollars.Drawingsundertheswaparrangementsareiniti- Less:Interestexpense..... 332 103 28 atedbytheforeigncentralbankandmustbeagreedtoby theFederalReserve. Netinterestincome..... 1,229 199 489 The remaining maturity distribution of central bank Non-interestincome: liquidity swaps at December 31 was as follows (in Portfolioholdingsgain millions): (loss) ................ (5,497) (1,499) (2,633) 2008 Unrealizedgainson 16days beneficialinterestin Within to consolidatedVIEs.... 1,188 1,003 2,198 15days 90days Total Non-interestincome .... (4,309) (496) (435) Australiandollar.. $ 10,000 $ 12,830 $ 22,830 Danishkrone ..... 0 15,000 15,000 Totalinterestincomeand Euro ............. 150,969 140,383 291,352 non-interestincome .. (3,080) (297) 54 Japaneseyen ..... 47,893 74,823 122,716 Less:Professionalfees .... 54 5 9 Koreanwon ...... 0 10,350 10,350 Norwegiankrone.. 2,200 6,025 8,225 Net(loss)income Swedishkrona.... 10,000 15,000 25,000 attributableto Swissfranc....... 19,221 5,954 25,175 consolidatedVIEs.... $(3,134)$ (302) $ 45 U.K.pound....... 120 32,960 33,080 Total........... $240,403 $313,325 $553,728 CPFF Total Interestincome: 2007 Portfoliointerestincome .. $1,707 $4,087 Total Less:Interestexpense..... 0 463 Australiandollar.. $ 0 Netinterestincome..... 1,707 3,624 Danishkrone ..... 0 Euro ............. 20,000 Non-interestincome: Japaneseyen ..... 0 Portfolioholdingsgain Koreanwon ...... 0 (loss) ................ 3 (9,626)
Federal Reserve Banks Combined Financial Statements 471 CPFF Total FairValue Unrealizedgainson Changes beneficialinterestin TotalReal- Unrealized consolidatedVIEs.... 0 4,389 izedGains Gains (Losses) (Losses) Non-interestincome .... 3 (5,237) Non-agencyCMOs ..... (4) (1,502) Totalinterestincomeand Commercialand non-interestincome .. 1,710 (1,613) residential Less:Professionalfees .... 12 80 mortgageloans..... 39 (2,693) Net(loss)income Swapcontracts ......... (70) 155 attributableto TBAcommitments...... (57) (10) consolidatedVIEs.... $1,698 $(1,693) Otherinvestments....... 237 (892) Total................. $ 36 $(9,662) The classification of significant assets and liabilities oftheconsolidatedVIEsatDecember31,2008,wasas Total follows(inmillions): Realized/ AssetsRecordedAt Unrealized Amor- Gains tized Fair (Losses) Cost Value Total CDOs .................. $(3,281) Assets: RMBS ................. (1,499) Commercialpaper ..... $333,631 $ 0 $333,631 AgencyCMOs.......... (49) CDOs................. 0 26,957 26,957 Non-agencyCMOs ..... (1,506) RMBS ................ 0 18,839 18,839 Commercialand AgencyCMOs ........ 0 13,565 13,565 residential Non-agencyCMOs .... 0 1,836 1,836 mortgageloans..... (2,654) Commercialand Swapcontracts ......... 85 residential TBAcommitments...... (67) mortgageloans ... 0 6,490 6,490 Otherinvestments....... (655) SWAPcontracts ....... 0 2,454 2,454 Total................. $(9,626) TBAcommitments .... 0 2,089 2,089 Otherinvestments ..... 0 2,340 2,340 (b) CommercialPaperFundingFacilityLLC Subtotal............... $333,631 $74,570 $408,201 Theinterestrateforunsecuredcommercialpaperheld Cash,cashequivalents, bytheCPFFisthethree-monthOISrateplus100basis andaccruedinterest points, along with an additional surcharge (“credit receivable ........ $ 3,795 enhancementfee”)of100basispoints.Theinterestrate Totalinvestmentsheld for asset-backed commercial paper is the three-month byconsolidated OISrateplus300basispoints. variableinterest Thenon-refundablefacilityfee(“registrationfee”)is entities: .......... $411,996 equalto10basispointstimesthemaximumamountof Liabilities: the participant’s commercial paper that the CPFF may Beneficialinterestin purchase, which equals the greatest amount of U.S. consolidated dollar-denominatedcommercialpaperthattheissuerhad variableinterest outstandingonthedaysbetweenJanuary1andAugust entities ........... $(2,824) 31,2008.Theregistrationfeeisrecognizedonastraightlinebasisoverthelifeoftheprogram. Otherliabilities........ $ (5,813) The credit enhancement fee is equal to 100 basis Theamountreportedas“Consolidatedvariableinter- points per annum of the face value of the unsecured estentities:Otherliabilities”intheCombinedStatements commercial paper purchased. Unsecured commercial ofConditioncomprises$2.6billionrelatedtocashcol- paperissuerscoveredbytheFDIC’sTemporaryLiquidlateralreceivedonswapcontracts,$2.4billionpayable ityGuaranteeProgramareviewedashavingasatisfacfor investments purchased by VIEs, accrued interest, toryguarantee,andthecreditenhancementfeeforthose unearnedregistrationfees,andaccruedprofessionalfees. participants is waived. The credit enhancement fee is Total realized gains (losses) and unrealized gains recognizedonastraight-linebasisoverthetermofthe (losses)associatedwiththeinvestmentsheldbyconsoli- commercialpaper,whichisnotmateriallydifferentfrom datedVIEsatDecember31,2008,wereasfollows(in theinterestmethod. millions): The FRBNY conducts a periodic review of the FairValue CPFF’scommercialpapertodetermineifimpairmentis Changes otherthantemporarysuchthatalossshouldberecog- TotalReal- Unrealized nized.AtDecember31,2008,therewerenocommercial izedGains Gains paper securities for which management considered (Losses) (Losses) impairmenttobeotherthantemporary. CDOs .................. $ 0 $(3,281) Theremainingmaturitydistributionofthecommercial RMBS ................. 0 (1,499) paperandtradingsecuritiesheldbytheCPFF,excluding AgencyCMOs.......... (109) 60 interestreceivable,atDecember31,2008,wasasfollows (inmillions):
472 95th Annual Report, 2008 CommercialPaper (c) MaidenLaneLLC Asset Non-Asset ML’s investment portfolio consists primarily of Backed Backed agencyandnon-agencyCMOs,commercialandresiden- 0−15Days............ $ 0 $ 0 tialmortgageloans,andderivativesandassociatedhedg- 16−60Days........... 95,306 201,660 ingactivities.Asynopsisofthesignificantholdingsat 61−92Days........... 25,625 11,040 December 31, 2008, and the associated credit risk for Total................. $120,931 $212,700 eachholdingfollows. i.AgencyCMOsandNon-agencyCMOs Trading Securities Total CMOsrepresentfractionalownershipinterestsinresi- 0−15Days............ $ 233 $ 233 dentialmortgage-backedsecuritiesissuedbyeitherU.S. 16−60Days........... 473 297,439 government agencies or private entities. The rate of 61−92Days........... 565 37,230 delinquenciesanddefaultsontheunderlyingresidential mortgageloansandtheaggregateamountoftheresult- Total................. $1,271 $334,902 inglosseswillbeaffectedbyanumberoffactors,includinggeneraleconomicconditions,particularlythoseinthe Top-tier commercial paper has received investment areawheretherelatedmortgagedpropertyislocated;the grade ratings from all rating agencies (A-1, P-1, F1). leveloftheborrower’sequityinthemortgagedproperty; Split-ratedcommercialpaperhasreceivedatop-tierratand the individual financial circumstances of the boring from two rating agencies and a second-tier rating rower.Changesineconomicconditions,includingdelin- (A-2, P-2, F2) from a third rating agency. Second-tier quenciesordefaultsonassetsunderlyingthesesecurities, commercialpaperhasreceivednon-investmentgraderatcanaffectthevalue,income,orliquidityofsuchposiings from two or more rating agencies (A-2, P-2, F2). tions. Commercialpaperthatisratedsecondtierresultedfrom AtDecember31,2008,theratingsbreakdownofthe ratingchangesafteracquisitionofthecommercialpaper. $16.8 billion of securities recorded at fair value in the Thecreditratingsprofileofcommercialpaperheldby MLportfolio,asapercentageofaggregatefairvalueof theCPFF,excludingcash,cashequivalents,andaccrued allsecuritiesintheportfolio,wasasfollows: interest,byassetsandbyissuertypeandindustrysector Ratings1 atDecember31,2008,wasasfollows(inmillions): AA+to A+to TopTier Split-Rated AAA AA− A− AssetBacked SecurityType:2 Multi-seller............. $ 58,879 $ 0 AgencyCMOs........ 0.0% 0.0% 0.0% Hybrid ................. 24,625 0 Non-AgencyCMOs... 6.7% 0.7% 0.7% Single-seller ............ 23,129 0 Other3 ............... 3.2% 1.3% 1.0% Other................... 14,298 0 Total............... 9.9% 2.0% 1.7% 120,931 0 Non-AssetBacked Ratings1 Diversifiedfinancial .... 179,651 1,685 BBB+ BB+ Insurance............... 17,647 1,805 to and Other................... 8,051 3,657 BBB− lower 205,349 7,147 SecurityType:2 Total................. $326,280 $7,147 AgencyCMOs........ 0.0% 0.0% Non-AgencyCMOs... 0.7% 2.2% SecondTier Total Other3 ............... 1.5% 1.1% AssetBacked Total............... 2.2% 3.3% Multi-seller............. $ 0 $ 58,879 Ratings1 Hybrid ................. 0 24,625 Single-seller ............ 0 23,129 Govern- Other................... 0 14,298 ment/ Agency Total 0 120,931 Non-AssetBacked SecurityType:2 Diversifiedfinancial .... 0 181,336 AgencyCMOs........ 80.9% 80.9% Insurance............... 204 19,656 Non-AgencyCMOs... 0.0% 11.0% Other................... 0 11,708 Other3 ............... 0.0% 8.1% 204 212,700 Total............... 80.9% 100.0% Total................. $204 $333,631 1Lowestofallratingsisusedforthepurposesofthis table. Thetoptenissuersofcommercialpaperheldbythe 2This table does not include ML swaps and other CPFFaccountedfor43.5%ofthetotalcommercialpaper derivative contracts, commercial and residential mortportfolio holdings at December 31, 2008. The largest gageloans,andTBAinvestments. issuer,adiversifiedfinancialcompany,represents10.8% 3Includes all asset sectors that individually represent ofthetotalcommercialpaperatDecember31,2008. lessthan5percentofaggregateportfoliofairvalue.
Federal Reserve Banks Combined Financial Statements 473 At December 31, 2008, non-agency CMOs held by The following table summarizes the state in which ML were collateralized by properties at the locations residential mortgage loans are collateralized and the identifiedbelow: propertytypesofthecommercialmortgageloansheldin GeographicLocation Percentage1 theMLatDecember31,2008: California ............................ 39.1% ConcentrationofUnpaid Florida ............................... 11.7% PrincipalBalances Other2 ............................... 49.2% Residential Commercial2 Total............................... 100.0% ByState: 1Based on a percentage of the total unpaid principal California .............. 35.8% balanceoftheunderlyingloans. Florida ................. 9.1% 2Nootherindividualstatecomprisesmorethan5per- Other1 ................. 55.1% centofthetotal. Total................. 100.0% ii.CommercialandResidentialMortgageLoans ByProperty: Commercial and residential mortgage loans are sub- Hospitality ............. 80.3% jecttoahighdegreeofcreditriskbecauseofexposure Office .................. 10.2% tolossfromloandefaults.Defaultratesaresubjecttoa Other1 ................. 9.5% wide variety of factors, including, but not limited to, Total................. 100.0% propertyperformance,propertymanagement,supplyand 1Nootherindividualstateorpropertycomprisesmore demandfactors,constructiontrends,consumerbehavior, than5percentofthetotal. regional economic conditions, interest rates, and other 2At December 31, 2008, one issuer represented factorsbeyondthecontroloftheFRBNY. approximately 48 percent of the total unpaid principal Theperformanceprofileforthecommercialandresi- balanceofthecommercialmortgageloanportfolio. dential mortgage loans at December 31, 2008, was as iii.DerivativeInstruments follows(inmillions): Remaining TheMLportfolioincludesvariousderivativefinancial Principal instruments,primarilyconsistingofsuchasatotalreturn Amount swapagreement(“TRS”)withJPMC.MLmayenterinto Outstanding FairValue additionalderivativecontractsduringthenormalcourse Performingloans: ofbusinesstoeconomicallyhedgeitsexposuretointer- Commercial ............ $ 8,406 $5,529 estrates.Lossesmayariseifthevalueofthederivative Residential ............. 1,288 817 contracts acquired decrease because of an unfavorable changeinthemarketpriceoftheunderlyingsecurityor Subtotal.............. 9,694 6,346 ifthecounterpartydoesnotperformunderthecontract. Non-performingloans Totalreturnswapsareagreementsinwhichoneparty (pastduegreaterthan commitstopayafeeinexchangeforareturnlinkedto 60days) the market performance of an underlying security or Commercial ............ 79 24 groupofsecurities,index,orotherasset(“referenceobli- Residential ............. 380 120 gation”). Risks may arise if the value of the swap Subtotal.............. 459 144 acquireddecreasesbecauseofanunfavorablechangein Total the price of the reference obligation or because of the Commercial ............ 8,485 5,553 inability of the counterparty to meet the terms of its Residential ............. 1,668 937 contracts. Totalloans ........... $10,153 $6,490 Duringthetermofaswapcontract,unrealizedgains orlossesarerecordedasaresultofmarkingtheswapto FairValueas fairvalue.Whenaswapissettledorterminated,areal- Percentageof izedgainorlossisrecordedequaltothedifference,if Remaining any,betweenthecontractualamountandtheactualpro- Principal ceedsonsettlementofthecontract. Performingloans: Atclosing,MLandJPMCenteredintoaTRSwith Commercial ............ 65.8% reference obligations representing to a basket of CDS Residential ............. 63.4% andinterestrateswaps(“IRS”).TheTRSisstructured Subtotal.............. 65.5% suchthatML’seconomicpositionforeachCDSandIRS replicatesBearStearns’economicposition.JPMCisthe Non-performingloans (pastduegreaterthan calculationagentfortheTRS,andtheunderlyingvalues 60days) arealsomonitoredbytheinvestmentmanageronbehalf Commercial ............ 30.3% of ML. ML made an initial payment to JPMC of $3.3 Residential ............. 31.7% billion,whichwasincludedinthepurchasepriceofthe Subtotal.............. 31.4% assets. At December 31, 2008, the cash collateral liability Total associatedwiththeTRSisinvestedincash,cashequiva- Commercial ............ 65.4% Residential ............. 56.2% lents,andinvestmentsintheamountsof$2.1billionand Totalloans ........... 63.9% $0.5 billion, respectively. In addition, the ML has pledged$3.0billionofagencyCMOstoJPMC.
474 95th Annual Report, 2008 CDSareagreementsthatprovideprotectionagainsta Such notional principal amounts often are used to credit event on one or more referenced credits. The expressthevolumeofthesetransactionsbutarenotactunatureofacrediteventisestablishedbytheprotection allyexchangedbetweenthecounterparties.MLentered buyerandprotectionsellerattheinceptionofatransac- into interest rate swaps as part of its interest rate risk tion,andsucheventsincludebankruptcy,insolvency,or managementstrategy.Additionally,thereisexposureto failuretomeetpaymentobligationswhendue.Thebuyer creditriskintheeventofnonperformancebythecounoftheCDSpaysapremiuminreturnforpaymentpro- terpartytotheswap.Thenotionalvalueoftheinterest tection upon the occurrence, if any, of a credit event. rateswapsinML,includingthoseembeddedintheTRS, Upon the occurrence of a triggering credit event, the totals$11.2billionatDecember31,2008. maximumpotentialamountoffuturepaymentstheseller FuturescontractsareagreementstobuyandsellfinancouldberequiredtomakeunderaCDSisequaltothe cialinstrumentsforasetpriceonafuturedate.Initial notationalamountofthecontract.Suchfuturepayments margin deposits in the form of cash or securities are couldbereducedoroffsetbyamountsrecoveredunder made upon entering into futures contracts. During the recourseorcollateralprovisionsoutlinedinthecontract, periodthatafuturescontractisopen,changesinthefair includingseizureandliquidationofcollateralpledgedby valueofthecontractarerecordedasunrealizedgainsor thebuyer. losses on a daily basis. Variation margin payments are Thefollowingtablesummarizesthemaximumcredit paid or received, depending upon whether unrealized exposure (notational amount, as described above) and gainsorlossesresult.Whenthecontractisclosed,ML fairvalueasofDecember31,2008,relatedtothoseCDS willrecordarealizedgainorlossequaltothedifference forwhichMLwastheprotectionsellerorguarantor(in betweentheproceedsfrom(orcostof)theclosingtransmillions): action and ML’s cost basis in the contract. The use of futurestransactionsinvolvestheriskofimperfectcorre- Notional Maturity lation in movements in the price of futures contracts, Amount Range(Date)1 interestrates,andtheunderlyinghedgedassets.MLis Single-nameCDS2 also at risk of not being able to enter into a closing ABS ................. $2,530 04/20/10− transactionforthefuturescontractbecauseofanilliquid 11/07/47 secondary market. At December 31, 2008, ML had CMBS ............... 621 01/25/36− pledged collateral related to future contracts of 10/12/52 $69.0million. CMO................. 83 07/25/34− 10/25/44 (d) MaidenLaneIILLC Corporatedebt 358 12/20/10− MLII’sRMBSinvestmentportfoliohasrisksrelated 03/20/18 tocredit,interestrate,generalmarket,andconcentration $3,592 risk.Credit-relatedriskonRMBSarisesfromlossesdue IndexCDS: todelinquenciesanddefaultsbyborrowersontheunder- CMBS ............... 17 2/17/51 lying mortgage loans and breaches by originators and servicersoftheirobligationsundertheunderlyingdocu- Totals.............. $3,609 mentationpursuanttowhichtheRMBSareissued.The FairValue rate of delinquencies and defaults on residential mortgage loans and the aggregate amount of the resulting Single-nameCDS2 losseswillbeaffectedbyanumberoffactors,including ABS ................. $(2,158) CMBS ............... (371) general economic conditions, particularly those in the CMO................. (61) areawheretherelatedmortgagedpropertyislocated,the Corporatedebt........ (150) leveloftheborrower’sequityinthemortgagedproperty, and the individual financial circumstances of the $(2,740) borrower. IndexCDS: TherateofinterestpayableoncertainRMBSmaybe CMBS ............... (12) set or effectively capped at the weighted average net Totals.............. $(2,752) coupon of the underlying mortgage loans themselves, oftenreferredtoasan“availablefundscap.”Asaresult 1The maturity range date represents a range of legal of this cap, the return to the holder of such RMBS is finalmaturitydatesofsingle-nameCDSwithinthecor- dependentontherelativetimingandrateofdelinquenrespondingCDSsector.Duetothefactthatmostofthe ciesandprepaymentsofmortgageloansbearingahigher referenceobligationsmaybeprepaidpriortotherespec- rateofinterest. tive legal final maturity dates, the terms of the LLC’s ThefairvalueofanyparticularRMBSassetmaybe obligation under a given CDS contract may terminate subjecttosubstantialvariation.Theentiremarketorparsoonerthanthelegalfinalmaturitydate. ticularinstrumentstradedonamarketmaydeclineeven 2IncludedinthereferenceobligationsoftheTRSwith ifprojectedcashfloworotherfactorsimprovebecause JPMC. thepricesofsuchinstrumentsaresubjecttonumerous Interest rate swaps obligate two parties to exchange otherfactorsthathavelittleornocorrelationtotheperoneormorepaymentstypicallycalculatedwithreference formanceofaparticularinstrument. tofixedorperiodicallyresetratesofinterestappliedtoa Since ML II concentrates its investments in RMBS, specifiednotionalprincipalamount.Notionalprincipalis theoverallimpactonMLIIofadversedevelopmentsin theamounttowhichinterestratesareappliedtodeter- theRMBSmarketcouldbeconsiderablygreaterthanif mine the payment streams under interest rate swaps. MLIIdidnotconcentrateitsinvestmentsinRMBS.
Federal Reserve Banks Combined Financial Statements 475 AtDecember31,2008,thesector/ratingcomposition canexperiencesubstantiallossesfromactualdefaultson ofMLII’s$18.8billionRMBSportfolio,recordedatfair theunderlyingRMBSorCMBS. value, as a percentage of aggregate fair value, was as Overthepastseveralyears,defaultrates,delinquenfollows(inmillions): cies,andratingdowngradesonRMBSandCMBShave increased significantly. This trend has reduced the Rating1 amountofcreditsupportavailablefortheABSCDOs. AA+to A+to Suchdiminishedcreditsupportincreasesthelikelihood AAA AA− A− that payments may not be made to holders of ABS Assettype: CDOs. Alt-A(adjustablerate) .. 10.6% 5.4% 4.1% ABSCDOissuerscanissueshort-termeligibleinvest- Subprime............... 22.5% 8.5% 6.7% mentsunderRule2a-7oftheInvestmentCompanyAct Other2 ................. 7.1% 1.1% 0.8% of 1940 if the ABS CDO contains arrangements to Total3................ 40.1% 15.0% 11.6% remarket the securities at defined periods. The investments must contain put options (“2a-7 puts”), which Rating1 allow the purchasers to sell the ABS CDO at par to a BBB+ BB+ thirdparty(“putprovider”)ifascheduledremarketingis to and unsuccessfulduetoreasonsotherthanacreditorbank- BBB− lower Total ruptcy event. As of December 31, 2008, the total Assettype: notional value of ABS CDOs held by ML III with Alt-A(adjustablerate) .. 3.1% 4.7% 27.7% embedded2a-7putsforwhichAIGFPwas,directlyor Subprime............... 6.8% 12.7% 57.3% indirectly,theputproviderwas$2.7billion.MLIIIhas Other2 ................. 4.4% 1.5% 15.0% agreed,inreturnfortheputpremiums,toeitherconvert Total3................ 14.3% 18.9% 100.0% theABSCDOstolong-termnotesorextinguishthe2a-7 1Lowestofallratingsisusedforthepurposesofthis puts,tonotexercisethe2a-7puts,oronlytoexercisethe table. 2a-7 puts if it simultaneously re-purchases the ABS 2Includesallassetsectorsthat,individually,represent CDOsatpar.Theseagreementswillmatureonorbefore less than 5 percent of the aggregate outstanding fair December31,2009. valueoftheportfolio. At December 31, 2008, the ABS CDO type/vintage 3Rowsandcolumnsmaynottotalduetorounding. andratingcompositionofMLIII’s$26.7billionCDO portfolio,recordedatfairvalue,asapercentageofaggre- At December 31, 2008, the RMBS held by ML II gatefairvalueofallsecuritiesintheportfolio,wasas werecollateralizedbypropertiesatthelocationsidenti- follows: Ratings1 fiedbelow,asapercentageofthetotalunpaidprincipal balanceoftheunderlyingloans: AA+to A+to AssetType/Vintage AAA AA− A− GeographicLocation Percentage1 High-GradeMulti-Sector California ............................ 32.5% CDO................. 0.2% 24.2% 7.4% Florida ............................... 12.6% 2003−2004 ............. 0.2% 9.4% 5.1% Other2 ............................... 54.9% 2005 ................... 0.0% 3.8% 2.3% Total............................... 100.0% 2006 ................... 0.0% 11.1% 0.0% 1Based on geographic location information that was MezzanineMulti-Sector available for approximately 88 percent of underlying CDO................. 0.3% 2.4% 1.6% mortgageloansbyoutstandingunpaidprincipalbalance. 2003−2004 ............. 0.3% 1.2% 0.9% 2Includes all geographic locations that, individually, 2005 ................... 0.0% 1.2% 0.7% representlessthan5percentofthetotalaggregateout- 2006 ................... 0.0% 0.0% 0.0% standing unpaid principal balance of the underlying CommercialReal-Estate loans. CDO................. 17.6% 0.4% 0.0% 2002−2005 ............. 2.8% 0.4% 0.0% (e) MaidenLaneIIILLC 2006 ................... 2.3% 0.0% 0.0% TheprimaryholdingswithinMLIIIareABSCDOs. 2007 ................... 12.5% 0.0% 0.0% An ABS CDO is a security issued by a bankruptcy- Total2................ 18.1% 27.0% 9.0% remoteentitythatisbackedbyadiversifiedpoolofdebt securities, which in the case of ML III are primarily Ratings1 RMBSandCMBS.ThecashflowsofABSCDOscanbe BB+ split into multiple segments, called “tranches,” which BBBto and will vary in risk profile and yield. The junior tranches AssetType/Vintage BBB− lower Total will bear the initial risk of loss followed by the more High-GradeMulti-Sector seniortranches.TheABSCDOsintheMLIIIportfolio CDO................. 12.5% 26.1% 70.4% representseniortranches.Becausetheyareshieldedfrom 2003−2004 ............. 3.9% 7.8% 26.3% defaults by the subordinated tranches, senior tranches 2005 ................... 8.6% 15.9% 30.6% willtypicallyhavehighercreditratingsandloweryields 2006 ................... 0.0% 2.4% 13.5% than their underlying securities and will often receive MezzanineMulti-Sector investmentgraderatingsfromoneormoreofthenation- CDO................. 0.2% 7.1% 11.6% ally recognized rating agencies. Despite the protection 2003−2004 ............. 0.0% 1.3% 3.7% afforded by the subordinated tranches, senior tranches 2005 ................... 0.2% 5.8% 7.9%
476 95th Annual Report, 2008 Ratings1 ii.DeterminationofFairValue BB+ TheconsolidatedVIEsvaluetheirinvestmentsonthe BBBto and basis of the last available bid prices or current market AssetType/Vintage BBB− lower Total quotations provided by dealers, or pricing services 2006 ................... 0.0% 0.1% 0.1% selected by their designated investment managers. To CommercialReal-Estate determine the value of a particular investment, pricing CDO................. 0.0% 0.0% 18.0% services may use certain information with respect to 2002−2005 ............. 0.0% 0.0% 3.2% transactions in such investments, quotations from deal- 2006 ................... 0.0% 0.0% 2.3% ers,pricingmatrices,markettransactionsincomparable 2007 ................... 0.0% 0.0% 12.5% investments,variousrelationshipsobservedinthemarket Total2................ 12.6% 33.2% 100.0% between investments, and calculated yield measures based on valuation technology commonly employed in 1Lowestofallratingsisusedforthepurposesofthis themarketforsuchinvestments. table. Marketquotationsmaynotrepresentfairvalueincer- 2Rowsandcolumnsmaynotfootduetorounding. tain circumstances where an investment manager believes that facts and circumstances applicable to an (f) FairValueMeasurement issuer,aseller,apurchaser,orthemarketforaparticular TheconsolidatedVIEshaveadoptedSFAS159and securitycausecurrentmarketquotationsnottoreflectthe SFAS157,andMLhaselectedthefairvalueoptionfor fair value of the security. The investment manager allofitsholdingsofsecuritiesandcommercialandresi- applies proprietary valuation models that use collateral dential mortgages. ML II and ML III qualify as non- performancescenariosandpricingmetricsderivedfrom registeredinvestmentcompaniesundertheprovisionsof reportedperformanceoftheuniverseofbondsaswellas the American Institute of Certified Public Accountants observablemarketdatatodeterminefairvalue. AuditandAccountingGuideforInvestmentCompanies Duetotheinherentuncertaintyofdeterminingthefair and,therefore,allinvestmentsarerecordedatfairvalue valueofinvestmentsthatdonothaveareadilyavailable inaccordancewithSFAS157.Inaddition,ML,MLII, fairvalue,thefairvalueoftheseinvestmentsmaydiffer andMLIIIhaveelectedtorecordtheirrespectiveben- significantlyfromthevaluesthatwouldhavebeenused eficialinterestsatfairvalue. hadareadilyavailablefairvalueexistedfortheseinvest- Theaccountingandclassificationoftheseinvestments mentsandmaydiffermateriallyfromthevaluesthatmay appropriatelyreflecttheVIEs’andtheFRBNY’sintent ultimatelyberealized. withrespecttothepurposeoftheinvestmentsandmost Thefairvalueoftheliabilityforthebeneficialintercloselyreflecttheamountoftheassetsavailabletoliq- ests of consolidated VIEs is estimated based upon the uidatetheentities’obligations. fairvalueoftheunderlyingassetsheldbytheVIEs.The holdersofthesebeneficialinterestsdonothaverecourse i.FairValueHierarchy tothegeneralcreditoftheFRBNY. SFAS157establishesathree-levelfairvaluehierar- iii. ValuationMethodologiesforLevel3Assetsand chy that distinguishes between market participant Liabilities assumptionsdevelopedusingmarketdataobtainedfrom Incertaincaseswherethereislimitedactivityorless independentsources(observableinputs)andtheconsolitransparencyaroundinputstothevaluation,securitiesare dated VIEs’ own assumptions about market participant classifiedwithinlevel3ofthevaluationhierarchy.For assumptionsdevelopedusingthebestinformationavailinstance,invaluingcollateralizeddebtobligations,cerableinthecircumstances(unobservableinputs). taincollateralizedmortgageobligations,andcommercial The three levels established by SFAS 157 are deandresidentialmortgageloans,thedeterminationoffair scribedbelow: valueisbasedoncollateralperformancescenarios.These • Level 1 — Valuation is based on quoted prices for valuationsalsoincorporatepricingmatricesderivedfrom identicalinstrumentstradedinactivemarkets. the reported performance of the universe of bonds as • Level 2 — Valuation is based on quoted prices for well as observations and estimates of market data. similarinstrumentsinactivemarkets,quotedpricesfor Because external price information is not available, identicalorsimilarinstrumentsinmarketsthatarenot market-basedmodelsareusedtovaluethesesecurities. active, and model-based valuation techniques for Keyinputstothemodelaremarketspreadsdataforeach whichallsignificantassumptionsareobservableinthe creditrating,collateraltype,andotherrelevantcontracmarket. tualfeatures.Becausethereisalackofobservablepric- • Level3—Valuationisbasedoninputsfrommodel- ing,loanscarriedatfairvalueareclassifiedwithinlevel basedtechniquesthatusesignificantassumptionsnot 3. observableinthemarket.Theseunobservableassump- Thefollowingtablepresentsthefinancialinstruments tionsreflecttheconsolidatedVIEs’ownestimatesof recordedinVIEsatfairvalueasofDecember31,2008, assumptions that market participants would use in bySFAS157hierarchy(inmillions): pricing the asset and liability. Valuation techniques Level1 Level2 Level3 includetheuseofoptionpricingmodels,discounted Assets: cashflowmodels,andsimilartechniques. CDOs .................. $0 $ 155 $26,802 Theinputsormethodologyusedforvaluingsecurities RMBS ................. 0 7,406 11,433 are not necessarily an indication of the risk associated AgencyCMOs.......... 0 12,670 895 withinvestinginthosesecurities. Non-agencyCMOs ..... 0 759 1,077
Federal Reserve Banks Combined Financial Statements 477 Level1 Level2 Level3 FairValue Commercialand Transfers December residential InorOut 31,2008 mortgageloans..... 0 0 6,490 Non-agencyCMOs ..... 0 1,077 Swapcontracts ......... 0 0 2,454 Commercialand TBAcommitments...... 0 2,089 0 residential Otherinvestments....... 0 1,992 348 mortgageloans..... 0 6,490 Totalassets .......... $0 $25,071 $49,499 Swapcontracts ......... 0 2,454 OtherInvestments ...... 0 348 Liabilities: Totalassets............. $0 $49,499 Beneficialinterestin consolidatedvariable Liabilities: interestentities..... $(2,824) Beneficialinterestin consolidatedvariable TotalFair interestentities1.... $(0) $(2,824) Value Assets: 1Includes$63millionincapitalizedinterest. CDOs .................. $26,957 (g) ProfessionalFees RMBS ................. 18,839 AgencyCMOs.......... 13,565 The consolidated VIEs have contracted with several Non-agencyCMOs ..... 1,836 nationallyrecognizedinstitutionstoserveasinvestment Commercialand managers, administrators, and custodians for the VIEs’ residential assets.ServiceproviderstotheVIEsoperateundermulmortgageloans..... 6,490 tiyearcontractsthatincludeprovisionsgoverningtermi- Swapcontracts ......... 2,454 nation. TBAcommitments...... 2,089 Thefeeschargedbytheinvestmentmanagers,custo- Otherinvestments....... 2,340 dians,administrators,auditors,andotherserviceprovid- Totalassets .......... $74,570 ersandorganizationcostsarerecordedasacomponent of“Operatingexpenses:Professionalfeesrelatedtocon- Liabilities: solidated variable interest entities” in the Combined Beneficialinterestin StatementsofIncomeandComprehensiveIncome. consolidatedvariable interestentities..... $(2,824) (10) BankPremises,Equipment,andSoftware Thetablebelowpresentsareconciliationofallassets Reserve Bank premises and equipment at December andliabilitiesmeasuredatfairvalueonarecurringbasis 31,2008,wereasfollows(inmillions): usingsignificantunobservableinputs(level3)duringthe 2008 2007 year ended December 31, 2008, including realized and ReserveBankpremisesand unrealizedgains(losses)(inmillions): equipment: Land ..................... $ 334 $ 323 NetPur- TotalReal- Buildings................. 2,161 1,878 chases, ized&Unre- Buildingmachinery Sales,and alizedGains/ andequipment ....... 463 416 Settlements (Loss) Constructioninprogress... 160 380 Assets: Furnitureandequipment .. 1,037 1,118 CDOs .................. $29,740 $(2,938) Subtotal................ 4,155 4,115 RMBS ................. 12,606 (1,173) AgencyCMOs.......... 891 4 Accumulateddepreciation (1,583) (1,576) Non-agencyCMOs ..... 2,062 (985) Bankpremisesand Commercialand equipment,net ....... $2,572 $2,539 residential mortgageloans..... 9,183 (2,693) Depreciationexpense, Swapcontracts ......... 2,369 85 fortheyearended OtherInvestments ...... 625 (277) December31 ........ $ 199 $ 185 Totalassets............. $57,746 $(7,977) TheFederalReserveBankofKansasCitycompleted Liabilities: theconstructionofanewheadquartersbuildinginKan- Beneficialinterestin sasCityin2008. consolidatedvariable Reserve Bank premises and equipment at December interestentities1.... $(7,213) $4,389 31includedthefollowingamountsforcapitalizedleases (inmillions): 2008 2007 FairValue Transfers December Leasedpremisesand InorOut 31,2008 equipmentunder capitalleases............ $21 $21 Assets: Accumulateddepreciation.. (13) (11) CDOs .................. $0 $26,802 RMBS ................. 0 11,433 Leasedpremisesand AgencyCMOs.......... 0 895 equipmentunder capitalleases,net ....... $ 8 $10
478 95th Annual Report, 2008 Depreciation expense related to leased premises and millionand$29millionfortheyearsendedDecember equipmentundercapitalleaseswas$4millionforeach 31,2008and2007,respectively.CertainoftheReserve oftheyearsendedDecember31,2008andDecember31, Banks’leaseshaveoptionstorenew. 2007. Futureminimumrentalpaymentsundernoncancelable CertainoftheReserveBanksleasespacetooutside operatingleases,netofsubleaserentals,withremaining tenantswithremainingleasetermsrangingfromoneto termsofoneyearormore,atDecember31,2008,areas fifteenyears.Rentalincomefromsuchleaseswas$30 follows(inmillions): millionand$27millionfortheyearsendedDecember Operating 31, 2008 and 2007, respectively, and is reported as a Leases component of “Non-interest income (loss): Other income” in the Combined Statements of Income and 2009 ................................. $ 11 2010 ................................. 10 Comprehensive Income. Future minimum lease pay- 2011 ................................. 9 mentsthattheReserveBankswillreceiveundernoncan- 2012 ................................. 9 celable lease agreements in existence at December 31, 2013 ................................. 9 2008,areasfollows(inmillions): Thereafter ............................ 91 2009 ................................. $ 28 Futureminimumrentalpayments ...... $139 2010 ................................. 27 2011 ................................. 22 Futureminimumrentalpaymentsundernoncancelable 2012 ................................. 20 capital leases, net of sublease rentals, with remaining 2013 ................................. 19 termsofoneyearormoreatDecember31,2008,were Thereafter ............................ 57 notmaterial. Total............................... $173 AtDecember31,2008,theReserveBankshadunrecorded unconditional purchase commitments and long- TheReserveBankshavecapitalizedsoftwareassets, termobligationsextendingthroughtheyear2017witha netofamortization,of$129millionand$158millionat remainingfixedcommitmentof$294million.Purchases December31,2008and2007,respectively.Amortization of$33millionand$59millionweremadeagainstthese expensewas$67millionand$62millionfortheyears commitmentsduring2008and2007,respectively.These endedDecember31,2008and2007,respectively.Capicommitments represent goods and services for maintetalized software assets are reported as a component of nanceofcurrency-processingmachinesandforlicenses “Other assets” in the Combined Statements of Condiand maintenance of check software and hardware, and tions,andtherelatedamortizationisreportedasacomhavevariableand/orfixedcomponents.Thevariableporponentof“Otherexpenses”intheCombinedStatements ofIncomeandComprehensiveIncome. tionofthecommitmentsisforadditionalservicesabove Assets impaired as a result of the Reserve Banks’ fixedcontractualservicelimits.Thefixedpaymentsfor restructuring plans, as discussed in Note 15, include thenextfiveyearsunderthesecommitmentsareasfolcheckequipment,leaseholdimprovements,andfurniture lows(inmillions): FixedComassets. Asset impairment losses of $2 million and $32 mitment million for the years ended December 31, 2008 and 2007, respectively, were determined using fair values 2009 ................................. $ 8 basedonquotedfairvaluesorothervaluationtechniques 2010 ................................. 59 andarereportedasacomponentof“Operatingexpenses: 2011 ................................. 30 Otherexpenses”intheCombinedStatementsofIncome 2012 ................................. 30 2013 ................................. 31 and Comprehensive Income. The Reserve Banks recordedwrite-offsof$9millionduringtheyearended TheFederalReserveBankofRichmondhadcommit- December 31, 2008 related to discontinued software ments of approximately $7 million and $51 million at developmentprojects. December31,2008and2007,respectively,fortheconstructionofanemployeeparkingdeckatitsheadoffice (11) CommitmentsandContingencies and for security enhancements throughout the District. Inthenormalcourseofoperations,theReserveBanks Expected payments related to these commitments are enterintocontractualcommitments,normallywithfixed $7millionfortheyearendingDecember31,2009. expiration dates or termination provisions, at specific Under the Insurance Agreement of the Federal ratesandforspecificpurposes. ReserveBanks,eachReserveBankhasagreedtobear, on a per incident basis, a pro rata share of losses in OperatingLeases excessofonepercentofthecapitalpaid-inoftheclaim- AtDecember31,2008,theReserveBankswereobli- ingReserveBank,upto50percentofthetotalcapital gatedundernoncancelableleasesforpremisesandequip- paid-in of all Reserve Banks. Losses are borne in the mentwithremainingtermsrangingfromonetoapproxi- ratio of a Reserve Bank’s capital paid-in to the total mately 15 years. These leases provide for increased capitalpaid-inofallReserveBanksatthebeginningof rentalpaymentsbaseduponincreasesinrealestatetaxes, thecalendaryearinwhichthelossisshared.Noclaims operatingcosts,orselectedpriceindices. wereoutstandingundertheagreementatDecember31, Rental expense under operating leases for certain 2008or2007. operatingfacilities,warehouses,anddataprocessingand The Reserve Banks are involved in certain legal officeequipment(includingtaxes,insurance,andmainte- actionsandclaimsarisingintheordinarycourseofbusinance when included in rent), net of sublease rentals ness.Althoughitisdifficulttopredicttheultimateout- (reportedasacomponentof“Otherincome”),was$27 comeoftheseactions,inmanagement’sopinion,based
Federal Reserve Banks Combined Financial Statements 479 on discussions with counsel, the aforementioned litiga- ciatedwiththeSystemPlanarenotreimbursedbyother tionandclaimswillberesolvedwithoutmaterialadverse participatingemployers. effectonthefinancialpositionorresultsofoperationsof Following is a reconciliation of the beginning and theReserveBanks. endingbalancesoftheSystemPlanbenefitobligation(in millions): OtherCommitments 2008 2007 Estimatedactuarialpresent Insupportoffinancialmarketstabilityactivities,the valueofprojectedbenefit FRBNYenteredintocommitmentstoprovidefinancial obligationatJanuary1 .... $5,325 $5,147 assistanceandbackstopsupporttofinancialinstitutions. Servicecost-benefitsearned ThecontractualamountrepresentstheFRBNY’smaxiduringtheperiod.......... 150 146 mumexposuretolossintheeventofdefaultbythebor- Interestcostonprojected rowerortotallossinvalueofpledgedcollateral.Total benefitobligation ......... 357 317 commitmentsatDecember31,2008,wereasfollows(in Actuarialloss(gain) ......... 599 (46) millions): Contributionsbyplan Contracparticipants ............... 3 3 tual Unfunded Specialterminationbenefits .. 9 22 Amount Amount Benefitspaid ................ (280) (264) Loancommitment Planamendments............ 868 0 (Citigroup).............. $244,800 $244,800 Estimatedactuarialpresent Securedlineofcredit valueofprojected (AIG) .................. 60,000 23,200 benefitobligationat Commercialloancommitments December31 ............. $7,031 $5,325 (ML) ................... 266 266 Total...................... $305,066 $268,266 FollowingisareconciliationofthebeginningandendingbalancesoftheSystemPlanassets,thefundedstatus, The agreement with Citigroup, while legally a loan andtheprepaidpensionbenefitcosts(inmillions): commitment, is accounted for in accordance with FIN 2008 2007 45, “Guarantor’s Accounting and Disclosure RequirementsforGuarantees,IncludingIndirectGuaranteesof Estimatedfairvalue IndebtednessofOthers.”AsofDecember31,2008,both ofplanassets theprobablelossandthefairvalueoftheFRBNY’sloan atJanuary1............... $6,604 $6,330 commitment was deemed to be zero, because under a Actualreturnonplanassets.. (1,274) 535 rangeofscenariositisunlikelythattheFRBNYwillbe Contributionsbyplan requiredtomaketheloan. participants ............... 3 3 Thesecuredlineofcreditrelatestotheundrawnpor- Benefitspaid ................ (280) (264) tionofthelineofcreditprovidedtoAIGtoassistitwith Estimatedfairvalue meeting obligations as they come due. Collateral to ofplanassets secure the line of credit includes the equity in AIG’s atDecember31 ........... $5,053 $6,604 subsidiaries.TheFRBNYdoesnotexpecttoincurany Fundedstatusand lossesrelatedtotheunfundedcommitmentasofDecem- (accrued)prepaid ber31,2008. pensionbenefitcosts ...... $(1,978) $1,279 ThecommercialloancommitmentsrelatetocommercialmortgageloansacquiredbyMLthathaveunderlying Amountsincludedinaccumuunfundedcommitmentsduetotheborrower. latedothercomprehensiveloss areshownbelow: (12) RetirementandThriftPlans Priorservicecost............ $ (989) $ (163) Netactuarialloss............ (3,429) (1,135) RetirementPlans Totalaccumulatedother TheReserveBankscurrentlyofferthreedefinedbene- comprehensiveloss........ $(4,418) $(1,298) fitretirementplanstoitsemployees,basedonlengthof service and level of compensation. Substantially all of Accrued and prepaid pension benefit costs are theReserveBanks’,BoardofGovernors,andtheOffice reportedas“Accruedbenefitcosts”and“Otherassets,” ofEmployeeBenefitsoftheFederalReserveSystems’ respectively,intheCombinedStatementsofCondition. employees participate in the Retirement Plan for The accumulated benefit obligation for the System Employees of the Federal Reserve System (“System Plan,whichdiffersfromtheestimatedactuarialpresent Plan”).Employeesatcertaincompensationlevelspartici- value of the projected benefit obligation because it is pate in the Benefit Equalization Retirement Plan basedoncurrentratherthanfuturecompensationlevels, (“BEP”),andcertainReserveBankofficersparticipatein was$6,143millionand$4,621millionatDecember31, theSupplementalEmployeeRetirementPlan(“SERP”). 2008and2007,respectively. The System Plan provides retirement benefits to Theweighted-averageassumptionsusedindeveloping employeesoftheFederalReserveBanks,theBoardof theaccumulatedpensionbenefitobligationfortheSys- Governors,andtheOfficeofEmployeeBenefitsofthe temPlanasofDecember31areasfollows: Federal Reserve Employee Benefits System. The 2008 2007 FRBNY, on behalf of the System, recognizes the net Discountrate ............. 6.00% 6.25% assetornetliabilityandcostsassociatedwiththeSystem Rateofcompensation Planinitsconsolidatedfinancialstatements.Costsasso- increase................ 5.00% 5.00%
480 95th Annual Report, 2008 In 2008, the System approved several plan amend- Expected ments.Asaresult,theactuariallydeterminednetperi- benefit odic benefit expense for the year ended December 31, payments 2008,wasremeasured,usinga7.75percentdiscountrate 2009 ................................. $ 315 asofNovember1.Theapprovedplanamendments,the 2010 ................................. 330 most significant of which was to incorporate annual, 2011 ................................. 346 ratherthanadhoc,cost-of-livingadjustmentstotheplan 2012 ................................. 368 benefit,resultedina$60millionincreaseinnetperiodic 2013 ................................. 391 benefitexpensesfortheyearendedDecember31,2008. 2014−2018 ........................... 2,278 Net periodic benefit expenses for the years ended Total............................... $4,028 December31wereactuariallydeterminedusingaJanuary1measurementdate.Theweighted-averageassump- TheSystem’sCommitteeonInvestmentPerformance tions used in developing net periodic benefit expenses (“CIP”) is responsible for establishing investment polifortheSystemPlanfortheyearswereasfollows: cies,selectinginvestmentmanagers,andmonitoringthe investment managers’ compliance with the policies. In 2008 2007 2008, the CIP reassessed the System Plan investment Discountrate ............. 6.50% 6.00% strategies, and the resulting target allocations evolved Expectedassetreturn ..... 8.00% 8.00% considerably.TheSystemPlan’sassetswereheldinfive Rateofcompensation investment vehicles: actively-managed balanced increase................ 5.00% 4.50% accounts, a constant mix asset allocation account, a liability-linkedaccount,indexedcommingledtrusts,and Discountratesreflectyieldsavailableonhigh-quality a money market fund. The actively-managed balanced corporatebondsthatwouldgeneratethecashflowsnecaccounts have equity, fixed income, and temporary essarytopaytheplan’sbenefitswhendue.Theexpected investmentsegments,withaperformancebenchmarkfor long-termrateofreturnonassetswasbasedonacombitheseassetsbasedupon60percentofthereturnofthe nationofmethodologiesincludingtheSystemPlan’shis- Standard&Poor’s500StockIndexand40percentofthe torical returns; surveys of expected rates of return for return of the Barclays Aggregate Bond Index, with otherentities’plans;buildingaprojectedreturnforequirequired equity segment exposures in the range of 40 tiesandfixedincomeinvestmentsbasedonrealinterest percentto80percentofeachaccount.Theconstantmix rates, inflation expectations, and equity risk premiums; account is comprised of two index funds, one tracking and surveys of expected returns in equity and fixed the Standard & Poor’s 500 Stock Index and the other incomemarkets. trackingtheBarclaysAggregateBondIndex,andisauto- The components of net periodic pension benefit matically rebalanced. The liability-linked account, expensefortheSystemPlanfortheyearsendedDecemfundedinApril2008,seekstodefeaseaportionofthe ber31areshownbelow(inmillions): System Plan’s liability related to retired lives using a 2008 2007 Treasurysecuritiesportfolio.Thepolicygoverningthis Servicecost-benefitsearned accountcallsforcash-matchingoverthenexttwoyears duringtheperiod.......... $150 $146 ofaportionofretireebenefitspaymentsandimmunizing Interestcostonaccumulated theremainingobligation.Thethreeindexedcommingled benefitobligation ......... 357 317 trustinvestments,initiallyfundedinOctober2008,are Amortizationofpriorservice intended to provide the System Plan with low-cost, cost ...................... 41 29 broadly-diversified exposures to U.S. equities, U.S. Amortizationofnetloss ..... 78 79 investment-gradebonds,andinternationalequities.The Expectedreturnonplan money market fund is the repository for cash balances assets..................... (497) (496) and adheres to a constant-dollar accounting method- Netperiodicpensionbenefit ology. expense................... 129 75 TheSystemPlan’sweighted-averageassetallocations Specialterminationbenefits .. 9 22 atDecember31,byassetcategory,areasfollows: Curtailment(gain)loss....... 0 0 2008 2007 Totalperiodicpensionbenefit Equities ................ 55.40% 65.70% expense................... $138 $ 97 Fixedincome........... 42.80% 33.20% Cash ................... 1.80% 1.10% Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensivelossintonetperiodicpen- Total................. 100.00% 100.00% sionbenefitexpensein2009areshownbelow: ContributionstotheSystemPlanmaybedetermined Priorservicecost............ $116 usingdifferentassumptionsthanthoserequiredforfinan- Actuarialloss ............... 284 cial reporting. The System Plan’s actuarial funding Total ..................... $400 method is expected to produce a recommended annual funding range between $150 and $200 million. Begin- The recognition of special termination losses is the ning in January 2009, the System will make monthly result of enhanced retirement benefits provided to contributionsof$20millionandwillreevaluatefunding employeesduringtherestructuringdescribedinNote15. upon completion of the 2009 actuarial valuation. The Followingisasummaryofexpectedbenefitpayments ReserveBanks’projectedbenefitobligation,fundedstaexcludingenhancedretirementbenefits(inmillions): tus,andnetpensionexpensesfortheBEPandtheSERP
Federal Reserve Banks Combined Financial Statements 481 atDecember31,2008and2007,andfortheyearsthen Following is a reconciliation of the beginning and ended,werenotmaterial. endingbalanceoftheplanassets,theunfundedpostretirement benefit obligation, and the accrued postretire- ThriftPlan mentbenefitcosts(inmillions): EmployeesoftheReserveBanksmayalsoparticipate 2008 2007 inthedefinedcontributionThriftPlanforEmployeesof Fairvalueofplanassets theFederalReserveSystem(“ThriftPlan”).TheReserve atJanuary1.............. $ 0 $ 0 Banksmatchemployeecontributionsbasedonaspeci- Contributionsbythe fied formula. For the years ended December 31, 2008 employer................. 53 52 and2007,theReserveBanksmatched80percentonthe Contributionsbyplan first6percentofemployeecontributionsforemployees participants............... 15 13 withlessthanfiveyearsofserviceand100percenton Benefitspaid ............... (72) (69) thefirst6percentofemployeecontributionsforemploy- MedicarePartDsubsidies... 4 4 ees with five or more years of service. The Reserve Fairvalueofplanassets Banks’ThriftPlancontributionstotaled$72millionand atDecember31 .......... 0 0 $69millionfortheyearsendedDecember31,2008and Unfundedobligationand 2007,respectively,andarereportedasacomponentof accruedpostretirement “Salariesandotherbenefits”intheCombinedStatements benefitcost .............. $1,221 $1,121 of Income and Comprehensive Income. Beginning in 2009,theReserveBankswillmatch100percentofthe Amountsincludedinaccumufirst6percentofemployeecontributionsfromthedateof latedothercomprehensive hireandprovideanautomaticemployercontributionof lossareshownbelow: 1percentofeligiblepay. Priorservicecost ........... 44 60 Netactuarialloss ........... (313) (292) (13) PostretirementBenefitsOtherThan Deferredcurtailmentgain ... 4 6 PensionsandPostemploymentBenefits Totalaccumulatedother PostretirementBenefitsOtherThanPensions comprehensiveloss ....... $(265) $(226) In addition to the Reserve Banks’ retirement plans, employees who have met certain age and length-of- Accruedpostretirementbenefitcostsarereportedasa servicerequirementsareeligibleforbothmedicalbene- componentof“Accruedbenefitcosts”intheCombined fitsandlifeinsurancecoverageduringretirement. StatementsofCondition. The Reserve Banks fund benefits payable under the For measurement purposes, the assumed health care medicalandlifeinsuranceplansasdueand,accordingly, costtrendratesatDecember31areasfollows: havenoplanassets. 2008 2007 Following is a reconciliation of the beginning and Healthcarecosttrend endingbalancesofthebenefitobligation(inmillions): rateassumedfornext 2008 2007 year .................... 7.50% 8.00% Accumulatedpostretirement Ratetowhichthecosttrend benefitobligationat rateisassumedtodecline January1 ................ $1,121 $1,164 (theultimatetrendrate).. 5.00% 5.00% Servicecost-benefitsearned Yearthattheratereaches duringtheperiod ......... 38 41 theultimatetrendrate ... 2014 2013 Interestcostonaccumulated Assumedhealthcarecosttrendrateshaveasignifibenefitobligation......... 71 69 canteffectontheamountsreportedforhealthcareplans. Netactuarialloss(gain)..... 54 (93) Aonepercentagepointchangeinassumedhealthcare Curtailmentgain............ (10) (10) Specialterminationbenefits costtrendrateswouldhavethefollowingeffectsforthe loss...................... 0 3 yearendedDecember31,2008(inmillions): Contributionsbyplan One One participants............... 15 13 Percentage Percentage Benefitspaid ............... (72) (69) Point Point MedicarePartDsubsidies... 4 4 Increase Decrease Planamendments ........... 0 (1) Effectonaggregateof Accumulatedpostretirement serviceandinterest benefitobligation costcomponentsofnet atDecember31 .......... $1,221 $1,121 periodicpostretirement benefitcosts.......... $ 14 $ (12) At December 31, 2008 and 2007, the weighted- Effectonaccumulated averagediscountrateassumptionsusedindevelopingthe postretirementbenefit postretirementbenefitobligationwere6.00percentand obligation ............ 125 (107) 6.25percent,respectively. Discountratesreflectyieldsavailableonhigh-quality Thefollowingisasummaryofthecomponentsofnet corporatebondsthatwouldgeneratethecashflowsnec- periodic postretirement benefit expense for the years essarytopaytheplan’sbenefitswhendue. endedDecember31(inmillions):
482 95th Annual Report, 2008 2008 2007 PostemploymentBenefits Servicecost-benefitsearned TheReserveBanksofferbenefitstoformerorinactive duringtheperiod ........ $ 38 $ 41 employees.Postemploymentbenefitcostsareactuarially Interestcostonaccumulated determinedusingaDecember31measurementdateand benefitobligation........ 71 69 includethecostofmedicalanddentalinsurance,survi- Amortizationofpriorservice vorincome,anddisabilitybenefits.Theaccruedpostemcost..................... (20) (22) ploymentbenefitcostsrecognizedbytheReserveBanks Amortizationofactuarial atDecember31,2008and2007were$117millionand loss..................... 27 48 $124 million, respectively. This cost is included as a Totalperiodicexpense ..... 116 136 componentof“Accruedbenefitcosts”intheCombined Curtailmentgain........... (1) 0 Statements of Condition. Net periodic postemployment Specialterminationbenefits benefit expense included in 2008 and 2007 operating loss..................... 0 3 expenseswere$10millionand$15million,respectively, Netperiodicpostretirement andarerecordedasacomponentof“Salariesandother benefitexpense.......... $115 $139 benefits” in the Combined Statements of Income and ComprehensiveIncome. Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensivelossintonetperiodicpos- (14) AccumulatedOtherComprehensiveIncome tretirementbenefitexpensein2009areshownbelow: andOtherComprehensiveIncome Priorservicecost .......... $(20) Followingisareconciliationofbeginningandending Netactuarialloss .......... 24 balances of accumulated other comprehensive income (loss)(inmillions): Total.................... $ 4 Amount Amount relatedto relatedto Netpostretirementbenefitcostsareactuariallydeter- defined postretirement minedusingaJanuary1measurementdate.AtJanuary benefit benefits 1, 2008 and 2007, the weighted-average discount rate retirement otherthan assumptions used to determine net periodic postretire- plan pensions mentbenefitcostswere6.25percentand5.75percent, BalanceatJanuary1, respectively. 2007 ................... $(1,492) $(357) Net periodic postretirement benefit expense is Changeinfundedstatusof reportedasacomponentof“Salariesandotherbenefits” benefitplans: intheCombinedStatementsofIncomeandComprehen- Priorservicecostsarising siveIncome. duringtheyear ......... 0 (3) The Medicare Prescription Drug, Improvement and Netactuarialgainarising Modernization Act of 2003 established a prescription duringtheyear ......... 86 103 drugbenefitunderMedicare(“MedicarePartD”)anda Deferredcurtailmentgain.. 0 5 federalsubsidytosponsorsofretireehealthcarebenefit Amortizationofprior plans that provide benefits that are at least actuarially servicecost............. 29 (22) equivalent to Medicare Part D. The benefits provided Amortizationofnet under the Reserve Banks’ plans to certain participants actuarialloss ........... 79 48 areatleastactuariallyequivalenttotheMedicarePartD Changeinfundedstatus prescription drug benefit. The estimated effects of the ofbenefitplans-other subsidyarereflectedinactuariallossintheaccumulated comprehensiveincome .. 194 131 postretirementbenefitobligationandnetperiodicpostretirementbenefitexpense. BalanceatDecember31, Federal Medicare Part D subsidy receipts were 2007 ................... $(1,298) $(226) $3.3millionand$6.2millionfortheyearsendedDecem- Changeinfundedstatusof ber31,2008and2007,respectively.Expectedreceiptsin benefitplans: 2009, which relate to benefits paid in the year ended Priorservicecostsarising December31,2008and2007,are$2.2million. duringtheyear ......... $ (868) $ 4 Following is a summary of expected postretirement Netactuariallossarising benefitpayments(inmillions): duringtheyear ......... (2,371) (48) Deferredcurtailmentgain.. 0 1 Without With Amortizationofprior subsidy subsidy servicecost............. 41 (20) 2009 ................... $ 72 $ 66 Amortizationofnet 2010 ................... 77 72 actuarialloss ........... 78 27 2011 ................... 83 77 Amortizationofdeferred 2012 ................... 87 80 curtailmentgain ........ 0 (3) 2013 ................... 92 84 Changeinfundedstatus 2014−2018 ............. 511 462 ofbenefitplans-other Total................. $922 $841 comprehensiveloss ..... (3,120) (39) BalanceatDecember31, 2008 ................... $(4,418) $(265)
Federal Reserve Banks Combined Financial Statements 483 Total operations into four regional Reserve Bank processing accumulated sites in Philadelphia, Cleveland, Atlanta, and Dallas. other Additionalannouncementsin2007includedrestructuring comprehensive plansassociatedwiththeU.S.Treasury’sCollectionsand income(loss) Cash Modernization initiative. The Reserve Banks BalanceatJanuary1, incurred various restructuring charges prior to 2007 2007 ................... $(1,849) relatedtotheinitialphasesofrestructuringoftheSys- Changeinfundedstatusof tem’scheck-processingandcash-handlinginfrastructure. benefitplans: Following is a summary of financial information Priorservicecostsarising relatedtotherestructuringplans(inmillions): duringtheyear ......... (3) 2006 Netactuarialgainarising andPrior 2007 duringtheyear ......... 189 Restructur- Restructur- Deferredcurtailmentgain.. 5 ingPlans ingPlans Amortizationofprior Informationrelatedto servicecost............. 7 restructuringplansasof Amortizationofnet actuarialloss ........... 127 December31,2008: Totalexpectedcosts Changeinfundedstatus relatedtorestructuring ofbenefitplans-other activity............... $ 36 $ 41 comprehensiveincome .. 325 Estimatedfuturecosts BalanceatDecember31, relatedtorestructuring 2007 ................... $(1,524) activity............... $ 0 $ 0 Expectedcompletion Changeinfundedstatusof date.................. 2008 2008 benefitplans: Priorservicecostsarising Reconciliationofliability duringtheyear ......... (864) balances: Netactuariallossarising BalanceatJanuary1, duringtheyear ......... (2,419) 2007................. $ 12 $ 0 Deferredcurtailmentgain 1 Employeeseparation Amortizationofprior costs................. 2 38 servicecost............. 21 Adjustments ............ (5) 3 Amortizationofnet Payments............... (6) (1) actuarialloss ........... 105 BalanceatDecember31, Amortizationofdeferred 2007................. $ 3 $ 40 curtailmentgain ........ (3) Employeeseparation Changeinfundedstatus costs................. 1 4 ofbenefitplans-other Adjustments ............ 0 (4) comprehensiveloss ..... (3,159) Payments............... (4) (17) BalanceatDecember31, BalanceatDecember31, 2008 ................... $(4,683) 2008................. $ 0 $ 23 Additionaldetailregardingtheclassificationofaccu- 2008 mulated other comprehensive loss is included in Notes Restructur- 12and13. ingPlans Total (15) BusinessRestructuringCharges Informationrelatedto restructuringplansasof 2008RestructuringPlans December31,2008: In2008,theReserveBanksannouncedtheaccelera- Totalexpectedcosts tion of their check restructuring initiatives to align the relatedtorestructuring check processing infrastructure and operations with activity............... $ 17 $94 decliningcheckprocessingvolumes.Thenewinfrastruc- Estimatedfuturecosts ture will involve consolidation of operations into two relatedtorestructuring regionalReserveBankprocessingsitesinClevelandand activity $ 1 $ 1 Atlanta. Additional announcements in 2008 included Expectedcompletion restructuringplansassociatedwiththeclosureofacheck date.................. 2012 processing contingency center and the consolidation of Reconciliationofliability checkadjustmentssites. balances: BalanceatJanuary1, 2007andPriorRestructuringPlans 2007................. $ 0 $12 In2007,theReserveBanksannouncedrestructuring Employeeseparation plansrelatedtoaligningthecheck-processinginfrastruc- costs................. 0 40 tureandoperationswithdecliningprocessingvolumes. Adjustments ............ 0 (2) The new infrastructure would involve consolidation of Payments............... 0 (7)
484 95th Annual Report, 2008 2008 arerecordedbasedontheaccumulatedbenefitearnedby Restructur- theemployee.Separationcoststhatareprovidedunder ingPlans Total thetermsofone-timebenefitarrangementsaregenerally BalanceatDecember31, measuredbasedontheexpectedbenefitasofthetermi- 2007................. $ 0 $43 nationdateandrecordedratablyovertheperiodtotermi- Employeeseparation nation. Restructuring costs related to employee separacosts................. 17 22 tionsarereportedasacomponentof“Salariesandother Adjustments ............ 0 (4) benefits” in the Combined Statements of Income and Payments............... 0 (21) ComprehensiveIncome. BalanceatDecember31, (16) SubsequentEvents 2008................. $17 $40 Whereapplicable,allsubsequenteventsaredisclosed Employee separation costs are primarily severance inNote3. costs for identified staff reductions associated with the Theeffectsofsubsequenteventsdonotrequireadjustannouncedrestructuringplans.Separationcoststhatare menttothecombinedfinancialstatementsasofDecemprovided under terms of ongoing benefit arrangements ber31,2008.
485 Office of Inspector General Activities The Board of Governors’ Office of OIG also keeps the Congress and the Inspector General (OIG) operates in Chairman of the Board of Governors accordance with the Inspector General fullyinformedaboutseriousabusesand Act of 1978, as amended. The OIG deficiencies. plans and conducts audits, attestations, During 2008, the OIG completed inspections, evaluations, investigations, 15audits,attestations,inspections,evaland law and regulation reviews relating uations, and other assessments, and totheBoard’sprogramsandoperations, conducted a number of follow-up reand to those functions that the Board views to evaluate action taken on prior has delegated to the Federal Reserve recommendations.ItalsoissuedaCom- Banks. In addition, it retains an inde- pendium of Open Recommendations, pendent auditor each year to audit the the Strategic Plan 2008-2011, and two Board’s financial statements. The OIG semiannual reports to Congress. In makes recommendations and conducts addition,theOIGclosednineinvestigaactivities to promote economy and effi- tions and performed numerous legislaciency, enhance policies and proce- tive and regulatory reviews. dures, and prevent and detect waste, Visit the OIG website at www. fraud, and abuse in Board and Board- federalreserve.gov/oig/ for more infordelegatedprogramsandoperations.The mation. OIGAudits,Attestations,Inspections,andEvaluationsCompletedduring2008 Reporttitle Monthissued SecurityControlReviewoftheFederalReserveIntegratedRecordsManagement Architecture(InternalReport) ......................................................... January SecurityControlReviewoftheEGovSystems(InternalReport) ............................. January AuditoftheFederalFinancialInstitutionsExaminationCouncil’sFinancial StatementsfortheYearEndedDecember31,2007 ..................................... February AuditoftheBoard’sFinancialStatementsfortheYearEndedDecember31,2007 ........... March InspectionofControlsforSafeguardingConfidentialandPersonallyIdentifiable InformationCollectedduringBankExaminations(InternalReport) ...................... March ReviewofSelectedCommonInformationSecurityControls(InternalReport)................. March ControlReviewoftheReserveBankOperatingAssessmentProcess.......................... March SecurityControlReviewoftheCurrencyOrderingSystem(InternalReport).................. June ReducingtheRiskofLossorTheftofConfidentialInformation:Comparisonof Agencies’Requirements(InternalReport) .............................................. June SecurityControlReviewoftheFISMAAssetsMaintainedbytheFederalReserve BankofBoston(InternalReport) ...................................................... September EvaluationofDataFlowsforBoardEmployeeDataReceivedbyOEBand itsContractors(InternalReport) ....................................................... September AuditoftheBoard’sInformationSecurityProgram ......................................... September ControlReviewoftheBoard’sCurrencyExpendituresandAssessments ..................... September EvaluationofCertificationandAccreditation(C&A)ReviewsoftheNational ExaminationDatabase(InternalReport) ................................................ September ReportontheExternalQualityControlReviewoftheSmithsonianInstitution InspectorGeneralAuditOrganization ................................................. December
486 Government Accountability Office Reviews Under the Federal Banking Agency were in various stages of completion at Audit Act (Public Law 95–320), most year-end (table). The Federal Reserve Federal Reserve System operations are also provided information to the GAO under the purview of the Government during the year on numerous other Accountability Office (GAO). In 2008, GAO investigations, including eight the GAO completed seven reports on other completed reviews and ten other selected aspects of Federal Reserve ongoing reviews. operations (table). In addition, eight The reports are available directly projectsconcerningtheFederalReserve from the GAO. ReportsCompletedduring2008 Monthissued Reporttitle Reportnumber (2008) HedgeFunds:RegulatorsandMarketParticipants AreTakingStepstoStrengthenMarketDiscipline, butContinuedAttentionIsNeeded ............................... GAO-08-200 January U.S.Coins:TheFederalReserveBanksAreFulfilling CoinDemand,butOptimalInventoryRangesAre Undefined....................................................... GAO-08-401 March FairLending:RaceandGenderDataAreLimitedfor NonmortgageLending ........................................... GAO-08-698 June InformationSecurityControlsatFRBs.............................. GAO-08-836R June U.S.PatriotAct:BetterInteragencyCoordinationand ImplementingGuidanceforSection311Could ImproveU.S.Anti–MoneyLaunderingEfforts .................... GAO-08-1058 September Risk-BasedCapital:NewBaselIIRulesReduced CertainCompetitiveConcerns,butBankRegulators ShouldAddressRemainingUncertainties ......................... GAO-08-953 September Check21Act:MostConsumersHaveAcceptedand BanksAreProgressingTowardFullAdoptionof CheckTruncation ............................................... GAO-09-8 October ProjectsActiveatYear-End2008 Subjectofproject Monthinitiated SuspiciousActivityReports(SAR)process.............................................. September2007 InspectorGenerals’roleinfederalentities .............................................. September2007 BankSecrecyAct(BSA)complianceandenforcement................................... October2007 Reviewoffederalenforcementoffairlendinglaws...................................... September2008 Systemicriskdetermination ............................................................ October2008 Risksandchallengespresentedbycreditdefaultswaps .................................. November2008 Riskmanagementoversightamongfederalfinancialregulators........................... December2008 Cybersecuritystrategy ................................................................. December2008
Maps of the Federal Reserve System
488 95th Annual Report, 2008 The Federal Reserve System 9 1 MINNEAPOLIS 2 BOSTON 7 12 3 NEWYORK CHICAGO SANFRANCISCO 10 CL 4 EVELAND PHILADELPHIA KANSASCITY RICHMOND ST.LOUIS 5 8 6 11 ATLANTA DALLAS ALASKA HAWAII Legend Bothpages Facingpage FederalReserveBankcity • FederalReserveBranchcity BoardofGovernorsoftheFederal Branchboundary ReserveSystem,Washington,D.C. Note TheFederalReserveofficiallyidentifies Bank serves the Commonwealth of Districts by number and by Reserve PuertoRicoandtheU.S.VirginIslands; Bankcity(shownonbothpages)andby the San Francisco Bank serves Ameriletter(shownonthefacingpage). can Samoa, Guam, and the Common- In the 12th District, the Seattle wealthoftheNorthernMarianaIslands. BranchservesAlaska,andtheSanFran- The maps show the boundaries within ciscoBankservesHawaii. the System as of year-end 2008. The System serves commonwealths andterritoriesasfollows:TheNewYork
Maps of the Federal Reserve System 489
Index
493 Index Accountingpolicy,111–112,114 Internationalstandardsonauditing,172 AccountingTaskForce(ATF),114 byOfficeofInspectorGeneral,437,485 Adjustable-ratemortgages.(SeeMortgage AutomatedClearinghouse(ACH)services, products,nontraditional) FederalReserveBanks,165,169,432 Advancedforeigneconomies,32,34, Automobileindustry,20,21,68 86–88,232,251,264,266,285,287, AvailabilityofFundsandCollectionof 303,305,314,324,326,330,348 Checks(RegulationCC),151 AmericanAssociationofResidential MortgageRegulators,193 Balancesheets AmericanInternationalGroup,Inc.(AIG), BoardofGovernors,440 3,10,56–57,175,217,316,322,327, FederalReserveBanks,5,31,36,37,39 361,408,409 BancoCentraldoBrasil,swaparrangement AmericanRecoveryandReinvestmentAct, with,52,321,322 24 BancodeMexico,swaparrangementwith, Anti-money-laundering(AML) 262,321,322 BankSecrecyAct/ Bankexaminertraining,121–122,144–148 Anti-Money-Laundering Bankholdingcompanies ExaminationManual,104 Assets,95 Examinations,104,112 Banksaffiliatedwith,403 Applications,notices,andproposals, Capitaladequacystandards,109–111 122–125,143–144 Consolidatedsupervisionof,100–101 AsianDevelopmentBank,108 Equityinvestments,111,210–211 AsiaPacificEconomicCooperation Inspectionsof,99,105 (APEC)FinancialRegulators’ Netlosses,95 TrainingInitiative,108 Numberof,98,99 Asset-backedcommercialpaper(ABCP), Ratingsystem,97 11,12,206−207,214−215,233,305, Regulatoryfinancialreports,117–119 315,327 Surveillanceandoff-sitemonitoring,107 Asset-BackedCommercialPaperMoney BankHoldingCompaniesandChangein MarketMutualFundLiquidityFacility BankControl(RegulationY), (AMLF),4–5,37,53,110,175,206, 206−207 207,214–215,327,351,408,409 BankHoldingCompanyAct(BHC),96, Asset-backedsecurities(ABS),6,11,21, 111,122–123 67,216,351 BankHoldingCompanyPerformance Assetsandliabilities Reports(BHCPRs),107 BoardofGovernors,440 BankingOrganizationNationalDesktop Commercialbanks,414 (BOND),120 FederalReserveBanks,406–407, Bankingorganizations,U.S.(SeealsoBank 410–413,416–420,454 holdingcompaniesandCommercial Nonmemberbanks,414 banks) AssociationofSupervisorsofBanksofthe Capitaladequacystandards,109–111 Americas(ASBA),108 Creditavailabilityand,13–14 Auditors’reports,439,451,453 Equityinvestments,111,210–211 Audits,reviews,andassessments Examinationsandinspections,97–102 ofBoardofGovernors,437,439–451 Failures,8 ofFederalReserveBanks,171–172,437 Foreignoperations,100–101,102,103, ofFederalReserveSystem,437 124
494 95th Annual Report, 2008 Minority-owneddepositoryinstitutions, Decisions,publicnoticeof,124–125 108–109 Discountrates,218–221 Numberof,403 DivisionofConsumerandCommunity Operationsofaffectedbyhurricanes,143 Affairs,127,137,145–148 Regulationof,122–125 Economicgrowthprojections,5–6, Structuralchanges,14 41–44 BankMergerAct,97,122 Exofficiomembers,394 BankofAmericaCorporation ExtensionofcredittoFannieMaeand CountrywideFinancialCorporation FreddieMac,60,79 acquisition,143 FFIECactivities,104,106,107,116, Loansandguaranteesfor,5,57–58,218 119–120 MerrillLynchacquisition,9,57,143, Financialstatements,439–451 316 Goalsandobjectives,181–183 BankofCanada GovernmentPerformanceandResults JointactionswiththeFederalReserve, Act,181–183 86 Illustrationsofconsumerinformationfor Monetarypolicyrate,34 hybridadjustable-ratemortgage Swaparrangementwith,52,262,333 products,209–210 Targetfundrate,87 Incomeandexpenses,441 BankofEngland Liquidityinitiatives,51–55,59,62, JointactionswiththeFederalReserve, 80–81 86 Litigationinvolving,361–362 Monetarypolicyrate,34 MarginstudyrequirementoftheEESA, Swaparrangementwith,52,333 199 Targetfundrate,87 Membersandofficers,365,391–393 BankofJapan Memorandumofunderstandingwiththe Swaparrangementwith,52,333 CommodityFuturesTrading Targetfundrate,87 CommissionandtheSEC,212 BankofKorea,swaparrangementwith,52, Memorandumofunderstandingwiththe 321,322 SEConinformationsharing,210 BankofMexico,swaparrangementwith, Mission,181 52 Modificationstotheprimarycredit BankSecrecyAct(BSA),104,112 program,51 BankSecrecyAct/Anti-Money-Laundering Policyactions,12–13,205–221 ExaminationManual,104 Policyinitiatives,7,12–13 Banks’securitiesactivities,117 Rulesofpracticeforhearings,209 BaselCommitteeonBankingSupervision, RulesregardingEqualOpportunity,209 108,110,112,113,114 Section13(3)reportingrequirements, BaselIICapitalAccord,96,109,210 199 BearStearnsCompanies,Inc.,acquisition Strategicplan,performanceplan,and ofbyJPMorganChase&Co.,7,56, performancereport,181 60,79,81,90,216,253 Supportofcriticalinstitutions,56–58 BoardofGovernors Systemic-riskexceptions,FDIC Appointedmembers,391–393 guarantees,211 Assessmentsby,426,428,430 TARPand,196–197 Assetsandliabilities,440 ThriftInstitutionsAdvisoryCouncil,371 Audits,reviews,andassessmentsof,437 Votesonchangestodiscountrates, Balancesheets,440 219–221 Businesscontinuity,106 BOND(BankingOrganizationNational Cashflows,442 Desktop),120 ConsumerAdvisoryCouncil,155–162, BorrowersofSecuritiesCredit(Regulation 370 X),125,415
Index 495 BradfordandBingleyBank,collapseof, Numberof,414 31 Regulatoryfinancialreports,119–120 Branches.(SeeFederalReserveBanks) Commercialmortgage-backedsecurities BrookingsInstitution,155 (CMBS),11,68,70,119,260,223, BureauofEconomicAnalysis,4,6 305,351 Businesscontinuity,106 CommercialPaperFundingFacility BusinessContinuityPlanningBooklet,106, (CPFF),5,31,37,53–54,215,327, 116 328,350–351,408 Businessinvestment,profits,andfinance, CommitteeofSponsoringOrganizations 21–24,67–70 (COSO),171 CommodityFuturesTradingCommission, 212 CallReports,107,119 Communityaffairs.(SeeConsumerand Capitalaccounts,FederalReserveBanks, communityaffairs) 416–420 CommunityAffairsOffices(CAOs),131, CapitalPurchaseProgram,110,119 154 Capitalstandards,109–111,122,210 CommunityForeclosureMitigation Cashflows,BoardofGovernors,442 Toolkits,131 Cash-managementservices,Federal CommunityReinvestmentAct(CRA) ReserveBanks,170 Applicationsformergersand CentralDocumentandTextRepository acquisitions,143–144 (CDTR),120 Distressedorunderservedlist,142–143 CertifiedInformationSystemsAuditor Examinationsforcompliancewith, certification,121 142–144 ChangeinBankControlAct,97,122, Foreclosure-relatedcredit,161 133 Interagencyquestionsandanswers, Checkcollectionandprocessing,Federal 212–213 ReserveBanks,164–165 ComplianceandtheComplianceFunction ChicagoBoardOptionsExchange,125 inBanks,113 CITGroup,Inc.,applicationtobecomea Complianceexaminations,103–104, bankholdingcompany,144 137–140,142–144 Citigroup Complianceriskmanagement,112–113 CDSspread,12 ComptrollerGeneraloftheUnitedStates, Loansandguaranteesfor,5,12,57,214, TARPoversight,198 217−218,351,461,479 ComptrolleroftheCurrency,Officeofthe ProposedacquisitionofWachovia,333 (OCC),96,102,103,109,114–115, Systemic-riskexception,211 116,150,206,209–210,211,212 CollectionsandCashManagement Conditionstatements,FederalReserve Modernization(CCMM)initiative, Banks,416–420,454 170 ConferenceBoardConsumerConfidence Collectionservicesforfederalgovernment, Survey,284 FederalReserveBanks,169 ConferenceofChairs,FederalReserve Combinedfinancialstatements,Federal Banks,373 ReserveBanks,453–484 ConferenceofFirstVicePresidents, CommerceBancorp,Inc., FederalReserveBanks,374 Toronto-DominionBank’sacquisition ConferenceofPresidents,FederalReserve of,143 Banks,373 Commercialbanks ConferenceofStateBankSupervisors,65, Assetsandliabilities,414 193 Creditavailabilityand,13 CongressionalBudgetOffice,24 Fiduciaryactivitiesexaminations, Consolidatedvariableinterestentities, 104–105 investmentof,175
496 95th Annual Report, 2008 ConsumerAdvisoryCouncil Increasingratesonexistingbalances, Advice,155–162 158–159 Membersandofficers,370 Paymentallocation,158 Consumerandcommunityaffairs Proposedrulesforcreditcardaccounts, Communitydevelopmentneedsin 158–159 historicallyunderserved RegulationAAamendments,133–134 communitiesandmarkets,154–155 RegulationZamendments,133,134–135 ConsumerAdvisoryCounciladvice, Statementmailingdates,159 155–162 Two-cyclebilling,134 Consumercomplaints,151–153 Unfairordeceptivepracticesbybanksin Consumerinquiries,151–152,153–154 connectionwith,156,158 Consumerprotectionsandcommunity Creditdefaultswap(CDS)spreads,7–8, reinvestment,137–154 10,11,12–13 Creditriskmanagement,114–116 Creditcards,133–135 “CreditRiskTransferDevelopmentsfrom Illustrationsofconsumerinformationfor 2005to2007,”114 hybridadjustable-ratemortgage Cross-SectoralReviewofGroupwide products,209–210 IdentificationandManagementofRisk Mortgagecredit,127–133 Considerations,114 Outreachactivities,154–155 Currencyandcoin,31,166–167,432 Overdraftservices,135–136 Currentaccount,U.S.,73 Risk-basedpricing,136–137,162 CustomerSuitabilityintheRetailSaleof Consumercomplaints,151–153 FinancialProductsandServices,114 ConsumerCreditProtectionAct,138,153 Consumerinquiries,153–154 ConsumerLeasing(RegulationM),150 DanmarksNationalbank,swap Consumerprices,4,17,19,27–28,34,39, arrangementwith,52,333 74–75,77–79 Debt Consumerprotectionlaws Corporate,13,83 Agencyreportsoncompliancewith, Domesticnonfinancialsector,66–67, 149–151 69–70,83–84 Supervisionforcompliancewith, Government,24–25,71 137–140 Household,19–21,66–67,83–84 AConsumer’sGuidetoMortgage DebtCollectionImprovementAct,209 Refinancings,132 Debtservicesforfederalgovernment, AConsumer’sGuidetoMortgage FederalReserveBanks,168–169 SettlementCosts,131 Decisions,publicnoticeof,124–125 Consumerspending,19–21,66–67 Defense,U.S.Departmentof,limitationson Corporatecompliance,113 consumercreditextendedtoservice Corporateprofits,22–24,68–70 membersanddependents,146 Counter-terrorismfinancing,112 Defensespending,25 CountrywideFinancialCorporation,Bank Delinquenciesandforeclosures,18,21,63, ofAmerica’sacquisitionof,143 64–65,67,70,84,130–132,160–161, Creditavailability,13–14 196–197 CreditbyBanksorPersonsotherthan Deloitte&ToucheLLP(D&T),171–172, BrokersorDealersforthePurposeof 439–451,453–484 PurchasingorCarryingMarginStock Depositoryinstitutions.(Seealso (RegulationU),105,125,415 Commercialbanks) CreditbyBrokersandDealers(Regulation Discountrates,218–221 T),125,415 InterestratesonloansbyFederal Creditcards ReserveBanks,401 Consumercomplaints,153 Reserverequirements,402 Disclosures,134–135 Reservesof,404–407,410–413
Index 497 Deposits Policyactionsandthemarketresponse, Commercialbanks,414 12–13 FederalReserveBanks,405,407,411, Prices,4,17,19,26–28,34,36,39,61, 413 66,73,74–75,77–79,90,91 DexiaBank,collapseof,31 Productivityandunitlaborcosts,28, Directors,FederalReserveBanksand 76–77 Branches,374–389 Recentfinancialandeconomic Disclosures developments,6–35 Creditcards,134–135 Stateandlocalgovernments,25,30, Statememberbanks,financial 71–72 disclosures,125 EdgeActcorporations,96,97,102–103, Truth-in-savings,147 124 Discountrates,218–221,253,401 ElectronicaccesstoFederalReserveBank Discrimination services,170 Complaintsrelatedto,153 ElectronicCheckProcessingprogram,169 DOJreviewsof,138 ElectronicFundTransfers(RegulationE), HMDAdataanalysis,138–139,140–142 135,147–148,149–150,159 Disposablepersonalincome(DPI),19, EmergencyEconomicStabilizationAct 66–67 (EESA),5,12,37,110,112,193,205, DoD.(SeeDefense,U.S.Departmentof) 207,325,328 DOJ.(SeeJustice,U.S.Departmentof) Executivecompensationprovisions, Dollarexchangerate,4,7,28,32–33,61, 195–196 87,273,287,318,326,352 Foreclosuremitigationeffortsand DueDiligenceandTransparencyregarding assistancetohomeowners,196–197 CoverPaymentMessagesRelatedto Interestonreserves,199 Cross-BorderWireTransfers,112 Keyelements,194–200 Marginstudyrequirement,199 EconomicStimulusAct,19,24,70,190 Mark-to-marketaccounting,200 Economies,foreign,11,32,34–35 Oversightandtransparencyprovisions, Economy,U.S. 197–199 Businesssector,21–24,67–70 Section13(3)reporting,199 Debt,domesticnonfinancialsector, SpecialInspectorGeneralfortheTARP, 66–67,69–70,83–84 197–198 Downturnin,3–6 Temporaryincreaseindepositinsurance Evolutionoffinancialturmoil,7–12 andFDICborrowingauthority, Externalsector,26–27,73–75 199–200 Federalborrowing,30 TroubledAssetsReliefProgram, Financialmarkets,4–5,7–12,31–33,62, 194–197 79–86,88 Emergingmarketeconomies,32,34–35, Financialstabilitydevelopments,7–31, 61,88 79–83 Employment,28,76–77.(Seealso Governmentsector,24–25,70–72 Unemployment) Householdsector,17–21,59,62–67 Employmentcostindex(ECI),77 Interestrates,8,19,21,23,34,37,39, TheEnduringChallengeofConcentrated 63–64,84–85,401 Poverty:CaseStudiesfrom Labormarket,3–4,15–17,28,43,61, CommunitiesAcrosstheU.S.,155 76–77 Energyprices,4,26–27,36,61,66,77,78, M2monetaryaggregate,30–31,85 90,91 Nationalsaving,20,27,72–73 Enforcementactions Outlookandprojections,3–6,29–30, FederalReserveSystem,106–107,125 35–50,59–61,241–248,273–278 Otherfederalagencies,137–154
498 95th Annual Report, 2008 EqualCreditOpportunity(RegulationB), FairHousingAct,137,153 149 Fairlendinglaws,compliancewith, EqualCreditOpportunityAct(ECOA), 137–140 137–138,154 FairValueMeasurementandModeling:An Equipmentandsoftware,21–22,68 AssessmentofChallengesandLessons Equityinvestments,111,210–211 LearnedfromtheMarketStress,114 Equitymarketsandprices,13,32,37,83, FannieMae 84,86 “Bridge”equityprovision,189 EuropeanCentralBank Conformingloanlimits,190 JointactionswiththeFederalReserve, Conservatorshipfor,3,6,8–9,187–189, 86 315–316 Monetarypolicyrate,34 Dropinshareprice,81,83 Swaparrangementwith,52,82,90,91, Extensionofcreditto,60,79,216–217, 260,309,310,327,333,408 317,351–352 Examinationsandinspections HERAprovisions,185–194 Affiliatemarketingstandards,146 Jumboconformingloans,65 Anti-money-launderingexaminations, Mortgage-backedsecuritiespurchasedby 104 theFederalReserve,38 Bankholdingcompanies,99,105 Newproductsandactivitiesand,190 CommunityReinvestmentAct, Prudentialmanagementandoperation compliancewith,142–144 standards,189 Complianceexaminations,103–104, Purchasesofdebtfrom,55,56 137–140,142–144 Secondarymortgagemarketand,19 Consumerprotectionlaws,compliance Securitizationofmortgages,63 with,137–140 Stockpricedecline,7 EdgeActagreementcorporations,97 Supervisoryandregulatoryframework, Electronicfundtransfers,147–148 186–190 FederalReserveBanks,171–172 Taxchanges,110 Fiduciaryactivities,104–105 FarmCreditAdministration(FCA),105, Financialholdingcompanies,102 125,148,149,192 Foreignbanks,100–101,103 FederalAdvisoryCouncil,membersand Identity-theft“redflags,”146–147 officers,369 Informationtechnologyactivities,104 Federalagencysecuritiesandobligations Internationalbankingactivities,102–103 Commercialbankholdings,414 RFIratingsystem,97 FederalReserveBankholdings,400, Securitiescreditlenders,105–106 404,406,410,412 Securitiesdealersandbrokers, Openmarkettransactions,398–399 governmentandmunicipal,105 FederalDepositInsuranceAct,99,201, Transferagents,105 211 Truth-in-savingsdisclosures,147 FederalDepositInsuranceCorporation ExaminerCommissioningProgram(ECP), (FDIC),96,103,109,114–115,116, 121 119,150,196–197,199–200,206, Examiners,training,121–122,144–148 209,210,211,212,351 Expenses.(SeeIncomeandexpenses) FederalDepositInsuranceCorporation Exports,26,73 ImprovementAct,99 Externalsector,developmentsin,26–27, FederalEmergencyManagementAgency 73–75 (FEMA),106–107,148 FederalFinancialInstitutionsExamination FairandAccurateCreditTransactions Council(FFIEC),104,106,107,116, Act(FACT),136,146,161 119–120,140,149–151,193 FairCreditReportingAct(FCRA), Federalfundsrate,4,7,29,36–39,51,59, 146–147 79,84,88–89,91,206,218,232,238,
Index 499 239,240–241,254,258,265,267, SystemOpenMarketAccount,9–10,55, 271,272,273,285,286,291,292, 90,172,250,259–260,262–263, 304,308,314,318,324–325,331– 283,286,291–292,301–302,310, 332,349,356,357 312,320–321,346,350 Federalgovernment FederalReserveAct,81,103,123–124, FederalReserveBankservicesto, 174,199,207,213,214,216,218 167–170 FederalReserveBanks Spending,receipts,andborrowing, AssessmentsbyBoardofGovernors, 24–25,30,70–71 426,428,430 FederalHomeLoanBanks(FHLBs),55, Assetsandliabilities,406–407,410–413, 56,185–194 416–420,454 FederalHomeLoanMortgageCorporation. Audits,reviews,andassessmentsof,437 (SeeFreddieMac) AutomatedClearinghouseservices,165, FederalHousingAdministration(FHA),63 169,432 HopeforHomeowners,18 Branchclosure,175 FederalHousingEnterpriseOversight, Branchesof,372–373,375–389 Officeof(OFHEO),62,185 Capitalaccounts,416–420 FederalHousingEnterprisesFinancial Cash-managementservices,170 SafetyandSoundnessAct,187 Chairs,Conferenceof,373 FederalHousingFinanceAgency(FHFA) Checkcollectionandprocessing, ConservatorshipofFannieMaeand 164–165 FreddieMac,8–9,187–189,315 Collectionservices,169 HERAprovisions,185–194 Conditionstatements,416–420,454 TARPand,196–197 Creditoutstanding,404,406,410,412 FederalNationalMortgageAssociation. Currencyandcoin,operationsand (SeeFannieMae) developmentsin,166–167,432 FederalOpenMarketCommittee(FOMC). Debtservicesforfederalgovernment, (SeealsoOpenmarketoperations) 168–169 Authorizations,226–229 Depositoryservicestofederal Conferencecallminutes,240–241, government,167–170 259–260,309–310,332–334 Deposits,405,407,411,413 Diversityofparticipants’views,45–50, Directorsof,374–389 223,245–247,278–280,297–300, Discountrates,218–221,253,401 339–343 Dualmandate,39,296,353 Domesticpolicydirectives,4,5–6, Economicgrowthprojections,5–6, 35–40,84–85,223,226–227, 41–44 237–239,257–259,258–260, Electronicaccesstoservices,170 272–273,291–293,308–309,319, Examinationsof,171–172 332,333–334,358–359 Examinertraining,121–122,144–148 Forecastuncertainty,50,248,281,300, FedLineCommand,170 344 FedLineDirect,170 Foreigncurrencydirectivesand FedwireFundsService,165–166 proceduralinstructions,227–241 FedwireSecuritiesService,166 Meetings,minutesof,223–359 Financialstatementsof,combined, Members,alternatemembers,and 453–484 officers,368 FirstVicePresidents,Conferenceof,374 Notationvotes,239–240,259,273,293, Fiscalagencyservices,167–170 310,319,334,359 Float,166,406,410,412 Summaryofeconomicprojections, Governmentdepositoryservices, 40–50,59–61,223,241–248, 167–170 273–278,293–297,334–338 Incomeandexpenses,172–173,422–431
500 95th Annual Report, 2008 Informationtechnologydevelopments, Consumerprotectionresponsibilities, 170–171 127–136 Interestratesonloanstodepository Decisions,publicnoticeof,124–125 institutions,401 Directpurchaseofassets,55–56 Investmentsofconsolidatedvariable Enforcementactions,106–107,125 interestentities,175 GAOreviewsof,486 Loansandothercreditextensions,406, Internationaltraining,108 408–409,410,412 Maps,488–489 Modificationstotheprimarycredit Membership,125–126 program,51 Regulatoryreports,117–120 NationalSettlementServices,165–166 Risk-focusedsupervision,97–99 Numberof,125–126 Safetyandsoundnessresponsibilities, Numberofofficersandemployees,433 97–109 Officers,listof,372–373 Supervisionandregulation Officersandemployees,numberand responsibilities,95–109 salariesof,433 Supervisorypolicy,109–120 Operations,volumeof,432 Surveillanceandoff-sitemonitoring,107 Paymentsofinterestonbalancesheldby Technicalassistance,108 oronbehalfofdepository Trainingandstaffdevelopment,121– institutions,199 122,144–148 Paymentsservices,169 Federalsector,developmentsin,24–25 PaymentstoU.S.Treasury,172 FederalTradeCommission(FTC), Premises,175–176,434 136–137,161 Presidents,Conferenceof,373 FederalTradeCommissionAct,153,156, Pricedservices,163–166,177–180 208 Private-sectoradjustmentfactor,163–166 FedLineCommand,170 Reservebalances,407 FedLineDirect,170 Salariesofofficersandemployees,433 FedwireFundServices,165–166 Securitiesandloans,holdingsof, FedwireSecuritiesService,166 173–175,400,404,406,410,412 FFIEC(FederalFinancialInstitutions Statementsforpricedservices,177–180 ExaminationCouncil),104,106,107, Statementsofchangesincapital,456 116,119–120,149–151,193 Statementsofcondition,416–420,454 FHAModernizationAct,190 Statementsofincome,455 Fiduciaryactivities,FederalReserve FederalReserveBulletin,HMDAdata examinationof,104–105 article,140–141 FifthThirdBancorp,acquisitionofFirst FederalReserveConsumerHelp(FRCH), CharterCorporation,143 132,151–152 FinalReportoftheAdvisoryCommitteeon FederalReserveElectronicTaxApplication ImprovementstoFinancialReporting, (FR-ETA),169 112 FederalReserveInformationTechnology Finance (FRIT),170–171 Business,22–24 FederalReserveSystem.(SeealsoBoard Household,19–21,62–66 ofGovernorsandFederalReserve Financialaccount,U.S.,33–34,73–75 Banks) FinancialAccountingStandardsBoard Accountingpolicy,111–112 (FASB),111–112 Audits,reviews,andassessmentsof,437 FinancialActionTaskForce,112 Bankingstructure,U.S.,regulationof, FinancialBankingInformation 122–125 InfrastructureCommittee(FBIIC), BaselCommitteeactivities,96,113 106,116
Index 501 FinancialCrimesEnforcementNetwork Conservatorshipfor,3,6,8–9,187–189, (FinCEN),112 317–318 Financialholdingcompanies,102 Dropinshareprice,81,83 FinancialIndustryRegulatoryAuthority, Extensionofcreditto,60,79,216–217, 125 317,351–352 Financialmarkets,4–5,7–12,31–33,62, HERAprovisions,185–194 79–86,88 Jumboconformingloans,65 FinancialServicesRegulatoryReliefAct, Mortgage-backedsecuritiespurchasedby 199,205,273 theFederalReserve,38 FinancialServicesSectorCoordinating Newproductsandactivitiesand,190 Council(FSSCC),116 Prudentialmanagementandoperation Financialstability,developmentsin,7–12, standards,189 79–83 Purchasesofdebtfrom,55,56 Financialstatements Secondarymortgagemarketand,19 BoardofGovernors,439–451 Securitizationofmortgages,63 FederalReserveBanks,combined, Stockpricedecline,7 453–484 Supervisoryandregulatoryframework, FederalReservepricedservices, 186–190 177–180 Taxchanges,110 FirstCharterCorporation,FifthThird Bancorp’sacquisitionof,143 GDP(grossdomesticproduct),4,6,17, Fiscalagencyservices,FederalReserve 24,25,26,27,30,41–44,45,46,62, Banks,167–170 70,71,72–73,79,85,87,88, Float,FederalReserveBanks,166,406, 242–243,244,267,268,270,275, 410,412 276,277,278,287,293–294,297– Floodinsurance,148–151 298,302,306,314,316,318,329, FOMC.(SeeFederalOpenMarket 335,337,338,352 Committee) GinnieMae,19,351–352 Foodprices,4,27–28,36,66,77–78 Mortgage-backedsecuritiespurchasedby ForeclosureResourceCenters,131,154 theFederalReserve,38 Foreclosures.(SeeDelinquenciesand GMAC,LLC,applicationtobecomea foreclosures) bankholdingcompany,144 ForeignAssetsControl,Officeof(OFAC), GoldmanSachs,10,214 112 Goldstock,404,406,410,412 Foreignbanks GovernmentAccountabilityOffice(GAO) Financialproblems,31 Reviewsby,486 U.S.activitiesof,100–101,103 TARPoversight,198 Foreigncurrencyoperations Governmentdepositoryservices,Federal Authorizationforconductof,227–228 ReserveBanks,167–170 Directives,229 GovernmentPerformanceandResultsAct Proceduralinstructions,229–241 (GPRA),181–183 Foreigneconomies,11,32,34–35,61, Governmentsector,developmentsin, 87–88 24–25,70–72.(SeealsoFederal ForeignoperationsofU.S.banking governmentandStateandlocal organizations,100–101,102,103, governments) 124 GovernmentSecuritiesAct,105 Foreigntrade,26–27,73 Governmentsecurities,dealersandbrokers, FortisBank,collapseof,31 examinationof,105 FreddieMac Government-sponsoredenterprises(GSEs). “Bridge”equityprovision,189 (SeeFannieMae,FreddieMac,and Conformingloanlimits,190 GinnieMae)
502 95th Annual Report, 2008 GrainInspection,PackersandStockyards HypoRealEstateHoldingAG,capital Administration,149 injectionfromtheGerman Gramm-Leach-BlileyAct,96,102,117, government,31 123 GSEs.(SeeFannieMae,FederalHome Identity-theft“redflags,”146–147 LoanBanks,FreddieMac,andGinnie Imports,26,73 Mae) Incomeandexpenses GuidetotheInteragencyCountryExposure BoardofGovernors,441 ReviewCommittee(ICERC)Process, FederalReserveBanks,172–173, 96,115–116 422–431,454–484 FederalReservepricedservices,178 HigherEducationOpportunityAct Industrialeconomies,32,34,87–88 (HEOA) Indy-MacFederalBank Disclosurerequirements,200–201 Failureof,8 Keyelements,200–201 Inflation,4,6–7,27,28,34,36,37,38,39, HomeMortgageDisclosure(RegulationC), 40–41,43–44,45,59–61,78,87,89, 140,205 90–91,92 HomeMortgageDisclosureAct(HMDA), Influenzapandemic,preparingfor,116–117 138–139,140–142,162 InformationSecurityArchitecture HomeOwnershipandEquityProtection Framework(ISAF),171 Act(HOEPA),65,128,207–208 InformationSystemsAuditControl HomeOwnershipandMortgageInitiative Association,121 (HMI),64–65,130,132 Informationtechnology(IT) HOPEforHomeownersProgram(H4H) inFederalReserveBankoperations, Program,18,160,190–192,196–197 170–171 HOPENOWalliance,145,155,209 FederalReserveexaminationof,104 Householdsector,17–21,59,62–67 SupportingFederalReservesupervision, HousingandEconomicRecoveryAct 120–121 (HERA) Inspections.(SeeExaminationsand FHAModernizationAct,190 inspections) GSEregulationandsupervision, InspectorGeneral,Officeof(OIG),437, 186–190 485 HOPEforHomeownersProgram, InspectorGeneralAct,485 190–192 InstituteofSupplyManagement, Keyelements,185–194 manufacturingsurvey,324 MortgageDisclosureImprovementAct, Insuredcommercialbanks.(See 193–194 Commercialbanks) S.A.F.E.MortgageLicensingAct, InteragencyAppraisalandEvaluation 192–193 Guidelines,116 Treasuryauthorizationtoprovide InteragencyStatementonMeetingthe financialsupporttoGSEs,185–186 NeedsofCreditworthyBorrowers, Useoffundsdistributedby,154 148,211 HousingandUrbanDevelopment,U.S. Interestrates,8,19,21,23,34,37,39, Departmentof(HUD),153,196–197 63–64,84–85,401.(SeealsoDiscount HowtoSpend$3.92Billion:Stabilizing ratesandFederalfundsrate) NeighborhoodsbyAddressing InternationalAccountingStandardsBoard, ForeclosedandAbandonedProperties 114 (Mallach),154 InternationalAssociationofInsurance H.2statisticalreleases,125 Supervisors,113 HUD.(SeeHousingandUrban InternationalAuditingandAssurance Development,U.S.Departmentof) StandardsBoard(IAASB),114
Index 503 InternationalBankingAct,96,124 LitigationinvolvingBoardofGovernors Internationalbankingactivities,supervision Artis,362 of,102–103 Barnes,361 Internationalfinancialmarkets,31–33, Bloomberg,361 86–87 Bumgarner,361 InternationalMonetaryFund,108,321 Chandler,361 InternationalOrganizationofSecurities Cobble,361 Commissions,113 InteractiveMediaEntertainmentand InternationalStandardsforthe GamingAssociation,Inc.,361 ProfessionalPracticeofInternal Jones,361 Auditing,172 Murray,361 Internationaltrade,26–27,73 Schulz,361 Inventoryinvestment,22,68 Smith,361 Investment Loancreditdefaultswaps(LDCX),11 Businesssector,21–24,67–68 LoanPerformancerepeat-salespriceindex, Consolidatedvariableinterestentities, 18 175 Loans Inventory,22,68 FederalReserveBankholdings,174– Overseas,byU.S.bankingorganizations, 175,406,408–409,410,412 124 Interestratesonloanstodepository Residential,17–19,62–66 institutions,401 Risk-takingand,3,10–11 Localgovernments,25,30,71–72 Treasurysecurities,9–10 Londoninterbankofferedrate(Libor),8, 10,12,57,82 Joblosses.(SeeUnemployment) Lossmitigationstrategies,209 JointForum,113–114 Low-incomehouseholdsupport,25 JPMorganChase&Co.,acquisitionof BearStearnsCompanies,Inc.,7,56, MaidenLaneLLC,56 60,79,81,90,216,253 MaidenLaneIIILLC,57 Justice,U.S.Departmentof MaidenLaneIILLC,57 Discriminationcases,investigationand Maps,FederalReserveSystem,488–489 reviewof,138 Marginrequirements,415 Viewsonbankmergers,123 Mark-to-marketaccounting,112,200 Medicare,25 Memberbanks.(SeealsoStatemember Labormarket,3–4,15–17,28,43,61, banks) 76–77 Assetsandliabilities,414 Largecomplexbankingorganizations Examinationsofforeignoperations, (LCBOs),supervisionof,98–99 100–101,103 LegacyTreasuryDirectsystem,169 Numberof,403 Legislativedevelopments Reserves,411,413 EmergencyEconomicStabilizationAct, Membersandofficers 194–200 BoardofGovernors,365–367 HigherEducationOpportunityAct, ConsumerAdvisoryCouncil,370 200–201 FederalAdvisoryCouncil,369 HousingandEconomicRecoveryAct, FederalOpenMarketCommittee,368 185–194 FederalReserveBanksandBranches, LehmanBrothersHoldings,bankruptcyof, 372–373 3,4,6,9,10,36,316,317,322 ThriftInstitutionsAdvisoryCouncil,371 Liabilities.(SeeAssetsandliabilities) MembershipofStateBankingInstitutions “LiquidityRisk:Managementand intheFederalReserveSystem SupervisoryChallenges,”113 (RegulationH),148,206
504 95th Annual Report, 2008 MerrillLynch Nationalincomeandproductsaccounts BankofAmerica’sacquisitionof,9, (NIPA),16,71,72,77 57–58,143 NationalInformationCenter(NIC),107, Extensionofcreditto,214 120–121 MiddleEastandNorthAfrica(MENA) Nationalsaving,20,27,72–73 FinancialRegulators’Training NationalSettlementServices,165–166 Initiative,108 NationwideMortgageLicensingSystem Minority-ownedfinancialinstitutions, andRegistry(NMLSR),193 108–109 NeighborhoodStabilizationProgram Monetaryaggregate(M2),30–31,85 (NSP),154,161 M2monetaryaggregate,30–31,85 NeighborWorksAmerica,64–65,131,155 MonetaryAuthorityofSingapore,swap NewYorkStockExchange,125 arrangementwith,52,321–322 Nonmemberbanks MonetaryControlAct,163,165 Assetsandliabilities,414 Monetarypolicy,3–6,29–30,34,35–40, Foreignoperations,102 59–61,88–92.(SeealsoFederalOpen Numberof,403 MarketCommittee) NorgesBank,swaparrangementwith,52, MonetarypolicyreportstoCongress 333 February2009,3–58 NorthAmericanFrameworkAgreement, July2008,59–92 262 Money-launderingprevention,104,112 Notes,FederalReserveBanks,416–421. MoneyMarketInvestorFundingFacility (SeealsoCurrencyandcoin) (MMIFF),5,37,54,215–216,327, NoticeofProposedRulemaking,110 351,408,409 MorganStanley,10,214 Mortgage-backedsecurities(MBSs),8,9, OfficeofFederalHousingEnterprise 11,19,38,53,65,82,90 Oversight(OFHEO),62,185 MortgageDisclosureImprovementAct OfficeofForeignAssetsControl(OFAC), (MDIA),193–194 112 Mortgageproducts,nontraditional,18, OfficeofInspectorGeneral(OIG),437, 63–64,65,114–115,127–133, 485 156–158,209–210.(SeealsoHome OfficeoftheComptrolleroftheCurrency MortgageDisclosureAct);(Seealso (OCC),96,102,103,109,114–115, Subprimemortgageproducts) 116,150,206,209–210,211,212 Mortgageproducts,traditional,17–18,19, OfficeofThriftSupervision(OTS),96, 63–64,114–115.(SeealsoHome 109,114–115,116,150,206,209, MortgageDisclosureAct) 210,211,212 Municipalsecurities,dealersandbrokers, Oilprices.(SeeEnergyprices) examinationof,105 OpenMarketDesk,85 Openmarketoperations.(SeealsoFederal NationalAssociationofSecurities OpenMarketCommittee) Dealers,125 Authorizationforconductof,226–227 NationalCityCorporation,PNCFinancial Volumeoftransactions,396–399 ServicesGroup,Inc.’sacquisitionof, Operations,volumeof,FederalReserve 143–144 Banks,432 NationalCreditUnionAdministration Outreachactivities,154–155 (NCUA),96,105,116,125,148,200, Overdraftservices,135–136,153,159–160 210 NationalExaminationDatabase(NED), 120 Pandemicpreparedness,116–117 NationalFloodInsuranceAct,148 PaperCheckConversionprogram,169 NationalFloodMitigationFund,148 PartnershipforProgress,108–109
Index 505 Pay.gov,169 Private-sectoradjustmentfactor(PSAF), Paymentsservices,FederalReserveBanks, 163–166 169 Productivity,28,76–77 PaymentstoU.S.Treasury,FederalReserve Professionaldevelopment,121–122 Banks,167–168,172,427,429,431 Profits,corporate,22–24,68–70 PCE(personalconsumptionexpenditures), ProhibitiononFundingofUnlawful 17,19,27,43–44,45,48,49,66,79 InternetGambling(RegulationGG), People’sBankofChina,88 208–209 PerformanceReportInformationand ProposedRevisionstotheBaselIIMarket SurveillanceMonitoring(PRISM),107 RiskFrameworkandGuidelinesfor PNCFinancialServicesGroup,Inc. ComputingCapitalforIncremental acquisitionofNationalCityCorporation, RiskintheTradingBook,113 143–144 Publicnotice,FederalReservedecisions, acquisitionofSterlingFinancial 124–125 Corporation,143 Policyactions BoardofGovernors,12–13,205–221 Racialdiscrimination.(See FederalOpenMarketCommittee,4,5–6, Discrimination) 35–40,84–85,223–359 “Recovery,Renewal,Rebuilding:AFederal Policystatements,BoardofGovernors ReserveForeclosureSeries,”131 Interagencyguidanceonthesupervisory Regulations reviewprocessforcapitaladequacy, AA,UnfairorDeceptiveActsor 210 Practices,133–134,151,208 InteragencyStatementonSubprime B,EqualCreditOpportunity,149 MortgageLending,210 C,HomeMortgageDisclosure,140,205 Paymentsystemrisk,212 CC,AvailabilityofFundsandCollection Statementtoservicersonreportingof ofChecks,151 lossmitigationofsubprime D,ReserveRequirementsofDepository mortgages,209 Institutions,205–206 Premises,FederalReserveBanks,175–176, DD,TruthinSavings,135,147,151, 434 208 Presidential$1CoinAct,167 E,ElectronicFundTransfers,135, Pricedservices,FederalReserveBanks, 147–148,149–150,159 163–166,177–180 GG,ProhibitiononFundingofUnlawful Prices InternetGambling,208–209 Consumer,4,17,19,27–28,34,39, H,MembershipofStateBanking 74–75,77–79 InstitutionsintheFederalReserve Energy,4,26–27,36,61,66,77,78,90, System,148,206 91 M,ConsumerLeasing,150 Exportsandimports,26,73 P,PrivacyofConsumerFinancial Food,4,27–28,36,66,77–78 Information,150 Primarycredit,218,253,265–266,408, T,CreditbyBrokersandDealers,125, 409 415 PrimaryDealerCreditFacility(PDCF),53, U,CreditbyBanksorPersonsother 60,81,82,90,174–175,213–214, thanBrokersorDealersforthe 266,286,292–293,305,309–310, PurposeofPurchasingorCarrying 315,316,328,350,408,409 MarginStock,105,125,415 PrinciplesforSoundLiquidityRisk W,TransactionsbetweenMemberBanks ManagementandSupervision,113 andTheirAffiliates,206–207 PrivacyofConsumerFinancialInformation X,BorrowersofSecuritiesCredit,125, (RegulationP),150 415
506 95th Annual Report, 2008 Y,BankHoldingCompaniesandChange Governmentandmunicipal,examination inBankControl,206,207 ofdealersandbrokers,105 Z,TruthinLending,127–129,133, Transferagents,105 134–135,140,150–151,156, SecuritiesActAmendments,105 207–208 SecuritiesandExchangeCommission Regulatoryreports,117–120 (SEC),56,60,81,112,117,149, Renewal,Recovery,Rebuilding:AFederal 199–200,210,212,292–293 ReserveSystemForeclosureSeries, Securitiescredit,125 154–155 SecuritiesExchangeAct,105,117,125 ReportoftheFinancialStabilityForumon SeniorLoanOfficerOpinionSurveyon EnhancingMarketandInstitutional BankLendingPractices,14,20–21, Resilience,114 63,69,70,83,84,237,266,269,323 ReportonMark-to-MarketAccounting, SharedNationalCredit(SNC),115,120 112 SmallBusinessAdministration,149 ReportsofConditionandIncome(Call SmallEntityComplianceGuidefor Reports),107,119 RegulationR,117 Repurchaseagreements,FederalReserve Software.(SeeEquipmentandsoftware) Banks,404,406,410,412 Specialdrawingrightscertificateaccount, ReserveBankofAustralia,swap 404,406,410,412 arrangementwith,52,333 SpecialInspectorGeneral(SpecialIG),for ReserveBankofNewZealand,swap theTARP,197–198 arrangementwith,52,321 SSIT.(SeeSystemsupervisoryinformation Reserverequirements,depository technology) institutions,402 Staffdevelopment,FederalReserve, ReserveRequirementsofDepository 121–122 Institutions(RegulationD),205–206 Stateandlocalgovernments,25,30,71–72 Residentialinvestment,17–19,62–66 Statememberbanks.(SeealsoMember Reuters/UniversityofMichiganSurveysof banks) Consumers,28,78,284 Assetsandliabilities,95 Revenue.(SeeIncomeandexpenses) Consumercomplaintsagainst,152–153 Reverserepurchaseagreements,Federal Examinationsof,99,104–105 ReserveBanks,405,407 Fairlendingviolations,138 RiegleCommunityDevelopmentand Financialdisclosures,125 RegulatoryImprovementAct,99 Numberof,98,99 Risk-basedpricing,136–137,162 Surveillanceandoff-sitemonitoring,107 Risk-focusedsupervision,FederalReserve Unregulatedpractices,153 System,97–99 “StatementonSubprimeMortgage Riskmanagement,95–96,101,112–113, Lending,”129 114–116 Statementtoservicersonreportingofloss mitigationofsubprimemortgages,209 Salaries,FederalReserveBankofficers SterlingFinancialCorporation,PNC andemployees,433 FinancialServicesGroup,Inc.’s Sarbanes-OxleyAct,171 acquisitionof,143 Savingrate.(SeeNationalsaving) Stockmarket,U.S.,volatilityof,11–12 Seasonalcredit,218,408,409 Stockmarkets Secondarycredit,218,408,409 Advancedforeigneconomies,32 SecureandFairEnforcementforMortgage Emergingmarketeconomies,32 LicensingAct(S.A.F.E.Mortgage Subprimemortgageproducts,7,18,60,63, LicensingAct),192–193 65,79,82,127–132,140,144–146, Securities.(SeealsoFederalagency 154,156–158,162,205,209–210, securitiesandTreasurysecurities) 239.(SeealsoHomeMortgage Banks’activities,117 DisclosureActandMortgage Creditlenders,examinationof,105–106 products,nontraditional)
Index 507 Supervisionandregulationresponsibilities, Toronto-DominionBank,acquisitionof FederalReserveSystem,95–120, CommerceBancorp,Inc.,143 127–133 Trade,international,26–27,73 SupervisionandRegulationStatistical Traininganddevelopment,FederalReserve AssessmentofBankRisk(SR-SABR), staff,121–122,144–148 107 TransactionsbetweenMemberBanksand SupervisoryGuidanceforAssessingBanks’ TheirAffiliates(RegulationW), FinancialInstrumentFairValue 206–207 Practices,114 Transferagents,examinationof,105 SupplementaryFinancingProgram,37,328 Transportation,U.S.Departmentof,149, Surveillanceandoff-sitemonitoring,107 150–151 SurveyofProfessionalForecasters,78 Treasury,U.S.Departmentofthe.(Seealso SverigesRiksbank,swaparrangementwith, TroubledAssetReliefProgram) 52,333 Cashholdings,405,407,411,413 Swaparrangements,31,33–34,38,52,82, Cash-managementservices,170 86,90,91,214,233,260,262,309, Collectionoffundsowedthefederal 310,312,321–322,327,332–333, government,169 408,409 ConservatorshipofFannieMaeand SwissNationalBank FreddieMac,8–9 JointactionswiththeFederalReserve, Currencyoutstandingandincirculation, 86 404–407,410–413 Swaparrangementwith,52,82,90,91, ElectronicCheckProcessingprogram, 260,333 169 Systemic-riskexceptions,FDICguarantees, HousingandEconomicRecoveryAct 211 authorizationtoprovidefinancial SystemOpenMarketAccount(SOMA). supporttoGSEs,185–186 (SeeFederalOpenMarketCommittee LoansandprovisionofcapitaltoGSEs, andOpenmarketoperations) 8 Systemsupervisoryinformationtechnology Moneymarketmutualfundguarantee,5 (SSIT),120 One-yearTreasurybillintroduction,71 PaperCheckConversionprogram,169 TalentAmendment,146 Paymentsprocessedfor,169 Technicalassistance,FederalReserve Paymentsto,byFederalReserveBanks, System,108 172,427,429,431 TemporaryLiquidityGuaranteeProgram PurchaseofAmericanInternational (TLGP),5,12,14,30,31,351 Group,Inc.(AIG)shares,57 TermAsset-BackedSecuritiesLoan PurchaseofBankofAmericashares, Facility(TALF),5,14,21,38,40,55, 58 216 PurchaseofCitigroupshares,57 TermAuctionFacility(TAF),4,37,52,60, Redesignof$5and$100bills,167 80,82,174,214,219,233,235,253, SupplementaryFinancingProgram,37, 262,286,309,310,315,327,328, 328 350,408,409 Treasurysecurities TermSecuritiesLendingFacility(TSLF), Commercialbankholdings,414 52–53,60,80–81,82,89–90,213, FederalReserveBankholdings,173– 253,254,259–260,262,292–293, 174,400,404,406,410,412 305,309–310,316,328,350 Foreignpurchasesof,30,33,71,74 ThriftInstitutionsAdvisoryCouncil, Investmentin,9–10 membersandofficers,371 Openmarkettransactions,396–397 ThriftSupervision,Officeof(OTS),96, Repurchaseandreverserepurchase 109,114–115,116,150,206,209, agreements,404–407,410,412 210,211,212 Yields,10–11,23,29–30,69,82,85,90
508 95th Annual Report, 2008 TreasuryTaxandLoan(TT&L)program, U.S.Congress.(Seealsotitlesof 170 legislation) TroubledAssetReliefProgram(TARP), CongressionalOversightPanel,198– 12,14,24,30,55,57,85,110,144, 199 160−162,194–198,351 LoansandprovisionofcapitaltoGSEs, TruthinLending(RegulationZ),127–129, 8 140,150–151,156,207–208 TroubledAssetReliefProgram,12,14, TruthinLendingAct(TILA),65,156, 24,30,194–197 158,193,200 TruthinSavings(RegulationDD),135, 147,151,208 WachoviaCorporation,WellsFargo’s acquisitionof,10,143,322,333 Unemployment,3–4,15–16,19,43,47, WashingtonMutual,financialproblems,10, 61,71,76.(SeealsoEmployment) 322 UnfairorDeceptiveActsorPractices WellsFargo&Co.,acquisitionof (RegulationAA),133–134,151,208 WachoviaCorporation,10,143 UniformBankPerformanceReports,107 WestTexasintermediate(WTI)crudeoil UnlawfulInternetGamblingEnforcement prices,26 Act,209,361 WhatYouShouldKnowaboutHomeEquity Unregulatedpractices,statememberbanks, LinesofCredit,131 153 WorldBank,108
Cite this document
Federal Reserve (2007, December 31). Annual Report of the Federal Reserve Board, 2008. Annual Reports, Federal Reserve. https://whenthefedspeaks.com/doc/annual_report_2008
@misc{wtfs_annual_report_2008,
author = {Federal Reserve},
title = {Annual Report of the Federal Reserve Board, 2008},
year = {2007},
month = {Dec},
howpublished = {Annual Reports, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/annual_report_2008},
note = {Retrieved via When the Fed Speaks corpus}
}