Annual Report of the Federal Reserve Board, 2009

96th 2009 Board of Governors of the Federal Reserve System

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. May 2010 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-sixth annual report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 2009. Sincerely, Ben Bernanke Chairman

Overview The Federal Reserve, the central bank of the United States, is a federal sys- For More Background on tem composed of a central governmen- Board Operations tal agency—the Board of Governors— and 12 regional Federal Reserve Banks. For more information about the Fed- The Board of Governors, located in eral Reserve Board and the Federal Washington, D.C., consists of seven Reserve System, visit the Board’s website at www.federalreserve.gov/ members appointed by the President of aboutthefed. An online version of this the United States and supported by a Annual Report is available at www. 2,100-person staff. Besides conducting federalreserve.gov/boarddocs/rptcongress. research, analysis, and policymaking related to domestic and international financial and economic matters, the v Records. Section 3 provides an Board plays a major role in the super- account of actions taken by the vision and regulation of the U.S. bank- Board on questions of policy in ing system and administers most of the 2009, and it also includes the policy nation’s laws regarding consumer credit actions of the Federal Open Market protection. It also has broad oversight Committee (FOMC)1 during the year, responsibility for the nation’s payments provided pursuant to section 10 of system and the operations and activities the Federal Reserve Act (see pages of the Federal Reserve Banks. 211–392). This report covers Board and System v Federal Reserve System Organizaoperations and activities during cal- tion. Section 4 provides listings of endar-year 2009. The report includes key officials at the Board and in the six main sections: Federal Reserve System, including v Monetary Policy and Economic the Board of Governors, its officers, FOMC members, several System Developments. Section 1 provides councils, and Federal Reserve Bank adapted versions of the February and Branch officers and directors 2010 and July 2009 Monetary Policy (see pages 395–424). Report to the Congress (see pages v Statistical Tables. Section 5 includes 3–95). v Federal Reserve Operations. Sec- 14 statistical tables that provide updated historical data concerning tion 2 provides summaries of the Board and System operations and ac- Board and System activities in the tivities (see pages 426–466). areas of banking supervision and v Federal Reserve System Audits. regulation, consumer and community Section 6 provides detailed informaaffairs, and Reserve Bank operations. tion on the several levels of audit and It also summarizes Board compliance with the Government Performance and Results Act of 1993 and its activities regarding legislative developments 1. For more information on the FOMC, see that affected Board operations in the Board’s website at www.federalreserve.gov/ 2009 (see pages 99–207). monetarypolicy/fomc.htm.

review conducted that concern Sys- The Federal Reserve Banks are the tem operations and activities, includ- operating arms of the central banking ing those provided by outside audi- system, carrying out a variety of Systors and the Board’s Office of tem functions, including operating a Inspector General (see pages 469– nationwide payments system; distribut- 544). ing the nation’s currency and coin; under authority delegated by the Board of Governors, supervising and regulating The Federal Reserve System bank holding companies and statechartered banks that are members of The Federal Reserve System, which the System; serving as fiscal agents of serves as the nation’s central bank, was the U.S. Treasury; and providing a vacreated by an act of Congress on riety of financial services for the Trea- December 23, 1913. The System con- sury, other government agencies, and sists of a seven-member Board of Gov- other fiscal principals. ernors with headquarters in Washing- The maps below and opposite identon, D.C., and the 12 Reserve Banks tify Federal Reserve Districts by their located in major cities throughout the official number, city, and letter desig- United States. nation. Á 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 Both pages Facing page Federal Reserve Bank city • Federal Reserve Branch city >Board of Governors of the Federal Branch boundary Reserve System, Washington, D.C.

Contents Monetary Policy and Economic Developments 3 MONETARYPOLICYREPORTOFFEBRUARY2010 3 Part1—Overview:MonetaryPolicyandtheEconomicOutlook 6 Part2—RecentFinancialandEconomicDevelopments 35 Part3—MonetaryPolicy:RecentDevelopmentsandOutlook 45 Part4—SummaryofEconomicProjections 56 Abbreviations 57 MONETARYPOLICYREPORTOFJULY2009 57 Part1—Overview:MonetaryPolicyandtheEconomicOutlook 59 Part2—RecentFinancialandEconomicDevelopments 86 Part3—MonetaryPolicy:RecentDevelopmentsandOutlook Federal Reserve Operations 99 BANKINGSUPERVISIONANDREGULATION 101 ScopeofResponsibilitiesforSupervisionandRegulation 101 SupervisionforSafetyandSoundness 112 SupervisoryPolicy 123 SupervisoryInformationTechnology 124 StaffDevelopment 125 RegulationoftheU.S.BankingStructure 128 EnforcementofOtherLawsandRegulations 129 FederalReserveMembership 131 CONSUMERANDCOMMUNITYAFFAIRS 131 RulemakingandRegulations 131 CreditCardReform 134 OverdraftServicesandGiftCardRules 136 MortgageandHomeEquityLendingReform 138 PrivateEducationLoanRules 140 ConsumerCreditReportingandRisk-BasedPricingRules 141 InformationPrivacyRules 141 CommunityReinvestmentActRules 142 OversightandEnforcement 142 CommunityReinvestmentActCompliance 144 FairLendingEnforcement 148 FloodInsurance 148 CoordinationwithOtherFederalBankingAgencies 150 TrainingforBankExaminers 151 AgencyReportsonCompliancewithConsumerProtectionLaws

154 RespondingtoConsumerComplaintsandInquiries 155 ConsumerComplaints 156 ConsumerInquiries 157 SupportingCommunityEconomicDevelopment 157 ForeclosuresandNeighborhoodStabilization 159 OtherCommunityDevelopmentInitiatives 161 MeetingDataandAnalysisNeeds 162 ConsumerAdvisoryCouncil 162 TheCreditCardAct 164 OverdraftServices 165 Closed-EndMortgagesandHomeEquityLinesofCredit 166 ForeclosureIssues 167 NeighborhoodStabilization 168 OtherDiscussionTopics 171 FEDERALRESERVEBANKS 171 DevelopmentsinFederalReservePricedServices 176 DevelopmentsinCurrencyandCoin 177 DevelopmentsinFiscalAgencyandGovernmentDepositoryServices 182 DevelopmentsinUseofFederalReserveIntradayCredit 184 ElectronicAccesstoReserveBankServices 185 InformationTechnology 185 ExaminationsoftheFederalReserveBanks 187 IncomeandExpenses 189 SOMAHoldingsandLoans 192 FederalReserveBankPremises 193 ProFormaFinancialStatementsforFederalReservePricedServices 199 THEBOARDOFGOVERNORSANDTHE GOVERNMENTPERFORMANCEANDRESULTSACT 199 StrategicPlan,PerformancePlan,andPerformanceReport 199 Mission 199 GoalsandObjectives 203 FEDERALLEGISLATIVEDEVELOPMENTS 203 TheCreditCardAct 205 TheHelpingFamiliesSaveTheirHomesAct Records 211 RECORDOFPOLICYACTIONSOFTHEBOARDOFGOVERNORS 211 RulesandRegulations 217 PolicyStatementsandOtherActions 218 SpecialLiquidityFacilitiesandOtherInitiatives 222 DiscountRatesforDepositoryInstitutionsin2009

225 MINUTESOFFEDERALOPENMARKETCOMMITTEEMEETINGS 226 MeetingHeldonJanuary27–28,2009 257 MeetingHeldonMarch17−18,2009 270 MeetingHeldonApril28–29,2009 294 MeetingHeldonJune23–24,2009 322 MeetingHeldonAugust11−12,2009 335 MeetingHeldonSeptember22−23,2009 349 MeetingHeldonNovember3−4,2009 375 MeetingHeldonDecember15–16,2009 391 LITIGATION Federal Reserve System Organization 395 BOARDOFGOVERNORS 398 FEDERALOPENMARKETCOMMITTEE 399 FEDERALADVISORYCOUNCIL 400 CONSUMERADVISORYCOUNCIL 401 THRIFTINSTITUTIONSADVISORYCOUNCIL 402 FEDERALRESERVEBANKSANDBRANCHES 421 MEMBERSOFTHEBOARDOFGOVERNORS,1913–2009 Statistical Tables 426 1. FederalReserveOpenMarketTransactions,2009 430 2. FederalReserveBankHoldingsofU.S.TreasuryandFederalAgencySecurities, December31,2007–2009 431 3. FederalReserveBankInterestRatesonLoanstoDepositoryInstitutions, December31,2009 A.RatesonSelectedLoans B.RatesonTermAuctionFacilityLoansOutstanding 432 4. ReserveRequirementsofDepositoryInstitutions,December31,2009 433 5. Banking Offices and Banks Affiliated with Bank Holding Companies in the UnitedStates,December31,2008and2009 434 6A. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items,Year-End1984–2009andMonth-End2009 438 6B. Loans and Other Credit Extensions, by Type, Year-End 1984–2009 and Month- End2009 442 6C. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items,Year-End1918–1983

446 7. PrincipalAssetsandLiabilitiesofInsuredCommercialBanks,byClassofBank, June30,2009and2008 447 8. InitialMarginRequirementsunderRegulationsT,U,andX 448 9A. Statement of Condition of the Federal Reserve Banks, by Bank, December 31, 2009and2008 453 9B. Statement of Condition of the Federal Reserve Banks, December 31, 2009 and 2008, Supplemental Information—Collateral Held against Federal Reserve Notes:FederalReserveAgents’Accounts 454 10. IncomeandExpensesoftheFederalReserveBanks,byBank,2009 458 11. IncomeandExpensesoftheFederalReserveBanks,1914–2009 464 12. OperationsinPrincipalDepartmentsoftheFederalReserveBanks,2006–2009 465 13. Number and Annual Salaries of Officers and Employees of the Federal Reserve Banks,December31,2009 466 14. Acquisition Costs and Net Book Value of the Premises of the Federal Reserve BanksandBranches,December31,2009 Federal Reserve System Audits 469 AUDITSOFTHEFEDERALRESERVESYSTEM 471 BOARDOFGOVERNORSFINANCIALSTATEMENTS 489 FEDERALRESERVEBANKSCOMBINEDFINANCIALSTATEMENTS 541 OFFICEOFINSPECTORGENERALACTIVITIES 543 GOVERNMENTACCOUNTABILITYOFFICEREVIEWS Index 547

Monetary Policy and Economic Developments

3 Monetary Policy Report of February 2010 Part 1 2009. Consumer spending—which was Overview: Monetary Policy boosted by supportive monetary and and the Economic Outlook fiscal policies—posted solid increases, though it remained well below its pre- After declining for a year and a half, recession level. Meanwhile, activity in economic activity in the United States the housing market, which began to turned up in the second half of 2009, pick up last spring, flattened over the supported by an improvement in finan- second half of 2009. In the business cial conditions, stimulus from monetary sector, investment in equipment and and fiscal policies, and a recovery in software posted a sizable gain in the foreign economies. These factors, along second half of last year, likely reflectwith increased business and household ing improved conditions in capital marconfidence, appear likely to boost kets and brighter sales prospects. In spending and sustain the economic addition, firms reduced the pace of expansion. However, the pace of the inventory liquidation markedly in the recovery probably will be tempered by fourth quarter. In contrast, investment households’ desire to rebuild wealth, in nonresidential structures continued still-tight credit conditions facing some to contract. With the recovery in U.S. borrowers, and, despite some tentative and foreign demand, U.S. trade flows signs of stabilization, continued weak- rebounded in the second half of 2009 ness in labor markets. With substantial after precipitous declines late in 2008 resource slack continuing to suppress and early in 2009. Nevertheless, both cost pressures and with longer-term in- exports and imports stayed considerflation expectations stable, inflation is ably below their earlier peaks. likely to be subdued for some time. Despite the pickup in output, em- U.S. real gross domestic product ployment continued to contract in the (GDP) rose at about a 4 percent pace, second half of 2009, albeit at a markon average, over the second half of edly slower pace than in the first half. The unemployment rate rose further during the second half, reaching 10 Note: Included in this chapter are the text, percent by the end of the year—its tables, and selected figures from the Monetary Policy Report submitted to Congress on Febru- highest level since the early 1980s— ary24,2010,pursuanttosection2BoftheFed- before dropping back in January. eralReserveAct.Thefiguresincludedherehave Although job losses have slowed, hirbeen renumbered, and therefore the figure numing remains weak, and the median dubersinthisreportdifferfromthefigurenumbers ration of unemployment has lengthened intheMonetaryPolicyReport.Thecompleteset of figures is available on the Board’s website at significantly. www.federalreserve.gov/boarddocs/hh. Headline consumer price inflation Othermaterialsinthisannualreportrelatedto picked up in 2009 as energy prices rose theconductofmonetarypolicyincludetheminsharply: Over the 12 months ending in utes of the 2009 meetings of the Federal Open Market Committee (see the ‘‘Records’’ section) December, prices for personal conand statistical tables 1–4 (see the “Statistical sumption expenditures (PCE) increased Tables”section).

4 96th Annual Report, 2009 about 2 percent, up from 1⁄ 2 percent in in the second half of the year, and loan 2008. In contrast, price increases for losses remained very high. consumer expenditures other than food Nonfinancial firms with access to and energy items—so-called core capital markets took advantage of the PCE—slowed noticeably last year. improvement in financial conditions to After rising at an annual rate of about issue corporate bonds and equity shares 13⁄ 4 percent in 2008 and the first half at a solid pace; a significant portion of of 2009, core PCE prices increased at issuance likely reflected an effort by an annual rate of just over 1 percent in businesses to substitute attractively the second half of the year. priced longer-term financing for The recovery in financial markets shorter-term debt. In contrast, many that began last spring continued small businesses and other firms that through the second half of the year and depend largely on banks to meet their into 2010. Broad equity price indexes funding needs found their access to increased further, on balance, and risk credit severely restricted; banks continspreads on corporate bonds narrowed ued to tighten their lending standards considerably. Conditions in short-term and terms, though to a more limited funding markets returned to near pre- extent, during the second half of 2009 crisis levels; liquidity and pricing in amid higher loan losses on their combank funding markets continued to nor- mercial loans and reports of lingering malize, while risk spreads in the com- uncertainty about business credit qualmercial paper market were stable at the ity. According to survey data, demand low end of the range observed since for business loans was also weak the fall of 2007. The functioning of throughout 2009. financial markets more generally im- Availability of credit for households proved further. remained constrained in the second half Investors became more optimistic of 2009, even as interest rates declined about the outlook for financial institu- for mortgages and many consumer tions during the first half of last year. loans. Restrictive bank lending policies That development was bolstered by the to individuals likely were due imporrelease of the results of the Supervisory tantly to banks’ concerns about the Capital Assessment Program (SCAP), ability of households to repay loans in which were seen as helping clarify the an environment of high unemployment financial conditions of the largest bank and continued softness in house prices. holding companies and provided inves- In addition, senior bank loan officers tors with greater assurance about the reported weakening loan demand from health of the institutions. Sentiment households throughout 2009. However, rose further over the remainder of the in part because of support from the year as investors became more optimis- Federal Reserve’s Term Asset-Backed tic about the economic outlook. Most Securities Loan Facility, the consumer of the 19 bank holding companies asset-backed securities market, which is included in the SCAP issued equity, an important funding source for consome to augment or improve the qual- sumer loans, improved. All told, in ity of their capital and some to repay 2009 nominal household debt experiinvestments made by the Treasury un- enced its first annual decline since the der the Troubled Asset Relief Program. beginning of the data series in 1951. Still, delinquency and charge-off rates The Federal Reserve continued to at commercial banks increased further support the functioning of financial

Monetary Policy Report of February 2010 5 markets and promote recovery in eco- was increased from 1⁄ 2 percent to 3⁄ 4 nomic activity using a wide array of percent effective February 19. In additools. The Federal Open Market Com- tion, the Federal Reserve announced mittee (FOMC) maintained a target that the final auction under the Term range of 0 to 1⁄ 4 percent for the federal Auction Facility will occur in March funds rate throughout the second half and later noted that the minimum bid of 2009 and early 2010 and indicated rate for that auction had been increased that economic conditions were likely to by 1⁄ 4 percentage point to 1⁄ 2 percent. warrant exceptionally low levels of the Overall, the size of the Federal Refederal funds rate for an extended serve’s balance sheet increased from period. Further, the Federal Reserve about $2 trillion in the summer of 2009 continued its purchases of Treasury se- to about $2.3 trillion on February 17, curities, agency mortgage-backed secu- 2010. The composition of the balance rities (MBS), and agency debt in order sheet continued to shift as a considerto provide support to mortgage and able decline in credit extended through housing markets and to improve overall various facilities was more than offset conditions in private credit markets. To by the increase in securities held outpromote a smooth transition in finan- right. The Federal Reserve continued to cial markets as the acquisitions are broaden its efforts to provide even completed, the Federal Reserve gradu- more information to the public regardally slowed the pace of these purchases ing its conduct of these programs and in late 2009 and early 2010. The of monetary policy (see box in Part 3). planned acquisitions of $300 billion of The Federal Reserve is taking steps Treasury securities were completed by to ensure that it will be able to October, while the purchases of $1.25 smoothly withdraw extraordinary poltrillion of MBS and about $175 billion icy accommodation when appropriate. of agency debt are expected to be fin- Because the Federal Reserve, under the ished by the end of the first quarter of statutory authority provided by the this year. Congress in October 2008, pays inter- In light of the improved functioning est on the balances depository instituof financial markets, the Federal tions hold at Reserve Banks, it can put Reserve removed some of the extraor- upward pressure on short-term interest dinary support it had provided during rates even with an extraordinarily large the crisis and closed many of its spe- volume of reserves in the banking syscial liquidity facilities and the tempo- tem by raising the interest rate paid on rary liquidity swap arrangements with such balances. In addition, the Federal other central banks in the fall of 2009 Reserve has continued to develop sevand early in 2010. The Federal Reserve eral other tools that it could use to realso began to normalize its lending to inforce the effects of increases in the commercial banks through the discount interest rate on balances at Reserve window by reducing the maximum ma- Banks. In particular, the Federal turity of loans extended through the Reserve has tested its ability to execute primary credit facility from 90 days to reverse repurchase agreements (reverse 28 days, effective on January 14, and repos) in the triparty repo market with by announcing that the maturity of primary dealers using both Treasury those loans will be reduced further to and agency debt as collateral, and overnight, effective on March 18. The it is developing the capability to conrate charged on primary credit loans duct such transactions with other

6 96th Annual Report, 2009 counterparties and against agency of further shocks to the economy. The MBS. The Federal Reserve has also central tendencies of these longer-run announced plans for implementing a projections were 2.5 to 2.8 percent for term deposit facility. In addition, it has real GDP growth, 5.0 to 5.2 percent for the option of redeeming or selling the unemployment rate, and 1.7 to 2.0 assets in order to reduce monetary pol- percent for the inflation rate. icy accommodation. In conjunction with the January 2010 Part 2 FOMC meeting, the members of the Recent Financial Board of Governors of the Federal and Economic Developments Reserve System and presidents of the Federal Reserve Banks, all of whom According to the advance estimate participate in FOMC meetings, pro- from the Bureau of Economic Analysis, vided projections for economic growth, real gross domestic product (GDP) unemployment, and inflation; these increased at an annual rate of 4 percent projections are presented in Part 4 of in the second half of 2009, retracing this report. FOMC participants agreed part of the sharp decline in activity that that economic recovery from the recent began in early 2008 (figure 1). Nonerecession was under way, but that they theless, labor market conditions, which expected it to proceed at a gradual tend to lag changes in economic activpace, restrained in part by household ity, remain very weak: The unemployand business uncertainty regarding the ment rate rose to 10 percent at the end economic outlook, modest improve- of last year, 5 percentage points above ment in labor markets, and slow easing its level at the start of 2008, before of credit conditions in the banking sec- dropping back some in January. Conditor. Participants expected that real GDP tions in many financial markets have would expand at a rate that was only improved significantly, but lending moderately above its longer-run sus- policies at banks remain stringent. tainable growth rate and that the unem- Meanwhile, an increase in energy ployment rate would decline only prices has boosted overall consumer slowly over the next few years. Most participants also anticipated that infla- 1. Change in Real Gross Domestic tion would remain subdued over this Product, 2003–09 period. Nearly all participants judged the Percent, annual rate risks to their growth outlook as generally balanced, and most also saw 6 roughly balanced risks surrounding 4 their inflation projections. Participants 2 + continued to judge the uncertainty sur- H1 _0 rounding their projections for economic 2 activity and inflation as unusually high 4 relative to historical norms. Participants also reported their assessments of the 2003 2005 2007 2009 rates to which key macroeconomic NOTE: Here and in subsequent figures, except as variables would be expected to con- noted, change for a given period is measured to its final verge in the longer run under appropri- quarter from the final quarter of the preceding period. SOURCE: Department of Commerce, Bureau of Ecoate monetary policy and in the absence nomic Analysis.

Monetary Policy Report of February 2010 7 price inflation; however, price inflation rate debt or refinance other debt. By for other items has remained subdued, contrast, many small businesses and and inflation expectations have been other firms that depend primarily on relatively stable. banks for their funding needs faced Conditions in financial markets substantial constraints on their access improved further in the second half of to credit even as demand for such 2009, reflecting a more positive eco- credit remained weak. In the household nomic outlook as well as the effects of sector, demand for credit was weak, the policy initiatives implemented by and supply conditions remained tight, the Federal Reserve, the Treasury, and as banks maintained stringent lending other government agencies to support standards for both consumer loans and financial stability and promote eco- residential real estate loans. However, nomic recovery. Treasury yields, mort- issuance of asset-backed securities gage rates, and other market interest (ABS), which are an important source rates remained low while equity prices of funding for consumer loans, continued to rise, on net, amid positive strengthened, supported in part by the earnings news, and corporate bond Federal Reserve’s Term Asset-Backed spreads narrowed substantially. As the Securities Loan Facility (TALF). functioning of short-term funding markets improved further, the usage of spe- Domestic Developments cial liquidity facilities declined sharply, and the Federal Reserve closed several The Household Sector of those facilities on February 1, 2010.1 Investors also seemed to become more Residential Investment optimistic about the prospects for the and Housing Finance banking sector, and many of the largest banking institutions issued equity and The housing market began to recover repaid investments made by the Trea- in the spring of 2009, but the pace of sury under the Troubled Asset Relief improvement slowed during the second Program (TARP). Nevertheless, the half of the year. After having increased credit quality of bank loan portfolios almost 30 percent through mid-2009, remained a concern, particularly for sales of new single-family homes loans secured by commercial and resi- retraced about one-half of that gain in dential real estate loans. the second half of the year. And, Private domestic nonfinancial sector although sales of existing single-family debt contracted, on balance, in the sec- homes moved up noticeably through ond half of 2009. On the positive side, November, they fell back sharply in firms with access to capital markets December, suggesting that some of the issued corporate bonds at a robust earlier strength reflected sales that had pace, with many firms reportedly seek- been pulled forward in anticipation of ing to lock in long-term, low-interest- the expiration of the first-time homebuyer tax credit.2 The index of pending 1. Specifically, the Primary Dealer Credit Facility, the Term Securities Lending Facility, the Commercial Paper Funding Facility, the Asset- 2. Thefirst-timehomebuyertaxcredit,which Backed Commercial Paper Money Market was enacted in February 2009 as part of the Mutual Fund Liquidity Facility, and the tempo- American Recovery and Reinvestment Act, was rary swap lines with foreign central banks were originally scheduled to expire on November 30, closed. 2009.InearlyNovember,however,theCongress

8 96th Annual Report, 2009 2. Private Housing Starts, 1996–2010 Performance repeat-sales index—is up, on net, from its trough earlier in the Millions of units, annual rate year, even though the last few readings of that index fell back a bit. According 1.6 to the Thomson Reuters/University of Single-family Michigan Surveys of Consumers, the 1.2 number of respondents who expect .8 house prices to increase over the next Multifamily 12 months has moved up and now .4 slightly exceeds the number of respondents who expect prices to decrease.3 1998 2002 2006 2010 The earlier declines in house prices in NOTE: The data are monthly and extend through combination with the low level of January 2010. mortgage rates have made housing SOURCE: Department of Commerce, Bureau of the Census. more affordable, and the apparent stabilization in prices may bring into the market buyers who were reluctant to home sales, a leading indicator of sales purchase a home when prices were perof existing homes, leveled off in ceived to be falling. That said, the still- December after November’s steep substantial inventory of unsold homes, decline. including foreclosed homes, has contin- The recovery in construction activity ued to weigh on the market. in the single-family sector also deceler- Even with house prices showing ated in the second half of 2009. After signs of stabilization, home values stepping up noticeably last spring from remained well below the remaining an exceptionally low level, starts of amount of principal on mortgages (sosingle-family homes were about flat, on called underwater loans) for many boraverage, from June to December (figrowers in the second half of 2009. ure 2). With the level of construction Against this backdrop, and with a very remaining quite low, the inventory of high unemployment rate, delinquency unsold new homes fell sharply and is rates on all types of residential mortnow less than one-half of the peak gages continued to move higher. As of reached in 2006. In the much smaller December, serious delinquency rates on multifamily sector—where tight credit prime and near-prime loans had conditions and high vacancies have declimbed to 16 percent for variable-rate pressed building—starts deteriorated a loans and to over 5 percent for fixed bit further in the second half of the rate loans.4 The delinquency rate on all year. subprime loans was about 35 percent in After falling sharply for about two December. Loans backed by the Fedand a half years, house prices, as meaeral Housing Administration (FHA) sured by a number of national indexes, also showed increasing strains, with dewere more stable in the second half of 2009. One house price measure with wide geographic coverage—the Loan- 3. Thesurvey,formerlytheReuters/University of Michigan Surveys of Consumers, was renamedtheThomsonReuters/UniversityofMichiextended the credit to sales occurring through ganSurveysofConsumersasofJanuary1,2010. April30,2010,andexpandedittoincluderepeat 4. A mortgage is defined as seriously delinhomebuyers who have owned and occupied a quentiftheborroweris90daysormorebehind houseforatleastfiveofthepasteightyears. inpaymentsorthepropertyisinforeclosure.

Monetary Policy Report of February 2010 9 linquency rates moving up to 9 percent 3. Mortgage Interest Rates, 1993–2010 at the end of 2009. Foreclosures remained exceptionally Percent elevated in the second half of 2009. 9 About 1.4 million homes entered fore- 8 closure during that period, similar to Fixed rate 7 the pace earlier in the year. Histori- 6 cally, about one-half of foreclosure 5 starts have resulted in homeowners los- 4 ing the home. The heightened level of Adjustable rate 3 foreclosures has been particularly notable among prime borrowers, for 1995 1998 2001 2004 2007 2010 whom the number of foreclosure starts NOTE: The data, which are weekly and extend moved up a bit in the second half of through February 17, 2010, are contract rates on 30-year mortgages. the year; by contrast foreclosure starts SOURCE: Federal Home Loan Mortgage Corporation. for subprime borrowers dropped back somewhat. To address the foreclosure problem, the Treasury has intensified mortgages, which are not included in efforts through its Making Home Af- the mortgage pools backing MBS that fordable program to encourage loan are eligible for purchase by the Federal modifications and to allow borrowers Reserve, also generally declined, but to refinance into mortgages with more- the spreads between nonconforming affordable payments. mortgage rates and rates on conforming Interest rates on 30-year fixed-rate mortgages remained wide by historical conforming mortgages moved down in standards. the second half of 2009, and despite a Although mortgage rates fell to low modest upturn around the start of 2010, levels, the availability of mortgage they remained near the lowest levels on financing continued to be sharply conrecord (figure 3).5 The low mortgage strained. Respondents to the Senior rates reflected the generally low level Loan Officer Opinion Survey on Bank of Treasury yields and the large pur- Lending Practices (SLOOS) indicated chases of agency mortgage-backed se- throughout 2009 that banks continued curities (MBS) by the Federal Reserve, to tighten their lending standards for all which were reportedly an important types of mortgage loans, though factor behind the narrow spread smaller net fractions reported doing so between these conforming mortgage in the January 2010 survey than had rates and yields on Treasury securities. been the case in earlier surveys. Lend- Interest rates on nonconforming ers’ reluctance to extend mortgage credit in an environment of declining home values also likely held down refi- 5. Conforming mortgages are those eligible nancing activity, which remained subfor purchase by Fannie Mae and Freddie Mac; dued in the second half of 2009 even theymustbeequivalentinrisktoaprimemortgage with an 80 percent loan-to-value ratio, and though mortgage rates decreased. The they cannot exceed in size the conforming loan FHA announced that it was raising limit.Theconformingloanlimitforafirstmort- mortgage insurance premiums because gage on a single-family home in the contiguous its capital reserve ratio had fallen be- UnitedStatesiscurrentlyequaltothegreaterof low the required threshold; at the same $417,000 or 115 percent of the area’s median houseprice,anditcannotexceed$729,750. time, the FHA announced that it was

10 96th Annual Report, 2009 increasing down-payment requirements The rise in consumer spending in for borrowers with very low credit 2009 was buoyed by improvements in scores. In recent years, the FHA has some of its underlying determinants: assumed a greater role in mortgage Equity prices moved up from their markets, especially for borrowers with lows reached last March, a develophigh loan-to-value ratios or lower ment that helped to rebuild household credit quality. Overall, residential mort- wealth, and household income was gage debt outstanding contracted at an lifted by provisions in the fiscal stimueven faster pace in the second half than lus package. Accordingly, consumer in the first half of the year. Net issu- sentiment has rebounded from the very ance of MBS by Fannie Mae, Freddie low levels seen earlier in 2009, though Mac, and Ginnie Mae, although brisk it remains low by historical standards. in the second half of 2009, was down a Consumer spending appears to have bit from the levels seen earlier in the been financed largely out of current year. The securitization market for income over the past year, and housemortgage loans not guaranteed by a holds were also able to increase their housing-related government-sponsored personal saving and begin deleveraging enterprise (GSE) or the FHA remained their balance sheets. After increasing closed. sharply in 2008, the saving rate moved up a bit further in 2009. Real disposable personal income— Consumer Spending after-tax income adjusted for inand Household Finance flation—increased about 13⁄ 4 percent last year, with the effects of the tax After having been roughly constant in cuts and higher social benefit payments the first half of last year, real personal included in the 2009 fiscal stimulus consumption expenditures (PCE) rose package accounting for most of the at an annual rate of about 21⁄ 2 percent in the second half. Sales of new light increase.7 Real labor income—that is, total wages, salaries, and employee motor vehicles jumped from an average benefits, adjusted for inflation—fell annual rate of 91⁄ 2 million units in the sharply in the first half of the 2009, first half of 2009 to a rate of 111⁄ 4 miland edged down a bit further in the lion units in the second half.6 Part of second half, as the decline in total emthis rebound likely reflected the “cash ployee work hours more than offset an for clunkers” program, but even after increase in real hourly compensation the expiration of that program, sales (figure 4). remained close to 11 million units, sup- After dropping during the preceding ported in part by improved credit conditions for auto buyers as the ABS 21⁄ 2 years, household net worth turned up in the second and third quarters of market revived. Real spending on 2009 and likely rose further in the goods excluding motor vehicles also fourth quarter. Much of the recovery increased at a robust pace in the second half of the year, while real outlays for services rose more modestly. 7. Theincreasesinbenefitpaymentsunderthe American Recovery and Reinvestment Act includedanexpansionofunemploymentbenefits, increases in food stamps and Pell grants, subsi- 6. Sales dropped back in January, but the diesforhealthinsurancecoveragefortheunemdecline occurred largely at Toyota, which was ployed,andaone-time$250paymenttoretirees confrontedbywidelypublicizedproblems. andveterans.

Monetary Policy Report of February 2010 11 4. Change in Real Income and in Real 5. Household Debt Service, 1980–2009 Wage and Salary Disbursements, 2003–09 Percent of disposable income Percent, annual rate 14 Real disposable personal income Real wage and salary 8 13 disbursements 6 12 4 11 2 + 1985 1993 2001 2009 _0 NOTE: The data are quarterly and extend through 2 2009:Q3. Debt service payments consist of estimated required payments on outstanding mortgage and 4 consumer debt. 6 SOURCE: Federal Reserve Board, “Household Debt Service and Financial Obligations Ratios,” statistical release. 2003 2005 2007 2009 SOURCE: Department of Commerce, Bureau of Economic Analysis. and consumer debt—fell as a share of disposable income. At the end of the reflected a rebound in equity prices, third quarter, the ratio of debt service although the modest gain, on net, in the payments to disposable income had value of owner-occupied real estate declined to its lowest level since 2001 also contributed. With the rise in net (figure 5). worth, the ratio of household wealth to Results from the recent SLOOS sugdisposable income increased in the sec- gest that the contraction in consumer ond half of the year to about its histori- credit has been the result of both weak cal average. demand and tight supply. A net fraction Households began to deleverage of about one-third of the bank loan around the third quarter of 2008, at the officers that responded to the January height of the financial crisis, and that SLOOS reported weaker demand for process continued during the second all types of consumer loans. The same half of 2009. The decline in nonmort- survey also indicated that banks contingage consumer debt intensified during ued to tighten terms on credit card the latter part of last year. The contrac- loans over the final three months of tion was most pronounced in revolving 2009 by reducing credit limits and raiscredit, which fell at about a 10 percent ing interest rates charged, though annual rate during the second half of smaller net fractions reported doing so 2009. Nonrevolving credit also de- than in previous surveys. After having creased. Including the drop in mortgage been tightened significantly in the sumdebt, the Federal Reserve’s flow of mer and fall of 2009, standards and funds data indicate that total household terms on consumer loans other than debt declined in 2009 for the first time credit card loans were little changed, since the data series began in 1951. on balance, in the January survey. Reflecting these developments, debt Changes in interest rates on conservice payments—the required princi- sumer loans were mixed during the pal and interest on existing mortgages second half of 2009. Interest rates on

12 96th Annual Report, 2009 new auto loans generally continued to 6. Gross Issuance of Selected Assettrend lower, and spreads on these loans Backed Securities, 2007–10 relative to comparable-maturity Treasury securities narrowed further. Inter- Billions of dollars est rates on credit card loans, however, TALF consumer ABS 40 jumped near midyear and increased Non-TALF consumer ABS 35 further toward year-end. According to 30 the October SLOOS, some of the 25 increases in credit card interest rates 20 15 and the tightening of other lending 10 terms reflected adjustments made by 5 banks in anticipation of the imposition Jan. July Jan. July Jan. July Jan. of new rules under the Credit Card Ac- 2007 2008 2009 2010 countability Responsibility and Disclosure (Credit CARD) Act.8 NOTE: Consumer ABS (asset-backed securities) are securities backed by credit card loans, nonrevolving Concerns about the ability of house- consumer loans, and auto loans. Data for consumer ABS holds to repay loans may also have show gross issuance facilitated by the Term Asset-Backed Securities Loan Facility (TALF) and such contributed to the tightening of lending issuance outside the TALF. policies for consumer credit over the SOURCE: Bloomberg and the Federal Reserve Bank of New York. second half of 2009. Delinquency rates on auto loans at captive finance companies remained elevated, and credit ing. By the end of the year, the yields card delinquency rates at commercial on such securities dropped markedly, banks stayed high at around 61⁄ 2 per- and issuance of ABS without TALF cent in the fourth quarter of 2009. In support increased accordingly. (Indeed, addition, the pace at which lenders the interest rates on TALF loans were were charging off these loans increased chosen so that they would become unsharply in recent quarters. On a more attractive as market conditions impositive note, respondents to the Janu- proved.) Issuance of ABS backed by ary SLOOS indicated that they auto loans in the second half of 2009 expected the credit quality of their con- was roughly on par with issuance prior sumer loans, other than credit card to the financial crisis, and only a small loans, to stabilize during 2010. portion was purchased using loans Prior to the crisis, a large portion of from the TALF. A renewed ability to consumer credit was funded through securitize auto loans may have contribthe ABS market. After having essen- uted to the reduction in the interest tially ground to a halt at the end of rates on these loans. Similarly, ABS is- 2008, consumer ABS markets recov- suance backed by credit card receivered in 2009 with the important sup- ables gained strength through most of port of the TALF (figure 6). Much of the year, though it experienced a drop the ABS issuance through the summer early in the fourth quarter because of relied heavily on the TALF for financ- uncertainty about how the Federal Deposit Insurance Corporation (FDIC) would treat securitized receivables 8. TheCreditCARDActincludessomeprovi- should a sponsoring bank fail. Issuance sionsthatplacerestrictionsonissuers’abilityto picked up slightly after the FDIC proimpose certain fees and to engage in risk-based vided a temporary extension of safepricing. Some provisions took effect in August 2009,andothersdidsoinFebruary2010. harbor rules for its handling of

Monetary Policy Report of February 2010 13 securitized assets in a receivership. By rebuilt their fleets of light motor vehicontrast, issuance of ABS backed by cles and accelerated their purchases of private student loans remained almost large trucks in advance of new envientirely dependent on financing from ronmental regulations on diesel enthe TALF. gines. Real spending on information technology capital—computers, software, and communications equip- The Business Sector ment—also accelerated toward the end of 2009, likely boosted by the desire to Fixed Investment replace older, less-efficient equipment. After falling throughout 2008 and the Investment in equipment other than infirst half of 2009, business spending on formation processing and transportaequipment and software (E&S) began tion, which accounts for nearly oneto expand in the second half of last half of E&S outlays, continued to fall year, as sales prospects picked up, cor- during the second half of 2009, but porate profits increased, and financial much more slowly than earlier in the conditions for many businesses (espe- year. More recently, orders of nondecially those with direct access to capital fense capital goods other than transpormarkets) improved (figure 7). Business tation items posted a second strong outlays on transportation equipment monthly increase in December, and rose sharply in the second half as firms recent surveys of business conditions have been more upbeat than in several 7. Change in Real Business Fixed years. Investment, 2003–09 In contrast to the upturn in equipment investment, real spending on non- Percent, annual rate residential structures continued to decline steeply throughout 2009. Real Structures Equipment and software 40 outlays for construction of structures other than those used for drilling and 20 mining fell at an annual rate of 25 per- + _0 cent in the second half of 2009, likely reflecting the drag from rising vacancy 20 rates and plunging property prices for commercial and office buildings, as 2003 2005 2007 2009 well as difficult financing conditions for new projects. Following a steep High-tech equipment 60 drop in the first half of the year, real and software Other equipment excluding 40 spending on drilling and mining structransportation tures increased sharply in the second 20 + half, likely in response to the rebound _0 in oil prices. 20 Inventory Investment 2003 2005 2007 2009 NOTE: High-tech equipment consists of computers After running off inventories aggresand peripheral equipment and communications sively during the first three quarters of equipment. 2009, firms moved to stem the pace of SOURCE: Department of Commerce, Bureau of Economic Analysis. liquidation in the fourth quarter.

14 96th Annual Report, 2009 Automakers added to their dealers’ Delinquency rates on loans to nonfistocks after cutbacks in production ear- nancial businesses, however, rose lier in the year had reduced days’ sup- throughout the year. For commercial ply of domestic light vehicles to below and industrial (C&I) loans, delinquentheir preferred levels. Outside of motor cies in the fourth quarter reached 4.5 vehicles, firms continued to draw down percent. In response to a special quesinventories in the fourth quarter, but at tion on the January 2010 SLOOS, a a much slower pace than earlier in the large net fraction of banks reported that year. Indeed, purchasing managers in in the fourth quarter, the credit quality the manufacturing sector report that of their existing C&I loans to small their customers’ inventories are rela- firms was worse than the quality of tively lean, a development that could their loans to larger firms. While surlead to some restocking in the coming vey respondents generally expected the months. credit quality of their C&I loan portfolios to improve during 2010, banks’ outlook for C&I loans to larger firms Corporate Profits was more optimistic than it was for and Business Finance such loans to smaller firms. Reflecting deterioration in commercial property Overall, operating earnings per share markets, delinquency rates on commerfor S&P 500 firms rebounded over the cial real estate (CRE) loans both in secourse of 2009. Still, earnings were curitized pools and on banks’ books well below the levels experienced prior moved up sharply in the second half of to the financial market turmoil and the 2009. Delinquency rates on construcaccompanying recession. Within the tion and land development loans S&P 500, earnings for financial firms climbed to especially high levels. In fluctuated around low levels, while October 2009, the Federal Reserve earnings for nonfinancial firms re- joined with other banking regulators to bounded sharply as the economic provide guidelines to banks in their efrecovery began to take hold. Data from forts to work constructively with firms that have reported for the fourth troubled CRE borrowers.9 quarter suggest that earnings for nonfinancial firms continued to recover. 9. This statement updated and replaced exist- The credit quality of nonfinancial ing supervisory guidance to assist examiners in corporations improved somewhat over evaluating institutions’ efforts to renew or rethe second part of last year, although structure loans to creditworthy CRE borrowers. The statement was intended to promote supervisigns of stress persisted. Business sory consistency, enhance the transparency of leverage, as measured by the ratio of CRE workout transactions (that is, transactions debt to assets, fell in the third quarter. intendedtorenewandrestructuretheloans),and Credit rating downgrades outpaced up- ensure that supervisory policies and actions do grades early in 2009, but the pace of notinadvertentlycurtailtheavailabilityofcredit to sound borrowers. For more information, see downgrades moderated substantially in BoardofGovernorsoftheFederalReserveSysthe second half of the year, and by the tem, Federal Deposit Insurance Corporation, fourth quarter upgrades were outpacing National Credit Union Administration, Office of downgrades. In addition, the corporate theComptrolleroftheCurrency,OfficeofThrift Supervision, and Federal Financial Institutions bond default rate dropped into the Examination Council State Liaison Committee range that had prevailed before the (2009), “Policy Statement on Prudent Commerfinancial crisis began in August 2007. cial Real Estate Loan Workouts,” attachment to

Monetary Policy Report of February 2010 15 The debt of domestic nonfinancial 8. Net Percentage of Domestic Banks businesses contracted slightly during Tightening Standards and Increasing the second half of 2009, and the com- Premiums Charged on Riskier Loans position of borrowing continued to to Large and Medium-Sized Borrowers, shift toward longer-term debt. Net issu- 1998–2010 ance of corporate bonds remained Percent strong as businesses took advantage of favorable market conditions to issue 90 longer-term debt; at the same time, Premiums bank loans to businesses—both C&I 60 and CRE loans—contracted, as did 30 + commercial paper. Standards _0 The decline in bank lending to busi- 30 nesses was due partly to the weakness in loan demand. Many banks experi- 1998 2001 2004 2007 2010 encing steep declines in C&I loans reported that existing loans were paid NOTE: The data are drawn from a survey generally conducted four times per year; the last observation is down across a wide swath of indus- from the January 2010 survey, which covers 2009:Q4. tries. Respondents to the January 2010 Net percentage is the percentage of banks reporting a tightening of standards or an increase in premiums less SLOOS indicated that weak demand the percentage reporting an easing or a decrease. The for C&I loans during the second half of definition for firm size suggested for, and generally used 2009 reflected their customers’ reduced by, survey respondents is that large and medium-sized firms have annual sales of $50 million or more. need to use these loans to finance SOURCE: Federal Reserve Board, Senior Loan Officer investment in plant and equipment as Opinion Survey on Bank Lending Practices. well as to finance accounts receivable, inventories, and mergers and acquisi- of banks also continued to report tighttions. In addition, demand was report- ening lending standards on CRE loans. edly low for CRE loans amid weak Small businesses have been particufundamentals in the sector. larly affected by tight bank lending The weakness in bank lending to standards because of their lack of direct businesses in 2009 was also a conse- access to capital markets. In surveys quence of a tightening in lending stan- conducted by the National Federation dards. Responses to the SLOOS indi- of Independent Business (NFIB), the cated that lending standards for C&I net fraction of small businesses reportloans were tightened significantly in ing that credit had become more diffithe summer and fall of 2009 and that cult to obtain over the preceding three they remained about unchanged in the months remained at extremely elevated final months of the year (figure 8). In levels during the second half of 2009. addition, many banks continued to Moreover, considerable net fractions of tighten some terms throughout the NFIB survey respondents expected year—for example, by increasing the lending conditions to tighten further in interest rate premiums charged on the near term. However, when asked riskier loans. Considerable net fractions about the most important problem they faced, small businesses most frequently cited poor sales, while only a small fraction cited credit availability. Recog- Supervision and Regulation Letter SR 09-7 nizing that small businesses play a cru- (October30),www.federalreserve.gov/boarddocs/ srletters/2009/sr0907a1.pdf. cial role in the economy and that some

16 96th Annual Report, 2009 are experiencing difficulty in obtaining underwriting and simpler structures or renewing credit, the federal financial than had prevailed during the credit regulatory agencies and the Conference boom, were brought to market and sucof State Bank Supervisors issued a cessfully completed without support statement on February 5, 2010, regard- from the TALF. Nevertheless, issuance ing lending to these businesses.10 The of CMBS remains very light, and matestatement emphasized that financial in- rial increases in issuance appeared unstitutions that engage in prudent small likely in the near term. Trading in exbusiness lending will not be subject to isting CMBS picked up during the supervisory criticism for small business second half of 2009, and yield spreads loans made on that basis. Further, the relative to Treasury securities narstatement emphasized that regulators rowed, although they remain very high are working with the industry and su- by historical standards. Some of the pervisory staff to ensure that supervi- improvement likely reflected support sory policies and actions do not inad- provided by the Federal Reserve vertently curtail the availability of through the part of the TALF program credit to financially sound small busi- that provides loans for the purchase of ness borrowers. “legacy” CMBS. In the equity market, both seasoned Issuance of leveraged loans, which and initial offerings by nonfinancial often involves loan extensions by nonfirms were solid in the second half of bank financial institutions, also re- 2009. After nearly ceasing earlier in mained weak throughout 2009 although the year, cash-financed mergers picked market conditions reportedly improved. up toward year-end, mostly as the Prior to the crisis, this segment of the result of a few large deals. Share repur- syndicated loan market provided conchases continued to be light. siderable financing to lower-rated non- New issuance in the commercial financial firms. However, issuance of mortgage-backed securities (CMBS) leveraged loans fell to low levels when market—which had ceased in the third investors moved away from structured quarter of 2008, thus eliminating an finance products such as collateralized important source of financing for many loan obligations, which had been sublenders—resumed in November 2009 stantial purchasers of such credits. The with a securitization supported by the market began to show signs of recov- Federal Reserve’s TALF program. A ery last year with secondary-market handful of subsequent small securi- prices of loans moving higher, and, by tizations, with more-conservative late in the year, new loans had found increased investor interest amid some easing in loan terms. 10. Formoreinformation,seeFederalDeposit InsuranceCorporation,OfficeoftheComptroller The Government Sector oftheCurrency,BoardofGovernorsoftheFederalReserveSystem,theOfficeofThriftSupervision, National Credit Union Administration, Federal Government and Conference of State Bank Supervisors (2010), “Interagency Statement on Meeting the The deficit in the federal unified bud- Credit Needs of Creditworthy Small Business get rose markedly in fiscal year 2009 Borrowers,” attachment to “Regulators Issue and reached $1.4 trillion, about $1 tril- Statement on Lending to Creditworthy Small lion higher than in fiscal 2008. The Businesses,” joint press release, February 5, www.occ.treas.gov/ftp/release/2010-14.htm. effects of the weak economy on

Monetary Policy Report of February 2010 17 revenues and outlays, along with the salary income, a decline in capital budget costs associated with the fiscal gains realizations, and the revenuestimulus legislation enacted last Febru- reducing provisions of the 2009 fiscal ary (the American Recovery and Rein- stimulus legislation. vestment Act (ARRA)), the Troubled While the outlays associated with the Asset Relief Program, and the conser- TARP and the conservatorship of the vatorship of the mortgage-related GSEs contributed importantly to the GSEs, all contributed to the widening rapid rise in federal spending in fiscal of the budget gap. The deficit is 2009, outlays excluding these extraorexpected to remain sharply elevated in dinary costs rose a relatively steep 10 fiscal 2010. Although the budget costs percent.12 Spending for Medicaid and of the financial stabilization programs income support programs jumped alare expected to be lower than in the most 25 percent in fiscal 2009 as a last fiscal year, the spend-out from last result of the deterioration in the labor year’s fiscal stimulus package is market as well as policy decisions to expected to be higher, and tax revenues expand funding for a number of such are anticipated to remain weak. The programs. This category of spending Congressional Budget Office projects has continued to rise rapidly thus far in that the deficit will be about $1.3 tril- fiscal 2010, and most other categories lion this fiscal year, just a touch below of spending have increased fairly last year’s deficit, and that federal debt briskly as well. held by the public will reach 60 per- As measured in the national income cent of nominal GDP, the highest level and product accounts (NIPA), real fedrecorded since the early 1950s. eral expenditures on consumption and The steep drop in economic activity gross investment—the part of federal during 2008 and the first half of 2009 spending that is a direct component of resulted in sharply lower tax receipts. GDP—rose at a 4 percent pace in the After falling about 2 percent in fiscal second half of 2009. Nondefense out- 2008, federal receipts plunged 18 per- lays increased rapidly, in part reflecting cent in fiscal 2009, and tax receipts the boost in spending from the 2009 over the first four months of the cur- fiscal stimulus legislation, while real rent fiscal year have continued to defense outlays rose modestly. decline relative to the comparable yearearlier period. The decline in revenues Federal Borrowing in fiscal 2009 was particularly steep for corporate taxes, mostly as a result of Federal debt expanded rapidly throughthe sharp contraction in corporate prof- out 2009 and rose to more than 50 perits in 2008.11 Individual income and cent of nominal GDP by the end of payroll taxes also declined substan- 2009, up from around 35 percent eartially, reflecting the effects of the weak lier in the decade. To fund the labor market on nominal wage and increased borrowing needs, Treasury 12. In the Monthly Treasury Statements, 11. Becausefinalpaymentson2008liabilities equitypurchasesanddebt-relatedtransactionsunwerenotdueuntilAprilof2009andbecauseof dertheTARParerecordedonanetpresentvalue thedifferencebetweenfiscalandcalendaryears, basis,takingintoaccountmarketrisk,asarethe muchofthecontractionin2008corporateprofits Treasury’s purchases of the GSE’s MBS. Howdidnotshowthroughtotaxrevenuesuntilfiscal ever,equitypurchasesfromtheGSEsinconser- 2009. vatorshiparerecordedonacashflowbasis.

18 96th Annual Report, 2009 auctions grew to record sizes. How- in January. In contrast, investment ever, demand for Treasury issues kept spending by state and local governpace, and bid-to-cover ratios at these ments rose moderately during the secauctions were generally strong. Foreign ond half of 2009. The rise in investdemand was solid, and foreign custody ment spending was supported by holdings of Treasury securities at the infrastructure grants provided by the Federal Reserve Bank of New York federal government as part of the increased considerably over the year. ARRA, as well as by a recovery of activity in municipal bond markets that increased the availability and lowered State and Local Government the cost of financing. Also, because Despite the substantial federal aid pro- capital budgets are typically not envided by the ARRA, the fiscal situa- compassed within balanced budget tions of state and local governments requirements, states were under less remain challenging. At the state level, pressure to restrain their investment revenues from income, business, and spending. sales taxes continued to fall in the second half of last year, and many states State and Local Government are currently in the process of address- Borrowing ing shortfalls in their fiscal 2010 budgets. At the local level, revenues have Borrowing by state and local governheld up fairly well, as receipts from ments picked up a bit in the second property taxes, on which these jurisdic- half of the year from its already solid tions rely heavily, have continued to pace in the first half. Gross issuance of rise moderately, reflecting the typically long-term bonds, primarily to finance slow response of property assessments new capital projects, was strong. Issuto changes in home values. Neverthe- ance was supported by the Build less, the sharp fall in house prices over America Bonds program, which was the past few years is likely to put some authorized under the ARRA.14 Shortdownward pressure on local revenues term issuance was more moderate and before long. Moreover, many state and generally consistent with typical sealocal governments have experienced sonal patterns. Market participants resignificant capital losses in their em- ported that the market for variable-rate ployee pension funds, and they will demand obligations, which became seneed to set aside resources in coming verely strained during the financial criyears to rebuild pension assets. sis, had largely recovered.15 These budget pressures showed through to state and local spending. As measured in the NIPA, real consump- 14. TheBuildAmericaBondsprogramallows tion expenditures of state and local state and local governments to issue taxable governments declined over the second bonds for capital projects and receive a subsidy payment from the Treasury for 35 percent of half of 2009.13 In particular, these jurisinterestcosts. dictions began to reduce employment 15. Variable-ratedemandobligations(VRDOs) in mid-2009, and those cuts continued are taxable or tax-exempt bonds that combine long maturities with floating short-term interest ratesthatareresetonaweekly,monthly,orother 13. Consumption expenditures by state and periodicbasis.VRDOsalsohaveacontractuallilocal governments include all outlays other than quidity backstop, typically provided by a comthoseassociatedwithinvestmentprojects. mercial or investment bank, that ensures that

Monetary Policy Report of February 2010 19 Interest rates on long-term municipal 9. Change in Real Imports and Exports bonds declined during the year, but the of Goods and Services, 2003–09 ratio of their yields to those on Percent, annual rate comparable-maturity Treasury securities remained somewhat elevated by Imports 20 historical standards. Credit ratings of Exports 10 state and local governments deterio- H1 + rated over 2009 as a consequence of _0 budgetary problems faced by many of 10 these governments. 20 The External Sector 2003 2005 2007 2009 Both exports and imports rebounded in SOURCE: Department of Commerce, Bureau of Economic Analysis. the second half of 2009 from precipitous falls earlier in the year (figure 9). As foreign economic activity began to Oil and nonfuel commodity prices improve, real exports rose at an annual increased substantially over the year rate of nearly 20 percent in the second (figure 10). After plunging from a daily half of the year. Real imports increased high of about $145 per barrel in midat about the same pace, supported by 2008 to a low of less than $40 per barthe recovery under way in U.S. de- rel early in 2009, the spot price of mand. The pickup in trade flows was West Texas Intermediate crude oil rose widespread across major types of prod- rapidly to reach about $70 per barrel ucts and U.S. trading partners but was by the middle of 2009. The price of oil particularly pronounced for both ex- rose further over the second half of the ports and imports of capital goods. Ex- year to reach about $80 per barrel in ports and imports of automotive prod- November and has fluctuated between ucts also picked up sharply in the $70 and $80 per barrel through second half of last year, reflecting the rise in motor vehicle production in 10. Prices of Oil and Nonfuel Commodities, 2005–10 North America, which depends importantly on flows of parts and finished December 2004 = 100 Dollars per barrel vehicles between the United States, Canada, and Mexico. Despite the boun- 240 Oil 140 220 ceback, trade flows only partially 200 120 retraced the unusually steep declines 180 100 160 registered in late 2008 and early 2009. 80 140 This pattern was also true for global 120 60 trade flows, as discussed in the box 100 Nonfuel 40 80 commodities “Developments in Global Trade.” The 60 20 strength of the recovery in global trade 200520062007200820092010 so far, however, differs substantially across countries and regions. NOTE: The data are monthly. The oil price is the spot price of West Texas Intermediate crude oil, and the last observation is the average for February 1–17, 2010. The price of nonfuel commodities is an index of 45 bondholders are able to redeem their investment primary-commodity prices and extends through January atparplusaccruedinterestevenifthesecurities 2010. cannot be successfully remarketed to other in- SOURCE: For oil, the Commodity Research Bureau; vestors. for nonfuel commodities, International Monetary Fund.

20 96th Annual Report, 2009 Developments in Global Trade The downturn in global activity was ac- A. Real and Nominal Global Exports, companied by a dramatic collapse in 1990–2009 global trade. Measured in U.S. dollars, global exports fell about 35 percent Billions of U.S. dollars between July 2008 and February 2009.1 1,300 About one-third of the decline was a 1,200 1,100 result of falling prices, notably for oil 1,000 900 and other commodities. The volume of Real 800 global exports is estimated to have con- 700 600 tracted about 20 percent between mid- 500 400 2008 and early 2009, a larger and more Nominal 300 abruptdeclinethanhasbeenobservedin 200 previouscycles(figureA). 1991 1997 2003 2009 NOTE: The data are monthly and extend through 1. Thetotalincludes44countries.Theemerging December 2009. Real global exports are staff estimates expressed in billions of 2007 U.S. dollars. AsianeconomiesconsistofChina,HongKong,India, Indonesia, Korea, Malaysia, the Philippines, ex S po O r U t R s C f E r : om T h i e n d n i o v m id i u n a a l l d c a o t u a n a tr r y e t s h o e u r s c u e m s o v f ia U d .S at . a d b o a l s l e a s r Singapore, Taiwan, Thailand, and Vietnam; the maintained by Haver Analytics, CEIC, and the IMF Latin American economies consist of Argentina, Direction of Trade Statistics, in some cases seasonally Brazil, Chile, Colombia, Mexico, and Venezuela; adjusted by Federal Reserve staff. Forty-four countries the other emerging market economies consist of are included. The real data are calculated using trade Hungary,Israel,Poland,Russia,SouthAfrica,and prices from country sources via Haver Analytics (in Turkey; and the advanced economies consist of some cases interpolated from quarterly or annual data), Australia,Austria,Belgium,Canada,Denmark,Fin- which are converted to U.S. dollar prices using each land,France,Germany,Greece,Ireland,Italy,Japan, country’s dollar exchange rate and rebased to 2007. Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, andtheUnitedStates. mid-February 2010. The increase in the start of 2009. As with the rise in oil price of oil over the course of 2009 prices, a key driver of the increase in was driven in large measure by commodity prices has been resurgent strengthening global activity, particu- demand from emerging market econolarly in the emerging market econo- mies, especially China. Market particimies. The ongoing effects of earlier re- pants expect some further increases in strictions in OPEC supply were another commodity prices as the economic likely contributing factor. The prices of recovery gains strength, albeit increases longer-term futures contracts (that is, that are less pronounced than those rethose expiring in December 2018) for corded during last year’s rebound. crude oil also moved up and, as of The steep decline in commodity mid-February, were about $96 per bar- prices in late 2008 put considerable rel. The upward-sloping futures curve downward pressure on U.S. import is consistent with a view by market prices for the first half of 2009. Overall participants that oil prices will continue for 2009, prices of imported goods fell to rise as global demand strengthens 1 percent while prices for goods over the medium term. excluding oil fell 21⁄ 2 percent. Recent Broad indexes of nonfuel commodity upward moves in commodity prices prices also rose from lows near the suggest that some of this downward

Monetary Policy Report of February 2010 21 Developments—continued The fall in global exports was also trade finance related to the general more widespread across countries and credit crunch may have played a role at regions than has typically been the case the beginning, but the fall in demand in past recessions. The severity of the soon became the more important factor. decline in trade was a major factor in The sensitivity of trade to the decline in the spread of the economic downturn to gross domestic product also appears to the emerging market economies in Asia have been stronger in this cycle than in and Latin America, which were gener- past cycles, although there is no real allylessdirectlyexposedtothefinancial agreement on why this might be the crisis than were the advanced econo- case. Greater integration of production mies. Early on, financial and economic across countries and an increase in exindicators in the emerging market ports of products for which there are economies appeared to be relatively re- shorter lags between changes in demand silient, raising the possibility that those and changes in exports—such as economies had “decoupled” from devel- electronics—may also have added to the opments in the advanced economies. speed and synchronicity of the collapse. However, the trade channel proved quite Exports appear to have stopped potent,andmostoftheemergingmarket declining in most economies in the first economies experienced deep recessions. half of 2009, but so far the strength of A major exception was China, which the recovery in trade has differed across provided considerable fiscal stimulus to countries. In particular, exports of the itsowneconomy. emerging Asian economies are much The primary explanation for the deep closer to their previous peaks than are and abrupt collapse in global trade exports of the advanced economies, as seems to be that the contraction in glo- thestrengthoftheChineseeconomyhas bal demand was much more severe than so far been a key factor driving exports in the past. Constraints on the supply of of the other emerging Asian economies. pressure on import prices will be National Saving reversed in 2010. The U.S. trade deficit narrowed con- Total U.S. net national saving—that is, siderably in the first half of 2009. the saving of households, businesses, Nominal imports fell more than nomi- and governments, excluding deprecianal exports early in the year, partly re- tion charges—remained extremely low flecting a substantial decline in the by historical standards in 2009, averagvalue of oil imports. The trade deficit ing about negative 21⁄ 2 percent of widened moderately over the remainder nominal GDP over the first three quarof the year, however, as both imports ters of the year. After having reached and exports picked up in subsequent nearly 4 percent of nominal GDP in quarters and oil prices moved higher. early 2006, net national saving dropped In the fourth quarter of 2009, the trade over the subsequent three years as the deficit was $440 billion (annual rate), federal budget deficit widened substanor about 3 percent of nominal GDP, tially and the fiscal positions of state compared with a deficit of 4 percent of and local governments deteriorated. In nominal GDP a year earlier. contrast, private saving rose consider-

22 96th Annual Report, 2009 ably, on balance, over this period. 12. Civilian Unemployment Rate, National saving will likely remain rela- 1976–2010 tively low this year in light of the continuing high federal budget deficit. If Percent not raised over the longer run, persistent low levels of national saving will 10 likely be associated with both low rates 8 of capital formation and heavy borrowing from abroad, limiting the rise in the 6 standard of living of U.S. residents over 4 time. 1980 1990 2000 2010 The Labor Market NOTE: The data are monthly and extend through January 2010. Employment and Unemployment SOURCE: Department of Labor, Bureau of Labor Statistics. After falling sharply in the first half of employment in the construction indus- 2009, employment continued to contry continued to be sizable through tract through the remainder of the year, January. but at a gradually moderating pace. After rising rapidly for more than a Nonfarm private payroll employment year, the unemployment rate stabilized fell 725,000 jobs per month, on averat 10 percent in the fourth quarter of age, from January to April of 2009; the 2009 (figure 12). In January, the jobpace of job loss slowed to about less rate dropped to 9.7 percent, though 300,000 per month from May to Octoit remained 4.7 percentage points ber, and to an average of 20,000 jobs higher than its level two years ago. per month from November to January The slowing in net job losses since (figure 11). The moderation in the pace mid-2009 primarily reflected a reducof job losses was relatively widespread tion in layoffs rather than an improveacross sectors, although cutbacks in ment in hiring. Both the number of new job losses and initial claims for 11. Net Change in Private Payroll unemployment insurance are down sig- Employment, 2003–10 nificantly from their highs in the spring of 2009, while most indicators of hir- Thousands of jobs, 3-month moving average ing conditions, such as the Bureau of Labor Statistics survey of job openings, 200 + remain weak. The average duration of _0 an ongoing spell of unemployment 200 continued to lengthen markedly in the 400 second half of 2009, and joblessness 600 became increasingly concentrated 800 among the long-term unemployed. In January, 6.3 million individuals—more 2004 2006 2008 2010 than 40 percent of the unemployed— NOTE: The data are monthly and extend through had been out of work for at least six January 2010. months. Furthermore, the labor force SOURCE: Department of Labor, Bureau of Labor Statistics. participation rate has declined steeply

Monetary Policy Report of February 2010 23 since last spring, a development likely ing almost 21⁄ 2 percent in 2008. Comrelated, at least in part, to the reactions pensation per hour in the nonfarm of potential workers to the scarcity of business sector—a measure derived employment opportunities. from the worker compensation data in However, in recent months, labor the NIPA—showed less deceleration, market reports have included some rising 2.2 percent in nominal terms in encouraging signs that labor demand 2009, only slightly slower than the may be firming. For example, employ- 2.6 percent rise recorded for 2008. Real ment in the temporary help industry, hourly compensation—that is, adjusted which frequently is one of the first to for the rise in consumer prices— see an improvement in hiring, has been increased only modestly. Reflecting the increasing since October. In addition, subdued increase in nominal hourly after steep declines in 2008 and the compensation, along with the outsized first quarter of 2009, the average work- gain in labor productivity noted earlier, week of production and nonsupervisory unit labor costs in the nonfarm business employees stabilized at roughly 33.1 sector declined 23⁄ 4 percent in 2009. hours per week through the remainder of the year, before ticking up to 33.2 Prices hours in November and December and 33.3 hours in January. Another indica- Headline consumer price inflation tor of an improvement in work hours, picked up in 2009, as sharp increases the fraction of workers on part-time in energy prices offset reductions in schedules for economic reasons, in- food prices and a deceleration in other creased only slightly, on net, in the sec- prices. After rising 1⁄ 2 percent over the ond half of the year after a sharp rise 12 months of 2008, overall prices for in the first half and then turned down personal consumption expenditures rose noticeably in January. about 2 percent in 2009. In contrast, the core PCE price index—which excludes the prices of energy items as Productivity and Labor Compensation well as those of food and beverages— Labor productivity surged in 2009, re- increased a little less than 11⁄ 2 percent flecting, at least to some extent, the re- in 2009, compared with a rise of luctance of firms to increase hiring roughly 13⁄ 4 percent in 2008 (figure even as demand expanded. According 13). Data for PCE prices in January to the latest available published data, 2010 are not yet available, but informaoutput per hour in the nonfarm busi- tion from the consumer price index and ness sector increased at an annual rate other sources suggests that inflation of 63⁄ 4 percent in the second half of remained subdued. 2009, after rising 31⁄ 2 percent in the Consumer energy prices rose sharply first half, and about 1 percent in 2008. in 2009, reversing much of the steep Despite large gains in productivity, decline recorded in 2008. The retail increases in hourly worker compensa- price of gasoline was up more than 60 tion have remained subdued. The em- percent for the year as a whole, driven ployment cost index for private indus- higher by a resurgence in the cost of try workers, which measures both crude oil. Reflecting the burgeoning wages and the cost to employers of supplies from new domestic wells, conproviding benefits, rose only 11⁄ 4 per- sumer natural gas prices fell sharply cent in nominal terms in 2009 after ris- over the first half of 2009, before in-

24 96th Annual Report, 2009 13. Change in the Chain-Type Price firms’ widespread cost-cutting efforts Index for Personal Consumption over the past year and the continued Expenditures, 2003–09 weakness in the housing market that has put downward pressure on housing Percent, annual rate costs have likely been important fac- Total tors. The prices of many core consumer 5 Excluding food and energy goods continued to rise only moder- 4 ately in 2009; a notable exception was 3 tobacco, for which tax-induced price 2 hikes were substantial. 1 Survey-based measures of near-term + _0 inflation expectations, which were unusually low in the beginning of 2003 2005 2007 2009 2009, moved up, on average, over the NOTE: Change is from December to December. remainder of the year. According to the SOURCE: Department of Commerce, Bureau of Eco- Thomson Reuters/University of Michinomic Analysis. gan Surveys of Consumers, median expectations for year-ahead inflation creasing again in the last few months stood at 2.8 percent in January, up of the year as the economic outlook from about 2 percent at the beginning improved. Electricity prices also fell of 2009. Historically, this short-term during the early part of 2009 before re- measure has been influenced fairly tracing part of that decline later in the heavily by contemporaneous moveyear. Overall, natural gas prices were ments in energy prices. Longer-term indown almost 20 percent in 2009, while flation expectations, by contrast, have electricity prices were about un- been relatively stable over the past changed. year. For example, the Thomson After posting sizable declines Reuters/University of Michigan survey throughout much of 2009, food prices measure of median 5- to 10-year inflaturned up modestly in the fourth quar- tion expectations was 2.9 percent in ter of last year. For the year as a January of this year, similar to the whole, consumer food prices fell 11⁄ 2 readings during most of 2009, and near percent after rising 63⁄ 4 percent in the lower end of the narrow range that 2008; these changes largely reflected has prevailed over the past few years. the pass-through to retail of huge swings in spot prices of crops and live- Financial Stability stock over the past two years. Developments Excluding food and energy, PCE price inflation slowed last year. Core PCE prices rose at an annual rate of Evolution of the Financial Sector, 13⁄ 4 percent in the first half of 2009, Policy Actions, and Market similar to the pace in 2008, and then Developments increased at an annual rate of only a little above 1 percent over the final six The recovery in the financial sector months of the year. This slowdown in that began in the first half of 2009 concore inflation was centered in a notice- tinued through the second half of the able deceleration in the prices of non- year and into 2010, as investor conenergy services. For those prices, cerns about the health of large financial

Monetary Policy Report of February 2010 25 14. Spreads on Credit Default Swaps for Agreements with Fannie Mae and Fred- Selected U.S. Banks, 2007–10 die Mac to ensure that each firm would maintain positive net worth for the next Basis points three years, and it also announced that 400 it was providing additional capital to 350 GMAC under the TARP. 300 Consistent with diminishing con- Large bank holding 250 companies cerns about the conditions of banking 200 institutions, functioning in bank fund- 150 100 ing markets has improved steadily Other banks 50 since the spring of last year. A measure Jan. July Jan. July Jan. July Jan. of stress in these markets—the spread 2007 2008 2009 2010 between the London interbank offered NOTE: The data are daily and extend through Feb- rate (Libor) and the rate on ruary 18, 2010. Median spreads for six bank holding comparable-maturity overnight index companies and nine other banks. swaps (OIS)—narrowed at all maturi- SOURCE: Markit. ties; spreads at shorter maturities reached pre-crisis levels, while those at institutions subsided further. Credit de- longer maturities remained somewhat fault swap (CDS) spreads for banking elevated by historical standards (figure institutions—which primarily reflect in- 15). Liquidity in term bank funding vestors’ assessments of and willingness markets also improved at terms up to to bear the risk that those institutions six months. Conditions improved in will default on their debt obligations— other money markets as well. Bidfell considerably from their peaks early asked spreads and haircuts applied to in 2009, although they remain above pre-crisis levels (figure 14). Bank 15. Libor Minus Overnight Index Swap equity prices have increased signifi- Rate, 2007–10 cantly since spring 2009. Many of the largest bank holding companies were Basis points able to issue equity and repurchase pre- 350 ferred shares that had been issued to 300 the Treasury under the TARP. Nonethe- 250 less, conditions in many banking mar- 200 Six-month kets remain very challenging, with de- 150 linquency and charge-off rates still 100 Oneelevated, especially on commercial and month 50 residential real estate loans. Investor 0 concerns about insurance companies— Jan. July Jan. July Jan. July Jan. 2007 2008 2009 2010 which had come under pressure in early 2009 and a few of which had re- NOTE: The data are daily and extend through February 19, 2010. An overnight index swap (OIS) is an ceived capital injections from the interest rate swap with the floating rate tied to an index Treasury—also diminished, as indi- of daily overnight rates, such as the effective federal funds rate. At maturity, two parties exchange, on the cated by narrowing CDS spreads for basis of the agreed notional amount, the difference those firms and increases in their between interest accrued at the fixed rate and interest equity prices. In December, the Trea- accrued by averaging the floating, or index, rate. Libor is the London interbank offered rate. sury announced that it was amending SOURCE: For Libor, British Bankers’ Association; for the cap on its Preferred Stock Purchase the OIS rate, Prebon.

26 96th Annual Report, 2009 collateral in repurchase agreement Credit Facility, the Term Securities (repo) markets retraced some of the Lending Facility, the Commercial Paper run-ups that had occurred during the Funding Facility, the Asset-Backed financial market turmoil, though hair- Commercial Paper Money Market cuts on most types of collateral contin- Mutual Fund Liquidity Facility, and the ued to be sizable relative to pre-crisis temporary liquidity swap lines with levels. In the commercial paper market, foreign central banks were all allowed spreads between rates on lower-quality to expire on February 1, 2010. Other A2/P2 paper and on asset-backed com- government agencies also reduced their mercial paper over higher-quality AA support to financial institutions. For nonfinancial paper fell to the low end instance, to buttress the liquidity of of the range observed since the fall of financial institutions, the FDIC had es- 2007. tablished in October 2008 a program to With improved conditions in finan- provide, in exchange for a fee, a guarcial markets, the Federal Reserve and antee on short- and medium-term debt other agencies removed some of the issued by banking institutions. Finanextraordinary support that had been cial institutions issued about $300 bilprovided during the crisis. Starting in lion under this program, but use of the the second half of 2009, the Federal program declined after the summer of Reserve began to normalize its lending 2009 as financial institutions were able to commercial banks. The amounts and to successfully issue nonguaranteed maturity of credit auctioned through debt. In light of these developments, the Term Auction Facility (TAF) were the FDIC announced in late October reduced over time, and early in 2010 2009 that the guarantee program would the Federal Reserve announced that the be extended but with significant restricfinal TAF auction would be conducted tions; no debt has been issued under in March 2010. Later, the Federal the extended program. Reserve noted that the minimum bid Asset prices in longer-term capital rate for the final auction would be 50 markets have also staged a noticeable basis points, 1⁄ 4 percentage point higher recovery since the spring of 2009, and than in recent auctions. The Federal risk premiums have narrowed notice- Reserve also shortened the maximum ably as investors’ appetite for risk maturity of loans provided under the appears to be recovering. In the corpoprimary credit program from 90 days rate bond market, risk spreads on both to 28 days, effective on January 14, investment- and speculative-grade and announced a further reduction of bonds—the difference between the the maximum maturity of those loans yields on these securities and those on to overnight effective March 18. In comparable-maturity Treasury securaddition, the rate charged on primary ities—dropped, and by the end of last credit loans was increased from 1⁄ 2 per- year those spreads were within ranges cent to 3⁄ 4 percent effective February observed during the recoveries from 19. Amounts outstanding under many previous recessions. During the second of the Federal Reserve’s special liquid- half of 2009, the decline in risk spreads ity facilities had dwindled to zero (or was accompanied by considerable innear zero) over the second half of 2009 flows into mutual funds that invest in as functioning of funding markets, both corporate bonds. In the leveraged loan in the United States and abroad, contin- market, the average bid price climbed ued to normalize. The Primary Dealer back toward par, and bid-asked spreads

Monetary Policy Report of February 2010 27 16. Stock Price Index, 1998–2010 Banking Institutions January 3, 2005 = 100 The profitability of the commercial banking sector, as measured by the Dow Jones total stock market index 140 return on equity, continued to be quite 120 low during the second half of 2009. El- 100 evated loan loss provisioning continued to be the largest factor restraining earn- 80 ings; however, provisioning decreased 60 significantly in the second half of the year, suggesting that banks believe that 1998 2000 2002 2004 2006 2008 2010 credit losses may be stabilizing. While NOTE: The data are daily and extend through some banks saw earnings boosted ear- February 18, 2010. lier last year by gains in trading and SOURCE: Dow Jones Indexes. investment banking activities, revenue from these sources is reported to have dropped back in the fourth quarter. narrowed noticeably as trading condi- Although delinquency and charge-off tions reportedly improved. Equity marrates for residential mortgages and kets rebounded significantly over the commercial real estate loans continued past few quarters, leaving broad equity to climb in the second half of 2009, for market indexes about 65 percent above most other types of loans these metrics the low point reached in March 2009 declined or showed signs of leveling (figure 16). out. Overall, the rebound in asset prices During the year, bank holding comlikely reflected corporate earnings that panies issued substantial amounts of were generally above market expectacommon equity. Significant issuance tions, improved measures of corporate occurred in the wake of the release of credit quality, and brighter economic the Supervisory Capital Assessment prospects. Apparently, investors also Program (SCAP) results, which indibecame somewhat less concerned about cated that some firms needed to augthe downside risks to the economic ment or improve the quality of their outlook, as suggested by declines in capital in order to assure that, even unmeasures of uncertainty and risk premider a macroeconomic scenario that was ums. Implied volatility on the S&P more adverse than expected, they 500, as calculated from option prices, would emerge from the subsequent held at moderate levels during the sectwo-year period still capable of meetond half of 2009 and was well off the ing the needs of creditworthy borrowpeak reached in November 2008. ers. The 19 SCAP firms issued about Moreover, a measure of the premium $110 billion in new common equity; that investors require for holding equity combined with conversions of preferred shares—the difference between the stock, asset sales, and other capital ratio of 12-month forward expected actions, these steps have added more earnings to equity prices for S&P 500 than $200 billion to common equity firms and the long-term real Treasury since the beginning of 2009. Equity ofyield—narrowed in 2009, though ferings were also undertaken by other it remains elevated by historical financial firms, and some used the standards.

28 96th Annual Report, 2009 17. Change in Total Bank Loans and basis for determining whether a firm Unused Bank Loan Commitments must consolidate securitized assets (as to Businesses and Households, well as the associated liabilities and 1990–2009 equity) onto its balance sheet; most banking organizations must implement Percent, annual rate the standards in the first quarter of 30 2010. Industry analysts estimate that Unused commitments 20 banking organizations will consolidate 10 approximately $600 billion of addi- + _0 tional assets as a result of implement- Total loans 10 ing FAS 166 and 167. A small number 20 of institutions with large securitization 30 programs will be most affected. While the regulatory capital ratios of the af- 1991 1994 1997 2000 2003 2006 2009 fected banking organizations may NOTE: The data, which are not seasonally adjusted, decrease after implementation of FAS are quarterly and extend through 2009:Q4. Total loans are adjusted to remove the effects of large thrifts 166 and 167, the ratios of organizations converting to commercial banks or merging with a most affected by the accounting change commercial bank. SOURCE: Federal Financial Institutions Examination are expected to remain substantially in Council, Consolidated Reports of Condition and Income excess of regulatory minimums. The (Call Report). federal banking agencies recently published a related risk-based capital rule proceeds to repay funds received as that includes an optional one-year part of the Capital Purchase Program. phase-in of certain risk-based capital Against a backdrop of weak loan de- impacts resulting from implementation mand and tight credit policies through- of FAS 166 and 167.16 out 2009, total loans on banks’ books contracted even more sharply in the last two quarters taken together than in the first half of the year (figure 17). Outstanding unused loan commitments 16. For more information and the text of the to both businesses and households also final rule, see Office of the Comptroller of the Currency, Board of Governors of the Federal declined, albeit at a slower pace than in ReserveSystem,FederalDepositInsuranceCorearly 2009. The decline in loans was poration,andOfficeofThriftSupervision(2010), partially offset by an increase in hold- “AgenciesIssueFinalRuleforRegulatoryCapiings of securities, particularly Treasury tal Standards Related to Statements of Financial Accounting Standards Nos. 166 and 167,” press securities and agency MBS, and a furrelease, January 21, www.federalreserve.gov/ ther rise in balances at the Federal newsevents/press/bcreg/20100121a.htm.Thefinal Reserve. On balance, total industry rule was also published in the Federal Register; assets declined. The decline in assets see Office of the Comptroller of the Currency, combined with an increase in capital to BoardofGovernorsoftheFederalReserveSystem,FederalDepositInsuranceCorporation,and push regulatory capital ratios consider- OfficeofThriftSupervision(2010),“Risk-Based ably higher. CapitalGuidelines;CapitalAdequacyGuidelines; The Financial Accounting Standards CapitalMaintenance:RegulatoryCapital;Impact Board published Statements of Finan- ofModificationstoGenerallyAcceptedAccounting Principles; Consolidation of Asset-Backed cial Accounting Standards Nos. 166 Commercial Paper Programs; and Other Related and 167 (FAS 166 and 167) in June Issues,” final rule, Federal Register, vol. 75 2009. The new standards modified the (January28),pp.4636–54.

Monetary Policy Report of February 2010 29 Monetary Policy Expectations and 18. Interest Rates on Selected Treasury Treasury Rates Securities, 2004–10 In July 2009, market participants had Percent expected the target federal funds rate to 10-year 5 be close to the current target range of 0 4 to 1⁄ 4 percent in early 2010, but they 2-year 3-month 3 had also anticipated that the removal of 2 policy accommodation would be imminent. Over the second half of 2009, + 1 however, investors marked down their _0 expectations for the path of the federal 2004 2006 2008 2010 funds rate. Quotes on futures contracts imply that, as of mid-February 2010, NOTE: The data are daily and extend through February 18, 2010. market participants anticipate that pol- SOURCE: Department of the Treasury. icy will be tightened beginning in the third quarter of 2010, and that the tightening will proceed at a pace about the economy and declines in the slower than was expected last summer. weight investors had placed on However, uncertainty about the size of extremely adverse economic outcomes. term premiums and potential distortions The gradual tapering and the complecreated by the zero lower bound for the tion of the Federal Reserve’s largefederal funds rate continue to make it scale asset purchases of Treasury secudifficult to obtain a definitive reading rities in October 2009 appeared to put on the policy expectations of market little upward pressure on Treasury participants from futures prices. The yields. downward revision in policy expecta- Yields on Treasury inflationtions since July likely has reflected in- protected securities (TIPS) declined coming economic data pointing to a somewhat in the second half of 2009 somewhat weaker trajectory for em- and into 2010. The result was an ployment and a lower path for inflation increase in inflation compensation— than had been anticipated. Another the difference between comparablecontributing factor likely was Federal maturity nominal yields and TIPS Reserve communications, including the yields. The increase was concentrated reiteration in the statement released at shorter-maturities and was partly a after each meeting of the Federal Open response to rising prices of oil and Market Committee that economic con- other commodities. Inflation compenditions are likely to warrant exception- sation at more distant horizons was ally low levels of the federal funds rate somewhat volatile and was little for an extended period. changed on net. Inferences about inves- Yields on shorter-maturity Treasury tors’ inflation expectations have been securities have edged lower since last more difficult to make since the second summer, consistent with the downward half of 2008 because special factors, shift in the expected policy path (figure such as safe-haven demands and an 18). However, yields on longer- increased preference of investors for maturity nominal Treasury securities liquid assets, appear to have signifihave increased slightly, on net, likely in cantly affected the relative demand for response to generally positive news nominal and inflation-indexed securi-

30 96th Annual Report, 2009 ties. These special factors began to declines in the interest rates offered on abate in the first half of 2009 and re- these products. The currency compoceded further in the second half of the nent of the money stock expanded year, and the resulting changes in modestly in the second half of the year. nominal and inflation-adjusted yields The monetary base—essentially the may have accounted for part of the sum of currency in circulation and the recent increase in inflation compensa- reserve balances of depository institution. On net, survey measures of tions held at the Federal Reserve— longer-run inflation expectations have expanded rapidly for much of the secremained stable. ond half of 2009, as the increase in reserve balances resulting from the large-scale asset purchases more than Monetary Aggregates and the offset the decline caused by reduced Federal Reserve’s Balance Sheet usage of the Federal Reserve’s credit After a brisk increase in the first half programs. However, the monetary base of the year, the M2 monetary aggregate increased more slowly toward the end expanded slowly in the second half of of 2009 and in early 2010 as these pur- 2009 and in early 2010.17 The rise in chases were tapered and as use of the latter part of the year was driven Federal Reserve liquidity facilities largely by increases in liquid deposits, declined. as interest rates on savings deposits The nontraditional monetary policy were reduced more slowly than rates actions taken by the Federal Reserve on other types of deposits, and house- since the onset of the financial crisis holds and firms maintained some pref- expanded the size of the Federal Reerence for safe and liquid assets. Out- serve’s balance sheet considerably durflows from small time deposits and ing 2008, and it remained very large retail money market mutual funds in- throughout 2009 and into 2010 (table tensified during the second half of 1). Total Federal Reserve assets on 2009, likely because of ongoing February 17, 2010, stood at about $2.3 trillion. The compositional shifts that had been under way in the first half of 17. M2 consists of (1) currency outside the 2009 continued during the remainder of U.S. Treasury, Federal Reserve Banks, and the the year. Lending to depository instituvaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits tions as well as credit extended under at commercial banks (excluding those amounts special liquidity facilities and the temheld by depository institutions, the U.S. govern- porary liquidity swaps with foreign ment,andforeignbanksandofficialinstitutions) central banks contracted sharply. By less cash items in the process of collection and contrast, the large-scale asset purchases FederalReservefloat;(4)othercheckabledeposits (negotiable order of withdrawal, or NOW, conducted by the Federal Reserve accountsandautomatictransferserviceaccounts boosted securities held outright. Holdatdepositoryinstitutions;creditunionsharedraft ings of agency MBS surpassed $1 trilaccounts; and demand deposits at thrift institulion early this year, up from about tions); (5) savings deposits (including money marketdepositaccounts);(6)small-denomination $525 billion in mid-July 2009. For timedeposits(timedepositsissuedinamountsof other types of securities, the increases less than $100,000) less individual retirement were more modest, with holdings of account(IRA)andKeoghbalancesatdepository agency debt expanding from about institutions; and (7) balances in retail money $100 billion in July 2009 to $165 bilmarket mutual funds less IRA and Keogh balancesatmoneymarketmutualfunds. lion in February and holdings of Trea-

Monetary Policy Report of February 2010 31 1. SelectedComponentsoftheFederalReserveBalanceSheet,2008–10 Millionsofdollars Dec.31, July15, Feb.17, Balancesheetitem 2008 2009 2010 Totalassets ......................................................... 2,240,946 2,074,822 2,280,952 Selectedassets Creditextendedtodepositoryinstitutionsanddealers Primarycredit..................................................... 93,769 34,743 14,156 Termauctioncredit ............................................... 450,219 273,691 15,426 Centralbankliquidityswaps ....................................... 553,728 111,641 0 PrimaryDealerCreditFacilityandotherbroker-dealercredit ........ 37,404 0 0 Creditextendedtoothermarketparticipants Asset-BackedCommercialPaperMoneyMarketMutualFund 23,765 5,469 0 LiquidityFacility ............................................... NetportfolioholdingsofCommercialPaperFundingFacilityLLC .. 334,102 111,053 7,721 NetportfolioholdingsofLLCsfundedthroughtheMoneyMarket 0 0 0 InvestorFundingFacility ........................................ TermAsset-BackedSecuritiesLoanFacility ........................ ... 30,121 47,182 Supportofcriticalinstitutions NetportfolioholdingsofMaidenLaneLLC,MaidenLaneIILLC, andMaidenLaneIIILLC1 ...................................... 73,925 60,546 65,089 CreditextendedtoAmericanInternationalGroup,Inc. .............. 38,914 42,871 25,535 PreferredinterestsinAIAAuroraLLCandALICOHoldingsLLC .. ... ... 25,106 Securitiesheldoutright U.S.Treasurysecurities............................................ 475,921 684,030 776,571 Agencydebtsecurities............................................. 19,708 101,701 165,587 Agencymortgage-backedsecurities(MBS)2 ........................ ... 526,418 1,025,541 Memo TermSecuritiesLendingFacility3 .................................... 171,600 4,250 0 Totalliabilities...................................................... 2,198,794 2,025,348 2,228,425 Selectedliabilities FederalReservenotesincirculation ................................ 853,168 870,327 892,985 Reservebalancesofdepositoryinstitutions ......................... 860,000 808,824 1,205,165 U.S.Treasury,generalaccount ..................................... 106,123 65,234 49,702 U.S.Treasury,supplementalfinancingaccount ...................... 259,325 199,939 5,000 Totalcapital ........................................................ 42,152 49,474 52,527 Note:LLCisalimitedliabilitycompany. 1. TheFederalReservehasextendedcredittoseveralLLCsinconjunctionwitheffortstosupportcriticalinstitutions.MaidenLaneLLCwasformedtoacquirecertainassetsofTheBearStearnsCompanies,Inc.MaidenLaneII LLCwasformedtopurchaseresidentialmortgage-backedsecuritiesfromtheU.S.securitieslendingreinvestment portfolioofsubsidiariesofAmericanInternationalGroup,Inc.(AIG).MaidenLaneIIILLCwasformedtopurchase multisectorcollateralizeddebtobligationsonwhichtheFinancialProductsgroupofAIGhaswrittencreditdefault swapcontracts. 2. IncludesonlyMBSpurchasesthathavealreadysettled. 3. TheFederalReserveretainsownershipofsecuritieslentthroughtheTermSecuritiesLendingFacility. ... Notapplicable. Source:FederalReserveBoard. sury securities rising from nearly $700 ALICO Holdings LLC, which are life billion to approximately $775 billion insurance holding company subsidiaries over the same period. The revolving of AIG. Loans related to the Maiden credit provided to American Interna- Lane facilities—which represent credit tional Group, Inc. (AIG), declined near extended in conjunction with efforts to year-end, as the outstanding balance avoid disorderly failures of The Bear was reduced in exchange for preferred Stearns Companies, Inc., and AIG— interests in AIA Aurora LLC and stayed roughly steady. On the liability

32 96th Annual Report, 2009 side of the Federal Reserve’s balance modity prices supported economic sheet, reserve balances increased from recovery in those countries. In the slightly more than $800 billion in July fourth quarter, the dollar stabilized and to about $1.2 trillion as of February 17, has since appreciated somewhat, on 2010, while the Treasury’s supplemen- net, as investors began to focus more tary financing account fell to $5 bil- on economic news and prospects for lion; the decline in the supplementary the relative strength of the economic financing account occurred late in 2009 recoveries in the United States and as part of the Treasury’s efforts to re- elsewhere (figure 19). Chinese authoritain flexibility in debt management ties held the renminbi steady against as federal debt approached the debt the dollar throughout the year. For ceiling. 2009 as a whole, the dollar depreciated roughly 41⁄ 2 percent on a tradeweighted basis against the major for- International Developments eign currencies and 31⁄ 2 percent against the currencies of the other important International Financial Markets trading partners of the United States. Sovereign bond yields in the Global financial markets recovered advanced economies rose over most of considerably in 2009 as the effective- 2009 as investors moved out of safe ness of central bank and government investments in government securities actions in stabilizing the financial sys- and became more willing to purchase tem became more apparent and as riskier securities. Concerns about rising signs of economic recovery began to budget deficits in many countries and take hold. Stock markets in the the associated borrowing needs also advanced foreign economies registered likely contributed to the increase in gains of about 50 percent from their troughs in early March, although they 19. U.S. Dollar Nominal Exchange Rate, remain below their levels at the start of Broad Index, 2005–10 the financial crisis in August 2007. Stock markets in the emerging market December 31, 2007 = 100 economies rebounded even more impressively over the year. Most Latin 120 American and many emerging Asian 115 stock markets are now close to their 110 levels at the start of the crisis. 105 As global prospects improved, inves- 100 tors shifted away from the safe-haven 95 investments in U.S. securities they had 90 made at the height of the crisis. As a 2005 2006 2007 2008 2009 2010 result, the dollar, which had appreci- NOTE: The data, which are in foreign currency units ated sharply in late 2008, depreciated per dollar, are daily. The last observation for the series against most other currencies in the is February 18, 2010. The broad index is a weighted second and third quarters of 2009. The average of the foreign exchange values of the U.S. dollar against the currencies of a large group of the most dollar depreciated particularly sharply important U.S. trading partners. The index weights, against the currencies of major which change over time, are derived from U.S. export shares and from U.S. and foreign import shares. commodity-producing nations, such as SOURCE: Federal Reserve Board, Statistical Release Australia and Brazil, as rising com- H.10, “Foreign Exchange Rates.”

Monetary Policy Report of February 2010 33 yields. Late in the year, the announce- Total private financial flows reversed ment of a substantial upward revision from the large net inflows that had to the budget deficit in Greece led to a characterized the second half of 2008 sharp rise in spreads of Greece’s sover- to large net outflows in the first half of eign debt over comparable yields on 2009. This reversal primarily reflected Germany’s sovereign debt. These changes in net bank lending. Banks lospreads remained elevated in early cated in the United States had sharply 2010 and also increased in other euro- curtailed their lending abroad as the area countries with sizable budget defi- financial crisis intensified in the third cits, especially Portugal and Spain. and fourth quarters of 2008, and they Sovereign yields in most of the renewed their net lending as functionadvanced economies, however, re- ing of interbank markets improved in mained significantly lower than prior to the first half of 2009. During the secthe financial crisis, as contained infla- ond half of 2009, interbank market tion, expectations of only slow eco- conditions continued to normalize, and nomic recovery, and easing of mone- net bank lending proceeded at a modertary policy by central banks have all ate pace. The increased availability of worked to keep long-term nominal funding in private markets also led to interest rates low. reduced demand from foreign central Conditions in global money markets banks for drawings on the liquidity have continued to improve. One-month swap lines with the Federal Reserve. Libor-OIS spreads in euros and sterling Repayment of the drawings in the first are now less than 10 basis points, near half of 2009 generated sizable U.S. oftheir levels before the crisis. Dollar ficial inflows that offset the large prifunding pressures abroad have also vate banking outflows. substantially abated, and foreign firms Foreign official institutions continued are more easily able to obtain dollar purchasing U.S. Treasury securities at a funding through private markets such strong pace throughout 2009, as they as those for foreign exchange swaps. had during most of the crisis. Foreign As a result, drawings on the Federal exchange intervention by several coun- Reserve’s temporary liquidity swap tries to counteract upward pressure on lines by foreign central banks declined their currencies gave a boost to these in the second half of 2009 to only purchases. Countries conducting such about $10 billion by the end of the intervention bought U.S. dollars in foryear, and funding markets continued to eign currency markets and acquired function without disruption as these U.S. assets, primarily Treasury securiswap lines expired on February 1, ties, with the proceeds. 2010. During the height of the crisis, private foreign investors had also purchased record amounts of U.S. Trea- The Financial Account sury securities, likely reflecting safe- The pattern of financial flows between haven demands. Starting in April 2009, the United States and the rest of the as improvement in financial conditions world in 2009 reflected the recovery became more apparent, private foreignunder way in global markets. As the ers began to sell U.S. Treasury securifinancial crisis eased, net bank lending ties, but net sales in the second and abroad resumed, but the recovery in third quarters were modest compared portfolio flows was mixed. with the amounts acquired in previous

34 96th Annual Report, 2009 quarters. The recovery in foreign de- Twelve-month consumer price inflamand for riskier U.S. securities was tion moved lower through the summer, mixed. Foreign investment in U.S. eq- with headline inflation turning negative uities picked up briskly after the first in all the major advanced foreign counquarter of 2009, nearly reaching a pre- tries except the United Kingdom. Howcrisis pace. However, foreign investors ever, higher energy prices in the second continued small net sales of U.S. cor- half of 2009 pushed inflation back into porate and agency debt. Meanwhile, positive territory except in Japan. Core U.S. investment in foreign securities consumer price inflation, which bounced back quickly and remained excludes food and energy, has fluctustrong throughout 2009. ated less. Foreign central banks cut policy rates aggressively during the first half Advanced Foreign Economies of 2009 and left those rates at histori- Economic activity in the advanced for- cally low levels through year-end. The eign economies continued to fall European Central Bank (ECB) has held sharply in early 2009 but began to its main policy rate at 1 percent since recover later in the year as financial May and has made significant amounts conditions improved and world trade of long-term funding available at this rebounded. The robust recovery in rate, allowing overnight interest rates to emerging Asia helped the Japanese fall to around 0.35 percent. The Bank economy to turn up in the second quar- of Canada has indicated that it expects ter, and other major foreign economies to keep its target for the overnight rate returned to positive economic growth at a record low 0.25 percent until at in the second half. Nevertheless, per- least mid-2010. In addition to their formance has been mixed. Spurred by interest rate moves, foreign central external demand and a reduction in the banks pursued unconventional monepace of inventory destocking, industrial tary easing. The Bank of England conproduction has risen in most countries tinued its purchases of British treasury but remains well below pre-crisis lev- securities, increasing its Asset Purchase els. Business confidence has shown Facility from £50 billion to £200 bilconsiderable improvement, and survey lion over the course of the year. Amid measures of manufacturing activity concerns about persistent deflation, the have risen as well. Consumer confi- Bank of Japan announced a new ¥10 dence also has improved as financial trillion three-month secured lending famarkets have stabilized, but household cility at an unscheduled meeting on finances remain stressed, with unem- December 1. The ECB has continued ployment at high levels and wage gains its planned purchases of up to €60 bilsubdued. Although government incen- lion in covered bonds, but it has also tives helped motor vehicle purchases to taken some initial steps toward scaling bounce back from the slump in early back its enhanced credit support mea- 2009, other household spending has sures, as it sees reduced need for speremained sluggish in most countries. cial programs to provide liquidity. Housing prices have recovered somewhat in the United Kingdom and more Emerging Market Economies in Canada but have continued to decline in Japan and in some euro-area Recovery from the global financial cricountries. sis has been more pronounced in the

Monetary Policy Report of February 2010 35 emerging market economies than in the the country’s first significant monetary advanced foreign economies. In aggre- policy tightening moves since the gate, emerging market economies con- financial crisis. In China and elsewhere tinued to contract in the first quarter of in Asia, asset prices have rebounded 2009, but economic activity in many sharply after falling steeply in the seccountries, particularly in emerging ond half of 2008. Asia, rebounded sharply in the second In Latin America, the rebound in acquarter and remained robust in the sec- tivity has lagged that in Asia. Ecoond half of the year. The upturn in eco- nomic activity in Mexico, which is nomic activity was driven largely by more closely tied to U.S. production domestic demand, which received and was adversely affected by the outstrong boosts from monetary and fiscal break of the H1N1 virus last spring, stimulus. By the end of 2009, the level did not turn up until the third quarter of real GDP in several emerging mar- of 2009, but it then grew rapidly. In ket economies had recovered to or was Brazil, the recession was less severe approaching pre-crisis peaks. With sig- than in Mexico, and economic growth nificant spare capacity as a result of the has been fairly strong since the second earlier steep contraction in activity in quarter of last year, supported in part these economies, inflation remained by government stimulus and rising generally subdued through the first half commodity prices. of last year but moved up in the fourth Russia and many countries in emergquarter as adverse weather conditions ing Europe suffered severe output conled to a sharp rise in food prices. tractions in the first half of 2009 and, In China, the fiscal stimulus package in some cases, further financial enacted in November 2008, combined stresses. In particular, Latvia faced difwith a surge in bank lending, led to a ficulties meeting the fiscal conditions sharp rise in investment and consump- of its international assistance package, tion. Strong domestic demand contrib- which heightened concerns about the uted to a rebound in imports, which survival of the Latvian currency rehelped support economic activity in the gime. However, economic and financial rest of Asia and in commodity- conditions in emerging Europe began exporting countries. Chinese authorities to recover in the second half of the halted the modest appreciation of their year. currency against the dollar in the middle of 2008, and the exchange rate between the renminbi and the dollar Part 3 has been unchanged since then. In the Monetary Policy: Recent second half of 2009, authorities acted Developments and Outlook to slow the increase in bank lending to a more sustainable pace after the level Monetary Policy over the Second of outstanding loans rose in the first Half of 2009 and Early 2010 half of the year by nearly one-fourth of nominal GDP. With the economy In order to provide monetary stimulus booming and inflation picking up, the to support a sustainable economic People’s Bank of China (the central expansion, the Federal Open Market bank) increased the required reserve Committee (FOMC) maintained a tarratio for banks 1⁄ 2 percentage point in get range for the federal funds rate of 0 January 2010 and again in February, to 1⁄ 4 percent throughout 2009 and into

36 96th Annual Report, 2009 early 2010. The Federal Reserve also during 2008 and early 2009. Nonethecontinued its program of large-scale less, meeting participants generally saw asset purchases, completing purchases the economy as likely to recover only of $300 billion in Treasury securities slowly during the second half of 2009 and making considerable progress to- and as still vulnerable to adverse ward completing its announced pur- shocks. Although housing activity apchases of $1.25 trillion of agency parently was beginning to turn up, the mortgage-backed securities (MBS) and weak labor market continued to restrain about $175 billion of agency debt. household income, and earlier declines However, with financial market con- in net worth were still holding back ditions improving, the Federal Reserve spending. Developments in financial took steps to begin winding down markets leading up to the meeting were many of its special credit and liquidity broadly positive, and the cumulative programs in 2009. On June 25, the improvement in market functioning Federal Reserve announced that it was since the spring was significant. Howextending the authorizations of several ever, the pickup in financial markets of these programs from October 30, was seen as due, in part, to support 2009, to February 1, 2010. However, from various government programs. the terms of some of these facilities Moreover, credit remained tight, with were tightened somewhat, the amounts many banks reporting that they continto be offered under the Term Auction ued to tighten loan standards and Facility (TAF) were reduced, and the terms. Overall prices for personal conauthorization for the Money Market In- sumption expenditures (PCE) rose in vestor Funding Facility was not June after changing little in each of the extended.18 Over the summer, the Fed- previous three months. Excluding food eral Reserve continued to trim the and energy, PCE prices moved up amounts offered through the TAF. moderately in June. The information reviewed at the Given the prospects for an initially August 11–12 FOMC meeting sug- modest economic recovery, substantial gested that overall economic activity resource slack, and subdued inflation, was stabilizing after having contracted the Committee agreed at its August meeting that it should maintain its target range for the federal funds rate at 0 18. In particular, the Federal Reserve began to 1⁄ 4 percent. FOMC participants requiringmoneymarketmutualfundstohaveex- expected only a gradual upturn in ecoperienced redemptions exceeding a certain nomic activity and subdued inflation threshold before becoming eligible to borrow and thought it most likely that the fedfromtheAsset-BackedCommercialPaperMoney eral funds rate would need to be main- MarketMutualFundLiquidityFacility.TheFederal Reserve also suspended auctions conducted tained at an exceptionally low level for under the Term Securities Lending Facility an extended period. With the downside (TSLF)involvingonlySchedule1collateraland risks to the economic outlook now conreduced the frequency of TSLF auctions involvsiderably reduced but the economic ing Schedule 2 collateral. Schedule 1 collateral refers to securities eligible for the open market recovery likely to be subdued, the operations arranged by the Federal Reserve’s Committee also agreed that neither Open Market Trading Desk—generally Treasury expansion nor contraction of its prosecurities, agency debt, or agency MBS. Schedgram of asset purchases was warranted ule2collateralincludesallSchedule1collateral at the time. The Committee did, howaswellasinvestment-gradecorporate,municipal, mortgage-backed,andasset-backedsecurities. ever, decide to gradually slow the pace

Monetary Policy Report of February 2010 37 of the remainder of its purchases of that their firms would also be cautious $300 billion of Treasury securities and in hiring and investing even as demand extend their completion to the end of for their products picked up. Some of October to help promote a smooth tran- the recent gains in economic activity sition in financial markets. Policymak- probably reflected support from govers noted that, with the programs for ernment policies, and participants expurchases of agency debt and MBS not pressed considerable uncertainty about due to expire until the end of the year, the likely strength of the upturn once they did not need to make decisions at those supports were withdrawn or their the meeting about any potential modifi- effects waned. Core consumer price incations to those programs. flation remained subdued, while overall By the time of the September 22–23 consumer price inflation increased in FOMC meeting, incoming data sug- August, boosted by a sharp upturn in gested that overall economic activity energy prices. was beginning to pick up. Factory out- Although the economic outlook had put, particularly motor vehicle produc- improved further and the risks to the tion, rose in July and August. Con- forecast had become more balanced, sumer spending on motor vehicles the recovery in economic activity was during that period was boosted by gov- likely to be protracted. With substantial ernment rebates and greater dealer in- resource slack likely to persist and centives. Household spending outside longer-term inflation expectations of motor vehicles appeared to rise in stable, the Committee anticipated that August after having been roughly flat inflation would remain subdued for from May through July. Sales data for some time. Under these circumstances, July indicated further increases in the the Committee judged that the costs of demand for both new and existing the economic recovery turning out to single-family homes. Although employ- be weaker than anticipated could be ment continued to contract in August, relatively high. Accordingly, the Comthe pace of job losses had slowed no- mittee agreed to maintain its target ticeably from earlier in the year. Devel- range for the federal funds rate at 0 to opments in financial markets were 1⁄ 4 percent and to reiterate its view that again regarded as broadly positive; economic conditions were likely to meeting participants saw the cumula- warrant an exceptionally low level of tive improvement in market functioning the federal funds rate for an extended and pricing since the spring as substan- period. With respect to the large-scale tial. Despite these positive factors, par- asset purchase programs, the Committicipants still viewed the economic tee indicated its intention to purchase recovery as likely to be quite re- the full $1.25 trillion of agency MBS strained. Credit from banks remained that it had previously established as the difficult to obtain and costly for many maximum for this program. With reborrowers; these conditions were spect to agency debt, the Committee expected to improve only gradually. agreed to reiterate its intention to pur- Many regional and small banks were chase up to $200 billion of these secuvulnerable to the deteriorating perfor- rities. To promote a smooth transition mance of commercial real estate loans. in markets as these programs con- In light of recent experience, consum- cluded, the Committee decided to ers were likely to be cautious in spend- gradually slow the pace of both its ing, and business contacts indicated agency MBS and agency debt

38 96th Annual Report, 2009 purchases and to extend their comple- exports. Meanwhile, consumer price intion through the end of the first quarter flation remained subdued. In spite of of 2010. To keep inflation expectations these largely positive developments, well anchored, policymakers agreed on participants at the November meeting the importance of the Federal Reserve noted that they were unsure how much continuing to communicate that it has of the recent firming in final demand the tools and willingness to begin with- reflected the effects of temporary fiscal drawing monetary policy accommoda- programs. Downside risks to economic tion at the appropriate time and pace to activity included continued weakness in prevent any persistent increase in infla- the labor market and its implications tion. for the growth of household income On September 24, the Board of Gov- and consumer confidence. Bank credit ernors announced a gradual reduction remained tight. Nonetheless, policyin amounts to be auctioned under the makers expected the recovery to con- TAF through January and indicated that tinue in subsequent quarters, although auctions of credit with maturities at a pace that would be rather slow longer than 28 days would be phased relative to historical experience after out by the end of 2009. Usage of the severe downturns. FOMC participants TAF had been declining in recent noted the possibility that some negative months as financial market conditions side effects might result from the mainhad continued to improve. The Money tenance of very low short-term interest Market Investor Funding Facility, rates for an extended period, including which had been established in October the possibility that such a policy stance 2008 to help arrest a run on money could lead to excessive risk-taking in market mutual funds, expired as sched- financial markets or an unanchoring of uled on October 30, 2009. inflation expectations. The Committee At the November 3–4 FOMC meet- agreed that it was important to remain ing, participants agreed that the incom- alert to these risks. ing information suggested that eco- Based on this outlook, the Commitnomic activity was picking up as tee decided to maintain the target range anticipated, with output continuing to for the federal funds rate at 0 to 1⁄ 4 perexpand in the fourth quarter. Business cent and noted that economic condiinventories were being brought into tions, including low levels of resource better alignment with sales, and the utilization, subdued inflation trends, pace of inventory runoff was slowing. and stable inflation expectations, were The gradual recovery in construction of likely to warrant exceptionally low single-family homes from its extremely rates for an extended period. With relow level earlier in the year appeared spect to the large-scale asset purchase to be continuing. Consumer spending programs, the Committee reiterated its appeared to be rising even apart from intention to purchase $1.25 trillion of the effects of fiscal incentives to agency MBS by the end of the first purchase autos. Financial market devel- quarter of 2010. Because of the limited opments over recent months were gen- availability of agency debt and conerally regarded as supportive of contin- cerns that larger purchases could imued economic recovery. Further, the pair market functioning, the Committee outlook for growth abroad had im- also agreed to specify that its agency proved since earlier in the year, espe- debt purchases would cumulate to cially in Asia, auguring well for U.S. about $175 billion by the end of the

Monetary Policy Report of February 2010 39 first quarter, $25 billion less than the participants broadly anticipated that the previously announced maximum for pickup in output and employment these purchases. The Committee also would be rather slow relative to past decided to reiterate its intention to recoveries from deep recessions. gradually slow the pace of purchases of The Committee made no changes to agency MBS and agency debt to pro- either its large-scale asset purchase promote a smooth transition in markets as grams or its target range for the federal the announced purchases are com- funds rate of 0 to 1⁄ 4 percent and, based pleted. on the outlook for a relatively sluggish On November 17, the Board of Gov- economic recovery, decided to reiterate ernors announced that, in light of con- its anticipation that economic conditinued improvement in financial market tions, including low levels of resource conditions, in January 2010 the maxi- utilization, subdued inflation trends, mum maturity of primary credit loans and stable inflation expectations, were at the discount window for depository likely to warrant exceptionally low institutions would be reduced to 28 rates for an extended period. Commitdays from 90 days. tee members and Board members The information reviewed at the agreed that substantial improvements in December 15–16 FOMC meeting sug- the functioning of financial markets gested that the recovery in economic had occurred; accordingly, they agreed activity was gaining momentum. that the statement to be released fol- Although the unemployment rate re- lowing the meeting should note the mained very elevated and capacity uti- anticipated expiration of most of the lization low, the pace of job losses had Federal Reserve’s special liquidity faslowed noticeably since the summer, cilities on February 1, 2010. and industrial production had sustained At the January 26–27 meeting, the the broad-based expansion that began Committee agreed that the incoming in the third quarter. Consumer spending information, though mixed, indicated expanded solidly in October. Sales of that overall economic activity had new homes had risen in October after strengthened in recent months, about as two months of little change, while sales expected. Consumer spending was well of existing homes continued to increase maintained in the fourth quarter, and strongly. Financial market conditions business expenditures on equipment were generally regarded as having and software appeared to expand subbecome more supportive of continued stantially. However, the improvement economic recovery during the inter- in the housing market slowed, and meeting period. A jump in energy spending on nonresidential structures prices pushed up headline inflation continued to fall. Recent data suggested somewhat, but core consumer price in- that the pace of inventory liquidation flation remained subdued. Although diminished considerably last quarter, some of the recent data had been better providing a sizable boost to economic than anticipated, policymakers gener- activity. Indeed, industrial production ally saw the incoming information as advanced at a solid rate in the fourth broadly in line with their expectations quarter. In the labor market, layoffs for a moderate economic recovery and subsided noticeably in the final months subdued inflation. Consistent with ex- of last year, but the unemployment rate perience following previous financial remained elevated and hiring stayed crises here and abroad, FOMC quite limited. The weakness in labor

40 96th Annual Report, 2009 Federal Reserve Initiatives to Increase Transparency Transparency is a key tenet of modern analysis contain detailed information recentral banking both because it contrib- garding policymakers’ views about the utes importantly to the accountability of future path of real gross domestic prodcentral banks to the government and the uct, inflation, and unemployment, inpublic and because it can enhance the cluding the long-run values of these effectiveness of central banks in achiev- variablesassumingappropriatemonetary ing their macroeconomic objectives. In policy.1 recognition of the importance of trans- Duringthefinancialcrisis,theFederal parency, the Federal Reserve has pro- Reserveimplementedanumberofcredit vided detailed information on the non- and liquidity programs to support the traditional policy actions taken to functioning of key financial markets and address the financial crisis, and gener- institutions and took complementary ally aims to maximize the amount of in- steps to ensure appropriate transparency formation it can provide to the public and accountability in operating these consistent with its broad policy objec- programs. The Board’s weekly H.4.1 tives. statistical release has been greatly The Federal Reserve has significantly expanded to provide detailed informaenhanced its transparency in a number tion on the Federal Reserve’s balance of important dimensions over recent sheet and the operation of the various years. On matters related to the conduct credit and liquidity facilities.2 The reof monetary policy, the Federal Reserve lease is closely watched in financial has long been one of the most transpar- markets and by the public for nearly ent central banks in the world. Follow- real-timeinformationontheevolutionof ing each of its meetings, the Federal theFederalReserve’sbalancesheet. Open Market Committee (FOMC) re- The Federal Reserve also developed a leasesstatementsthatprovidearationale public website focused on its credit and for the policy decision, along with a liquidity programs that provides backrecord of the Committee’s vote and ex- ground information on all the facilities.3 planations for any dissents. In addition, In addition, starting in December 2008 detailedminutesofeachFOMCmeeting the Federal Reserve has issued are made public three weeks following the meeting. The minutes provide a 1. FOMCstatementsandminutes,theSummary great deal of information about the ofEconomicProjections,andotherrelatedinformation are available on the Federal Reserve Board’s range of policymakers’ views on the website. See Board of Governors of the Federal economic situation and outlook as well ReserveSystem,“FederalOpenMarketCommittee,” as on their deliberations about the ap- webpage, www.federalreserve.gov/monetarypolicy/ propriate stance of monetary policy. fomc.htm. 2. Board of Governors of the Federal Reserve Recently, the Federal Reserve further System,StatisticalReleaseH.4.1,“FactorsAffecting advanced transparency by initiating a ReserveBalances,”webpage,www.federalreserve.gov/ quarterly Summary of Economic Projec- releases/h41. tionsofFederalReserveBoardmembers 3. Board of Governors of the Federal Reserve System, “Credit and Liquidity Programs and the andReserveBankpresidents.Thesepro- BalanceSheet,”webpage,www.federalreserve.gov/ jections and the accompanying summary monetarypolicy/bst.htm.

Monetary Policy Report of February 2010 41 FederalReserveInitiatives—continued bi-monthly reports to the Congress in The Federal Reserve has also been fulfillment of section 129 of the Emer- transparent about the management of its gency Economic Stabilization Act of programs. Various programs employ 2008; in October 2009, the Federal private-sector firms as purchasing and Reserve began incorporating these re- settlement agents and to perform other ports into its monthly report on credit functions; the contracts for all of these and liquidity programs and the balance vendor arrangements are available on sheet.4 The monthly report, which is the website of the Federal Reserve Bank available on the Federal Reserve’s web- of New York.6 Moreover, the Federal site, provides more-detailed information Reserve has recently begun to publish on the full range of credit and liquidity detailed CUSIP-number-level data reprograms implemented during the crisis. gardingitsholdingsofTreasury,agency, This report includes data on the number and agency mortgage-backed securities; and types of borrowers using various fa- these data provide the public with precilities and on the types and value of cise information about the maturity and collateral pledged; information on the asset composition of the Federal Reassetsheldintheso-calledMaidenLane serve’s securities holdings.7 On January facilities—created to acquire certain 11, 2010, the Federal Reserve Bank of assets of The Bear Stearns Companies, New York published a revised policy Inc., and of American International governing the designation of primary Group, Inc. (AIG)—and in other special dealers.8 An important motivation in islending facilities; and quarterly financial suing revised guidance in this area was statements for the Federal Reserve Sys- to make the process for becoming a pritem. Furthermore, the monthly reports marydealermoretransparent. provide detailed information on all of the programs that rely on emergency lendingauthorities,includingtheFederal Reserve’s assessment of the expected cost to the Federal Reserve and the U.S. 6. FederalReserveBankofNewYork,“Vendor taxpayerofvariousFederalReservepro- Information,” webpage, www.newyorkfed.org/ grams implemented during the crisis. To aboutthefed/vendor_information.html. provide further transparency regarding 7. FederalReserveBankofNewYork,“System its transactions with AIG, the Federal Open Market Account Holdings,” webpage, www. newyorkfed.org/markets/soma/sysopen_accholdings. Reserve recently indicated that it would html. welcome a full review by the Govern- CUSIPistheabbreviationforCommitteeonUnimentAccountabilityOfficeofallaspects formSecuritiesIdentificationProcedures.ACUSIP of the Federal Reserve’s involvement number identifies most securities, including stocks withtheextensionofcredittoAIG.5 ofallregisteredU.S.andCanadiancompaniesand U.S.governmentandmunicipalbonds.TheCUSIP system—ownedbytheAmericanBankersAssocia- 4. Board of Governors of the Federal Reserve tionandoperatedbyStandard&Poor’s—facilitates System,FederalReserveSystemMonthlyReporton theclearingandsettlementprocessofsecurities. Credit and Liquidity Programs and the Balance 8. Federal Reserve Bank of New York (2010), Sheet(Washington:BoardofGovernors). “New York Fed Publishes Revised Policy for 5. Ben S. Bernanke (2010), letter to Gene L. Administration of Primary Dealer Relationships,” Dodaro, January 19, www.federalreserve.gov/ press release, January 11, www.newyorkfed.org/ monetarypolicy/files/letter_aig_20100119.pdf. newsevents/news/markets/2010/ma100111.html.

42 96th Annual Report, 2009 markets continued to be an important liquidity facilities and that the tempoconcern for the Committee; moreover, rary swap lines with foreign central the prospects for job growth remained banks would expire. In addition, the a significant source of uncertainty in statement would say that the Federal the economic outlook, particularly in Reserve was in the process of winding the outlook for consumer spending. down the TAF and that the final auc- Financial market conditions were sup- tion would take place in March 2010. portive of economic growth. However, On February 1, 2010, given the net debt financing by nonfinancial overall improvement in funding marbusinesses was near zero in the fourth kets, the Federal Reserve allowed the quarter after declining in the third, con- Primary Dealer Credit Facility, the sistent with sluggish demand for credit Term Securities Lending Facility, the and tight credit standards and terms at Commercial Paper Funding Facility, banks. Increases in energy prices and the Asset-Backed Commercial pushed up headline consumer price in- Paper Money Market Mutual Fund flation even as core consumer price in- Liquidity Facility to expire. The tempflation remained subdued. orary swap lines with foreign central In their discussion of monetary pol- banks were closed on the same day. On icy for the period ahead, the Commit- February 18, 2010, the Federal Reserve tee agreed that neither the economic announced a further normalization of outlook nor financial conditions had the terms of loans made under the prichanged appreciably since the Decem- mary credit facility: The rate charged ber meeting and that no changes to the on these loans was increased from Committee’s large-scale asset purchase 1⁄ 2 percent to 3⁄ 4 percent, effective on programs or to its target range for the February 19, and the typical maximum federal funds rate of 0 to 1⁄ 4 percent maturity for such loans was shortened were warranted at this meeting. Fur- to overnight, effective on March 18, ther, policymakers reiterated their 2010. On the same day, the Federal anticipation that economic conditions, Reserve also announced that the miniincluding low levels of resource utiliza- mum bid rate on the final TAF auction tion, subdued inflation trends, and on March 8 had been raised to 50 basis stable inflation expectations, were points, 1⁄ 4 percentage point higher than likely to warrant exceptionally low in previous auctions. The Federal rates for an extended period. The Com- Reserve noted that the modifications mittee affirmed its intention to pur- are not expected to lead to tighter chase a total of $1.25 trillion of agency financial conditions for households and MBS and about $175 billion of agency businesses and do not signal any debt by the end of the current quarter change in the outlook for the economy and to gradually slow the pace of these or for monetary policy. purchases to promote a smooth transi- Over the course of 2009, the Federal tion in markets. Committee members Reserve continued to undertake initiaand Board members agreed that with tives to improve communications about substantial improvements in most its policy actions. These initiatives are financial markets, including interbank described in detail in the box “Federal markets, the statement would indicate Reserve Initiatives to Increase that on February 1, 2010, the Federal Transparency.” Reserve was closing several special

Monetary Policy Report of February 2010 43 Monetary Policy as the Economy not supply short-term funds to the Recovers money markets at rates significantly below what they can earn by simply The actions taken by the Federal leaving funds on deposit at the Federal Reserve to support financial market Reserve Banks. Actual and prospective functioning and provide extraordinary increases in short-term interest rates monetary stimulus to the economy will be reflected, in turn, in longerhave led to a rapid expansion of the term interest rates and in financial con- Federal Reserve’s balance sheet, from ditions more generally through standard less than $900 billion before the crisis transmission mechanisms, thus preventbegan in 2007 to about $2.3 trillion ing inflationary pressures from currently. The expansion of the Federal developing. Reserve’s balance sheet has been ac- The Federal Reserve has also been companied by a comparable increase in developing a number of additional the quantity of reserve balances held by tools that will reduce the quantity of depository institutions. Bank reserves reserves held by the banking system are currently far above their levels and lead to a tighter relationship prior to the crisis. Even though, as between the interest rate that the Fednoted in recent statements of the eral Reserve pays on banks’ holdings FOMC, economic conditions are likely of reserve balances and other shortto warrant exceptionally low rates for term interest rates. Reverse repurchase an extended period, in due course, as agreements (reverse repos) are one the expansion matures, the Federal such tool; in a reverse repo, the Federal Reserve will need to begin to tighten Reserve sells a security to a countermonetary conditions to prevent the de- party with an agreement to repurchase velopment of inflation pressures. That it at some specified date in the future. tightening will be accomplished partly The counterparty’s payment to the Fedthrough changes that will affect the eral Reserve has the effect of draining composition and size of the Federal an equal quantity of reserves from the Reserve’s balance sheet. Eventually, banking system. Recently, by developthe level of reserves and the size of the ing the capacity to conduct such trans- Federal Reserve’s balance sheet will be actions in the triparty repo market, the reduced substantially. Federal Reserve has enhanced its abil- The Federal Reserve has a number ity to use reverse repos to absorb very of tools that will enable it to firm the large quantities of reserves. The capastance of policy at the appropriate time bility to carry out these transactions and to the appropriate degree, some of with primary dealers, using the Federal which do not affect the size of the bal- Reserve’s holdings of Treasury and ance sheet or the quantity of reserves. agency debt securities, has already Most importantly, in October 2008 the been tested and is currently available if Congress gave the Federal Reserve and when needed. To further increase statutory authority to pay interest on its capacity to drain reserves through banks’ holdings of reserve balances at reverse repos, the Federal Reserve is Federal Reserve Banks. By increasing also in the process of expanding the set the interest rate paid on reserves, the ofcounterpartieswithwhichitcantrans- Federal Reserve will be able to put sig- act and is developing the infrastructure nificant upward pressure on all short- necessary to use its MBS holdings as term interest rates, because banks will collateral in these transactions.

44 96th Annual Report, 2009 As a second means of draining also be used to drain reserves and supreserves, the Federal Reserve is also port the Federal Reserve’s control of developing plans to offer to depository short-term interest rates. However, the institutions term deposits, which are use of the SFP must be compatible roughly analogous to certificates of de- with the Treasury’s debt-management posit that the institutions offer to their objectives. The SFP is not a necessary customers. The Federal Reserve would element in the Federal Reserve’s set of likely offer large blocks of such depos- tools to achieve an appropriate moneits through an auction mechanism. The tary policy stance in the future; still, effect of these transactions would be to any amount outstanding under the SFP convert a portion of depository institu- will result in a corresponding decrease tions’ holdings of reserve balances into in the quantity of reserves in the bankdeposits that could not be used to meet ing system, which could be helpful depository institutions’ very short-term in the Federal Reserve’s conduct of liquidity needs and could not be policy. counted as reserves. The Federal Re- The exact sequence of steps and serve published in the Federal Register combination of tools that the Federal a proposal for such a term deposit fa- Reserve chooses to employ as it exits cility and is in the process of reviewing from its current very accommodative the public comments received. After a policy stance will depend on economic revised proposal is approved by the and financial developments. One pos- Board, the Federal Reserve expects to sible trajectory would be for the Fedbe able to conduct test transactions in eral Reserve to continue to test its tools the spring and to have the facility for draining reserves on a limited basis available if necessary shortly thereafter. in order to further ensure preparedness Reverse repos and the deposit facility and to give market participants a period would together allow the Federal of time to become familiar with their Reserve to drain hundreds of billions of operation. As the time for the removal dollars of reserves from the banking of policy accommodation draws near, system quite quickly should it choose those operations could be scaled up to to do so. drain more-significant volumes of re- The Federal Reserve also has the serve balances to provide tighter conoption of redeeming or selling securi- trol over short-term interest rates. The ties as a means of applying monetary actual firming of policy would then be restraint. A reduction in securities hold- implemented through an increase in the ings would have the effect of further interest rate paid on reserves. If ecoreducing the quantity of reserves in the nomic and financial developments were banking system as well as reducing the to require a more rapid exit from the overall size of the Federal Reserve’s current highly accommodative policy, balance sheet. It would likely also put however, the Federal Reserve could at least some direct upward pressure on increase the interest rate on reserves at longer-term yields. about the same time it commences The Treasury’s temporary Supple- draining operations. mentary Financing Program (SFP)— The Federal Reserve currently does through which the Treasury issues not anticipate that it will sell any of its Treasury bills to the public and places securities holding in the near term, at the proceeds in a special deposit least until after policy tightening has account at the Federal Reserve—could gotten under way and the economy is

Monetary Policy Report of February 2010 45 clearly in a sustainable recovery. How- neously monitoring a range of market ever, to help reduce the size of its bal- rates. No decision has been made on ance sheet and the quantity of reserves, this issue, and any deliberation will be the Federal Reserve is allowing agency guided in part by the evolution of the debt and MBS to run off as they ma- federal funds market as policy accomture or are prepaid. The Federal modation is withdrawn. The Federal Reserve is rolling over all maturing Reserve anticipates that it will eventu- Treasury securities, but in the future it ally return to an operating framework might decide not to do so in all cases. with much lower reserve balances than In the long run, the Federal Reserve at present and with the federal funds anticipates that its balance sheet will rate as the operating target for policy. shrink toward more historically normal levels and that most or all of its securities holdings will be Treasury securi- Part 4 ties. Although passively redeeming Summary of agency debt and MBS as they mature Economic Projections or are prepaid will move the Federal Reserve in that direction, the Federal The following material appeared as an Reserve may also choose to sell securi- addendum to the minutes of the Janties in the future when the economic uary 26–27, 2010, meeting of the recovery is sufficiently advanced and Federal Open Market Committee. the FOMC has determined that the associated financial tightening is war- In conjunction with the January 26–27, ranted. Any such sales would be 2010, FOMC meeting, the members of gradual, would be clearly communi- the Board of Governors and the presicated to market participants, and would dents of the Federal Reserve Banks, all entail appropriate consideration of eco- of whom participate in deliberations of nomic conditions. the FOMC, submitted projections for As a result of the very large volume output growth, unemployment, and inof reserves in the banking system, the flation for the years 2010 to 2012 and level of activity and liquidity in the over the longer run. The projections federal funds market has declined con- were based on information available siderably, raising the possibility that the through the end of the meeting and on federal funds rate could for a time each participant’s assumptions about become a less reliable indicator than factors likely to affect economic outusual of conditions in short-term comes, including his or her assessment money markets. Accordingly, the Fed- of appropriate monetary policy. “Aperal Reserve is considering the utility, propriate monetary policy” is defined during the transition to a more normal as the future path of policy that the policy configuration, of communicating participant deems most likely to foster the stance of policy in terms of another outcomes for economic activity and inoperating target, such as an alternative flation that best satisfy his or her intershort-term interest rate. In particular, it pretation of the Federal Reserve’s dual is possible that the Federal Reserve objectives of maximum employment could for a time use the interest rate and stable prices. Longer-run projecpaid on reserves, in combination with tions represent each participant’s astargets for reserve quantities, as a guide sessment of the rate to which each to its policy stance, while simulta- variable would be expected to converge

46 96th Annual Report, 2009 over time under appropriate monetary and inflation were little changed, with policy and in the absence of further participants continuing to expect that shocks. the pace of the economic recovery will FOMC participants’ forecasts for be restrained by household and busieconomic activity and inflation were ness uncertainty, only gradual improvebroadly similar to their previous pro- ment in labor market conditions, and jections, which were made in conjunc- slow easing of credit conditions in the tion with the November 2009 FOMC banking sector. Participants generally meeting. As depicted in figure 1, the expected that it would take some time economic recovery from the recent re- for the economy to converge fully to cession was expected to be gradual, its longer-run path—characterized by a with real gross domestic product sustainable rate of output growth and (GDP) expanding at a rate that was by rates of employment and inflation only moderately above participants’ as- consistent with their interpretation of sessment of its longer-run sustainable the Federal Reserve’s dual objectives— growth rate and the unemployment rate with a sizable minority of the view that declining slowly over the next few the convergence process could take years. Most participants also antici- more than five to six years. As in pated that inflation would remain sub- November, nearly all participants dued over this period. As indicated in judged the risks to their growth outlook table 1, a few participants made modest as generally balanced, and most also upward revisions to their projections saw roughly balanced risks surrounding for real GDP growth in 2010. Beyond their inflation projections. Participants 2010, however, the contours of partici- continued to judge the uncertainty surpants’ projections for economic activity rounding their projections for economic Table1. EconomicProjectionsofFederalReserveGovernorsandReserveBank Presidents,January2010 Percent Centraltendency1 Range2 Variable Longer Longer 2010 2011 2012 2010 2011 2012 run run ChangeinrealGDP .. 2.8to3.5 3.4to4.5 3.5to4.5 2.5to2.8 2.3to4.0 2.7to4.7 3.0to5.0 2.4to3.0 Novemberprojection 2.5to3.5 3.4to4.5 3.5to4.8 2.5to2.8 2.0to4.0 2.5to4.6 2.8to5.0 2.4to3.0 Unemploymentrate ... 9.5to9.7 8.2to8.5 6.6to7.5 5.0to5.2 8.6to10.0 7.2to8.8 6.1to7.6 4.9to6.3 Novemberprojection 9.3to9.7 8.2to8.6 6.8to7.5 5.0to5.2 8.6to10.2 7.2to8.7 6.1to7.6 4.8to6.3 PCEinflation ........ 1.4to1.7 1.1to2.0 1.3to2.0 1.7to2.0 1.2to2.0 1.0to2.4 0.8to2.0 1.5to2.0 Novemberprojection 1.3to1.6 1.0to1.9 1.2to1.9 1.7to2.0 1.1to2.0 0.6to2.4 0.2to2.3 1.5to2.0 CorePCEinflation3 .. 1.1to1.7 1.0to1.9 1.2to1.9 1.0to2.0 0.9to2.4 0.8to2.0 Novemberprojection 1.0to1.5 1.0to1.6 1.0to1.7 0.9to2.0 0.5to2.4 0.2to2.3 Note: Projectionsofchangeinrealgrossdomesticproduct(GDP)andininflationarefromthefourthquarterof thepreviousyeartothefourthquarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentage ratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures(PCE)andthepriceindexfor PCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemployment rateinthefourthquarteroftheyearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentof appropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’sassessmentoftheratetowhicheach variablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershocksto theeconomy.TheNovemberprojectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarket CommitteeonNovember3–4,2009. 1. Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2. Therangeforavariableinagivenyearconsistsofallparticipants’projections,fromlowesttohighest,forthat variableinthatyear. 3. Longer-runprojectionsforcorePCEinflationarenotcollected.

Monetary Policy Report of February 2010 47

48 96th Annual Report, 2009 activity and inflation as unusually high percent. As in November, participants relative to historical norms. generally expected that the continued repair of household balance sheets and gradual improvements in credit avail- The Outlook ability would bolster consumer spend- Participants’ projections for real GDP ing. Responding to an improved sales growth in 2010 had a central tendency outlook and readier access to bank of 2.8 to 3.5 percent, a somewhat nar- credit, businesses were likely to rower interval than in November. increase production to rebuild their Recent readings on consumer spending, inventory stocks and increase their outindustrial production, and business out- lays on equipment and software. In lays on equipment and software were addition, improved foreign economic seen as broadly consistent with the conditions were viewed as supporting view that economic recovery was under robust growth in U.S. exports. Howway, albeit at a moderate pace. Busi- ever, participants also indicated that elnesses had apparently made progress in evated uncertainty on the part of housebringing their inventory stocks into holds and businesses and the very slow closer alignment with sales and hence recovery of labor markets would likely would be likely to raise production as restrain the pace of expansion. Morespending gained further momentum. over, although conditions in the bank- Participants pointed to a number of fac- ing system appeared to have stabilized, tors that would support the continued distress in commercial real estate marexpansion of economic activity, includ- kets was expected to pose risks to the ing accommodative monetary policy, balance sheets of banking institutions ongoing improvements in the condi- for some time, thereby contributing to tions of financial markets and institu- only gradual easing of credit conditions tions, and a pickup in global economic for many households and smaller firms. growth, especially in emerging market In the absence of further shocks, pareconomies. Several participants also ticipants generally anticipated that real noted that fiscal policy was currently GDP growth would converge over time providing substantial support to real ac- to an annual rate of 2.5 to 2.8 percent, tivity, but said that they expected less the longer-run pace that appeared to be impetus to GDP growth from this fac- sustainable in view of expected demotor later in the year. Many participants graphic trends and improvements in indicated that the expansion was likely labor productivity. to be restrained not only by firms’ cau- Participants anticipated that labor tion in hiring and spending in light of market conditions would improve only the considerable uncertainty regarding slowly over the next several years. the economic outlook and general busi- Their projections for the average unemness conditions, but also by limited ployment rate in the fourth quarter of access to credit by small businesses 2010 had a central tendency of 9.5 to and consumers dependent on bank- 9.7 percent, only a little below the levintermediated finance. els of about 10 percent that prevailed Looking further ahead, participants’ late last year. Consistent with their outprojections were for real GDP growth look for moderate output growth, parto pick up in 2011 and 2012; the pro- ticipants generally expected that the jections for growth in both years had a unemployment rate would decline only central tendency of about 31⁄ 2 to 41⁄ 2 about 21⁄ 2 percentage points by the end

Monetary Policy Report of February 2010 49 of 2012 and would still be well above economic activity and unemployment its longer-run sustainable rate. Some continued to be subject to greater-thanparticipants also noted that consider- average uncertainty.19 Participants genable uncertainty surrounded their esti- erally saw the risks to these projections mates of the productive potential of the as roughly balanced, although a few economy and the sustainable rate of indicated that the risks to the unememployment, owing partly to substan- ployment outlook remained tilted to the tial ongoing structural adjustments in upside. As in November, many participroduct and labor markets. Nonethe- pants highlighted the difficulties inherless, participants’ longer-run unemploy- ent in predicting macroeconomic outment projections had a central tendency comes in the wake of a financial crisis of 5.0 to 5.2 percent, the same as in and a severe recession. In addition, November. some pointed to uncertainties regarding Most participants anticipated that in- the extent to which the recent run-up in flation would remain subdued over the labor productivity would prove to be next several years. The central ten- persistent, while others noted the risk dency of their projections for personal that the deteriorating performance of consumption expenditures (PCE) infla- commercial real estate could adversely tion was 1.4 to 1.7 percent for 2010, affect the still-fragile state of the bank- 1.1 to 2.0 percent for 2011, and 1.3 to ing system and restrain the growth of 2.0 percent for 2012. Many participants output and employment over coming anticipated that global economic quarters. growth would spur increases in energy As in November, most participants prices, and hence that headline PCE in- continued to see the uncertainty surflation would run slightly above core rounding their inflation projections as PCE inflation over the next year or higher than historical norms. However, two. Most expected that substantial a few judged that uncertainty in the resource slack would continue to re- outlook for inflation was about in line strain cost pressures, but that inflation with typical levels, and one viewed the would rise gradually toward their indi- uncertainty surrounding the inflation vidual assessments of the measured outlook as lower than average. Nearly rate of inflation judged to be most con- all participants judged the risks to the sistent with the Federal Reserve’s dual inflation outlook as roughly balanced; mandate. As in November, the central however, two saw these risks as tilted tendency of projections of the longer- to the upside, while one regarded the run inflation rate was 1.7 to 2.0 per- risks as weighted to the downside. cent. A majority of participants antici- Some participants noted that inflation pated that inflation in 2012 would still expectations could drift downward in be below their assessments of the response to persistently low inflation mandate-consistent inflation rate, while the remainder expected that inflation 19. Table2providesestimatesofforecastunwould be at or slightly above its certainty for the change in real GDP, the unemlonger-run value by that time. ploymentrate,andtotalconsumerpriceinflation overtheperiodfrom1989to2008.Attheendof this summary, the box “Forecast Uncertainty” Uncertainty and Risks discussesthesourcesandinterpretationofuncertaintyineconomicforecastsandexplainstheap- Nearly all participants shared the judgproachusedtoassesstheuncertaintyandriskatment that their projections of future tendingparticipants’projections.

50 96th Annual Report, 2009 Table2. AverageHistoricalProjection the projections for real GDP growth in ErrorRanges 2011 and in 2012 were little changed. Percentagepoints The dispersion in participants’ output growth projections reflected, among Variable 2010 2011 2012 other factors, the diversity of their as- ChangeinrealGDP1 ...... ±1.3 ±1.5 ±1.6 sessments regarding the current degree Unemploymentrate1 ....... ±0.6 ±0.8 ±1.0 Totalconsumerprices2..... ±0.9 ±1.0 ±1.0 of underlying momentum in economic activity, the evolution of consumer and Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for business sentiment, and the likely pace 1989through2008thatwerereleasedinthewinterby of easing of bank lending standards and various private and government forecasters. As determs. Regarding participants’ unemscribedinthebox“ForecastUncertainty,”undercertain assumptions,thereisabouta70percentprobabilitythat ployment rate projections, the distribuactualoutcomesforrealGDP,unemployment,andcon- tion for 2010 narrowed slightly, but the sumerpriceswillbeinrangesimpliedbytheaverage distributions of their unemployment sizeofprojectionerrorsmadeinthepast.Furtherinformation is in David Reifschneider and Peter Tulip rate projections for 2011 and 2012 did (2007),“GaugingtheUncertaintyoftheEconomicOut- not change appreciably. The distribulook from Historical Forecasting Errors,” Finance and Economics Discussion Series 2007-60 (Washington: tions of participants’ estimates of the Board of Governors of the Federal Reserve System, longer-run sustainable rates of output November). growth and unemployment were essen- 1. Fordefinitions,refertogeneralnoteintable1. 2. Measureistheoverallconsumerpriceindex,the tially the same as in November. pricemeasurethathasbeenmostwidelyusedingov- Figures 2.C and 2.D provide correernment and private economic forecasts. Projection is sponding information about the diverpercent change, fourth quarter of the previous year to thefourthquarteroftheyearindicated. sity of participants’ views regarding the inflation outlook. For overall and core and continued slack in resource utiliza- PCE inflation, the distributions of partion. Others pointed to the possibility ticipants’ projections for 2010 were of an upward shift in expected and acnearly the same as in November. The tual inflation, especially if extraordinardistributions of overall and core inflaily accommodative monetary policy tion for 2011 and 2012, however, were measures were not unwound in a noticeably more tightly concentrated timely fashion. Participants also noted than in November, reflecting the abthat an acceleration in global economic sence of forecasts of especially low inactivity could induce a surge in the flation. The dispersion in participants’ prices of energy and other commodities projections over the next few years was that would place upward pressure on mainly due to differences in their judgoverall inflation. ments regarding the determinants of inflation, including their estimates of pre- Diversity of Views vailing resource slack and their Figures 2.A and 2.B provide further assessments of the extent to which such details on the diversity of participants’ slack affects actual and expected inflaviews regarding the likely outcomes for tion. In contrast, the relatively tight disreal GDP growth and the unemploy- tribution of participants’ projections for ment rate in 2010, 2011, 2012, and longer-run inflation illustrates their over the longer run. The distribution of substantial agreement about the meaparticipants’ projections for real GDP sured rate of inflation that is most congrowth this year was slightly narrower sistent with the Federal Reserve’s dual than the distribution of their projections objectives of maximum employment last November, but the distributions of and stable prices.

Monetary Policy Report of February 2010 51

52 96th Annual Report, 2009

Monetary Policy Report of February 2010 53

54 96th Annual Report, 2009

Monetary Policy Report of February 2010 55 Forecast Uncertainty The economic projections provided by experienced in the past and the risks the members of the Board of Governors around the projections are broadly baland the presidents of the Federal anced, the numbers reported in table 2 Reserve Banks inform discussions of would imply a probability of about 70 monetary policy among policymakers percent that actual GDP would expand and can aid public understanding of the within a range of 1.7 to 4.3 percent in basis for policy actions. Considerable thecurrentyear,1.5to4.5percentinthe uncertainty attends these projections, second year, and 1.4 to 4.6 percent in however. The economic and statistical the third year. The corresponding 70 models and relationships used to help percent confidence intervals for overall produce economic forecasts are neces- inflation would be 1.1 to 2.9 percent in sarily imperfect descriptions of the real thecurrentyearand1.0to3.0percentin world. And the future path of the econ- thesecondandthirdyears. omy can be affected by myriad unfore- Because current conditions may differ seen developments and events. Thus, in from those that prevailed, on average, setting the stance of monetary policy, over history, participants provide judgparticipants consider not only what ments as to whether the uncertainty atappears to be the most likely economic tached to their projections of each varioutcome as embodied in their projec- able is greater than, smaller than, or tions, but also the range of alternative broadly similar to typical levels of forepossibilities, the likelihood of their oc- cast uncertainty in the past as shown in curring, and the potential costs to the table 2. Participants also provide judgeconomyshouldtheyoccur. ments as to whether the risks to their Table 2 summarizes the average his- projections are weighted to the upside, torical accuracy of a range of forecasts, are weighted to the downside, or are including those reported in past Mone- broadly balanced. That is, participants tary Policy Reports and those prepared judge whether each variable is more by Federal Reserve Board staff in likely to be above or below their projecadvance of meetings of the Federal tions of the most likely outcome. These OpenMarketCommittee.Theprojection judgments about the uncertainty and the error ranges shown in the table illustrate risks attending each participant’s projecthe considerable uncertainty associated tions are distinct from the diversity of with economic forecasts. For example, participants’ views about the most likely suppose a participant projects that real outcomes. Forecast uncertainty is congross domestic product (GDP) and total cerned with the risks associated with a consumer prices will rise steadily at an- particular projection rather than with dinual rates of, respectively, 3 percent and vergences across a number of different 2 percent. If the uncertainty attending projections. those projections is similar to that

56 96th Annual Report, 2009 Abbreviations GSE government-sponsored enterprise ABS asset-backed securities Libor London interbank offered rate AIG American International Group, LLC limited liability company Inc. MBS mortgage-backed securities ARRA American Recovery and Rein- NFIB National Federation of Indevestment Act pendent Business CDS credit default swap NIPA national income and product C&I commercial and industrial accounts CMBS commercial mortgage-backed OIS overnight index swap securities PCE personal consumption expendi- CRE commercial real estate tures Credit Credit Card Accountability Re- repo repurchase agreement CARD sponsibility and Disclosure Act SCAP Supervisory Capital Act Assessment Program CUSIP Committee on Uniform Securi- SFP Supplementary Financing ties Identification Procedures Program ECB European Central Bank SLOOS Senior Loan Officer Opinion E&S equipment and software Survey on Bank Lending Practices FAS Financial Accounting Standards TAF Term Auction Facility FDIC Federal Deposit Insurance Corporation TALF Term Asset-Backed Securities Loan Facility FHA Federal Housing Administration TARP Troubled Asset Relief Program FOMC Federal Open Market Commit- TIPS Treasury inflation-protected tee; also, the Committee securities Á GDP gross domestic product

57 Monetary Policy Report of July 2009 Part 1 in overall output looks to have mod- Overview: Monetary Policy erated somewhat of late. Consumer and the Economic Outlook spending—which has been supported recently by the boost to disposable Amid a severe global economic downincome from the tax cuts and increases turn, the U.S. economy contracted furin various benefit payments that were ther and labor market conditions worsimplemented as part of the 2009 fiscal ened over the first half of 2009. In the stimulus package—appears to be holdearly part of the year, economic activing reasonably steady so far this year. ity deteriorated sharply, and strains in And consumer sentiment is up from the financial markets and pressures on historical lows recorded around the financial institutions generally intensiturn of the year. In the housing market, fied. More recently, however, the a leveling out of home sales and condownturn in economic activity appears struction activity in the first half of to be abating and financial conditions 2009 suggests that the demand for new have eased somewhat, developments houses may be stabilizing following that partly reflect the broad range of three years of steep declines. Busipolicy actions that have been taken to nesses, however, have continued to cut address the crisis. Nonetheless, credit capital spending and liquidate invenconditions for many households and tories in response to soft demand and businesses remain tight, and financial excessive stocks. Economic activity markets are still stressed. In the labor abroad plummeted in the first quarter market, employment declines have and has continued to fall, albeit more remained sizable—although the pace of slowly, in recent months. Slumping forjob loss has diminished somewhat from eign demand led to a sharp drop in earlier in the year—and the unemploy- U.S. exports during the first half of the ment rate has continued to climb. year. However, the ongoing contraction Meanwhile, consumer price inflation in U.S. domestic demand triggered an has remained subdued. even sharper drop in imports. U.S. real gross domestic product The further contraction in domestic (GDP) fell sharply again in the first economic activity during the first half quarter of 2009, but the contraction of 2009 was accompanied by a significant deterioration in labor market con- Note: The discussion in this chapter consists ditions. Private-sector payroll employofthetextandtablesfromparts1−3oftheMonment fell at an average monthly rate of etary Policy Report submitted to Congress on July 21, 2009 (the figures from that report 670,000 jobs in the first four months of are available on the Board’s website, at this year before declining by 312,000 www.federalreserve.gov/boarddocs/hh).Part4of jobs in May and 415,000 jobs in June. that report is identical to the addendum to the Meanwhile, the unemployment rate minutesoftheJune23−24,2009,meetingofthe FederalOpenMarketCommitteeandispresented moved up steadily from 71⁄ 4 percent at with those minutes in the “Records” section of the turn of the year to 91⁄ 2 percent in thisannualreport. June. With the sharp reductions in em-

58 96th Annual Report, 2009 ployment, the wage and salary incomes Reserve also continued to provide of households, adjusted for price funding to financial institutions and changes, fell during this period. markets through a variety of credit and Overall consumer price inflation, liquidity facilities. In February, the which slowed sharply late last year, Treasury, the Federal Reserve, the Fedremained subdued in the first half of eral Deposit Insurance Corporation, the this year as the margin of slack in Office of the Comptroller of the Curlabor and product markets widened rency, and the Office of Thrift Superviconsiderably further and as prices of oil sion announced the Financial Stability and other commodities retraced only a Plan. The plan included, among other part of their earlier steep declines. All elements, a Capital Assistance Program told, the 12-month change in the per- designed to assess the capital needs of sonal consumption expenditures (PCE) banking institutions under a range of price index was close to zero in May, economic scenarios (through the Superwhile the 12-month change in PCE visory Capital Assessment Program prices excluding food and energy was (SCAP), or stress test) and, if neces- 13⁄ 4 percent. Survey measures of sary, to assist banking institutions in longer-term inflation expectations have strengthening the amount and quality remained relatively stable this year and of their capital. In early March, the currently stand at about their average Federal Reserve and the Treasury values in 2008. launched the Term Asset-Backed Secu- During the first few months of 2009, rities Loan Facility (TALF), an initiapressures on financial firms, which had tive designed to catalyze the securitizaeased late last year, intensified again. tion markets by providing financing to Equity prices of banks and insurance investors to support their purchases of companies fell amid reports of large certain AAA-rated asset-backed securilosses in the fourth quarter of 2008, ties. At the March meeting of the Fedand market-based measures of the like- eral Open Market Committee (FOMC), lihood of default by those institutions the Committee decided to expand its rose. Broad equity price indexes also purchases of agency MBS and agency fell in the United States and abroad, debt and to begin buying longer-term and measures of volatility in such mar- Treasury securities to help improve kets stayed at near-record levels. In conditions in private credit markets. In addition, bank funding markets were May, the Federal Reserve announced strained, flows of credit to businesses an expansion of eligible collateral unand households were impaired, and der the TALF program. In the same many securitization markets remained month, the results of the SCAP were shut. announced and were positively re- The Federal Reserve and other gov- ceived in financial markets. ernment entities continued to respond These policy actions, and ones previforcefully to these adverse financial ously taken, have helped stabilize a market developments. The Federal number of financial markets and, in Reserve kept its target for the federal some cases, have led to significant imfunds rate at a range between 0 and 1⁄ 4 provements. In recent months, strains percent and purchased additional in short-term funding markets have agency mortgage-backed securities eased, with some credit spreads in (MBS) and agency debt. Throughout those markets returning close to prethe first half of the year, the Federal crisis levels. The narrowing in spreads

Monetary Policy Report of July 2009 59 likely reflects, in part, a decrease in the half of this year and then to move onto probability that market participants as- a path of gradual recovery, bolstered by sign to extremely adverse outcomes for an accommodative monetary policy, the economy in light of the apparent government efforts to stabilize financial moderation in the rate of economic markets, and fiscal stimulus. However, contraction. Global equity prices have all participants expected that labor marrecouped some of their earlier declines, ket conditions would continue to deteand measures of volatility in equity and riorate during the remainder of this other financial markets have retreated year and improve only slowly over the somewhat, though they remain at el- subsequent two years, with the unemevated levels. Issuance in some securi- ployment rate still elevated at the end tization markets that were essentially of 2011. FOMC participants expected shut down earlier has begun to total and core inflation to be lower in increase. Although yields on longer- 2009 than during 2008 as a whole, in term Treasury securities have risen, part because of the sizable amount of some of these increases are likely at- slack in resource utilization; inflation tributable to improvement in the eco- was forecast to remain subdued in nomic outlook and a reversal in flight- 2010 and 2011. to-quality flows. Mortgage rates have Participants generally judged that the risen about in line with Treasury degree of uncertainty surrounding the yields, but corporate bond yields have medium-term outlook for both ecocontinued to decline. By early June, the nomic activity and inflation exceeded 10 banking organizations required by historical norms. Participants viewed the SCAP to bolster their capital buff- the risks to their projections of ecoers had issued new common equity in nomic growth over the medium run as amounts that either met or came close either balanced or tilted to the downto meeting the SCAP requirements. side, and most saw the risk to their Nonetheless, despite these notable im- projections of medium-run inflation as provements, strains remain in most balanced. Participants also reported financial markets, many financial insti- their assessments of the rates to which tutions face the possibility of signifi- key macroeconomic variables would be cant additional losses, and the flow of expected to converge in the longer run credit to some businesses and house- under appropriate monetary policy and holds remains constrained. in the absence of further shocks to the In conjunction with the June 2009 economy. Most participants expected FOMC meeting, the members of the real GDP to grow in the longer run at Board of Governors of the Federal an annual rate of about 21⁄ 2 percent, the Reserve System and presidents of the unemployment rate to be about 5 per- Federal Reserve Banks, all of whom cent, and the rate of consumer price inparticipate in FOMC meetings, pro- flation to be about 2 percent. vided projections for economic growth, unemployment, and inflation; these Part 2 projections are presented in Part 4 of Recent Financial this report. FOMC participants generand Economic Developments ally viewed the outlook for the economy as having improved modestly in Economic activity, which fell sharply recent months. Participants expected in the fourth quarter of 2008, declined real GDP to bottom out in the second at nearly the same rate in the first quar-

60 96th Annual Report, 2009 ter of 2009. However, the pace of con- tional policy initiatives to support traction appears to have moderated financial stability and promote ecosomewhat of late. To be sure, busi- nomic recovery. Federal Reserve initianesses have continued to cut back on tives included expanding direct purinvestment spending, and firms have chases of agency debt and agency reacted to the abrupt rise in inventory- mortgage-backed securities (MBS), besales ratios around the turn of the year ginning direct purchases of longer-term by cutting production and running Treasury securities, and providing loans down inventories at a more rapid pace, against consumer and other assetparticularly in the motor vehicle sec- backed securities (ABS).1 Other govtor. Nevertheless, consumer spending ernment entities also undertook new seems to have stabilized, on balance, in measures to support the financial secthe first half of this year, and housing tor, including the provision of more activity, while still quite depressed, has capital to banking institutions under the leveled off in recent months. And, Capital Purchase Program, or CPP, and while the recession abroad led to the announcement of programs to help another sharp drop in export demand in banks manage their legacy assets. In the first quarter, the latest indicators addition, the bank supervisory agencies suggest that the contraction in foreign undertook a special assessment of the activity has lessened, especially in capital strength of the largest U.S. emerging Asian economies. In the banking organizations (the Supervisory labor market, the pace of job loss has Capital Assessment Program, or diminished in recent months from the SCAP). rate earlier this year; nonetheless, em- Partly as a result of these efforts, ployment declines have remained siz- conditions in financial markets began able, and the unemployment rate has to show signs of improvement starting risen sharply. Meanwhile, inflation in March, although they remained remained subdued in the first half of strained. During the subsequent few this year. months, both equity prices of financial In early 2009, strains in some finan- firms and broad equity price indexes cial markets appeared to intensify from rose, on balance, and corporate bond the levels seen in late 2008. Market spreads narrowed. Firms responded by participants’ concerns about major substituting longer-term financing financial institutions increased, equity through the corporate bond market for prices for such institutions fell, and shorter-term funding from bank loans their credit default swap (CDS) spreads and commercial paper (CP). Supported widened substantially. These develop- by the Federal Reserve’s Term Assetments spilled over to broader markets, Backed Securities Loan Facility with equity prices falling and spreads (TALF), issuance of consumer ABS of yields on corporate bonds over those began to approach pre-crisis levels. on comparable-maturity Treasury secu- Short-term interbank funding markets rities moving to near-record highs. Deterioration in the functioning of many financial markets restricted the flow of credit to businesses and households. 1.Formoreinformation,seeBoardofGovernors of the Federal Reserve System (2009), In response to these financial market Federal Reserve System Monthly Report on stresses, the Federal Reserve and other Credit and Liquidity Programs and the Balance government entities implemented addi- Sheet(Washington:BoardofGovernors,July).

Monetary Policy Report of July 2009 61 also showed substantial improvement, over the past year. These declines have and banking institutions involved in the coincided with a substantial worsening SCAP were able to issue significant of many of the economic and financial amounts of public equity and nonguar- factors that influence construction in anteed debt. However, outstanding this sector, including reports of a pullbank loans to households and nonfinan- back in the availability of credit for cial businesses continued to decline new projects and a sharp decline in the amid expectations that borrower credit price of apartment buildings following quality would deteriorate further, risk a multiyear run-up. spreads in many markets that were still House prices continued to fall in the quite elevated, and financial conditions first part of this year. The latest readthat remained somewhat strained. ings from national indexes show price declines for existing homes over the past 12 months in the range of 7 to Domestic Developments 18 percent. One such measure with wide geographic coverage, the Loan- Performance repeat-sales price index, The Household Sector fell more than 9 percent over the Residential Investment 12 months ending in May and is now and Housing Finance 20 percent below the peak that it achieved in mid-2006. Price declines Although home prices have continued have been particularly marked in areas to fall, the steep declines in housing of the country that have experienced a demand and construction that began in large number of foreclosure-related late 2005 appear to be abating. Sales of sales, such as Nevada, Florida, Califorexisting single-family homes have flat- nia, and Arizona. Lower prices imtened out at a little more than 4 million prove the affordability of homeownerunits at an annual rate since late last ship for potential new buyers and, all year, and sales of new single-family else being equal, should eventually homes have been little changed since help bolster housing demand. However, January at a bit below 350,000 units. expectations of further declines in That said, the pace of sales for both house prices can make potential buyers new and existing homes is still very reluctant to enter the market. Although low by historical standards. consumer surveys continue to suggest In the single-family housing sector, that a sizable portion of households starts of new units appear to have expect house prices to fall in the comfirmed of late, though they remain at a ing year, the share of such households depressed level. With this restrained appears to have subsided in recent level of construction, months’ supply months. of unsold new homes relative to sales With house prices still falling, condihas come down somewhat from its tions in the labor market deteriorating, peak at the turn of the year, but it still and household financial conditions remains quite high compared with ear- remaining weak, delinquency rates conlier in the decade. Starts in the multi- tinued to rise across all categories of family sector—which had held up well mortgage loans. As of April 2009, through the spring of 2008 even as nearly 40 percent of adjustable-rate single-family activity was plum- subprime loans and 15 percent of meting—have deteriorated considerably fixed-rate subprime loans were

62 96th Annual Report, 2009 seriously delinquent.2 In May 2009, de- be well above rates on conforming linquency rates for prime and near- loans.3 Although the declines in rates prime loans reached about 12 percent and spreads made borrowing relatively for adjustable-rate loans and 4 percent less expensive for those qualified for for fixed-rate loans, representing sub- conforming mortgages, access to credit stantial increases over the past year to remained limited for many other borhistoric highs. rowers. In the April 2009 Senior Loan Foreclosures also jumped in 2009. Officer Opinion Survey on Bank Lend- Over the last three quarters of 2008, ing Practices, a majority of respondents about 600,000 homes entered the fore- indicated that they had tightened stanclosure process each quarter. During dards on residential mortgages over the the first quarter of 2009, about 750,000 preceding three months, an extension homes entered the process. The of the prevailing trend in earlier quarincrease may be related to the expira- ters, that about 40 percent of banks had tion of temporary foreclosure moratori- reduced the size of existing home ums that were put in place by some equity lines of credit, and that only a state and local governments, some pri- few of the banks reported having made vate firms, and the government- subprime loans. The secondary market sponsored enterprises (GSEs) late last for conventional mortgage loans not year. The Treasury Department has guaranteed by Fannie Mae or Freddie recently established the Making Home Mac remained essentially shut. Affordable program, which encom- Mortgage debt outstanding was passes several efforts designed to lower about flat in the first quarter of 2009, foreclosure rates. The program includes with the effects of the weakness in the a provision to allow borrowers to refi- housing market and relatively restricted nance easily into mortgages with lower access to credit offsetting the influence payments and a provision to encourage of lower mortgage rates. The available mortgage lenders and servicers to indicators suggest that mortgage debt modify delinquent mortgages. likely remained very soft in the second Interest rates on 30-year fixed-rate quarter. Refinancing activity was someconforming mortgages declined during what elevated early in the year, probearly 2009; although those rates have ably due to low mortgage interest rates risen more recently, about in line with and the waiver of many fees and easing increases in Treasury rates, mortgage of many underwriting terms by the rates remain at historically low levels. GSEs. However, such activity Part of the decrease may have reflected expansion of the Federal Reserve’s 3.Conformingmortgagesarethoseeligiblefor agency MBS purchase program. Early purchase by Fannie Mae and Freddie Mac; they in the year, spreads of rates on con- must be equivalent in risk to a prime mortgage forming fixed-rate mortgages over with an 80 percent loan-to-value ratio, and they long-term Treasury yields fell to their cannotexceedinsizetheconformingloanlimit. The conforming loan limit for a first mortgage lowest levels in more than a year. Offer onasingle-familyhomeinthecontiguousUnited rates on nonconforming jumbo fixed- States is currently equal to the greater of rate loans fell slightly but continued to $417,000 or 115 percent of the area’s median house price; it cannot exceed $625,500. Jumbo mortgages are those that exceed the maximum 2. A mortgage is defined as seriously delin- size of a conforming loan; they are typically quentiftheborroweris90daysormorebehind extended to borrowers with relatively strong inpaymentsorthepropertyisinforeclosure. credithistories.

Monetary Policy Report of July 2009 63 moderated considerably when interest employment and the workweek have rates rose during the past few months. cut deeply into total hours worked and hence overall labor compensation. With real after-tax income up appreciably in Consumer Spending the first half of the year and consumer and Household Finance outlays leveling off, the personal saving Consumer spending appears to have rate jumped during the spring, reaching leveled off so far this year after falling nearly 7 percent in May compared with sharply in the second half of last year. the 13⁄ 4 percent average recorded dur- Continued widespread job losses and ing 2008. the drag from large declines in house- Household net worth continued to hold wealth have weighed on consump- fall in the first quarter of this year as a tion; however, spending lately has been result of the ongoing declines in house supported by the boost to household in- prices and a further drop in equity comes from the fiscal stimulus package prices. However, equity prices have reenacted in February. Measures of con- corded substantial gains since March, sumer sentiment, while still at de- helping to offset continued declines in pressed levels, have nonetheless moved the value of real estate wealth. The up from the historical lows recorded recent stimulus-induced jump in real around the turn of the year. disposable income and the improve- Real personal consumption expendi- ment in equity wealth since this spring tures (PCE), although variable from apparently helped lift consumer sentimonth to month, have essentially ment somewhat from its earlier very moved sideways since late last year. low levels. Sales of new light motor vehicles con- Nonmortgage consumer debt outtinued to contract early this year but standing is estimated to have fallen at have stabilized in recent months—at an an annual rate of 2 percent in the first average annual rate of 9.7 million units half of 2009, extending a decline that over the four months ending in June. began in the final quarter of 2008. The Outlays on other goods, which plunged decreases likely reflect both reduced in 2008, have remained at extremely demand for loans as a result of the relow levels, while spending on services strained pace of consumer spending has only edged up so far this year. and a restricted supply of credit. The Real disposable personal income, or April 2009 Senior Loan Officer Opin- DPI—that is, after-tax income adjusted ion Survey showed a further tightening for inflation—has risen at an annual of standards and terms on consumer rate of about 9 percent so far this year, loans over the preceding three months, a substantial pickup from the increase actions that included lowering credit of 11⁄ 4 percent posted in 2008. Gains in limits on existing credit card accounts. after-tax income have been bolstered The tightening in standards and by the tax cuts and increases in social terms likely reflected, in part, concerns benefit payments that were imple- by financial institutions about conmented as part of the 2009 fiscal sumer credit quality. Delinquency rates stimulus package. In contrast, nominal on most types of consumer lending— labor income has been declining credit card loans, auto loans, and other steeply. Although nominal hourly com- nonrevolving loans—continued to rise pensation has risen at a faster pace than during the first half of 2009. The overall prices, sizable reductions in increase in credit card loan delinquency

64 96th Annual Report, 2009 rates at banks was particularly sharp, The Business Sector and at 61⁄ 2 percent as of the end of the first quarter of 2009, such delinquen- Fixed Investment cies exceeded the level reached during the 2001 recession. Household bank- Businesses have continued to cut back ruptcy rates continued the upward trend capital spending, with declines broadly that has been evident since the bank- based across equipment, software, and ruptcy law reform in 2005; the recent structures. Real business fixed investincreases likely reflect the deterioration ment fell markedly in the final quarter in household financial conditions. of 2008 and the first quarter of this Changes in interest rates on con- year. The cutbacks in business investsumer loans were mixed over the first ment were prompted by a deterioration half of the year. Auto loan rates were late last year and early this year in the about flat, credit card rates ticked economic and financial conditions that upward, and rates on other consumer influence capital expenditures: In parloans showed a slight decline. Spreads ticular, business output contracted of these rates over those on com- steeply, corporate profits declined, and parable-maturity Treasury securities credit availability remained tight for remained at elevated levels. many borrowers. More recently, it ap- Before the onset of the financial cri- pears that the declines in capital spendsis, the market for ABS provided sig- ing may be abating, and financing connificant support for consumer lending ditions for businesses have improved by effectively reducing the cost to somewhat. lenders of providing such credit. The Real business outlays for equipment near-complete cessation of issuance in and software dropped at an annual rate this market in the fourth quarter of of 34 percent in the first quarter of 2008 thus likely contributed impor- 2009 after falling nearly as rapidly in tantly to the curtailment of consumer the fourth quarter. In both quarters, credit. Issuance of credit card, auto, business purchases of motor vehicles and student loan ABS began to pick up plunged at annual rates of roughly in March and approached pre-crisis 80 percent, and real spending on highlevels in April and May. Spreads of tech capital—computers, software, and yields on AAA-rated credit card and communications equipment—fell at an auto ABS over yields on swaps fell annual rate of more than 20 percent. sharply in early 2009, although they Real investment in equipment other remained at somewhat elevated levels. than high tech and transportation, The increased issuance and falling which accounts for nearly one-half of spreads appeared to reflect importantly outlays for equipment and software, the TALF program, which had been dropped at an annual rate of about announced in late 2008 and began 35 percent in the first quarter after falloperation in March 2009. Availability ing at a 20 percent rate in the previous of loans to purchase automobiles, quarter. The available indicators sugwhich had declined sharply at the end gest that real spending on equipment of 2008, rebounded in early 2009 as and software fell further in the second some auto finance companies accessed quarter, though at a much less precipicredit through the TALF and others tous pace: Although shipments of nonreceived funding directly from the defense capital goods other than transgovernment. portation items continued to fall in

Monetary Policy Report of July 2009 65 April and May, the rate of decline 100 days in February to less than 70 slowed from the first-quarter pace. In days at the end of June, closer to the addition, business purchases of new automakers’ preferred level. trucks and cars appear to have stabi- Firms outside of the motor vehicle lized in the second quarter (albeit at sector also have been making signifilow levels), and recent surveys of busi- cant production adjustments to bring ness conditions have been generally down inventories. Factory output less downbeat than earlier this year. (excluding motor vehicles and parts) Real spending on nonresidential plunged in the first quarter, and invenstructures turned down late last year tories of nonfarm goods other than and fell sharply in the first quarter. motor vehicles were drawn down no- Outlays for construction of commercial ticeably in real terms. According to the and office buildings declined apprecia- available data, this pattern of producbly late last year and have contracted tion declines and inventory liquidation further so far this year. Spending on appears to have continued in the secdrilling and mining structures, which ond quarter as well. Although inhad risen briskly for a number of years, ventory-sales ratios remain elevated in has plunged this year in response to the many industries, some recent business substantial net decline in energy prices surveys suggest that firms have become since last summer. In contrast, outlays more comfortable in recent months on other energy-related projects—such with the current level of inventories. as new power plants and the expansion and retooling of existing petroleum Corporate Profits refineries—have been growing rapidly and Business Finance for some time now and continued to post robust gains through May. On bal- Operating earnings per share for S&P ance, the recent data on construction 500 firms in the first quarter were expenditures suggest that declines in about 35 percent below their yearspending on nonresidential structures earlier levels. Profitability of both may have slowed in the second quarter. financial and nonfinancial firms However, weak business output and showed steep declines. Analysts’ foreprofits, tight financing conditions, and casts suggest that the pace of profit rising vacancy rates likely will con- declines moderated only slightly in the tinue to weigh heavily on this sector. second quarter, although downward revisions to forecasts for earnings over the next two years have slowed Inventory Investment recently. Businesses ran off inventories aggres- Business financial conditions in the sively in the first quarter, as firms en- first half of the year were characterized tered the year with extremely high by lower demand for funds, even as inventory-sales ratios despite having financial conditions eased somewhat on drawn down stocks throughout 2008. balance. Borrowing by domestic nonfi- Much of the first-quarter liquidation nancial businesses fell slightly in the occurred in the motor vehicle sector, first half of 2009 after having slowed where production was cut sharply and markedly in the second half of 2008. remained low in the second quarter. As The composition of borrowing shifted, a result, days’ supply of domestic light with net issuance of corporate bonds vehicles dropped from its peak of about surging, while both commercial and

66 96th Annual Report, 2009 industrial (C&I) loans and CP out- loans continued to increase in the first standing fell. This reallocation of bor- quarter, while those on CRE loans rose rowing may have reflected a desire by substantially. Delinquency rates on conbusinesses to strengthen their balance struction and land development loans sheets by substituting longer-term for one- to four-family residential propsources of financing for shorter-term erties increased to more than 20 persources during a period when the cost cent. Banks that responded to the of bond financing was generally fall- Senior Loan Officer Opinion Survey ing. In particular, yields on both conducted in April 2009 expected deinvestment- and speculative-grade cor- linquency and charge-off rates on such porate bonds dropped sharply, and their loans to increase over the rest of 2009, spreads over yields on comparable- assuming that economic activity promaturity Treasury securities narrowed gressed in line with consensus foreappreciably, as investors’ concerns casts. about the economic outlook eased. Financial firms issued bonds at a Nonetheless, bond spreads remained solid pace, including both debt issued somewhat elevated by historical stan- under the Temporary Liquidity Guarandards. tee Program of the Federal Deposit In- C&I and commercial real estate surance Corporation (FDIC) and debt (CRE) lending by commercial banks issued without such guarantees. Equity were both quite weak in the first half issuance by such firms picked up subof 2009, likely reflecting reduced de- stantially from a very low level followmand for loans and a tighter lending ing the completion of the SCAP stance on the part of banks. The results reviews in May. of the April 2009 Senior Loan Officer Opinion Survey indicated that commer- The Government Sector cial banks had tightened terms and standards on C&I and CRE loans over Federal Government the preceding three months. The market for commercial mortgage-backed secu- The deficit in the federal unified budrities (CMBS)—an important source of get has increased substantially during funding before the crisis—remained the current fiscal year. The budget shut. costs associated with the Troubled Both seasoned and initial equity of- Asset Relief Program (TARP), the conferings by nonfinancial corporations servatorship of the mortgage-related were modest over the first half of GSEs, and the fiscal stimulus package 2009. Equity retirements are estimated enacted in February, along with the to have slowed in early 2009 from their effects of the weak economy on outlays rapid pace during the second half of and revenues, have all contributed to 2008. As a result, net equity issuance the widening of the budget gap. Over in the first quarter declined by the the first nine months of fiscal year smallest amount since 2002. 2009—from October through June—the The credit quality of nonfinancial unified budget recorded a deficit of firms continued to deteriorate in the about $1.1 trillion. The deficit is first half of 2009. The pace of rating expected to widen further over the rest downgrades on corporate bonds in- of the fiscal year because of the contincreased, and upgrades were relatively ued slow pace of economic activity, few. Delinquency rates on banks’ C&I additional spending increases and tax

Monetary Policy Report of July 2009 67 cuts associated with the fiscal stimulus outlays in the first nine months of fislegislation, and further costs related to cal 2009 were almost 21 percent higher financial stabilization programs. The than during the same period in fiscal budget released by the Office of Man- 2008. Spending was boosted, in part, agement and Budget in May, which by $232 billion in outlays recorded for included the effects of the President’s activities under the TARP and the conbudget proposals, calculated that the servatorship of the GSEs so far this fisdeficit for fiscal 2009 would total more cal year.6 Spending for income than $1.8 trillion (13 percent of nomi- support—particularly for unemploynal GDP), significantly larger than the ment insurance benefits—has been deficit in fiscal 2008 of $459 billion pushed up by the deterioration in labor (31⁄ 4 percent of nominal GDP).4 market conditions as well as by policy The decline in economic activity has decisions to expand funding for a numcut deeply into tax receipts so far this ber of benefit programs. Meanwhile, fiscal year. After falling about 2 per- federal spending on defense, Medicare, cent in fiscal 2008, federal receipts and Social Security also has recorded dropped about 18 percent in the first sizable increases. In contrast, net internine months of fiscal 2009 compared est payments declined compared with with the same period in fiscal 2008. the same year-earlier period, as the re- The decline in revenue has been par- duction in interest rates on Treasury ticularly pronounced for corporate re- debt more than offset the rise in ceipts, which have plunged as corpo- Treasury debt. rate profits have contracted and as As measured in the national income firms have presumably adjusted pay- and product accounts (NIPA), real fedments to take advantage of the bonus eral expenditures on consumption and depreciation provisions contained in the gross investment—the part of federal Economic Stimulus Act of 2008 and spending that is a direct component of the American Recovery and Reinvest- GDP—fell at an annual rate of 41⁄ 2 perment Act of 2009. Individual income cent in the first quarter following its and payroll tax receipts have also steep rise of more than 8 percent in declined noticeably, reflecting the 2008. Real defense spending more than weakness in nominal personal income accounted for the first-quarter contracand reduced capital gains realizations.5 tion, as nondefense outlays increased Nominal federal outlays have risen slightly. However, in the second quarmarkedly of late. After having in- ter, defense spending appears to have creased about 9 percent in fiscal 2008, rebounded, and it is likely to rise further in coming quarters given currently enacted appropriations. 4. The President’s budget includes a placeholderforadditionalfundsforfinancialstabilization programs that have not been enacted but haveanestimatedbudgetcostof$250billion. 6.IntheMonthlyTreasuryStatementsandthe 5. While the 2009 stimulus plan has reduced Administration’s budget, both equity purchases individual taxes by around $13 billion so far in anddebt-relatedtransactionsundertheTARPare fiscal2009,thestimulustaxrebatesin2008low- recordedonanet-present-valuebasis,takinginto eredindividualtaxesbyabout$50billionduring account market risk, and the Treasury’s purthesameperiodlastyear.Thus,thetaxcutsasso- chasesoftheGSE’sMBSarerecordedonanetciated with fiscal stimulus have not contributed present-value basis. However, equity purchases totheyear-over-yeardeclineinindividualtaxre- from the GSEs in conservatorship are recorded ceipts. onacash-flowbasis.

68 96th Annual Report, 2009 Federal Borrowing business, and sales taxes have declined sharply.8 Plans by states to address Federal debt continued to increase in widening projected budget gaps have the first half of 2009, although at a included cutting planned spending, slightly less rapid pace than had been drawing down rainy day funds, and posted in the second half of 2008. De- raising taxes and fees. In coming quarspite the considerable issuance of Trea- ters, the grants-in-aid included in the sury securities in the first half of the fiscal stimulus legislation will likely year, demand at Treasury auctions gen- mitigate somewhat the pressures on erally kept pace, with bid-to-cover state budgets, but many states are still ratios within historical ranges. Foreign expecting significant budget gaps for custody holdings of Treasury securities the upcoming fiscal year. At the local at the Federal Reserve Bank of New level, revenues have held up fairly York grew steadily over the first half of well; receipts from property taxes have the year. Fails-to-deliver of Treasury continued to rise moderately, reflecting securities, which were elevated earlier the typically slow response of property in the year, generally decreased after taxes to changes in home values.9 Nevthe May 1 implementation of the Trea- ertheless, the sharp fall in house prices sury Market Practices Group’s recom- over the past two years is likely to put mendation of a mandatory charge for downward pressure on local revenues delivery failures.7 before long. Moreover, many state and local governments have experienced State and Local Government significant capital losses in their employee pension funds in the past year, The fiscal positions of state and local and they will need to set aside money governments have deteriorated signifi- in coming years to rebuild pension cantly over the past year, and budget assets. strains are particularly acute in some Outlays by state and local governstates, as revenues have come in ments have been restrained by the presweaker than policymakers expected. At sures on their budgets. As measured in the state level, revenues from income, the NIPA, aggregate real expenditures on consumption and gross investment 7.Thefailschargeisincurredwhenapartyto a repurchase agreement or cash transaction fails 8. Sales taxes account for nearly one-half of todeliverthecontractedTreasurysecuritytothe thetaxrevenuescollectedbystategovernments. otherpartybythedateagreedupon.Thecharge 9.Thedelaybetweenchangesinhouseprices isashareofthevalueofthesecurity,wherethe and changes in property tax revenues likely ocshare is the greater of 3 percent (at an annual curs for three reasons. First, property taxes are rate) minus the target federal funds rate (or the based on assessed property values from the prebottomoftherangewhentheFederalOpenMar- viousyear.Second,inmanyjurisdictions,assessketCommitteespecifiesarange)andzero.Previ- ments are required to lag contemporaneous ously, the practice was that a failed transaction changes in market values (or they lag such was allowed to settle on a subsequent day at an changesforadministrativereasons).Third,many unchangedinvoiceprice;therefore,thecostofa localitiesaresubjecttostatelimitsontheannual failwasthelostinterestonthefundsowedinthe increases in total property tax payments and transaction,whichwasminimalwhenshort-term property value assessments. Thus, increases and interestrateswereverylow.Thenewpracticeof decreasesinmarketpricesforhousestendnotto afailschargeensuresthatthetotalcostofafail be reflected in property tax bills for quite some isatleast3percent. time.

Monetary Policy Report of July 2009 69 by state and local governments—the payments are subsidized by the Treapart of state and local spending that is sury at a 35 percent rate. Yields on a direct component of GDP—fell in municipal securities rose somewhat in both the fourth quarter of last year and May and June, concomitant with the the first quarter of this year, led by rise in other long-term interest rates sharp declines in real construction over that period; even so, the ratio of spending. However, recent data on con- municipal bond yields to those on struction expenditures suggest that comparable-maturity Treasury securiinvestment spending in the second ties dropped to its lowest level in alquarter picked up, reversing a portion most a year. of the earlier declines. State and local In contrast to long-term municipal employment has remained about flat bond markets, conditions in short-term over the past year, although some state municipal bond markets continued to and local governments are in the pro- exhibit substantial strains. Market parcess of reducing outlays for compensa- ticipants continued to report that the tion through wage freezes and manda- cost of liquidity support and credit entory furloughs that are not reflected in hancement for variable-rate demand the employment figures. obligations (VRDOs)—bonds that combine long maturities with floating short-term interest rates—remained State and Local substantially higher than it had been a Government Borrowing year earlier.10 In addition, auctions of On net, bond issuance by state and most remaining auction-rate securities local governments picked up in the failed. Some municipalities were able second quarter of 2009 after having to issue new VRDOs, but many lowerbeen tepid during the first quarter. Issu- rated issuers appeared to be either unance of short-term debt remained mod- willing or unable to issue this type of est, although about in line with typical debt at the prices that would be deseasonal patterns. Issuance of long- manded of them. However, the seventerm debt, which is generally used to day Securities Industry and Financial fund capital spending projects or to re- Markets Association swap index, a fund existing long-term debt, increased measure of yields for high-grade from the sluggish pace seen in the sec- VRDOs, declined to the lowest level ond half of 2008. The composition of on record, suggesting that the market new issues continued to be skewed to- was working well for higher-rated ward higher-rated borrowers. issuers. Interest rates on long-term municipal bonds declined in April as investors’ concerns about the credit quality of municipal bonds appeared to ease somewhat with the passage of the fiscal 10. VRDOs are taxable or tax-exempt bonds thatcombinelongmaturitieswithfloatingshortstimulus plan, which included a subterm interest rates that are reset on a weekly, stantial increase in the amount of fed- monthly, or other periodic basis. VRDOs also eral grants to states and localities. That have a contractual liquidity backstop, typically bill also aided the finances of state and provided by a commercial or investment bank, thatensuresthatbondholdersareabletoredeem local governments by establishing theirinvestmentatparplusaccruedinteresteven Build America Bonds, taxable state and if the securities cannot be successfully remarlocal government bonds whose interest ketedtootherinvestors.

70 96th Annual Report, 2009 The External Sector In the first quarter of 2009, the U.S. current account deficit was $406 billion The demand for U.S. exports dropped at an annual rate, a bit less than 3 persharply in the first quarter. However, cent of GDP, considerably narrower U.S. demand for imports fell even more than the $706 billion deficit recorded in precipitously, softening the decline in 2008. The narrowing largely reflected real GDP. the sharp reduction in the U.S. trade Real exports of goods and services deficit, with the contraction in real imdeclined at an annual rate of 31 percent ports described earlier being comin the first quarter, exceeding even the pounded by a steep fall in the value of 24 percent rate of decline in the fourth nominal oil imports as oil prices quarter of 2008. Exports in almost all declined. major categories contracted, with ex- Import prices fell sharply in late ports of machinery, industrial supplies, 2008 and the first quarter of this year, automotive products, and services re- but they have stabilized over the past cording large decreases. (Exports of few months. This pattern was influaircraft were the exception, with enced importantly by the swing in increases following the end of strike- prices for oil and non-oil commodities, related production disruptions in the which turned back up in the second fourth quarter.) All of our major trad- quarter. Prices for finished goods ing partners reduced their demand for declined only slightly in the last quarter U.S. exports, with exports to Canada, of 2008 and the first quarter of this Europe, and Mexico exhibiting espe- year and have increased slightly in cially significant declines. Data for recent months. April and May suggest that exports in The price of crude oil in world marthe second quarter continued to fall, kets rose considerably over the first although more moderately, reflecting a half of this year. After plunging from a slowing in the rate of contraction in record high of more than $145 per barforeign economic activity. rel in mid-July 2008 to a December Real imports of goods and services average of about $40, the spot price of fell at an annual rate of more than West Texas intermediate (WTI) crude 36 percent in the first quarter. The drop oil rebounded to about $60 per barrel in imports was widespread across U.S. in mid-July of this year. The rebound trading partners, with large declines ob- in oil prices appears to reflect the view served for imports from Canada, that the global demand for oil has Europe, Japan, and Latin America. All begun to pick up once again. In addimajor categories of imports fell, with tion, the ongoing effects of previous reimports of machinery, automotive prod- ductions in OPEC supply seem to be ucts, and industrial supplies displaying putting upward pressure on oil prices. particularly pronounced declines. The The prices of longer-term futures consharp fall in exports and imports of au- tracts for crude oil have moved up to tomotive products partly reflected cut- around $85 per barrel, reflecting the backs in North American production of view that the market will continue to motor vehicles, which relies heavily on tighten as global demand strengthens flows of parts and finished vehicles over the medium term. among the United States, Canada, and Mexico.

Monetary Policy Report of July 2009 71 National Saving lion jobs. In recent months, however, the pace of job loss has moderated Total net national saving—that is, the somewhat. Private nonfarm payroll emsaving of households, businesses, and ployment fell by 670,000 jobs, on avergovernments, excluding depreciation age, per month from January to April, charges as measured in the NIPA—fell but the declines slowed to 312,000 in to a level of negative 11⁄ 2 percent of May and 415,000 in June. In contrast, nominal GDP in the first quarter of this the civilian unemployment rate has year, its lowest reading in the post– continued to move up rapidly so far World War II period. After having this year, climbing 21⁄ 4 percentage reached 31⁄ 2 percent of nominal GDP in points between December 2008 and early 2006, net national saving dropped June to 91⁄ 2 percent. over the subsequent three years as the Virtually all major industries experifederal budget deficit widened substan- enced considerable job losses in the tially and the fiscal positions of state first few months of the year. More and local governments deteriorated. In recently, employment declines in many contrast, private saving has risen con- industry groups have eased, and some siderably, on balance, over this period, industries have reported small gains. as a decline in business saving has The May and June declines in conbeen more than offset by the recent struction jobs were the smallest since jump in personal saving. National sav- last fall, job declines in temporary help ing will likely remain very low this services slowed noticeably, and emyear in light of the weak economy and ployment in nonbusiness services the probable further widening of the turned up in May and increased further federal budget deficit. Nonetheless, if in June. Meanwhile, in the manufacturnot boosted over the longer run, persis- ing sector, employment declines have tent low levels of national saving will subsided a bit in recent months but still likely be associated with both low rates remain sizable; job losses in this sector of capital formation and heavy borrow- have totaled 1.9 million since the start ing from abroad, which would limit the of the recession. rise in the standard of living of U.S. In addition to shedding jobs, firms residents over time and hamper the have cut their labor input by shortening ability of the nation to meet the retire- hours worked. Average weekly hours ment needs of an aging population. of production and nonsupervisory workers on private payrolls dropped The Labor Market sharply through June. In addition, the share of persons who reported that they Employment and Unemployment were working part time for economic reasons—a group that includes indi- The labor market deteriorated signifi- viduals whose hours have been cut by cantly further in the first half of this their employers as well as those who year as employment continued to fall would like to move to full-time jobs and the unemployment rate rose but are unable to find them—is high. sharply. The job losses so far this year Since the beginning of the recession have been widespread across industries in December 2007, the unemployment and have brought the cumulative rate has risen more than 41⁄ 2 percentage decline in private employment since points. The rise in joblessness has been December 2007 to more than 61⁄ 2 mil- especially pronounced for those who

72 96th Annual Report, 2009 lost their jobs permanently; these indi- firms have responded to the contraction viduals tend to take longer to find new in aggregate demand by aggressively jobs than those on temporary layoffs or reducing employment and shortening those who left their jobs voluntarily, the workweeks of their employees. Acand their difficulty in finding new jobs cording to the latest available published has been exacerbated by the ongoing data, output per hour in the nonfarm weakness in hiring. Accordingly, the business sector increased at an annual median duration of uncompleted spells rate of about 11⁄ 2 percent in the first of unemployment has increased from quarter after rising 21⁄ 4 percent during 81⁄ 2 weeks in December 2007 to all of 2008. If these productivity esti- 18 weeks in June 2009, and the num- mates prove to be accurate, they would ber of workers unemployed more than suggest that the fundamental factors 15 weeks has moved up appreciably. that have supported a solid trend in The labor force participation rate, underlying productivity in recent which typically weakens during periods years—such as the rapid pace of techof rising unemployment, decreased nological change and ongoing efforts gradually through March but has by firms to use information technology moved up somewhat, on balance, in to improve the efficiency of their recent months. The emergency unem- operations—remain in place. ployment insurance programs that were Alternative measures of nominal introduced last July have likely contrib- hourly compensation and wages suguted to the higher participation rate and gest, on balance, that increases in labor unemployment rate by encouraging un- costs have slowed this year in response employed individuals to remain in the to the sizable amount of slack in labor labor force to continue to look for markets. The employment cost index work. In addition, anecdotes suggest (ECI) for private industry workers, that the impairment of household bal- which measures both wages and the ance sheets during this recession may cost to employers of providing benefits, have led some workers to delay retire- has decelerated considerably over the ment and other workers to enter the past year. This measure of compensalabor force. tion increased less than 2 percent in Other more recent indicators suggest nominal terms between March 2008 that conditions in the labor market and March 2009 after rising 31⁄ 4 perremain very weak. Initial claims for cent in each of the preceding two unemployment insurance, which rose years. Average hourly earnings of prodramatically earlier this year, have duction and nonsupervisory workers—a fallen noticeably from their peak but more timely, but narrower, measure of remain elevated, and the number of in- wage developments—have also deceldividuals receiving regular and emer- erated significantly, especially in recent gency unemployment insurance bene- months. In contrast, compensation per fits climbed, reaching nearly 10 million hour (CPH) in the nonfarm business at the end of June. sector—an alternative measure of hourly compensation derived from the data in the NIPA—increased about 4 Productivity and Labor Compensation percent over the year ending in the first Labor productivity has continued to quarter of 2009, similar to the rate of increase at a surprising rate during the increase seen during the past several most recent downturn, in part because years.

Monetary Policy Report of July 2009 73 The much slower pace of overall Consumer energy prices flattened consumer price inflation over the past out, on balance, in the first five months year has supported real wage growth. of 2009 following their sharp drop late Indeed, changes in both broad mea- last year. However, crude oil prices sures of hourly compensation—the ECI have turned up again, with the spot and CPH—have picked up in real price of WTI rising to around $60 per terms over the past year, as has the barrel in mid-July from about $40, on inflation-adjusted increase in average average, last December. The increase in hourly earnings. Nonetheless, as noted crude costs has been putting upward previously, with the sharp reduction in pressure on the price of gasoline at the total hours worked, real wage and sal- pump in recent months. In contrast, ary income of households has fallen natural gas prices continued to plunge over this period. over the first half of this year in response to burgeoning supplies from new wells in Louisiana, North Dakota, Prices Pennsylvania, and Texas that boosted inventories above historical midyear Headline consumer prices, which fell averages. Consumer prices for electricsharply late last year with the marked ity have edged down so far this year— deterioration in economic activity and after rising briskly through the end of drop-off in the prices of crude oil and last year—as fossil fuel input costs other commodities, have risen at a have continued to decline. moderate pace so far this year. While Food prices decelerated considerably the margin of slack in product and in the first part of this year in response labor markets has widened consider- to the dramatic downturn in spot prices ably further this year, putting down- of crops and livestock in the second ward pressure on inflation, many com- half of last year. After climbing nearly modity prices have retraced part of 61⁄ 2 percent in 2008, the PCE price intheir earlier declines. All told, the dex for food and beverages decreased chain-type price index for personal at an annual rate of 1 percent between consumption expenditures increased at December 2008 and May 2009. an annual rate of about 13⁄ 4 percent Core PCE prices rose at an annual between December 2008 and May rate of 21⁄ 2 percent over the first five 2009, compared with its 3⁄ 4 percent rise months of the year, compared with over the 12 months of 2008. The core 13⁄ 4 percent over all of 2008. The PCE price index—which excludes the pickup in core inflation during the first prices of energy items as well as those part of this year reflected, in part, a of food and beverages—also has jump in the prices of tobacco products increased at a moderate pace so far this associated with large increases in fedyear following especially low rates of eral and state excise taxes this spring; increase late in 2008. Data for PCE excluding tobacco prices—for which prices in June are not yet available, but the large increases likely were one-off information from the consumer price adjustments—core inflation was unindex and other sources suggests that changed at 13⁄ 4 percent over this period. total PCE prices posted a relatively Aside from tobacco, prices for other large increase that month as gasoline core goods snapped back early this prices jumped; core consumer price year—following heavy discounting at increases were moderate. the end of last year in reaction to weak

74 96th Annual Report, 2009 demand and excess inventories—but financial institutions reported substanhave been little changed for the most tial losses for the fourth quarter of part in recent months. In contrast, 2008. prices for a wide range of non-energy Strains in short-term funding markets services have decelerated noticeably persisted in January and February. A further this year. measure of stress in the interbank mar- Survey-based measures of near-term ket, the spread of the London interbank inflation expectations declined late last offered rate (Libor) over the rate on year and early this year as actual head- comparable-maturity overnight index line inflation came down markedly, swaps (OIS), remained at elevated levbut, in recent months, some measures els early in the year. Required margins have moved back up close to their of collateral (also known as haircuts) average levels of recent years. Accord- and bid-asked spreads generally contining to the Reuters/University of Michi- ued to be wide in the markets for gan Surveys of Consumers, median ex- repurchase agreements backed by many pectations for year-ahead inflation types of securities. stood at 3.0 percent in the preliminary Other financial markets also continestimate for July, up from about 2 per- ued to show signs of stress during the cent around the turn of the year. Indi- first two months of the year. In the cators of longer-term inflation expecta- leveraged loan market, bid prices tions have been steadier over this remained close to historical lows, and period. These expectations in the issuance—particularly of loans in- Reuters/University of Michigan survey tended for nonbank lenders—dropped stood at 3.1 percent in the preliminary to very low levels. Issuance of securi- July release, about the measure’s aver- ties backed by credit card loans, nonreage value over all of 2008. volving consumer loans, and auto loans continued to be minimal in the first few months of the year, and there was Financial Stability no issuance of CMBS in the first half Developments of 2009. An index based on CDS spreads on AAA-rated CMBS widened Evolution of the Financial Turmoil, and neared the peak levels seen in Policy Actions, and the Market November. Broad equity price indexes Response continued to fall, and measures of Stresses in financial markets intensified equity price volatility remained very in the first few months of 2009 but high. have eased more recently. Credit de- Nonetheless, a few financial markets fault swap spreads for bank holding showed signs of improvement early in companies—which primarily reflect in- the year. In the CP market, spreads on vestors’ assessments of the likelihood shorter-maturity A1/P1 nonfinancial of those institutions defaulting on their and financial CP as well as on assetdebt obligations—rose sharply in early backed commercial paper (ABCP) over January on renewed concerns that some AA nonfinancial CP declined modestly. of those firms could face considerable Although part of the improvement capital shortfalls and liquidity difficul- likely reflected greater demand from ties. Equity prices for banking and in- institutional investors as short-term surance companies fell in the first quar- Treasury yields declined to near zero ter of the year as a number of large on occasion, CP markets continued to

Monetary Policy Report of July 2009 75 be supported by the Federal Reserve’s The announcement of the plan did Commercial Paper Funding Facility not lead to an immediate improvement (CPFF). More notably, spreads on in financial market conditions. Bank shorter-maturity A2/P2 CP, which is and insurance company equity prices not eligible for purchase under the continued to decline, and CDS spreads CPFF, also fell. In the corporate bond of such institutions widened to levels market, spreads of yields on BBB-rated above those observed the previous fall. and speculative-grade bonds relative to Market participants were reportedly unyields on comparable-maturity Treasury clear about the methodology that would securities narrowed in January and underlie the assessment of bank capital February, although they remained at needs. The timing of the announcement historically high levels. Spreads on 10- of the results and the likely policy year Fannie Mae debt and option- responses from this part of the CAP— adjusted spreads on Fannie Mae formally named the SCAP, but popumortgage-backed securities over larly known as the stress test—were comparable-maturity Treasury securi- also sources of uncertainty. (CAP and ties dropped early in the year, reflect- SCAP are described in greater detail in ing, in part, the effects of Federal the box titled “Capital Assistance Pro- Reserve purchases of agency debt and gram and Supervisory Capital Assessagency MBS. Interest rates on 30-year ment Program.”) On March 2, Amerifixed rate conforming mortgages also can International Group, Inc. (AIG), fell. reported losses of more than $60 bil- In an effort to help restore confi- lion for the fourth quarter of 2008, and dence in the strength of U.S. financial the Treasury and the Federal Reserve institutions and restart the flow of lend- announced a restructuring of the goving to businesses and households, on ernment assistance to AIG to enhance February 10, the Treasury, the Federal the company’s capital and liquidity in Reserve, the FDIC, the Office of the order to facilitate the orderly comple- Comptroller of the Currency, and the tion of its global divestiture program. Office of Thrift Supervision announced On March 3, the Treasury and the the Financial Stability Plan. The plan Federal Reserve announced the launch included the Capital Assistance Pro- of the TALF. In the initial phase of the gram (CAP), designed to assess the program, the Federal Reserve offered to capital needs of depository institutions provide up to $200 billion of three-year under a range of economic scenarios loans on a nonrecourse basis secured and to help increase the amount and by AAA-rated ABS backed by newly strengthen the quality of their capital if and recently originated auto loans, necessary; a new Public-Private Invest- credit card loans, student loans, and ment Program, or PPIP, which would loans guaranteed by the Small Business combine public and private capital with Administration. The Treasury’s TARP government financing to help banks would purchase $20 billion of subordidispose of legacy assets and strengthen nated debt in a special purpose vehicle their balance sheets, thereby supporting (SPV) created by the Federal Reserve new lending; an expansion of the Fed- Bank of New York. The SPV would eral Reserve’s TALF program; and an purchase and manage any assets reextension of the senior debt portion of ceived by the New York Fed in conthe FDIC’s Temporary Liquidity Guar- nection with any TALF loans. The deantee Program to October 31, 2009. mand for TALF funding was initially

76 96th Annual Report, 2009 Capital Assistance Program and Supervisory Capital Assessment Program On February 10, 2009, the Treasury, cise was to conduct a comprehensive Federal Reserve, Federal Deposit Insur- and consistent assessment simultaance Corporation (FDIC), Office of the neously on the largest BHCs using a Comptroller of the Currency, and Office common set of alternative macroof Thrift Supervision announced a Capi- economic scenarios and a common tal Assistance Program (CAP) to ensure forward-looking conceptual framework. that the largest banking institutions Extensive information was collected on would be appropriately capitalized with the characteristics of the major loan, sehigh-quality capital. As part of this pro- curities,andtradingportfolios,revenues, gram, the federal banking supervisors and modeling methods of the instituundertook a Supervisory Capital Assess- tions. With this information, supervisors ment Program (SCAP) to evaluate the were able to apply a consistent and syscapital needs of the largest U.S. bank tematic approach across firms to estiholding companies (BHCs) under a mate losses, revenues, and reserves for more challenging economic environment 2009 and 2010, and to determine than generally anticipated. The Treasury whether firms would need to raise capiand federal banking agencies believe it tal to build a buffer to withstand largerimportantforthelargestBHCstohavea than-expected losses. The SCAP buffer capital buffer sufficient to withstand for each BHC was sized to achieve a losses and allow them to meet the credit Tier 1 risk-based ratio of 6 percent and needs of their customers if the economy a Tier 1 Common risk-based ratio of 4 were to weaken more than expected in percent at the end of 2010 under a more order to help facilitate a broad and sus- severe macroeconomic scenario than tainableeconomicrecovery. expected. The SCAP was initiated on February Supervisors took the unusual step of 25, 2009, and results were released pub- publicly reporting the findings of the licly on May 7, 2009. U.S. BHCs with SCAP. The decision to depart from the risk-weighted assets of more than $100 standard practice of maintaining confibillion at the end of 2008 were required dentiality of examination information to participate. The objective of the exer- stemmed from the belief that greater modest, reportedly on concerns that expand its purchases of agency MBS future changes in government policies by $750 billion, and of agency debt by could adversely affect TALF borrowers. $100 billion; in addition it would also Financial markets began to show purchase up to $300 billion of longersigns of improvement in early March term Treasury securities over the next when a few large banks indicated that six months. Yields on a wide range of they had been profitable in January and longer-term debt securities dropped February. Sentiment continued to substantially within a day of the release improve after the March 17-18 meeting of the Committee’s statement. Firstof the Federal Open Market Committee quarter earnings results pre-announced (FOMC), at which, against a backdrop by some large financial institutions of weakening economic activity and were substantially better than expected, significant financial market strains, the although some of the surprise was at- Committee announced that it would tributable to greater-than-anticipated

Monetary Policy Report of July 2009 77 clarity around the SCAP process and equity in the public markets and raised findings would make the exercise more about$40billion;theyalsoraisedasubeffective at reducing uncertainty and stantial additional amount of capital by restoring confidence in financial insti- exchanging preferred shares to common tutions.1 shares and selling assets. Firms that do ResultsoftheSCAPindicatedthat10 not meet their buffer requirement can firms would need to augment their capi- issue mandatory convertible shares to tal or improve the quality of the capital the Treasury in an amount up to 2 perfrom 2008:Q4 levels; the combined cent of the institution’s risk-weighted amount totaled $185 billion, nearly all assets(orhigheronrequest),asabridge of which is required to meet the target to private capital. In addition, firms can Tier 1 Common risk-based ratio. Be- apply to the Treasury to exchange their tweentheendof2008andthereleaseof existing Capital Purchase Program prethe results in May, many firms had al- ferred stock to help meet their buffer reready completed or contracted for asset quirement. To protect taxpayers, firms sales or restructured existing capital in- will be expected to have issued private struments. After adjusting for these capitalbeforeorsimultaneouslywiththe transactions and revenues that exceeded exchange. what had been assumed in the SCAP, The firms not asked to augment their the combined amount of additional capi- capital also raised about $20 billion in tal needed to establish the buffer was common equity in May and early June. $75billion.The10firmsarerequiredto Most of these firms and others applied raise the additional capital by Novem- for and received approval from their suber9,2009. pervisors to repay their outstanding Sincethereleaseoftheresults,almost Capital Purchase Program preferred all of the 10 firms that were asked to stock. In early June, 10 large BHCs reraisecapitalbuffersissuednewcommon paidabout$68billiontotheTreasury.A number of banks have also been able to 1. Adescriptionofthemethodologyandasum- issue debt not guaranteed by the FDIC’s maryofresults,includinglossratesonmajorloan Temporary Liquidity Guarantee Procategories for each firm, is available at www. federalreserve.gov/bankinforeg/scap.htm. gram. effects of revisions in accounting measures of equity price volatility rules.11 Equity prices of banks and in- declined. Libor-OIS spreads began to surance companies rose, and CDS edge down. Spreads on lower-rated spreads for such institutions narrowed, investment-grade and speculative-grade although to still-elevated levels. Broad corporate bonds over comparablestock price indexes also climbed and maturity Treasury securities also fell, though again to levels that remained high by historical standards. Bid-asked 11. In early April, the Financial Accounting Standards Board issued new guidance related to fair value measurements and other-thantemporary impairments (OTTIs). The new fair when two criteria are met: (1) The institution valueguidancereducestheemphasistobeplaced doesnothavetheintenttosellthedebtsecurity, on the “last transaction price” in valuing assets and (2) it is unlikely that the institution will be whenmarketsarenotactiveandtransactionsare required to sell the debt security before a forelikely to be forced or distressed. The new OTTI casted recovery of its cost basis. The two guidance will require impairment write-downs changes have resulted in higher fair value estithrough earnings only for the credit-related por- mates and reductions in impairments, improving tion of a debt security’s fair value impairment institutions’reportedfirst-quarterearnings.

78 96th Annual Report, 2009 spreads on speculative-grade bonds banking sector (see “International Dedeclined. Similarly, bid-asked spreads velopments” for additional detail). narrowed in the leveraged loan market. In early June, the Federal Reserve Conditions in financial markets con- outlined the criteria it would use to tinued to improve in the second quar- evaluate applications to redeem Treater, aided in part by the emergence of sury capital from participants in the more detail on the SCAP program and SCAP. On June 17, 10 banking instituthe release of its results on May 7. tions redeemed about $68 billion in Market participants reportedly viewed Treasury capital. At about the same the amount of additional capital that time, the 10 banking organizations that banks were required to raise in con- had been required under the SCAP to junction with the SCAP as relatively bolster their capital buffers all submitmodest. With uncertainty about the ted plans that would provide sufficient SCAP results resolved, and amid the capital to meet the required buffer unongoing improvements in financial der the assessment’s more adverse scemarkets, market participants appeared nario. On June 25, the Federal Reserve to mark down the probability of announced that while it would extend a extremely adverse financial market out- number of its liquidity facilities comes. Equity prices for many large through early 2010, in light of the imbanks and insurance companies rose provement in financial conditions and even as substantial equity issuance by reduced usage of some of its facilities, banks covered by the SCAP program it would trim their size and adjust some added to supply. The secondary market of their terms. for leveraged loans also showed improvement, with the average bid price Banking Institutions rising considerably; issuance, however, particularly of institutional loans, re- Profitability of the commercial banking mained very weak. Short-term inter- sector, as measured by return on assets bank funding markets continued to and return on equity, recovered someimprove, with Libor-OIS spreads at what in the first quarter after having one-month tenors declining to near pre- posted near-record lows in the fourth crisis levels; spreads at longer tenors quarter of 2008. Profits were concenalso fell but remained very high. De- trated at the largest banks and were mand for TALF funds increased in driven by a rebound in trading revenue May and June, particularly for securi- as well as reduced noninterest expense ties backed by credit card and auto related to smaller write-downs of intanloans. Supported by the TALF, issuance gible assets. Smaller banks, in contrast, of consumer ABS picked up further in continued to lose money amid mount- May, and it began to approach pre- ing credit losses. Indeed, at the industry crisis levels. Also in May, the Federal level, loan quality deteriorated substan- Reserve announced that, starting in tially from the already poor levels re- June, CMBS and securities backed by corded late last year, with delinquency insurance premium finance loans would rates on credit card loans reaching their be eligible collateral under the TALF. highest level on record (back to 1991). Financial markets abroad also im- Delinquency rates on residential mortproved during the second quarter, re- gages held by banks soared to 8 perflecting improved global economic cent. Regulatory capital ratios improspects and positive news from the proved in the fourth quarter of 2008

Monetary Policy Report of July 2009 79 and the first quarter of 2009 as com- the April survey indicated that they mercial banks received substantial capi- expected the credit quality of their loan tal infusions—likely related to funds portfolios to worsen over the remainder received by their parent bank holding of the year. Demand for most types of companies under the Capital Purchase loans also reportedly weakened over Program—while total assets declined. the survey period, with the noticeable Despite a decline in loans outstanding, exception of demand from prime borunused commitments to fund loans to rowers for mortgages to purchase both households and businesses shrank homes—a development that coincided at an annual rate of more than 30 per- with a temporary rise in applications to cent in the first quarter of 2009. refinance home mortgages. Commercial bank lending contracted Data from the February and May at an annual rate of nearly 7 percent Surveys of Terms of Business Lending during the first half of 2009, reflecting indicated that the spreads of yields on weak loan demand and tight credit con- C&I loans over those on comparableditions. C&I loans fell at an annual rate maturity market instruments rose noof about 14 percent over this period, ticeably. The increase in the May surpartly as a result of broad and sus- vey was partly attributable to a steep tained paydowns of outstanding loans increase in spreads on loans made unamid weak investment spending by der commitment, as a larger share of businesses. Some of these paydowns loans in the May survey were drawn also were likely related to increased is- from commitments arranged after the suance of longer-term corporate debt, onset of the financial crisis. as nonfinancial firms—especially those rated as investment grade—tapped the Monetary Policy Expectations corporate bond market. CRE loans ran and Treasury Rates off steadily, likely a result of continued weakness in that sector. Bank loans to The current target range for the federal households also fell over the first half funds rate, 0 to 1⁄ 4 percent, is in line of the year, particularly in the spring, with the level that investors expected at as banks reportedly sold or securitized the end of 2008. However, over the large volumes of residential mortgages first half of 2009, investors marked and consumer credit card loans. Loan down, on balance, their expectation for loss reserves reported by large banks the path of the federal funds rate for increased considerably in the second the remainder of the year. Early in the quarter, suggesting continued deteriora- year, the markdown was attributable to tion in credit quality and further pres- continued concerns about the health of sure on earnings. financial institutions, weakness in the The Senior Loan Officer Opinion real economy, and a moderation in in- Survey conducted in April 2009 indi- flation pressures. Later in the period, cated that large fractions of banks con- FOMC communications indicating that tinued to tighten standards and terms the federal funds rate would likely on loans to businesses and households remain low for an extended period reover the preceding three months. For portedly also contributed to the downmost loan categories, however, the ward revision to policy expectations. In fractions of banks that reported having contrast, investors marked up their exdone so decreased from the January pectations about the pace with which survey. The majority of respondents to policy accommodation will be removed

80 96th Annual Report, 2009 in 2010, likely in light of increased op- which resulted in a noticeable increase timism about the economic outlook. in measured inflation compensation— Futures quotes currently suggest that the difference between comparableinvestors expect the federal funds rate maturity nominal yields and TIPS to remain within the current target yields. Inferences about inflation exrange for the remainder of this year pectations from inflation compensation and then to rise in 2010. However, un- have been difficult to make since the certainty about the size of term premi- second half of 2008 because yields on ums and potential distortions created nominal and TIPS issues appear to by the zero lower bound for the federal have been affected significantly by funds rate continue to make it difficult movements in liquidity premiums, and to obtain a definitive reading on the because other special factors have bufpolicy expectations of market partici- feted yields on nominal Treasury pants from futures prices. Options issues. Some of these special factors prices suggest that investor uncertainty have begun to subside in recent about the future path for policy months, suggesting that the increase in increased, on balance, during the first inflation compensation since year-end half of 2009. is partly due to an improvement in Yields on longer-maturity Treasury market functioning and other special securities increased substantially, on factors, although near-term inflation exnet, over the first half of 2009, in pectations may have been boosted by response to better-than-expected eco- rising energy prices. nomic data releases, declines in the weight investors attached to highly ad- Monetary Aggregates and the verse economic outcomes, signs of Federal Reserve’s Balance Sheet thawing in the credit markets, technical factors related to the hedging of mort- The M2 monetary aggregate expanded gage holdings, and the large increase in at an annual rate of 73⁄ 4 percent during the expected supply of such securities. the first half of 2009, reflecting robust The rise in Treasury yields has likely growth in the first quarter and more been mitigated somewhat by the imple- moderate growth in the second.12 This mentation of the Federal Reserve’s large-scale asset purchases, under 12. M2 consists of (1) currency outside the which the Federal Reserve is conduct- U.S. Treasury, Federal Reserve Banks, and the ing substantial purchases of agency vaults of depository institutions; (2) traveler’s debt, agency MBS, and longer-maturity checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts Treasury securities. On net, yields on held by depository institutions, the U.S. govern- 2- and 10-year Treasury notes rose ment,andforeignbanksandofficialinstitutions) about 50 and 115 basis points, respec- less cash items in the process of collection and tively, during the first half of 2009, FederalReservefloat;(4)othercheckabledeposwith the rise concentrated in the second its (negotiable order of withdrawal, or NOW, accountsandautomatictransferserviceaccounts quarter, after having declined about 200 atdepositoryinstitutions;creditunionsharedraft and 140 basis points, respectively, dur- accounts; and demand deposits at thrift instituing the second half of 2008. tions); (5) savings deposits (including money In contrast to yields on their nominal marketdepositaccounts);(6)small-denomination timedeposits(timedepositsissuedinamountsof counterparts, yields on Treasury inless than $100,000) less individual retirement flation-protected securities (TIPS) deaccount(IRA)andKeoghbalancesatdepository clined over the first half of 2009, institutions; and (7) balances in retail money

Monetary Policy Report of July 2009 81 expansion was due in part to the rela- circulation) and about $20 billion in retively small difference between market serve balances held by depository instiinterest rates and the rates offered on tutions. M2 assets, as well as an increased de- By December 31, 2008, after the insire of households and firms to hold troduction of several new Federal safe and liquid assets because of the Reserve policy initiatives, assets had financial turmoil. Strong growth in liq- more than doubled to about $2.2 triluid deposits was partially offset by lion. Holdings of U.S. Treasury securirapid declines in small time deposits ties had declined by nearly one-half. At and retail money market mutual funds, that point, the majority of Federal as yields on the latter two assets Reserve assets consisted of credit dropped relative to rates on liquid extended to depository institutions, deposits. The currency component of other central banks, and primary dealthe money stock also increased, with a ers.13 The Federal Reserve had exnotable rise in the first quarter that tended about $330 billion in funding to appeared to reflect strong demand for the CPFF and was providing more than U.S. banknotes from both foreign and $100 billion in support of certain critidomestic sources. The monetary base— cal institutions. The growth in assets essentially the sum of currency in the was largely funded by an increase in hands of the public and the reserve bal- reserve balances, which, at $860 bilances of depository institutions held at lion, slightly exceeded currency in the Federal Reserve—continued to circulation. expand rapidly in the first quarter of Over the first half of this year, total 2009, albeit at a slower pace than in Federal Reserve assets decreased the second half of 2008. The expansion slightly, on net, to about $2.1 trillion, of the monetary base slowed further in though there were large changes in the the second quarter of 2009, as a composition of those assets. Holdings decline in amounts outstanding under of Treasury securities increased to the Federal Reserve’s credit and liquid- nearly $685 billion, and holdings of ity programs partially offset the effects agency debt and MBS rose to more on reserve balances of the Federal Re- than $625 billion as a result of largeserve’s large-scale asset purchases. scale asset purchases. Credit extended The nontraditional monetary policy to depository institutions, primary dealactions employed by the Federal ers, and other market participants fell Reserve since the onset of the current as market functioning improved. The episode of financial turmoil have decline importantly reflected a decrease resulted in a considerable expansion of in foreign central banks’ draws on dolthe Federal Reserve’s balance sheet lar liquidity swap lines and a runoff in (table 1). On December 31, 2007, prior credit extended through the CPFF and to much of the financial market tur- the Term Auction Facility (TAF). The moil, the Federal Reserve’s assets to- amount of credit extended in support of taled nearly $920 billion, the bulk of certain critical institutions remained which was Treasury securities. Its li- about unchanged. On the liability side, abilities included nearly $800 billion in Federal Reserve notes (currency in 13. Primary dealers are broker-dealers that market mutual funds less IRA and Keogh bal- tradeinU.S.governmentsecuritieswiththeFedancesatmoneymarketmutualfunds. eralReserveBankofNewYork.

82 96th Annual Report, 2009 1. SelectedComponentsoftheFederalReserveBalanceSheet,2007−09 Millionsofdollars Dec.31, Dec.31, July15, Balancesheetitem 2007 2008 2009 Totalassets......................................................... 917,922 2,240,946 2,074,822 Selectedassets Creditextendedtodepositoryinstitutionsanddealers Primarycredit.................................................... 8,620 93,769 34,743 Termauctioncredit .............................................. 40,000 450,219 273,691 Centralbankliquidityswaps ...................................... 24,000 553,728 111,641 PrimaryDealerCreditFacilityandotherbroker-dealercredit ....... ... 37,404 0 Creditextendedtoothermarketparticipants Asset-BackedCommercialPaperMoneyMarketMutualFund ... 23,765 5,469 LiquidityFacility .............................................. NetportfolioholdingsofCommercialPaperFundingFacilityLLC . ... 334,102 111,053 NetportfolioholdingsofLLCsfundedthroughtheMoneyMarket ... 0 0 InvestorFundingFacility ....................................... TermAsset-BackedSecuritiesLoanFacility ....................... ... ... 30,121 Supportofcriticalinstitutions NetportfolioholdingsofMaidenLaneLLC,MaidenLaneIILLC, andMaidenLaneIIILLC1...................................... ... 73,925 60,546 CreditextendedtoAmericanInternationalGroup,Inc. ............. ... 38,914 42,871 Securitiesheldoutright U.S.Treasurysecurities........................................... 740,611 475,921 684,030 Agencydebtsecurities............................................ 0 19,708 101,701 Agencymortgage-backedsecurities(MBS)2........................ ... ... 526,418 Memo TermSecuritiesLendingFacility3 ................................... ... 171,600 4,250 Totalliabilities..................................................... 881,023 2,198,794 2,025,348 Selectedliabilities FederalReservenotesincirculation ............................... 791,691 853,168 870,327 Reservebalancesofdepositoryinstitutions ........................ 20,767 860,000 808,824 U.S.Treasury,generalaccount .................................... 16,120 106,123 65,234 U.S.Treasury,supplementalfinancingaccount ..................... ... 259,325 199,939 Totalcapital........................................................ 36,899 42,152 49,474 Note:LLCisalimitedliabilitycompany. 1. TheFederalReservehasextendedcredittoseveralLLCsinconjunctionwitheffortstosupportcriticalinstitutions.MaidenLaneLLCwasformedtoacquirecertainassetsofTheBearStearnsCompanies,Inc.MaidenLaneII LLCwasformedtopurchaseresidentialmortgage-backedsecuritiesfromtheU.S.securitieslendingreinvestment portfolioofsubsidiariesofAmericanInternationalGroup,Inc.(AIG).MaidenLaneIIILLCwasformedtopurchase multisectorcollateralizeddebtobligationsonwhichtheFinancialProductsgroupofAIGhaswrittencreditdefault swapcontracts. 2. IncludesonlyMBSpurchasesthathavealreadysettled. 3. TheFederalReserveretainsownershipofsecuritieslentthroughtheTermSecuritiesLendingFacility. ... Notapplicable. Source:FederalReserveBoard. reserve balances fell somewhat, while ity would spiral further downward led currency in circulation rose. to a sharp selloff in foreign equity markets and to rising spreads on foreign corporate debt. Stock indexes in International Developments Europe and Japan fell about 20 percent, and European bank shares fell more International Financial Markets than 40 percent in response to weak During most of the first quarter of earnings reports and rising fears about 2009, fears that global economic activ- the exposure of many Western Euro-

Monetary Policy Report of July 2009 83 pean banks to emerging Europe. Inter- market economies, which were helped bank funding markets were supported both by the improved outlook and by by government guarantees of bank debt an increased willingness on the part of and other policies put in place during investors to hold riskier assets, are now 2008 to aid wholesale funding. These 20 to 75 percent higher than at the start markets remained more stressed than of the year. before the financial crisis, but their The decisions of several foreign cenfunctioning continued to gradually tral banks to engage in nontraditional improve from the serious disarray that monetary policies appeared to have occurred last fall. some effect on longer-term interest Rapidly easing monetary policies in rates. Yields on long-term British gilts many foreign economies, along with fell 60 basis points around the March 5 further safe-haven flows into Treasury announcement by the Bank of England securities, fueled continued dollar that it would begin purchasing governappreciation over the first two months ment securities, and yields on European of the year. The Federal Reserve’s covered bonds fell nearly 30 basis broadest measure of the nominal trade- points over the week following the weighted foreign exchange value of the May 7 announcement by the European dollar rose more than 6 percent during Central Bank (ECB) that it would pur- January and February. However, begin- chase covered bonds. However, as the ning in March, the dollar depreciated economic outlook improved some in as the global outlook improved a bit the second quarter, and amid concerns and investors accordingly shifted away about mounting fiscal deficits and from Treasury securities to riskier debts, yields on nominal benchmark assets abroad, reversing the pattern ob- bonds rose. On balance, nominal served in the fourth quarter of 2008. benchmark bond yields in major for- During the spring, the dollar fell most eign countries are higher than at the sharply against currencies of major start of the year, even as yields on commodity-producing economies such inflation-protected bonds have fallen. as Australia and Canada, as the improvement in the global outlook also The Financial Account boosted commodity prices. On net, the Federal Reserve’s broad measure of the The pattern of financial flows between nominal exchange value of the dollar is the United States and the rest of the about 2 percent lower than it was at the world was strongly affected by the instart of the year but remains well above tensification of financial turmoil in the its mid-2008 lows. fall of 2008 and, more recently, by the Stock markets around the world re- easing of strains in financial markets. bounded in the second quarter along In the second half of 2008, U.S. inveswith prospects for global growth. tors withdrew to some extent from for- Financial stocks led this rise in the eign securities, and foreigners slowed advanced foreign economies as some their purchases of U.S. assets. At the large banks reported strong earnings same time, foreigners noticeably shifted growth, which benefited from the low their purchases away from U.S. corpointerest rate environment. On net, head- rate and agency securities and toward line European stock indexes are now safer U.S. Treasury securities. For 2008 about where they were at the start of as a whole, the size of the purchases of the year. Equity prices in the emerging U.S. Treasury securities by foreigners

84 96th Annual Report, 2009 was unprecedented, nearly doubling the tone of interbank funding markets led previous record. to a resumption of net lending abroad The pattern of flows has normalized by U.S. banks after a sharp contraction somewhat this year. The pace of pri- of lending in the fourth quarter. As private foreign net Treasury purchases vate sources of dollar liquidity reslowed in the first quarter, and in April emerged, foreign banks were able to flows turned to net sales, primarily of repay the loans they had received from short-term Treasury securities, signal- their central banks. These foreign cening some reversal of the flight to tral banks, in turn, reduced the outsafety. Foreign demand for most other standing amounts of U.S. dollars drawn U.S. securities, however, remained on swap lines from the Federal extremely weak throughout the first Reserve. part of 2009. Foreigners continued to sell U.S. corporate and agency securi- Advanced Foreign Economies ties through April, although they did show renewed interest in U.S. corporate The contraction of economic activity in stocks in March, April, and particularly the major advanced foreign economies May. deepened in the first quarter, as finan- Foreign official institutions resumed cial turbulence, shrinking world trade, strong net purchases of U.S. assets in adverse wealth effects, and eroding the first several months of 2009, business and consumer confidence conalthough acquisitions remained cen- tinued to weigh on activity. GDP fell tered on U.S. Treasury securities. This particularly sharply in Germany and development followed net sales in the Japan, which were hit hard by a confourth quarter of 2008 as some coun- traction in manufacturing exports. tries sold reserves to support their cur- Domestic demand plummeted across rencies; although foreign official insti- the advanced foreign economies, with tutions made large net purchases of double-digit declines in investment Treasury securities, they sold larger spending and sizable negative contriamounts of other U.S. assets. Foreign butions of inventories to economic official acquisitions of Treasury securi- growth. Housing markets also continties were concentrated in short-term ued to weaken in the first quarter, with bills for some months during the win- prices and building activity declining. ter, but official acquisitions of long- By the second quarter, however, term notes and bonds have been similar monthly indicators of economic activity to those of bills over the period since in these economies began to show February. some moderation in the pace of con- Resumption of portfolio investment traction. Purchasing managers indexes abroad by U.S. investors in 2009 also and surveys of business confidence repointed to reduced risk aversion in bounded in the second quarter from the financial markets. Following unprec- exceptionally low levels reached in the edented net inflows in this category in first quarter, while industrial production 2008 resulting from U.S. residents stabilized somewhat. bringing home their foreign invest- Twelve-month consumer price inflaments, outflows resumed in early 2009 tion continued to decline during the as U.S. investors returned to net pur- first half of the year, driven down by chases of foreign securities. Finally, the fall in oil and other commodity starting this year, improvements in the prices since mid-2008 and the

Monetary Policy Report of July 2009 85 significant increase in economic slack. production, and retail sales suggest that Headline inflation fell to near or below economic activity may be starting to zero in all major economies except the recover. United Kingdom, where the deprecia- Among the larger developing econotion of the pound late last year contrib- mies, only China and India have mainuted to keeping inflation around 2 per- tained positive growth during the glocent. Excluding food and energy prices, bal slowdown. Chinese growth was the slowing in consumer prices in these supported in the first quarter and economies was more limited. boosted significantly further in the sec- Foreign central banks responded to ond quarter by a large fiscal stimulus worsening economic conditions and re- package, which focused on infrastrucduced inflation by aggressively cutting ture investment, and by an enormous policy rates and, in some cases, initiat- jump in credit growth. India’s economy ing unconventional monetary easing. also was supported by fiscal stimulus The ECB and Bank of England each and was relatively insulated from the reduced its key policy rate 150 basis negative global shock because it is less points over the first half of 2009, while open. Elsewhere in emerging Asia, the the Bank of Canada lowered its rate economies of Hong Kong, Malaysia, 125 basis points. The Bank of Japan, Singapore, South Korea, Taiwan, and which had already cut the overnight Thailand all contracted at double-digit uncollateralized call rate to 10 basis annual rates in at least one quarter, in points, kept rates at that minimal level. line with their deep trade and financial As policy rates fell to very low levels, linkages with the global economy. central banks implemented nontradi- More recently, however, indicators such tional policies to provide further sup- as industrial production have turned up port to activity. The Bank of England in some of these countries. In addition, established an Asset Purchase Facility exports, although they remain weak, to purchase up to £125 billion in gov- have edged higher in some countries, ernment and corporate debt; the Bank partly because of stimulus-driven deof Japan announced that it would mand from China. increase its purchase of Japanese gov- Economic activity in Mexico conernment bonds, including longer-term tracted sharply late last year and again bonds, and would purchase commercial in the first quarter, owing largely to paper outright; and the ECB announced Mexico’s strong ties to the United plans to purchase as much as €60 bil- States. The outbreak of the H1N1 virus lion in covered bonds over the next was a significant drag on Mexican ecoyear and conducted its first one-year nomic activity in the second quarter. In financing operations on June 24, allo- addition, the economies of Mexico and cating €442 billion. some other Latin American countries continued to be negatively affected by the sharp fall in commodity prices in Emerging Market Economies the second half of last year. However, The global financial crisis took its toll as in Asia, industrial production in sevon the emerging market economies as eral Latin American countries has well. After falling steeply in the fourth recently turned higher. In Brazil, the quarter, economic activity contracted automobile sector, which has received sharply again in the first quarter. How- government support, appears to have ever, recent data on business sentiment, led a rebound in output.

86 96th Annual Report, 2009 Several countries in emerging Eur- decreasing its target for the federal ope continued to experience intense funds rate from 2 percent to a range financial stress and sharp economic between 0 and 1⁄ 4 percent and took a contractions in the first quarter, with number of additional actions to activity declining at an especially pre- increase liquidity and improve the cipitous rate in Latvia. The region has functioning of financial markets. Durfaced external financing difficulties as ing the first half of 2009, the FOMC a result of large external imbalances maintained its target range for the fedand high dependence on foreign capital eral funds rate of 0 to 1⁄ 4 percent, and it flows. Hungary, Latvia, Romania, and extended and modified the nontradi- Ukraine are among the countries that tional policy actions taken previously. have received official assistance from The data reviewed at the January the International Monetary Fund. 27–28 FOMC meeting indicated a con- As the global economy has slowed, tinued sharp contraction in economic inflation in emerging market economies activity. The housing market remained has diminished. Inflation in emerging on a steep downward trajectory, con- Asia has decreased significantly, espe- sumer spending continued its significially in China where consumer prices cant decline, the slowdown in business in June were below their year-earlier equipment investment intensified, and levels. Reduced price pressures and foreign demand had weakened. Condiweak economic growth prompted sig- tions in the labor market had continued nificant monetary easing in several to deteriorate rapidly, and the drop in Asian emerging market economies. In- industrial production had accelerated. flation in Latin America has fallen less Headline consumer prices fell in sharply. Notably, Mexican inflation November and December, reflecting remains near its recent high, due in declines in consumer energy prices; part to pass-through from the peso’s core consumer prices were about flat in depreciation earlier this year. In these those months. Although credit condicircumstances, monetary easing has tions generally had remained tight, taken place in Latin America, but some financial markets—particularly nominal interest rates remain somewhat those that were receiving support from higher than in Asia. Many emerging Federal Reserve liquidity facilities and market economies have undertaken fis- other government actions—exhibited cal stimulus this year, although the de- modest signs of improvement. Meeting gree has varied and all stimulus pack- participants—Federal Reserve Board ages have been smaller than that in governors and Federal Reserve Bank China. presidents—anticipated that a gradual recovery in U.S. economic activity would begin in the second half of the Part 3 year in response to monetary easing, Monetary Policy: Recent additional fiscal stimulus, relatively Developments and Outlook low energy prices, and continued ef- Monetary Policy forts by the government to stabilize the over the First Half of 2009 financial sector and increase the availability of credit. Committee members Over the second half of 2008, the Fed- agreed that keeping the target range for eral Open Market Committee (FOMC) the federal funds rate at 0 to 1⁄ 4 percent eased the stance of monetary policy by would be appropriate. In its January

Monetary Policy Report of July 2009 87 statement, the FOMC reiterated that the January meeting. Economic activity Federal Reserve would use all available continued to fall sharply, with widetools to promote the resumption of sus- spread declines in payroll employment tainable economic growth and to pre- and industrial production. Consumer serve price stability. The Committee spending had remained flat at a low also stated that, in addition to the pur- level, the housing market weakened chases of agency debt and mortgage- further, and nonresidential construction backed securities (MBS) already under fell. Business spending on equipment way, it was prepared to purchase and software had continued to decline longer-term Treasury securities if across a broad range of categories. Deevolving circumstances indicated that spite the cutbacks in production, invensuch transactions would be particularly tory overhangs appeared to have worseffective in improving conditions in ened in a number of areas. Of private credit markets. The Committee particular note was the sharp fall in indicated that it would continue to foreign economic activity, which was monitor carefully the size and composi- having a negative effect on U.S. extion of the Federal Reserve’s balance ports. Both headline and core consumer sheet in light of evolving financial mar- prices had edged up in January and ket developments. It would also con- February. Credit conditions remained tinue to assess whether expansions of, very tight, and financial markets conor modifications to, lending facilities tinued to be fragile and unsettled, with would serve to further support credit pressures on financial institutions genmarkets and economic activity and help erally having intensified over the past preserve price stability. few months. Overall, participants ex- On February 7, 2009, the Committee pressed concern about downside risks met by conference call in a joint ses- to an outlook for activity that was sion with the Board of Governors to already weak. Nonetheless, looking discuss the potential role of the Federal beyond the very near term, participants Reserve in the Treasury’s forthcoming saw a number of market forces and Financial Stability Plan. The Federal policies then in place as eventually Reserve’s primary direct role in the leading to economic recovery. Notably, plan would be through an expansion of the low level of mortgage interest rates, the previously announced Term Asset- reduced house prices, and the Adminis- Backed Securities Loan Facility tration’s new programs to encourage (TALF), which would be supported by mortgage refinancing and mitigate foreadditional funds from the Treasury’s closures ultimately could bring about a Troubled Asset Relief Program lower cost of homeownership, a sus- (TARP). It was anticipated that such an tained increase in home sales, and a expansion would provide additional stabilization of house prices. assistance to financial markets and in- In light of the deterioration in the stitutions in meeting the credit needs economic situation and outlook, Comof households and businesses and thus mittee members agreed that substantial would support overall economic ac- additional purchases of longer-term tivity. assets would be appropriate. In its At the March FOMC meeting, nearly March statement, the Committee anall participants indicated that economic nounced that, to provide greater supconditions had deteriorated relative to port to mortgage lending and housing their expectations at the time of the markets, it would increase the size of

88 96th Annual Report, 2009 the Federal Reserve’s balance sheet comprehensive resolution regime for further by purchasing up to an addi- systemically important financial institutional $750 billion of agency MBS, tions, and the Treasury promised to bringing its total purchases of these se- remove the emergency loans for syscurities up to $1.25 trillion in 2009, temically important institutions from and that it would increase its purchases the Federal Reserve’s balance sheet of agency debt this year by up to over time to the extent its authorities $100 billion to a total of up to permit. $200 billion. Moreover, to help im- At the FOMC meeting on April 28 prove conditions in private credit mar- and 29, participants noted that the pace kets, the Committee decided to pur- of decline in some components of final chase up to $300 billion of longer-term demand appeared to have slowed. Con- Treasury securities over the next six sumer spending firmed in the first months. The Committee decided to quarter after dropping markedly during maintain the target range for the federal the second half of 2008. Housing activfunds rate at 0 to 1⁄ 4 percent and noted ity remained depressed but seemed to in its March statement that it antici- have leveled off in February and pated that economic conditions were March. In contrast, businesses had cut likely to warrant exceptionally low lev- production and employment substanels of the federal funds rate for an tially in recent months—reflecting, in extended period. The Committee also part, inventory overhangs that had pernoted that the Federal Reserve had sisted into the early part of the year— launched the TALF to facilitate the ex- and fixed investment continued to contension of credit to households and tract. Headline and core consumer small businesses, and it anticipated that prices rose at a moderate pace over the the range of eligible collateral for this first three months of the year. Particifacility was likely to be expanded to pants noted that financial market condiinclude other financial assets. The tions had generally strengthened, and Committee stated that it would con- surveys and anecdotal reports pointed tinue to carefully monitor the size and to a pickup in household and business composition of the Federal Reserve’s confidence, which nonetheless rebalance sheet in light of evolving mained at very low levels. Yields on financial and economic developments. Treasury and agency securities had On March 23, the Federal Reserve fallen after the release of the March and the Treasury issued a joint state- FOMC statement, which noted the ment on the role of the Federal Reserve increase in planned purchases of in preserving financial and monetary longer-term securities. However, this stability. In the statement, the Federal initial drop was subsequently reversed Reserve and the Treasury agreed to amid the improved economic outlook, continue to cooperate on measures to an easing of concerns about financial improve the stability and functioning of institutions, and perhaps some unwindthe financial system while minimizing ing of flight-to-quality flows. Particithe associated credit risk to the Federal pants anticipated that the acceleration Reserve and preserving the ability of in final demand and economic activity the Federal Reserve to achieve its over the next few quarters would be monetary policy objectives. The two modest, with growth of consumption government entities also agreed to expenditures likely to be restrained and work together with the Congress on a business investment spending probably

Monetary Policy Report of July 2009 89 shrinking further. Looking further cial markets. The Federal Reserve was ahead, participants considered a num- facilitating the extension of credit to ber of factors that would be likely to households and businesses and supportrestrain the pace of economic recovery ing the functioning of financial markets over the medium term. Strains in credit through a range of liquidity programs. markets were expected to recede only The Committee indicated that it would gradually as financial institutions con- continue to carefully monitor the size tinued to rebuild their capital and and composition of the Federal Reremained cautious in their approach to serve’s balance sheet in light of finanasset-liability management, especially cial and economic developments. given that the outlook for credit perfor- The information reviewed at the mance would probably remain weak. June 23–24 FOMC meeting suggested Households would likely continue to be that the economy remained weak, cautious, and their desired saving rates though declines in activity seemed to would be relatively high over the be lessening. Consumer spending apextended period that would be required peared to have stabilized, sales and to bring their wealth back up to more starts of new homes flattened out, and normal levels relative to income. The the recent declines in capital spending stimulus from fiscal policy was did not look as severe as those that had expected to diminish over time as the occurred around the turn of the year. government budget moved to a sustain- At the same time, labor markets and able path. Demand for U.S. exports industrial production continued to detewould also take time to revive, re- riorate sharply. Apart from a taxflecting the gradual recovery of eco- induced jump in tobacco prices, connomic activity in our major trading sumer price inflation was fairly partners. quiescent in recent months, although Against this backdrop, the FOMC an upturn in energy prices appeared indicated that it would maintain the tar- likely to boost headline inflation in get range for the federal funds rate at 0 June. Conditions and sentiment in to 1⁄ 4 percent and anticipated that eco- financial markets had continued to nomic conditions would be likely to show signs of improvement since the warrant exceptionally low levels of the last meeting. The results of the Superfederal funds rate for an extended visory Capital Assessment Program period. The Committee reiterated that, (SCAP) were positively received by to provide support to mortgage lending financial markets, credit default swap and housing markets and to improve spreads of banking organizations deoverall conditions in private credit mar- clined considerably, and the institutions kets, the Federal Reserve would pur- involved in the SCAP were subchase a total of up to $1.25 trillion of sequently able to issue significant agency MBS and up to $200 billion of amounts of public equity and nonguaragency debt by the end of the year. In anteed debt. The functioning of shortaddition, the Federal Reserve would term funding markets improved, broad buy up to $300 billion of Treasury se- stock price indexes increased, and curities by autumn. The Committee spreads on corporate bonds continued would continue to evaluate the timing to narrow. Nominal Treasury yields and overall amounts of its purchases of climbed steeply, reflecting investors’ securities in light of the evolving eco- perceptions of an improved economic nomic outlook and conditions in finan- outlook, a reversal of flight-to-quality

90 96th Annual Report, 2009 2. ExtensionsandModificationsofFederalReserveLiquidityPrograms Liquidityprogram Extension Modification Asset-BackedCommercialPaperMoneyMarket MutualFundLiquidityFacility(AMLF)........ ExtendedtoFebruary1,2010 Moneymarketmutualfunds havetoexperiencematerialoutflowsbeforebeingabletosell asset-backedcommercialpaper thatwouldbeeligiblecollateral forAMLFloans. Centralbankswaplines ....................... ExtendedtoFebruary1,2010 ... CommercialPaperFundingFacility ............ ExtendedtoFebruary1,2010 ... MoneyMarketInvestorFundingFacility ....... Expirationdateremainsat ... October30,2009 PrimaryDealerCreditFacility ................. ExtendedtoFebruary1,2010 ... TermAsset-BackedSecuritiesLoanFacility .... Expirationdateremainsat ... December31,2009 TermAuctionFacility ......................... Nofixedexpirationdate Auctionamountsreducedinitiallyto$125billion. TermSecuritiesLendingFacility ............... ExtendedtoFebruary1,2010 AuctionsbackedbySchedule1 collateralsuspendedeffective July1,2009.Auctionsbacked bySchedule2collateralnow conductedeveryfourweeks. Totalamountofferedreduced initiallyto$75billion. ... Notapplicable. Source:FederalReserveBoard. flows, and technical factors related to securities in light of the evolving ecothe hedging of mortgage holdings. nomic outlook and conditions in finan- In its June statement, the FOMC re- cial markets. The FOMC also stated iterated that it would employ all avail- that the Federal Reserve was monitorable tools to promote economic recov- ing the size and composition of its balery and preserve price stability. It noted ance sheet and would make adjustthat it would maintain its target range ments to its credit and liquidity for the federal funds rate at 0 to 1⁄ 4 per- programs as warranted. cent and continued to anticipate that Conditions in financial markets had economic conditions would likely war- improved notably by the end of June, rant exceptionally low levels of the although market functioning in many federal funds rate for an extended areas remained impaired and seemed period. The FOMC indicated that, as it likely to remain strained for some time. had previously announced, to provide Usage of some of the Federal Resupport to mortgage lending and hous- serve’s liquidity programs had also ing markets and to improve overall decreased in recent months. Against conditions in private credit markets, the this backdrop, on June 25, the Federal Federal Reserve would purchase a total Reserve announced extensions of and of up to $1.25 trillion of agency MBS modifications to a number of its liquidand up to $200 billion of agency debt ity programs (see table 2 for a sumby the end of the year. In addition, the mary of the changes).14 The Federal Federal Reserve would buy up to Reserve noted that the Board and the $300 billion of Treasury securities by autumn. The Committee noted that it 14. Formoredetails,seeBoardofGovernors would continue to evaluate the timing of the Federal Reserve System (2009), “Federal and overall amounts of its purchases of ReserveAnnouncesExtensionsofandModifica-

Monetary Policy Report of July 2009 91 FOMC would continue to monitor ery will take hold, labor market condiclosely the condition of financial mar- tions will improve, and the downward kets and the need for and effectiveness pressures on inflation will diminish. of the Federal Reserve’s special liquid- When this process has advanced suffiity facilities and arrangements. Should ciently, the stance of policy will need the recent improvements in market to be tightened to prevent inflation conditions continue, the Board and the from rising above levels consistent FOMC anticipated that a number of the with price stability and to keep ecofacilities might not need to be extended nomic activity near its maximum susbeyond February 1, 2010. However, if tainable level. The FOMC is confident financial stresses did not moderate as that it has the necessary tools to withexpected, the Board and the FOMC draw policy accommodation, when were prepared to extend the terms of such action becomes appropriate, in a some or all of the facilities as needed smooth and timely manner. to promote financial stability and eco- Monetary policy actions taken over nomic growth. The public would the past year have led to a considerable receive timely notice of planned exten- increase in the assets held by the Fedsions, discontinuations, or modifica- eral Reserve. This increase in assets retions of Federal Reserve programs. The flects both the expansion of Federal next section of this report, “Monetary Reserve liquidity facilities and the pur- Policy as the Economy Recovers,” has chases of longer-term securities. On the further discussion related to the evolu- margin, the extension of credit and action of these programs. quisition of assets by the Federal Over the first half of the year, the Reserve has been funded by crediting Federal Reserve also undertook a num- the reserve accounts of depository inber of initiatives to improve communi- stitutions (henceforth referred to as cations about its policy actions. These banks). Thus, the increase in Federal initiatives are described more fully in Reserve assets has been associated with the box titled “Federal Reserve Initia- substantial growth in banks’ reserve tives to Increase Transparency.” balances, leaving the level of reserves far above that typically observed when short-term interest rates were signifi- Monetary Policy as cantly greater than zero. the Economy Recovers To some extent, a contraction in the At present, the focus of monetary pol- stock of reserve balances will occur auicy is on stimulating economic activity tomatically as financial conditions in order to limit the degree to which improve. In particular, most of the lithe economy falls short of full employ- quidity facilities deployed by the Fedment and to prevent a sustained decline eral Reserve in the current period of in inflation below levels consistent financial turmoil are priced at a prewith the Federal Reserve’s legislated mium over normal interest rate spreads objectives. Economic conditions are or have a minimum bid rate that is likely to warrant accommodative mone- high enough to make them unattractive tary policy for an extended period. At under normal market conditions. Thus, some point, however, economic recov- the sizes of these programs, as well as the stock of reserve balances they create, will tend to diminish automatically tions to a Number of Its Liquidity Programs,” pressrelease,June25. as financial strains abate. Indeed, as

92 96th Annual Report, 2009 Federal Reserve Initiatives to Increase Transparency The Federal Reserve took a number of the Federal Reserve’s emergency lendnontraditional policy actions during the ingprograms. current episode of financial turmoil. In On June 10, the Federal Reserve late 2008, Chairman Bernanke asked issuedthefirstofaseriesofmonthlyre- ViceChairmanKohntoleadareviewof ports to provide more information on its how Federal Reserve disclosure policies creditandliquidityprograms.2Formany should be adapted to make more infor- of those programs, the new information mation about these programs available provided in the report includes the numto the public and to the Congress. A ber of borrowers and the amounts borguiding principle of the review was that rowed by type of institution, collateral the Federal Reserve would seek to pro- by type and credit rating, and data on vide to the public as much information the concentration of borrowing. The reand analysis as possible, consistent with port also includes information on liquidits objectives of promoting maximum ity swap usage by country, quarterly employment and price stability. The income earned on different classes of Federal Reserve subsequently created a Federal Reserve assets, and asset distriseparate section of its website devoted bution and other information on the to providing data, explanations, and LLCs. In addition, the report summaanalyses of its lending programs and rizes and discusses recent developments balance sheet.1 Postings in the first half acrossanumberofFederalReserveproof 2009 included additional explanatory grams. In addition to the new report, the material and details about a number of Federal Reserve Bank of New York Federal Reserve credit and liquidity pro- recently made available the investment grams,theannualfinancialstatementsof management agreements related to its the12FederalReserveBanks,theBoard financial stability and liquidity activof Governors, and the limited liability ities.3 companies (LLCs) created in 2008 to avert the disorderly failures of The Bear Stearns Companies, Inc., and American 2. See Board of Governors of the Federal Reserve System (2009), Federal Reserve System International Group, Inc., as well as the Monthly Report on Credit and Liquidity Programs most recent reports to the Congress on andtheBalanceSheet(Washington:BoardofGovernors,July). 1. This section of the Board’s website is avail- 3. Federal Reserve Bank of New York (2009), ableatwww.federalreserve.gov/monetarypolicy/bst. “Vendor Information,” www.newyorkfed.org/ htm. aboutthefed/vendor_information.html. noted elsewhere in this report, total $200 billion per year over the next few credit extended to banks and other years, leading to further reductions in market participants (excluding support reserve balances. of critical institutions) declined from But even after lending facilities have about $1.5 trillion as of December 31, wound down and holdings of long-term 2008, to less than $600 billion as of assets have begun to run off, the vol- July 15, 2009, as financial conditions ume of assets on the Federal Reserve’s improved. In addition, redemptions of balance sheet may remain very large the Federal Reserve’s holdings of for some time. Without additional agency debt, agency MBS, and longer- actions, the level of bank reserves term Treasury securities are expected would continue to remain elevated as to occur at a rate of $100 billion to well.

Monetary Policy Report of July 2009 93 Despite continued large holdings of 2008, when payment of interest on assets, the Federal Reserve will have at reserves first began. This gap appears its disposal two broad means of tight- to have reflected several factors: First, ening monetary policy at the appropri- the Federal Reserve is not allowed to ate time. In principle, either of these pay interest on balances held by nondemethods would suffice to raise short- pository institutions, including some term interest rates; however, to ensure large lenders in the federal funds mareffectiveness, the two methods will ket such as the government-sponsored most likely be used in combination. enterprises (GSEs). Such institutions The first method for tightening may have an incentive to lend at rates monetary policy relies on the authority below the rate that banks receive on rethat the Congress granted to the Fed- serve balances. Second, the payment of eral Reserve last fall to pay interest on interest on reserves was a new policy the balances maintained by banks. By at the time that the gap was particularly raising the rate it pays on banks’ re- noticeable, and banks may not have serve balances, the Federal Reserve had time to adjust their operations to will be able to tighten monetary policy the new regime. Third, the unusually by inducing increases in the federal strained conditions in financial markets funds rate and other short-term market at that time may have reduced the willinterest rates. In general, banks will not ingness of banks to arbitrage by borsupply funds to the money market at an rowing in the federal funds market at interest rate lower than the rate they rates below the rate paid on reserve can earn risk free at the Federal balances and earning a higher rate by Reserve. Moreover, they should com- increasing their deposits at the Federal pete to borrow any funds that are Reserve. The latter two factors are not offered in the market at rates below the likely to persist, particularly as the rate of interest paid by the Federal economy and financial markets recover. Reserve, as such borrowing allows Moreover, if, as the economy recovers, them to earn a spread without any risk. large-scale lending in the federal funds Thus, raising the interest rate paid on market by nondepository institutions balances that banks hold at the Federal threatens to hold the federal funds rate Reserve should provide a powerful below its target, the Federal Reserve upward influence on short-term market has various options to deal with the interest rates, including the federal problem. For example, it could offer funds rate, without the need to drain these institutions the option of investreserve balances. A number of foreign ing in reverse repurchase agreements. central banks have been able to main- Under these transactions, the Federal tain overnight interbank interest rates at Reserve sells securities from its portor above the level of interest paid on folio, thereby removing funds from the bank reserves even in the presence of market, and agrees to buy back the seunusually high levels of reserve bal- curities at a later date.15 Eliminating ances (see the box titled “Foreign Ex- the incentive of nondepository instituperience with Interest on Reserves”). tions to lend their excess funds into Despite this logic, the federal funds rate has been somewhat lower than the 15. These transactions are referred to as rate of interest banks earn on reserve reverse repurchase agreements to distinguish balances; the gap was especially nothem from repurchase agreements in which the ticeable in October and November FederalReserveistheinvestor.

94 96th Annual Report, 2009 Foreign Experience with Interest on Reserves Paying interest on excess reserve bal- the ECB pays on deposits—but, imporances, either directly or by allowing tantly, not below that rate. Since banks to place excess balances into an November 2008, the Bank of Japan interest-bearing account, is a standard (BOJ) on a temporary basis has paid tool used by major foreign central interest on excess reserve balances, at a banks. Many have used interest on rateof10basispointsperyear,whichis reserves, in combination with other also its current target for the overnight tools, to maintain a floor under over- uncollateralized call rate; the BOJ noted night interbank interest rates both in that its action was intended to keep the normal circumstances and during the call rate close to the targeted level as it period of financial turmoil. The Euro- suppliedadditionalliquiditytothebankpean Central Bank (ECB), for example, ing system. Indeed, the overnight rate has long allowed banks to place excess has traded near 10 basis points in recent reserves into a deposit facility that pays months, even as reserve balances at the interest at a rate below the ECB’s main BOJ have risen substantially, returning refinancing rate (its bellwether policy to their level during much of 2002, rate). The quantity of funds that banks when the BOJ was implementing its hold in that facility increased sharply as Quantitative Easing Policy and the call the ECB expanded its liquidity- rate was trading at 1 basis point or beproviding operations last fall and has low. The Bank of Canada and the Bank remained well above pre-crisis levels; as ofEnglandalsohaveusedtheirstanding a result, the euro-area overnight inter- deposit facilities to help manage interbank rate fell from a level close to the bankinterestrates. main refinancing rate toward the rate short-term money markets would help ond, the Treasury could sell more bills ensure that raising the rate of interest and deposit the proceeds with the Fedpaid on reserves would raise the federal eral Reserve. The Treasury has been funds rate and tighten monetary condi- conducting such operations since last tions even if the level of reserve bal- fall; the resulting deposits are reported ances were to remain high. on the Federal Reserve balance sheet as The second method for tightening the Supplementary Financing Account. monetary policy, despite a high level of One limitation on this option is that the assets on the Federal Reserve’s balance associated Treasury debt is subject to sheet, is to take steps to reduce the the statutory debt ceiling. Also, to preoverall level of reserve balances. Poli- serve monetary policy independence, cymakers have several options for re- the Federal Reserve must ensure that it ducing the level of reserve balances can achieve its policy objectives withshould such action be desired. First, the out reliance on the Treasury if neces- Federal Reserve could engage in large- sary. A third option is for the Federal scale reverse repurchase agreements Reserve to offer banks the opportunity with financial market participants, to hold some of their balances as term including GSEs as well as other institu- deposits. Such deposits would pay tions. Reverse repurchase agreements interest but would not have the liquidare a traditional tool of Federal Reserve ity and transactions features of reserve monetary policy implementation. Sec- balances. Term deposits could not be

Monetary Policy Report of July 2009 95 counted toward reserve requirements, Reserve retains the option to reduce its nor could they be used to avoid over- stock of assets by selling off a portion night overdraft penalties in reserve of its holdings of longer-term securities accounts.16 Each of these three policy before they mature. Asset sales by the options would allow a tightening of Federal Reserve would serve to raise monetary policy by draining reserve short-term interest rates and tighten balances and raising short-term interest monetary policy by reducing the level rates. As noted earlier, measures to of reserve balances; in addition, such drain reserves will likely be used in sales could put upward pressure on conjunction with increases in the inter- longer-term interest rates by expanding est rate paid on reserves to tighten con- the supply of longer-term assets availditions in short-term money markets. able to investors. In an environment of Raising the rate of interest on re- strengthening economic activity and serve balances and draining reserves rising inflation pressures, broad-based through the options just described increases in interest rates could faciliwould allow policy to be tightened tate the achievement of the Federal Reeven if the level of assets on the Fed- serve’s dual mandate. eral Reserve’s balance sheet remained In short, the Federal Reserve has a very high. In addition, the Federal wide range of tools that can be used to tighten the stance of monetary policy at the point that the economic outlook calls for such action. However, eco- 16. Tobesuccessful,especiallyinaperiodof nomic conditions are not likely to warrising interest rates, such deposits likely would rant a tightening of monetary policy for havetopayratesofinterestabovetheovernight rate on reserve balances. To prevent banks from an extended period. The timing and earning risk-free profits by borrowing from the pace of any future tightening, together Federal Reserve and investing the proceeds in with the mix of tools employed, will be term deposits, the rate of remuneration on term calibrated to best foster the Federal Redeposits would have to be kept lower than the serve’s dual objectives of maximum rates the Federal Reserve charges on its lending facilities,suchasthediscountwindow. employment and price stability. Á

Federal Reserve Operations

99 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 BHCs in of financial institutions and activities. It 2009. As a group, state member banks plays an important role as the consoli- sustained losses of $4.4 billion in dated supervisor of bank holding com- 2009—in part attributed to a special aspanies (BHCs), including financial sessment by the Federal Deposit Insurholding companies. And it is the pri- ance Corporation (FDIC) and somemary federal supervisor of state banks what less than the $4.8 billion loss that are members of the Federal incurred in 2008. Earnings remained Reserve System. lackluster due to elevated provision In the midst of general improve- levels and a sizable increase in securiments in financial markets throughout ties losses to $4.2 billion, but benefited the course of 2009, U.S. BHCs and from higher trading revenue as market state member banks continued to face conditions improved. Mirroring trends substantial challenges. As a group, at BHCs, the nonperforming assets BHCs returned to profitability in 2009, ratio escalated to 4.6 percent of loans reporting $14.5 billion in earnings fol- and foreclosed assets, reflecting both lowing a $30.7 billion loss in 2008. contracting loan balances and weaken- But 41 percent of all BHCs represent- ing asset quality. Construction lending ing 36.3 percent of assets reported accounted for one-third of the growth losses in 2009. Improved market condi- in problem loans, but weakness encomtions boosted trading revenues and trig- passed nonfarm nonresidential lending, gered appreciation in securities port- residential mortgages, and C&I loans. folios. Although BHC assets grew 15.2 The risk-based capital ratios for state percent from 2008, lending contracted member banks improved over 2009 in 2.9 percent. The nonperforming assets the aggregate, but the percent of state ratio escalated to 4.7 percent of loans member banks deemed well capitalized and foreclosed assets, an 18-year high. by ratios, consistent with the designa- Weaknesses were broad based, encom- tion under prompt corrective action passing residential mortgages (first- standards, dropped to 96 percent from lien), commercial real estate—espe- 98 percent at year-end 2008. State cially non-owner nonfarm nonresi- member banks repaid approximately dential and construction other than $19.3 billion or 48 percent of funds resingle-family—and commercial and in- ceived from TARP. In 2009, 16 state dustrial (C&I) loans. BHC capital ratios member banks with $13.4 billion in improved substantially during 2009. Of assets failed, with losses of $3.6 billion the 596 BHCs that received funds from according to FDIC estimates. the U.S. Department of Treasury’s In response to the market turmoil of (Treasury) Troubled Asset Relief Pro- 2008, Treasury and the Federal gram (TARP), 57 have repaid all funds Reserve, working with other federal received; approximately 66 percent of banking agencies, initiated the Superviall funds distributed have been repaid. sory Capital Assessment Program

100 96th Annual Report, 2009 (SCAP). Popularly known as the bank businesses because owner-occupied “stress test,” the SCAP was designed to CRE often serves as collateral for ensure that 19 of the largest U.S. BHCs many small business loans. To underhad sufficient financial strength to ab- score expectations regarding the guidsorblossesunderamoreadversethanex- ance, the Federal Reserve conducted pected macroeconomic scenario, while extensive outreach to examiners and remaining sufficiently capitalized to the industry. meet the needs of their creditworthy During 2009, the Federal Reserve borrowers. As a result of our analysis, continued to work with banking organiit was determined that 10 of the BHCs zations to correct some of the riskassessed under SCAP needed to aug- management weaknesses revealed by ment their capital by a combined total the financial crisis that began in midof $185 billion, almost all in the form 2007. These supervisory activities of common equity. The transparency covered a number of areas, including around supervisors’ loss estimates firmwide risk identification, senior increased investor confidence in the management oversight, and liquidity banking system and helped open the risk management. Where institutions public equity markets to these institu- did not make appropriate progress, sutions. Actions taken by the 10 BHCs pervisors downgraded supervisory ratneeding to increase their capital buffer, ings and used enforcement tools to together with related actions to support bring about corrective action. repayment of Treasury capital by the Federal Reserve staff continued to 19 banking organizations, increased work with the other federal banking their aggregate tier 1 common capital agencies to implement the advanced by nearly $200 billion. In conjunction approaches of the Basel II Capital Acwith these efforts, the Federal Reserve cord in the United States, with the final issued guidance on BHCs’ capital plan- rule taking effect on April 1, 2008.2 A ning in March 2009. All of these number of institutions have begun their actions have significantly improved the transition to the new rules after having quality of capital across the largest U.S. developed implementation plans and banking organizations. worked to put in place systems that In October 2009, the Federal will comply with the final rule’s quali- Reserve issued interagency guidance on fication requirements. commercial real estate (CRE) loan re- In light of identified supervisory lesstructurings and workouts.1 This policy sons learned, the Federal Reserve plans statement provides guidance for exam- to augment its processes for conducting iners and for financial institutions that are working with CRE borrowers who are experiencing diminished operating 2. The Basel II Capital Accord, an internacash flows, depreciated collateral val- tional agreement formally titled “International ues, or prolonged delays in selling or ConvergenceofCapitalMeasurementandCapital Standards: A Revised Framework,” was develrenting commercial properties. The opedbytheBaselCommitteeonBankingSuperstatement is especially relevant to small vision, which is made up of representatives of thecentralbanksorothersupervisoryauthorities of 19 countries. The original document was 1. Interagency Policy Statement on Prudent issued in 2004; the original version and an up- CRELoanRestructuringsandWorkouts(Novem- datedversionissuedinNovember2005areavailber 2009); www.federalreserve.gov/newsevents/ ableonthewebsiteoftheBankforInternational press/bcreg/20091030a.htm. Settlements(www.bis.org).

Banking Supervision and Regulation 101 examinations and inspections as firms), and the bank regulatory agenneeded, as well as its processes for en- cies of other nations. suring that there is appropriate follow-up with institutions about issues Supervision for identified during examinations and Safety and Soundness inspections. To promote the safety and soundness of banking organizations, the Federal Scope of Responsibilities for Reserve conducts on-site examinations Supervision and Regulation and inspections and off-site surveil- The Federal Reserve is the federal su- lance and monitoring. It also takes enpervisor and regulator of all U.S. forcement and other supervisory ac- BHCs, including financial holding tions as necessary. companies formed under the authority of the 1999 Gramm-Leach-Bliley Act, Examinations and Inspections and state-chartered commercial banks that are members of the Federal The Federal Reserve conducts exami- Reserve System. In overseeing these nations of state member banks, the U.S. organizations, the Federal Reserve branches and agencies of foreign seeks primarily to promote their safe banks, and Edge Act and agreement and sound operation, including their corporations. In a process distinct from compliance with laws and regulations. examinations, it conducts inspections of The Federal Reserve also has re- BHCs and their nonbank subsidiaries. sponsibility for supervising the opera- Whether an examination or an inspections of all Edge Act and agreement tion is being conducted, the review of corporations, the international opera- operations entails (1) an evaluation of tions of state member banks and U.S. the adequacy of governance provided BHCs, and the U.S. operations of for- by the board and senior management, eign banking organizations. including an assessment of internal The Federal Reserve exercises im- policies, procedures, controls, and opportant regulatory influence over entry erations; (2) an assessment of the qualinto the U.S. banking system, and the ity of the risk-management and internal structure of the system, through its ad- control processes in place to identify, ministration of the Bank Holding Com- measure, monitor, and control risks; (3) pany Act, the Bank Merger Act (with an assessment of the key financial facregard to state member banks), the tors of capital, asset quality, earnings, Change in Bank Control Act (with re- and liquidity; and (4) a review for gard to BHCs and state member compliance with applicable laws and banks), and the International Banking regulations. The accompanying table Act. The Federal Reserve is also re- (see next page) provides information sponsible for imposing margin require- on examinations and inspections conments on securities transactions. In car- ducted by the Federal Reserve during rying out these responsibilities, the the past five years. Federal Reserve coordinates its super- Inspections of BHCs, including fivisory activities with the other federal nancial holding companies, are built banking agencies, state agencies, func- around a rating system introduced in tional regulators (that is, regulators for 2005 that reflects the shift in superviinsurance, securities, and commodities sory practices away from a historical

102 96th Annual Report, 2009 StateMemberBanksandBankHoldingCompanies,2005–2009 Entity/Item 2009 2008 2007 2006 2005 Statememberbanks Totalnumber .......................... 845 862 878 901 907 Totalassets(billionsofdollars) ........ 1,690 1,854 1,519 1,405 1,318 Numberofexaminations ............... 850 717 694 761 783 ByFederalReserveSystem.......... 655 486 479 500 563 Bystatebankingagency............. 195 231 215 261 220 Top-tierbankholdingcompanies Large(assetsofmorethan$1billion) Totalnumber ....................... 488 485 459 448 394 Totalassets(billionsofdollars) ...... 15,744 14,138 13,281 12,179 10,261 Numberofinspections............... 658 519 492 566 501 ByFederalReserveSystem1 ...... 640 500 476 557 496 Onsite......................... 501 445 438 500 457 Offsite ........................ 139 55 38 57 39 Bystatebankingagency 18 19 16 9 5 Small(assetsof$1billionorless) Totalnumber ....................... 4,486 4,545 4,611 4,654 4,760 Totalassets(billionsofdollars) ...... 1,018 1,008 974 947 890 Numberofinspections............... 3,264 3,192 3,186 3,449 3,420 ByFederalReserveSystem ....... 3,109 3,048 3,007 3,257 3,233 Onsite......................... 169 107 120 112 170 Offsite ........................ 2,940 2,941 2,887 3,145 3,063 Bystatebankingagency .......... 155 144 179 192 187 Financialholdingcompanies Domestic.............................. 479 557 597 599 591 Foreign ............................... 46 45 43 44 38 1. Forlargebankholdingcompaniessubjecttocontinuous,risk-focusedsupervision,includesmultipletargeted reviews. analysis of financial condition toward a visor’s rating of the subsidiary deposimore dynamic, forward-looking assess- tory institution. ment of risk-management practices and The Federal Reserve uses a riskfinancial factors. Under the system, focused approach to supervision, with known as RFI but more fully termed activities focused on identifying the RFI/C(D), holding companies are as- areas of greatest risk to banking organisigned a composite rating (C) that is zations and assessing the ability of the based on assessments of three compo- organizations’ management processes nents: Risk Management (R), Financial for identifying, measuring, monitoring, Condition (F), and the potential Impact and controlling those risks. Key aspects (I) of the parent company and its non- of the risk-focused approach to consolidepository subsidiaries on the subsidi- dated supervision of large complex ary depository institution.3 The fourth banking organizations (LCBOs) include component, Depository Institution (D), (1) developing an understanding of is intended to mirror the primary super- each LCBO’s legal and operating structure, and its primary strategies, business lines, and risk-management and 3. Each of the first two components has four internal control functions; (2) developsubcomponents: Risk Management—(1) Board and Senior Management Oversight; (2) Policies, ing and executing a tailored supervi- Procedures,andLimits;(3)RiskMonitoringand sory plan outlining the work required Management Information Systems; and (4) In- to maintain a comprehensive underternalControls.FinancialCondition—(1)Capital; standing and assessment of each (2) Asset Quality; (3) Earnings; and (4) Liquidity. LCBO, incorporating reliance to the

Banking Supervision and Regulation 103 fullest extent possible on assessments commercial banks and held approxiand information developed by other mately 14 percent of all insured comrelevant domestic and foreign supervi- mercial bank assets in the United sors and functional regulators; (3) States. maintaining continual supervision of The guidelines for Federal Reserve these organizations—including through examinations of state member banks meetings with banking organization are fully consistent with section 10 of management and analysis of internal the Federal Deposit Insurance Act, as and external information—so that the amended by section 111 of the Federal Federal Reserve’s understanding and Deposit Insurance Corporation Imassessment of each organization’s con- provement Act of 1991 and by the dition remains current; (4) assigning to Riegle Community Development and each LCBO a supervisory team com- Regulatory Improvement Act of 1994. posed of Reserve Bank staff members A full-scope, on-site examination of who have skills appropriate for the or- these banks is required at least once a ganization’s risk profile (the team year, although certain well-capitalized, leader is the Federal Reserve System’s well-managed organizations having tocentral point of contact for the organi- tal assets of less than $500 million may zation, has responsibility for only one be examined once every 18 months.4 LCBO, and is supported by specialists The Federal Reserve conducted 655 excapable of evaluating the risks of ams of state member banks in 2009. LCBO business activities and functions and assessing the LCBO’s consolidated Bank Holding Companies financial condition); and (5) promoting Systemwide and interagency infor- At year-end 2009, a total of 5,634 U.S. mation-sharing through automated sys- BHCs were in operation, of which tems and other mechanisms. 4,974 were top-tier BHCs. These orga- For other banking organizations, the nizations controlled 5,710 insured comrisk-focused consolidated supervision mercial banks and held approximately program provides that examination and 99 percent of all insured commercial inspection procedures are tailored to bank assets in the United States. each banking organization’s size, com- Federal Reserve guidelines call for plexity, risk profile, and condition. As annual inspections of large BHCs and with the LCBOs, these supervisory pro- complex smaller companies. In judging grams entail both off-site and on-site the financial condition of the subsidiary work, including planning, preexamina- banks owned by holding companies, tion visits, detailed documentation, and Federal Reserve examiners consult exexamination reports tailored to the amination reports prepared by the fedscope and findings of the examination. eral and state banking authorities that have primary responsibility for the supervision of those banks, thereby State Member Banks At the end of 2009, 845 state-chartered 4. The Financial Services Regulatory Relief banks (excluding nondepository trust Actof2006,whichbecameeffectiveinOctober companies and private banks) were 2006,authorizedthefederalbankingagenciesto raise the threshold from $250 million to $500 members of the Federal Reserve Sysmillion,andfinalrulesincorporatingthechange tem. These banks represented approxiintoexistingregulationswereissuedonSeptemmately 12 percent of all insured U.S. ber21,2007.

104 96th Annual Report, 2009 minimizing duplication of effort and re- International Activities ducing the supervisory burden on banking organizations. Noncomplex BHCs The Federal Reserve supervises the forwith consolidated assets of $1 billion eign branches and overseas investments or less are subject to a special supervi- of member banks, Edge Act and agreesory program that permits a more flex- ment corporations, and BHCs and also ible approach.5 In 2009, the Federal the investments by BHCs in export Reserve conducted 640 inspections of trading companies. In addition, it sularge BHCs and 3,109 inspections of pervises the activities that foreign small, noncomplex BHCs. banking organizations conduct through entities in the United States, including branches, agencies, representative of- Financial Holding Companies fices, and subsidiaries. Under the Gramm-Leach-Bliley Act, BHCs that meet certain capital, mana- Foreign Operations of gerial, and other requirements may U.S. Banking Organizations elect to become financial holding companies and thereby engage in a wider In supervising the international operarange of financial activities, including tions of state member banks, Edge Act full-scope securities underwriting, mer- and agreement corporations, and BHCs, chant banking, and insurance under- the Federal Reserve generally conducts writing and sales. The statute stream- its examinations or inspections at the lines the Federal Reserve’s supervision U.S. head offices of these organizaof all BHCs, including financial hold- tions, where the ultimate responsibility ing companies, and sets forth param- for the foreign offices lies. Examiners eters for the supervisory relationship also visit the overseas offices of U.S. between the Federal Reserve and other banks to obtain financial and operating regulators. The statute also differenti- information and, in some instances, to ates between the Federal Reserve’s re- evaluate the organization’s efforts to lations with regulators of depository in- implement corrective measures or to stitutions and its relations with test their adherence to safe and sound functional regulators. banking practices. Examinations abroad As of year-end 2009, 479 domestic are conducted with the cooperation of BHCs and 46 foreign banking organi- the supervisory authorities of the counzations had financial holding company tries in which they take place; for nastatus. Of the domestic financial hold- tional banks, the examinations are ing companies, 35 had consolidated coordinated with the Office of the assets of $15 billion or more; 111, Comptroller of the Currency (OCC). between $1 billion and $15 billion; 74, At the end of 2009, 53 member between $500 million and $1 billion; banks were operating 557 branches in and 259, less than $500 million. foreign countries and overseas areas of the United States; 32 national banks were operating 503 of these branches, 5. The special supervisory program was and 21 state member banks were operimplementedin1997andmodifiedin2002.See ating the remaining 54. In addition, 18 SR letter 02-01 for a discussion of the factors nonmember banks were operating 26 considered in determining whether a BHC is branches in foreign countries and overcomplexornoncomplex,(www.federalreserve.gov/ boarddocs/srletters/). seas areas of the United States.

Banking Supervision and Regulation 105 Edge Act and Agreement 204 state-licensed branches and agen- Corporations cies, of which 6 were insured by the FDIC, and 50 OCC-licensed branches Edge Act corporations are international and agencies, of which 4 were insured banking organizations chartered by the by the FDIC. These foreign banks also Board to provide all segments of the owned 8 Edge Act and agreement cor- U.S. economy with a means of financ- porations and 3 commercial lending ing international business, especially companies; in addition, they held a exports. Agreement corporations are controlling interest in 58 U.S. commersimilar organizations, state chartered or cial banks. Altogether, the U.S. offices federally chartered, that enter into of these foreign banks at the end of agreements with the Board to refrain 2009 controlled approximately 17 perfromexercisinganypowerthatisnotper- cent of U.S. commercial banking assets. missible for an Edge Act corporation. These 176 foreign banks also operated Sections 25 and 25A of the Federal 78 representative offices; an additional Reserve Act grant Edge Act and agree- 58 foreign banks operated in the United ment corporations permission to engage States through a representative office. in international banking and foreign State-licensed and federally licensed financial transactions. These corpora- branches and agencies of foreign banks tions, most of which are subsidiaries of are examined on-site at least once member banks, may (1) conduct a de- every 18 months, either by the Federal posit and loan business in states other Reserve or by a state or other federal than that of the parent, provided that regulator. In most cases, on-site examithe business is strictly related to inter- nations are conducted at least once national transactions, and (2) make for- every 12 months, but the period may eign investments that are broader than be extended to 18 months if the branch those permissible for member banks. or agency meets certain criteria. At year-end 2009, 55 banking orga- In cooperation with the other federal nizations, operating 10 branches, were and state banking agencies, the Federal chartered as Edge Act or agreement Reserve conducts a joint program for corporations. These corporations are supervising the U.S. operations of forexamined annually. eign banking organizations. The program has two main parts. One part in- U.S. Activities of Foreign Banks volves examination of those foreign banking organizations that have mul- The Federal Reserve has broad author- tiple U.S. operations and is intended to ity to supervise and regulate the U.S. ensure coordination among the various activities of foreign banks that engage U.S. supervisory agencies. The other in banking and related activities in the part is a review of the financial and op- United States through branches, agen- erational profile of each organization to cies, representative offices, commercial assess its general ability to support its lending companies, Edge Act corpora- U.S. operations and to determine what tions, commercial banks, BHCs, and risks, if any, the organization poses certain nonbanking companies. Foreign through its U.S. operations. Together, banks continue to be significant partici- these two processes provide critical inpants in the U.S. banking system. formation to U.S. supervisors in a logi- As of year-end 2009, 176 foreign cal, uniform, and timely manner. The banks from 53 countries were operating Federal Reserve conducted or partici-

106 96th Annual Report, 2009 pated with state and federal banking applicable anti-money-laundering laws agencies in 430 examinations in 2009. and regulations and conducts such examinations in accordance with the Federal Financial Institutions Examination Compliance with Council (FFIEC) Bank Secrecy Act/ Regulatory Requirements Anti-Money Laundering Examination The Federal Reserve examines institu- Manual.6 tions for compliance with a broad range of legal requirements, including Specialized Examinations anti-money-laundering and consumer protection laws and regulations, and The Federal Reserve conducts specialother laws pertaining to certain banking ized examinations of banking organizaand financial activities. Most compli- tions in the areas of information techance supervision is conducted under nology, fiduciary activities, transfer the oversight of the Board’s Division agent activities, and government and of Banking Supervision and Regula- municipal securities dealing and brotion, but consumer compliance supervi- kering. The Federal Reserve also consion is conducted under the oversight ducts specialized examinations of cerof the Division of Community and tain nonbank entities that extend credit Consumer Affairs. The two divisions subject to the Board’s margin coordinate their efforts with each other regulations. and also with the Board’s Legal Division to ensure consistent and compre- Information Technology Activities hensive Federal Reserve supervision for compliance with legal requirements. In recognition of the importance of information technology to safe and sound operations in the financial industry, the Anti-Money-Laundering Examinations Federal Reserve reviews the informa- The Treasury regulations implementing tion technology activities of supervised the Bank Secrecy Act (BSA) generally banking organizations as well as cerrequire banks and other types of finan- tain independent data centers that procial institutions to file certain reports vide information technology services to and maintain certain records that are these organizations. All safety and useful in criminal, tax, or regulatory soundness examinations include a riskproceedings. The BSA and separate focused review of information technol- Board regulations require banking or- ogy risk-management activities. During ganizations supervised by the Board to 2009, the Federal Reserve continued as file reports on suspicious activity related to possible violations of federal law, including money laundering, ter- 6. TheFFIECisaninteragencybodyoffinanrorism financing, and other financial cial regulatory agencies established to prescribe uniform principles, standards, and report forms crimes. In addition, BSA and Board and to promote uniformity in the supervision of regulations require that banks develop financialinstitutions.TheCouncilhassixvoting written BSA compliance programs and members:theBoardofGovernorsoftheFederal that the programs be formally approved Reserve System, the Federal Deposit Insurance Corporation,theNationalCreditUnionAdminisby bank boards of directors. The Fedtration,theOfficeoftheComptrolleroftheCureral Reserve is responsible for examinrency, the Office of Thrift Supervision, and the ing institutions for compliance with chairoftheStateLiaisonCommittee.

Banking Supervision and Regulation 107 the lead agency in three interagency banks and BHCs that were registered examinations of large, multiregional as transfer agents. data processing servicers, and it assumed leadership in one additional Government and Municipal Securities examination. Dealers and Brokers The Federal Reserve is responsible for Fiduciary Activities examining state member banks and foreign banks for compliance with the The Federal Reserve has supervisory Government Securities Act of 1986 and responsibility for state member banks with the Treasury regulations governand state member nondepository trust ing dealing and brokering in governcompanies that reported $43.3 trillion ment securities. Eleven state member and $33.9 trillion of assets, respecbanks and four state branches of fortively, as of year-end 2009, held in eign banks have notified the Board that various fiduciary and custodial capacithey are government securities dealers ties. On-site examinations of fiduciary or brokers not exempt from the Treaand custody activities are risk-focused sury’s regulations. During 2009, the and entail the review of an organiza- Federal Reserve conducted five examition’s compliance with laws, regulanations of broker-dealer activities in tions, and general fiduciary principles, government securities at these organiincluding effective management of conzations. These examinations are generflicts of interest; management of legal, ally conducted concurrently with the operational, and reputational risk expo- Federal Reserve’s examination of the sures; and audit and control procedures. state member bank or branch. In 2009, Federal Reserve examiners The Federal Reserve is also responconducted 68 on-site fiduciary examisible for ensuring that state member nations, excluding transfer agent exbanks and BHCs that act as municipal aminations, of state member banks. securities dealers comply with the Securities Act Amendments of 1975. Mu- Transfer Agents nicipal securities dealers are examined pursuant to the Municipal Securities As directed by the Securities Exchange Rulemaking Board’s rule G-16 at least Act of 1934, the Federal Reserve con- once every two calendar years. Of the ducts specialized examinations of those 11 entities that dealt in municipal secustate member banks and BHCs that are rities during 2009, five were examined registered with the Board as transfer during the year. agents. Among other things, transfer agents countersign and monitor the is- Securities Credit Lenders suance of securities, register the transfer of securities, and exchange or con- Under the Securities Exchange Act of vert securities. On-site examinations 1934, the Board is responsible for focus on the effectiveness of an organi- regulating credit in certain transactions zation’s operations and its compliance involving the purchase or carrying of with relevant securities regulations. securities. As part of its general exami- During 2009, the Federal Reserve con- nation program, the Federal Reserve ducted on-site transfer agent examina- examines the banks under its jurisdictions at 16 of the 49 state member tion for compliance with the Board’s

108 96th Annual Report, 2009 Regulation U (Credit by Banks and The Federal Reserve, together with Persons other than Brokers or Dealers other federal and state financial regulafor the Purpose of Purchasing or Carry- tors, is a member of the Financial ing Margin Stock). In addition, the Banking Information Infrastructure Federal Reserve maintains a registry of Committee (FBIIC), which was formed persons other than banks, brokers, and to improve coordination and communidealers who extend credit subject to cation among financial regulators, en- Regulation U. The Federal Reserve hance the resilience of the U.S. finanmay conduct specialized examinations cial sector, and promote the public/ of these lenders if they are not already private partnership. The FBIIC has subject to supervision by the Farm established emergency communication Credit Administration (FCA) or the protocols to maintain effective commu- National Credit Union Administration nication among members in the event (NCUA). of an emergency. The FBIIC protocols At the end of 2009, 566 lenders were active at various points in 2009 to other than banks, brokers, or dealers monitor the status and impact of the were registered with the Federal H1N1 flu outbreak and each time a sig- Reserve. Other federal regulators super- nificant storm made landfall in the vised 186 of these lenders, and the United States. remaining 380 were subject to limited In January 2009, the Federal Reserve Federal Reserve supervision. The Fed- and the other FFIEC agencies particieral Reserve exempted 168 lenders pated in a pandemic-related tabletop from its on-site inspection program on exercise conducted through the FFIEC the basis of their regulatory status and Task Force on Supervision. The exerannual reports. Fifty-one inspections cise accomplished the following main were conducted during the year. objectives: validate current interagency pandemic planning and identify existing gaps in communications; share Business Continuity/Pandemic agency key response triggers, empha- Preparedness sizing response activation and resump- In 2009, the Federal Reserve continued tion of normal business; consider ramits efforts to strengthen the resilience of ifications of national infrastructure the U.S. financial system in the event limitations; and review response conof unexpected disruptions, including fo- text for any needed policymaking. cused supervisory efforts to evaluate In September 2009, the Federal the resiliency of the banking institu- Reserve joined other financial regulations under its jurisdiction. Particular tory agencies, the Financial Services emphasis was placed on large institu- Sector Coordinating Council, and the tions’ preparedness for a pandemic-like Financial Services Information Sharing event and on the resiliency require- and Analysis Center in conducting the ments imposed on core and significant Cyber Financial Industry and Regulamarket firms under the Interagency tors Exercise of 2009. This exercise Paper on Sound Practices to brought together 76 registered partici- Strengthen the Resilience of the U.S. Financial System.7 that play a critical role in financial markets and are subject to resiliency guidelines issued in 7. Thepopulationunderreviewincludedcore April 2003, also called the “Sound Practices clearing and settlement organizations and firms Paper.”

Banking Supervision and Regulation 109 pants, including regulators, exchanges, Surveillance and and firms from across the financial ser- Off-Site Monitoring vices sector to respond to a series of disruptive scenario events. One of the The Federal Reserve uses automated primary objectives of the exercise was screening systems to monitor the finanto develop a better understanding of the cial condition and performance of state dependencies of the sector upon the in- member banks and BHCs between onformation and communications infra- site examinations. Such monitoring and structure that may impact the sector’s analysis helps direct examination resecurity and resilience. sources to institutions that have higher risk profiles. Screening systems also assist in the planning of examinations Enforcement Actions by identifying companies that are engaging in new or complex activities. The Federal Reserve has enforcement The primary off-site monitoring tool authority over the banking organiza- used by the Federal Reserve is the Sutions it supervises and their affiliated pervision and Regulation Statistical Asparties. Enforcement actions may be sessment of Bank Risk model (SRtaken to address unsafe and unsound SABR). Drawing mainly on the practices or violations of any law or financial data that banks report on their regulation. Formal enforcement actions Reports of Condition and Income (Call include cease-and-desist orders, written Reports), SR-SABR uses econometric agreements, removal and prohibition techniques to identify banks that report orders, and civil money penalties. In financial characteristics weaker than 2009, the Federal Reserve completed those of other banks assigned similar 191 formal enforcement actions. Civil supervisory ratings. To supplement the money penalties totaling $249,570 were SR-SABR screening, the Federal assessed. As directed by statute, all Reserve also monitors various market civil money penalties are remitted to data, including equity prices, debt either the Treasury or the Federal spreads, agency ratings, and measures Emergency Management Agency. En- of expected default frequency, to gauge forcement orders and prompt cor- market perceptions of the risk in bankrective action directives, which are ing organizations. In addition, the Fedissued by the Board, and written agree- eral Reserve prepares quarterly Bank ments, which are executed by the Holding Company Performance Re- Reserve Banks, are made public and ports (BHCPRs) for use in monitoring are posted on the Board’s website and inspecting supervised banking or- (www.federalreserve.gov/boarddocs/ ganizations. The BHCPRs, which are enforcement/). compiled from data provided by large In addition to taking these formal BHCs in quarterly regulatory reports enforcement actions, the Reserve Banks (FR Y-9C and FR Y-9LP), contain, for completed 467 informal enforcement individual companies, financial statisactions in 2009. Informal enforcement tics and comparisons with peer compaactions include memoranda of under- nies. BHCPRs are made available to standing and board of directors resolu- the public on the National Information tions. Information about these actions Center (NIC) website, which can be acis not available to the public. cessed at www.ffiec.gov.

110 96th Annual Report, 2009 During 2009, three major upgrades sively for foreign supervisory authorito the web-based Performance Report ties, both in the United States and in a Information and Surveillance Monitor- number of foreign jurisdictions. System ing (PRISM) application were com- staff also took part in technical assispleted. PRISM is a querying tool used tance and training missions led by the by Federal Reserve analysts to access International Monetary Fund, the and display financial, surveillance, and World Bank, the Asian Development examination data. In the analytical Bank, the Basel Committee on Banking module, users can customize the pre- Supervision (Basel Committee), and the sentation of institutional financial infor- Financial Stability Institute. mation drawn from Call Reports, Uni- The Federal Reserve is also an assoform Bank Performance Reports, FR ciate member of the Association of Su- Y-9 statements, BHCPRs, and other pervisors of Banks of the Americas regulatory reports. In the surveillance (ASBA), an umbrella group of bank module, users can generate reports supervisors from countries in the Westsummarizing the results of surveillance ern Hemisphere. The group, headquarscreening for banks and BHCs. tered in Mexico, promotes communica- The Federal Reserve works through tion and cooperation among bank the FFIEC Task Force on Surveillance supervisors in the region; coordinates Systems to coordinate surveillance ac- training programs throughout the retivities with the other federal banking gion with the help of national banking agencies. supervisors and international agencies; and aims to help members develop banking laws, regulations, and supervi- International Training and sory practices that conform to interna- Technical Assistance tional best practices. The Federal In 2009, the Federal Reserve continued Reserve contributes significantly to to provide technical assistance on bank ASBA’s organizational management supervisory matters to foreign central and to its training and technical assisbanks and supervisory authorities. tance activities. Technical assistance involves visits by Federal Reserve staff members to for- Initiatives for Minority-Owned and eign authorities as well as consultations De Novo Depository Institutions with foreign supervisors who visit the Board or the Reserve Banks. The Fed- Partnership for Progress is a program eral Reserve, along with the OCC, the created by the Federal Reserve to foster FDIC, and the Treasury, was an active the strength and vitality of the nation’s participant in the Middle East and minority-owned and de novo deposi- North Africa Financial Regulators’ tory institutions. Launched in 2008, the Training Initiative, which is part of the program seeks to help these institutions U.S. government’s Middle East Partner- compete effectively in today’s marketship Initiative. The Federal Reserve place by offering a combination of onealso contributes to the regional training on-one guidance and targeted workprovision under the Asia Pacific Eco- shops on topics of particular relevance nomic Cooperation Financial Regula- to starting and growing a bank in a tors’ Training Initiative. safe and sound manner. In 2009, the Federal Reserve offered Designated Partnership for Progress a number of training courses exclu- contacts in each of the 12 Reserve

Banking Supervision and Regulation 111 Bank Districts and at the Board answer federal banking agencies to initiate a questions and coordinate assistance for supervisory exercise to assess whether institutions requesting guidance. These major U.S. banking organizations contacts also host regional conferences needed an additional capital buffer, and and conduct other outreach activities to offer Treasury-contingent common within their Districts in support of mi- equity to firms unable to raise the necnority and de novo institutions. In essary capital through market issuance. 2009, the Reserve Banks hosted over Beginning in February, the Federal 15 such regional training sessions, Reserve led the effort to estimate poworkshops, and conferences to provide tential losses—and resources available assistance on key aspects of banking to absorb those losses—at 19 of the supervision. In December 2009, the largest U.S. banking organizations, asstaff met with select CEOs from these suming an economic scenario more seinstitutions to learn about their business vere than was anticipated. This effort challenges and opportunities and solicit was designed to ensure that the firms inputs for improving Partnership for would remain strongly capitalized and Progress. able to fulfill their function of provid- Additionally, the Federal Reserve ing credit to creditworthy borrowers. coordinates its efforts with those of the Termed the “Supervisory Capital Asother agencies through participation in sessment Program,” or “SCAP,” this an annual interagency conference for unprecedented effort involved over 150 minority depository institutions. For the examiners and analysts from across the federal banking agencies, the confer- Federal Reserve System and other fedence provides an opportunity to meet eral banking agencies. Supervisors, with senior managers from minority- economists, accountants, market speowned institutions and gain a better un- cialists, and attorneys from the various derstanding of the institutions’ unique agencies played a significant role in dechallenges and opportunities. Finally, signing and executing the SCAP framethe agencies offer training classes and work. The SCAP was unusually transbreakout sessions on emerging banking parent for a supervisory exercise, as the issues. Federal Reserve published a white Additional information on the Part- paper detailing the methodology, pronership for Progress can be found on- cess, and key economic assumptions line at www.fedpartnership.gov/. underlying the analysis. The results were also published, with supervisors estimating total losses over 2009 and Supervisory Capital 2010 of $600 billion under the more Assessment Program adverse scenario. The weak economic outlook entering In the aggregate, the 19 banking or- 2009 contributed to uncertainty around ganizations were found to need $185 the health and viability of U.S. finan- billion of capital, with the vast majority cial institutions, jeopardizing the criti- in the form of common equity, to escal role banks play in lending to credit- tablish the required capital buffer. The worthy households and businesses. SCAP’s emphasis on common equity With financial markets unwilling to reflects the fact that it is the first eleprovide capital to financial firms given ment of the capital structure to absorb this uncertainty, the Treasury worked losses, offers protection to more senior with the Federal Reserve and the other parts of the capital structure, and low-

112 96th Annual Report, 2009 ers the risk of insolvency. The 10 ment No. 140, and Statement of Finan- BHCs projected to have inadequate cial Accounting Standards 167, Amendcommon stock under the stress test ment to FASB Interpretation No. 46(R) were required to submit a plan for rais- (FAS 166 and FAS 167). The final rule ing such capital by early November. eliminates the exclusion of certain con- The Federal Reserve’s identification of solidated asset-backed commercial these organizations’ capital needs, and paper programs from risk-weighted its supervisory directive to these bank- assets; provides for a transitional ing organizations to raise much-needed phase-in of the effect on risk-weighted capital, helped restore confidence in the assets and tier 2 capital resulting from banking system and helped reopen the the implementation of FAS 166 and public equity markets to these institu- FAS 167; and adds a reservation of tions. In fact, the SCAP process, and authority addressing off-balance sheet related analysis of capital needed to entities. The final rule was issued by support repayment of Treasury capital the federal banking agencies in January (led by the Federal Reserve), caused 2010. these 19 banking organizations to During the year, the Board, in some increase their tier 1 common capital by instances together with the other fednearly $200 billion in 2009. These ef- eral banking agencies, issued several forts have contributed to the recovery rulemakings and guidance documents: of nearly 70 percent of Treasury investments in the banking system. • The Board issued for comment pro- The SCAP has served as a model for posed guidance designed to help endeveloping more effective and compre- sure that incentive compensation hensive supervision of the financial policies at banking organizations do system. In the future, the Federal not encourage excessive risk taking Reserve will increase its use of hori- and are consistent with the safety zontal examinations and scenario and soundness of the organization. analysis. As with the SCAP, these ac- The Board also announced two sutivities will involve multi-disciplinary pervisory initiatives designed to spur perspectives, data-driven analysis to fa- and monitor progress towards safe cilitate benchmarking across institu- and sound incentive compensation tions, and expanded cooperation with arrangements, to identify emerging primary and functional supervisors. best practices, and to advance the state of practice more generally in the industry. The Board’s initiatives Supervisory Policy are consistent with the Principles for In December, the Board approved a fi- Sound Compensation Practices nal rule amending the risk-based capi- issued in April 2009 by the Financial tal adequacy frameworks for state Stability Board and with the associmember banks and BHCs following ated implementation standards. Final changes to the U.S. generally accepted guidance is expected to be issued in accounting principles from the Finan- 2010. cial Accounting Standard Board’s • The Board issued guidance regarding (FASB’s) Statement of Financial BHCs’ declaration and payment of Accounting Standards No. 166, dividends, capital redemptions, and Accounting for Transfers of Financial capital repurchases in the context of Assets, an Amendment of FASB State- their capital planning processes. The

Banking Supervision and Regulation 113 guidance largely reiterates Board su- environment, the Board adopted a fipervisory policies and guidance in nal rule that delays until March 31, light of recent market events and 2011, the effective date of new limits highlights expectations regarding on the inclusion of trust preferred sewhen a BHC should inform and con- curities and other restricted core sult with the Federal Reserve in capital elements in tier 1 capital. advance of taking capital-related • The federal banking agencies issued actions that could raise safety-and- a final rule providing that mortgage soundness concerns. In addition, the loans modified under the Treasury’s Board issued Dividend Increases and Home Affordable Mortgage Program Other Capital Distributions for the will generally retain the risk weight 19 Supervisory Capital Assessment appropriate to the mortgage loan Firms, a temporary addendum to the prior to modification. guidance advising certain BHCs to • The federal banking agencies, toconsult with Federal Reserve staff gether with the FCA and the NCUA, before taking any actions that could issued jointly for comment proposed result in a diminished capital base, rules requiring mortgage loan origiincluding increasing dividends or re- nators who are employees of institudeeming or repurchasing capital in- tions regulated by these agencies to struments. meet the registration requirements of • The Board issued supervisory guid- the Secure and Fair Enforcement for ance for BHCs and state member Mortgage Licensing Act of 2008 (the banks subject to the market risk S.A.F.E. Act). The S.A.F.E. Act recapital rule that emphasizes some of quires these agencies to jointly dethe rule’s core requirements and pro- velop and maintain a system for regvides additional information and istering residential mortgage loan clarification on certain technical as- originators who are employees of pects of the rule. The guidance em- certain regulated institutions, includphasizes requirements around the ing national and state banks, savings application of the market risk capital associations, credit unions, and Farm rule to all positions covered by the Credit System institutions, and cerrule; risk capture in market risk tain of their subsidiaries. A final rule models and model backtesting; and is expected to be issued in 2010. banking organizations’ independent reviews of their market riskmanagement and measurement Capital Adequacy Standards systems. • The federal banking agencies issued In 2009, Board and Reserve Bank staff guidance to banking organizations on conducted supervisory analyses of a the appropriate risk weighting of large number of complex capital issu- California-registered warrants for ances, private capital investments, and risk-based capital purposes. The novel transactions to determine their guidance also discussed risk- qualification for inclusion in regulatory management considerations with re- capital and consistency with safety and spect to accepting these warrants. soundness. Much of the work involved • Recognizing the challenges faced by evaluating enhanced forms of trust prebanking organizations in raising ferred securities, mandatory convertible capital in the uncertain economic securities, perpetual preferred stock,

114 96th Annual Report, 2009 and convertible perpetual preferred Board staff also continued in 2009 to stock (mandatory and optionally con- work closely with the Treasury on the vertible). Board and Reserve Bank terms of the capital instruments issued analyses of these capital issuances fo- by banking organizations under the cused on compliance with the qualify- Capital Purchase Program (CPP), initiing standards for tier 1 capital under ated in 2008, and the Capital Assisthe Board’s capital rules, as well as tance Program (CAP), initiated in consistency with safety and soundness. 2009. The purpose of these programs Staff required banking organizations to was to buttress the financial strength of make changes needed for instruments banking organizations and the overall to satisfy these criteria. Much of such banking and financial systems to staff review during 2009 focused on enable them to withstand severe finanlarge amounts of common stockhold- cial stresses during 2009. Board staff ers’ equity raised under the SCAP pro- reviewed the terms of securities struccess discussed above, as well as other tured by the Treasury for issuance by banking organizations’ capital banking organizations under the CPP issuances. and CAP to determine their qualifica- Board staff also participated in the tion for inclusion in tier 1 capital and review of many applications for private consistency with safety and soundness. capital investments by private equity The Board issued interim final and fifirms and other private investors to nal rules authorizing the inclusion in invest in banking organizations, includ- BHCs’ tier 1 capital of CPP and CAP ing banking organizations in severely securities issued by publicly traded impaired financial condition. The focus banking organizations. The Board also of the analyses of such capital invest- issued an interim final rule allowing ments is compliance with the Board’s the inclusion in BHCs’ tier 1 capital of capital standards for inclusion in tier 1 TARP securities issued by S corporacapital, as well as consistency with tions and mutual banking organizations safety and soundness to ensure that the to the Treasury. terms of such private investments do not (1) impede prudent action by issuing banking organizations to address Other Policy Issues financial issues or (2) impair the Fed- In 2009, the Board evaluated the condieral Reserve’s ability to take approprition of banking organizations applying ate supervisory action. to participate in the Treasury’s CPP, as- Board and Reserve Bank staff also sessed the ongoing capital requirements reviewed a significant number of exof large banking organizations through change transactions conducted for the the SCAP, and provided transparent purpose of increasing GAAP equity to guidelines regarding the capital requiredetermine consistency with safety and ments of banking organizations preparsoundness. These exchange transactions ing applications to redeem the Treagenerally involved the exchange of bilsury’s capital investment in their firms. lions of dollars of trust preferred secu- Among these activities during 2009 rities at a deep discount in exchange were the following: for common stock, thereby increasing the percentage of banking organiza- • The Board issued with the federal tions’ tier 1 capital comprised of banking agencies and Treasury a common stock. joint statement on the CAP that

Banking Supervision and Regulation 115 described the SCAP, which assessed the formulation of policy positions the amount and quality of capital of based on the potential impact of the largest banking organizations changes in standards or guidance (or under challenging economic sce- other events) on the financial sector. narios. As a consequence, Federal Reserve • The Board published a white paper staff routinely provides informal input on process and methodologies em- to standard-setters, as well as formal ployed by federal banking agencies input through public comment letters in capital assessment of large U.S. on proposals, to ensure appropriate and BHCs (SCAP). transparent financial statement report- • The Board, with Treasury, FDIC, ing. and OCC, issued a joint statement on During 2009, Federal Reserve staff the CAP and SCAP and released the participated in activities arising from results of the assessments of the 19 global market conditions and in suplargest BHCs. port of efforts related to financial stability. The financial crisis raised accounting and reporting challenges Accounting Policy for the financial sector. Addressing The Federal Reserve strongly endorses these challenges was a priority for sound corporate governance and effec- Federal Reserve staff members. Sigtive accounting and auditing practices nificant issues arising from stressed for all regulated financial institutions. market conditions included accounting Accordingly, the supervisory policy for financial instruments at fair value, function is responsible for monitoring accounting for impairment in securities major domestic and international pro- and other financial instruments, and posals, standards, and other develop- accounting for asset securitizations and ments affecting the banking industry in other off-balance-sheet items. Staff the areas of accounting, auditing, inter- members participated in a number of nal controls over financial reporting, discussions with accounting and auditfinancial disclosure, and supervisory ing standard-setters and provided comfinancial reporting. mentary on a number of proposals rel- Federal Reserve staff members inter- evant to the financial sector. For act with key constituents in the example, staff provided comment letaccounting and auditing professions, ters to the FASB on proposals related including standard-setters, accounting to the use of fair value when inactive firms, the financial services industry, markets and distressed transactions accounting and financial sector trade exist and the recognition and presentagroups, and other financial sector regu- tion of impairment on investment seculators. The Federal Reserve also par- rities. Staff also contributed to the ticipates in the Basel Committee’s development of numerous comment Accounting Task Force, which repre- letters related to accounting and auditsents the Basel Committee at interna- ing matters that were submitted to the tional meetings on accounting, audit- International Accounting Standards ing, and disclosure issues affecting Board (IASB) and the International global banking organizations. These Auditing and Assurance Standards efforts help inform our understanding Board through the Basel Committee. of current domestic and international With respect to the future of finanpractices and proposed standards and cial reporting, Federal Reserve staff

116 96th Annual Report, 2009 provided a comment letter to the Secu- matters as appropriate. In addition, rities and Exchange Commission (SEC) Federal Reserve policy staff support the on a roadmap for potential use of Inter- efforts of the Reserve Banks in finannational Financial Reporting Standards cial institution supervisory activities rein the United States. This letter sup- lated to financial accounting, auditing, ported the long-term goal of a single reporting, and disclosure. set of high-quality global standards and also identified a few challenges that Compliance Risk Management would need to be addressed before establishing a date for U.S. companies to Bank Secrecy Act and utilize International Financial Reporting Anti-Money-Laundering Compliance Standards. The Federal Reserve supported the efforts of the FASB and the In 2009, the Federal Reserve provided IASB to continue toward the achieve- training for staff on risk-focusing and ment of converged standards, which the use of the FFIEC minimum BSA/ should help to improve comparability Anti-Money-Laundering (AML) examiof financial reporting across national nation procedures in conjunction with jurisdictions and promote more effi- broader efforts to increase consistency cient capital allocation. The Federal and address industry concerns about Reserve was actively involved in moni- regulatory burden. The Federal Reserve toring standard-setting projects that af- currently chairs the FFIEC BSA/AML fect convergence, particularly with re- working group, which is a forum for gard to financial instrument accounting, the discussion of all pending BSA poloff-balance-sheet accounting, fair-value icy and regulatory matters, and particimeasurements, and provisioning. Fed- pates in the Treasury-led Bank Secrecy eral Reserve staff continued to stress Act Advisory Group, which includes the importance of effective financial re- representatives of regulatory agencies, porting and global convergence of law enforcement, and the financial seraccounting standards through regular vices industry and covers all aspects of interactions with the FASB and the the BSA. Beginning in 2009, the IASB. FFIEC BSA/AML working group Given the Federal Reserve’s unique meeting participation was expanded, on perspectives on the challenges facing a quarterly basis, to include the SEC, financial institutions and our role in the the Commodity Futures Trading Comfinancial markets, staff participated on mission, the Internal Revenue Service, the joint FASB and IASB Financial and the Office of Foreign Assets Con- Crisis Advisory Group, which pub- trol (OFAC) in an effort to share and lished in July its review of standard- discuss information on BSA/AML setting activities following the global examination procedures and general financial crisis. Federal Reserve staff trends. also participated on the FASB’s Valua- The Federal Reserve and other fedtion Resource Group, which was cre- eral banking agencies continued during ated to assist the FASB in matters 2009 to regularly share examination involving valuation for financial re- findings and enforcement proceedings porting purposes. with the Financial Crimes Enforcement The Federal Reserve issued supervi- Network under the interagency memosory guidance to financial institutions randum of understanding (MOU) that and supervisory staff on accounting was finalized in 2004, and with the

Banking Supervision and Regulation 117 Treasury’s Office of Foreign Assets implement the Federal Reserve’s 2008 Control under the interagency MOU guidance relating to firmwide comthat was finalized in 2006. pliance-risk management programs and oversight at large banking organizations with complex compliance profiles. International Coordination on Sanctions, Anti-Money Laundering, and Counter-Terrorism Financing International Guidance on Supervisory Policies The Federal Reserve participates in a number of international coordination As a member of the Basel Committee, initiatives related to sanctions, money the Federal Reserve participates in eflaundering, and terrorism financing. forts to advance sound supervisory For example, the Federal Reserve has a policies for internationally active banklong-standing role in the U.S. delega- ing organizations and to improve the tion to the intergovernmental Financial stability of the international banking Action Task Force and its working system. During 2009, the Federal groups, contributing a banking supervi- Reserve participated in ongoing coopsory perspective to formulation of in- erative work on strategic responses to ternational standards on these matters. the financial markets crisis, initiatives The Federal Reserve also continues to enhance and implement Basel II, and to contribute to international efforts to many other policies. The Federal promote transparency and address risks Reserve contributed to supervisory polfaced by financial institutions involved icy recommendations, reports, and pain international funds transfers. The pers issued by the Basel Committee, Federal Reserve participates in a sub- which were generally aimed at improvcommittee of the Basel Committee that ing the supervision of banking organifocuses on AML/counter-terrorism zations’ risk-management practices. financing issues. In May 2009, the Among these final papers, consultative Basel Committee released a paper titled papers, and other publications were the Due Diligence and Transparency re- following: garding Cover Payment Messages Related to Cross-Border Wire Transfers. Final papers: The Federal Reserve, together with the other U.S. federal banking supervisors, • Guidelines for computing capital for issued interagency guidance clarifying incremental risk in the trading book, the supervisors’ perspective on certain published in July (consultative paper points in the Basel Committee paper, previously issued in January) including expectations for intermediary • Revisions to the Basel II market risk banks on OFAC sanctions screening framework, published in July (conand transaction monitoring to comply sultative paper previously issued in with BSA/AML requirements. January) • Enhancements to the Basel II framework, published in July (consultative Corporate Compliance paper previously issued in January) Federal Reserve staff conducted train- • Principles for sound stress testing ing and industry outreach to clarify su- practices and supervision, published pervisory expectations with respect to in May (consultative paper previcompliance risk management and to ously issued in January)

118 96th Annual Report, 2009 Consultative papers: through its founding organizations, issued a comprehensive report on the • International framework for liquidity structure and use of special purpose risk measurement, standards and vehicles, Report on Special Purpose monitoring, published in December Vehicles, published on September 28, • Strengthening the resilience of the 2009. On June 15, 2009, the Joint Fobanking sector, published in Decemrum also published a final paper, Stockber taking on the Use of Credit Ratings. Other publications: • Loss given default floors Credit Risk Management • Analysis of the trading book quanti- The Federal Reserve works with the tative impact study other federal banking agencies to de- • Stocktaking on the use of credit rat- velop guidance on the management of ings credit risk; to coordinate the assess- • Findings on the interaction of market ment of regulated institutions’ credit and credit risk risk; and to ensure that institutions • Report on special purpose entities properly identify, measure, and manage • Report and recommendations of the credit risk. Cross-border Bank Resolution Group • Range of practices and issues in eco- Prudent Commercial Real Estate nomic capital frameworks Loan Workouts In October, the Federal Reserve, along Joint Forum with the other financial regulators of In 2009, the Federal Reserve continued the FFIEC, issued a policy statement to participate in the Joint Forum—an on Prudent Commercial Real Estate international group of supervisors of Loan Workouts. This statement was the banking, securities, and insurance issued to update longstanding guidance industries established to address varied regarding the classification and workissues crossing the traditional borders out of CRE loans, especially in light of of these sectors, including the regula- recent increases in loan workouts. The tion of financial conglomerates. The guidance promotes prudent CRE loan Joint Forum operates under the aegis of workouts at regulated financial instituthe Basel Committee, the International tions and instructs examiners to take a Organization of Securities Commis- balanced and consistent approach in sions, and the International Association reviewing institutions’ workout activiof Insurance Supervisors. National su- ties. Further, examiners were reminded pervisors of these three sectors, who that renewed or restructured loans to are members of the Joint Forum’s creditworthy borrowers on reasonable founding organizations, jointly meet terms should not be subject to adverse and work together to carry out the re- classification solely because the value sponsibilities of the Joint Forum. of the underlying collateral has During the year, the Federal Reserve declined. contributed to the development of su- As discussed in the statement, prupervisory policy papers, reports, and dent workouts are often in the best recommendations that may be issued in interest of both the institution and the the near future. The Joint Forum, borrower. The Federal Reserve expects

Banking Supervision and Regulation 119 examiners to evaluate a regulated insti- 31, 2008, provided by federally supertution’s loan workouts, considering a vised institutions. The 2009 review project’s current and stabilized cash found that the commitment volume of flows, debt service capacity, guarantor SNCs rose 3.3 percent over the 2008 support, and other factors relevant to a review, to $2.9 trillion. However, the borrower’s ability and willingness to number of credits remained virtually repay the debt. The statement sets forth unchanged. “Criticized” assets reprethe appropriate standards for evaluating sented 22.3 percent of the SNC portthe management practices, workout ar- folio, compared with 13.4 percent in rangements, credit classification, regu- the 2008 review. Criticized assets were latory reporting, and accounting for mainly associated with the media and CRE loan workouts. The statement telecom, utilities, finance and insurincludes examples of CRE loan work- ance, and oil and gas sectors. Within outs, illustrating an examiner’s analyti- the “criticized” category, “special mencal process for credit classifications and tion” (potentially weak) credits assessment of an institution’s account- declined to $195 billion, accounting for ing and reporting treatments for re- 6.8 percent of the SNC portfolio, comstructured loans. pared with 7.5 percent in the 2008 review; and “classified” credits (credits having well-defined weaknesses) rose Shared National Credit Program to $447 billion from $163 billion, In September, the Federal Reserve, accounting for 15.5 percent of the SNC FDIC, OCC, and Office of Thrift Su- portfolio compared with 5.8 percent in pervision released summary results of the 2008 review. The rise in classified the 2009 annual review of the Shared and criticized credits in part resulted National Credit (SNC) Program. The from the deterioration in large, leveragencies established the program in aged credits used to finance merger and 1977 to promote an efficient and con- acquisition activity over the past sevsistent review and classification of eral years. The reasons for this decline shared national credits. A SNC is any in credit quality include reliance on loan or formal loan commitment—and overly optimistic projections, weak any asset, such as other real estate, covenant protection, and borrower’s instocks, notes, bonds, and debentures ability to obtain new funding. taken as debts previously contracted— Underwriting standards in 2008 extended to borrowers by a supervised improved from prior years, with examinstitution, its subsidiaries, and affili- iners identifying fewer loans with ates. A SNC must have an original structurally weak underwriting characloan amount that aggregates to $20 teristics compared to credits written in million or more and either (1) is shared 2006 and 2007. However, the SNC by three or more unaffiliated super- portfolio contained loans with structurvised institutions under a formal lend- ally weak underwriting characteristics ing agreement or (2) a portion of which that were committed before mid-2007 is sold to two or more unaffiliated su- that contributed significantly to the pervised institutions, with the purchas- increase in criticized assets. ing institutions assuming their pro rata share of the credit risk. The 2009 SNC review was based on analyses of credit data as of December

120 96th Annual Report, 2009 Banks’ Securities Activities Reports in the FR Y-9 series—FR Y-9C, FR Y-9LP, and FR Y-9SP— In 2009, the Federal Reserve provided provide standardized financial stateexaminer training on Regulation R, ments for BHCs on both a consolidated adopted jointly by the Board and the and a parent-only basis. The reports are SEC in September 2007, with a comused to detect emerging financial probpliance date of January 1, 2009, for lems, to review performance and conmost banks. Regulation R implemented duct pre-inspection analysis, to monitor certain key exceptions for banks from and evaluate risk profiles and capital the definition of the term “broker” adequacy, to evaluate proposals for under section 3(a) (4) of the Securities BHC mergers and acquisitions, and to Exchange Act of 1934, as amended by analyze a holding company’s overall the Gramm-Leach-Bliley Act. financial condition. Nonbank subsidiary reports—FR Y-11, FR 2314, FR Y-7N, Regulatory Reports and FR 2886b—help the Federal Reserve determine the condition of The Federal Reserve’s supervisory pol- BHCs that are engaged in nonbank icy function is responsible for develop- activities and also aid in monitoring the ing, coordinating, and implementing number, nature, and condition of the regulatory reporting requirements for companies’ nonbank subsidiaries. The various financial reporting forms filed FR Y-8 report provides information on by domestic and foreign financial insti- transactions between an insured depositutions subject to Federal Reserve su- tory institution and its affiliates that are pervision. Federal Reserve staff mem- subject to section 23A of the Federal bers interact with other federal Reserve Act; it is used to monitor bank agencies and relevant state supervisors, exposures to affiliates and to ensure including foreign bank supervisors as banks’ compliance with section 23A of needed, to recommend and implement the Federal Reserve Act. The FR Y-10 appropriate and timely revisions to the report provides data on changes in reporting forms and the attendant in- organization structure at domestic and structions. foreign banking organizations. The FR Y-6 and FR Y-7 reports gather additional information on organization Bank Holding Company structure and shareholders from domes- Regulatory Reports tic banking organizations and foreign The Federal Reserve requires that U.S. banking organizations, respectively; the BHCs periodically submit reports pro- information is used to monitor structure viding financial and structure informa- so as to determine compliance with tion. The information is essential in provisions of the Bank Holding Comsupervising the companies and in for- pany Act and Regulation Y and to asmulating regulations and supervisory sess the ability of a foreign banking orpolicies. It is also used in responding ganization to continue as a source of to requests from Congress and the strength to its U.S. operations. public for information about BHCs and During 2009, a number of revisions their nonbank subsidiaries. Foreign to the FR Y-9C report were implebanking organizations also are required mented, including (1) new data items to periodically submit reports to the and revisions to existing data items on Federal Reserve. trading assets and liabilities, (2) new

Banking Supervision and Regulation 121 data items associated with the Treasury corporations with total assets of $50 CPP, (3) new data items and revisions million or less; collect a new Schedule to existing data items on regulatory RC-D, Trading Assets and Liabilities, capital requirements, (4) new data comparable to, but less detailed than, items and revisions to several data Schedule HC-D, Trading Assets and items applicable to noncontrolling (mi- Liabilities, on the FR Y-9C report; and nority) interests in consolidated subsid- collect additional information on option iaries, (5) clarification of the definition contracts and other swaps. of loans secured by real estate, In addition, effective March 2009, (6) clarification of the instructions for the FR Y-11, FR 2314, and FR Y-7N reporting unused commitments, (7) ex- reports were revised to collect new inemptions from reporting certain exist- formation on assets held in trading ing data items for BHCs with less than accounts. $1 billion in total assets, (8) instruc- Effective June 2009, the FR Y-9SP tional guidance on quantifying mis- was revised to also collect new data statements, (9) new data items and de- items associated with the Treasury’s letion of existing items for holdings of CPP, and the FR Y-8 was revised to recollateralized debt obligations and quire respondents to submit all reports other structured financial products, (10) electronically. new data items and revisions to exist- Effective December 2009, the FR ing data items for holdings of commer- Y-10 report was updated to reference cial mortgage-backed securities, the accounting standard (FAS 167) (11) new data items and revisions to with respect to the exclusion of reportexisting data items for unused commit- ing of variable interest entities. In addiments with an original maturity of one tion, the instructions for the FR Y-6 year or less to asset-backed commercial were modified to incorporate the paper conduits, (12) new data items extended deadline for completion of and revisions to existing data items for the annual audit for nonpublic compafair-value measurements by level for nies as amended by part 363 of section asset and liability categories reported at 112 of the Federal Deposit Insurance fair value on a recurring basis, Corporation Improvement Act, to (13) new data items for pledged loans include the reporting of warrants issued and pledged trading assets, (14) new to the Treasury through the TARP CPP data items for collateral held against program when the warrants represent 5 over-the-counter derivative exposures percent or more of voting stock, and to (for BHCs with $10 billion or more in elucidate the legal responsibilities of total assets), (15) new data items and the person attesting to the validity of revisions and deletions of existing data the report. items for investments in real estate In 2009, the Federal Reserve proventures, and (16) new data items and posed a number of revisions to the FR revisions to existing data items for Y-9C for implementation in 2010. The credit derivatives. proposed revisions include items to Also effective in March 2009, the identify other-than-temporary impair- Consolidated Report of Condition and ment losses on debt securities; addi- Income for Edge and Agreement Cor- tional items for unused credit card porations (FR 2886b) was revised to lines and other unused commitments reduce the reporting frequency to and a related additional item for other annual for Edge Act and agreement loans; reformatting of the schedule that

122 96th Annual Report, 2009 collects information on quarterly aver- atives; (8) remaining maturities of ages; additional items for assets cov- unsecured other borrowings and suborered by FDIC loss-sharing agreements; dinated notes and debentures; (9) and clarification of the instructions for unused short-term commitments to unused commitments. asset-backed commercial paper conduits; (10) investments in real estate ventures; and (11) held-to-maturity and Commercial Bank available-for-sale securities in domestic Regulatory Financial Reports offices. In addition, revisions were As the federal supervisor of state mem- made to (1) modify several data items ber banks, the Federal Reserve, along relating to noncontrolling (minority) with the other banking agencies interests in consolidated subsidiaries; through the FFIEC, requires banks to (2) provide for exemptions from submit quarterly Call Reports. Call Re- reporting certain existing items by ports are the primary source of data for banks having less than $1 billion in the supervision and regulation of banks total assets; (3) clarify the definition of and the ongoing assessment of the the term “loan secured by real estate”; overall soundness of the nation’s bank- (4) provide guidance in the reporting ing system. Call Report data, which instructions on quantifying misstatealso serve as benchmarks for the finan- ments in the Call Report; (5) eliminate cial information required by many the confidential treatment of data colother Federal Reserve regulatory finan- lected from trust institutions on fiducial reports, are widely used by state ciary income, expenses, and losses; and local governments, state banking and (6) expand information collected supervisors, the banking industry, secu- on trust department activities. rities analysts, and the academic In addition, during 2009, the Report community. of Assets and Liabilities of U.S. During 2009, the FFIEC imple- Branches and Agencies of Foreign mented revisions to the Call Report to Banks (FFIEC 002) was revised. Effecenhance the banking agencies’ surveil- tive in March, a number of items were lance and supervision of individual eliminated from Schedule O—Other banks and enhance their monitoring of Data for Deposit Insurance Assessment. the industry’s condition and perfor- In June, additional space was provided mance. The revisions included new in the USA Patriot Act Section 314(a) items on (1) the date on which the Anti-Money Laundering section to bank’s fiscal year ends; (2) real estate allow for the optional reporting of construction and development loans on additional contact information. In Sepwhich interest is capitalized; (3) hold- tember, revisions were made to Schedings of commercial mortgage-backed ule O in response to the temporary securities and structured financial increase in the deposit insurance limit products, such as collateralized debt from $100,000 to $250,000 that has obligations; (4) fair value measure- been extended through December 31, ments for assets and liabilities reported 2013. at fair value on a recurring basis; Also during 2009, the FFIEC pro- (5) pledged loans and pledged trading posed a number of revisions to the Call assets; (6) collateral and counterparties Report for implementation in 2010. associated with over-the-counter der- The proposed revisions include items ivatives exposures; (7) credit deriv- to identify other-than-temporary

Banking Supervision and Regulation 123 impairment losses on debt securities; chitecture blueprint and roadmap; (4) additional items for unused credit card adopted a strategy to simplify applicalines and other unused commitments tion security; (5) identified and impleand a related additional item for other mented improvements to make technolloans; new items pertaining to reverse ogy and data more accessible to staff mortgages; an additional item on time working in the field; (6) broadened the deposits and revisions to reporting of use of business intelligence tools to inbrokered deposits; and additional items tegrate supervisory and management for assets covered by FDIC loss- information systems that support both sharing agreements. In addition, revi- office-based and field staff; and (7) sions were proposed to change the re- implemented a tool for comprehenporting frequency of the number of sively tracking exam findings Systemcertain deposit accounts from annually wide. to quarterly; eliminate an item for internal allocations of income and ex- National Information Center pense from foreign offices; clarify the instructions for unused commitments; The NIC is the Federal Reserve’s comand change the reporting frequency of prehensive repository for supervisory, loans to small businesses and small financial, and banking-structure data. It farms from annually to quarterly. is also the main repository for many supervisory documents. NIC includes (1) data on banking structure through- Supervisory Information out the United States as well as foreign Technology banking concerns; (2) the National Information technology supporting Fed- Examination Desktop (NED), which eral Reserve supervisory activities is enables supervisory personnel as well managed within the System Supervi- as federal and state banking authorsory Information Technology (SSIT) ities to access NIC data; (3) the Bankfunction in the Board’s Division of ing Organization National Desktop Banking Supervision and Regulation. (BOND), an application that facil- SSIT works through assigned staff at itates secure, real-time electronic the Board and the Reserve Banks, as information-sharing and collaboration well as through System committees, to among federal and state banking agenensure that key staff members through- cies for the supervision of banking orout the System participate in identify- ganizations; and (4) the Central Docuing requirements and setting priorities ment and Text Repository, which for information technology initiatives. contains documents supporting the su- In 2009, the SSIT function com- pervisory processes. pleted an update to the supervision Within the NIC, the supporting sysfunction’s IT strategic plan. In addi- tems have been modified over time to tion, the following strategic initiatives extend their useful lives and improve were initiated or completed: (1) with business workflow efficiency. During the other federal regulatory agencies, 2009, work continued on upgrading the continued the phased implementation entire NIC infrastructure to provide of the new SNC system; (2) imple- easier access to information, a consismented new tools to improve secure tent Federal Reserve enterprise infordocument exchange and work team mation data repository, a comprehencollaboration; (3) developed an IT ar- sive metadata repository, and uniform

124 96th Annual Report, 2009 security across the Federal Reserve a quarterly basis rather than annually; System. Comprehensive testing was and (5) improvements in data quality performed and application developers and the data validation processes by throughout the System were briefed on providing immediate feedback to reupcoming changes. Implementation porting banks regarding the quality of was extended to begin in April 2010 their reported data. This significantly and is expected to continue throughout improves the efficiency of the data col- 2010 as System applications are transi- lection process and improves the qualtioned to use the new infrastructure. ity of the data. Also during the year, numerous pro- Finally, the Federal Reserve particigramming changes were made to NIC pated in a number of technologyapplications in support of business related initiatives supporting the superneeds, primarily to ensure NIC infor- vision function as part of FFIEC task mation remains current with the chang- forces and subgroups. ing needs based on the continuing changes with the financial and banking Staff Development markets. NIC support also includes supporting The Federal Reserve’s staff developthe Shared National Credit Moderniza- ment program is responsible for the ontion Project (SNC Mod). The SNC Pro- going development of nearly 2,400 program is an interagency program estab- fessional supervisory staff and ensuring lished in 1977 to provide periodic that these staff have the skills necessary credit-risk assessments of the largest to meet supervisory responsibilities toand most complex credit facilities day and in the future. The Federal owned or agented by federally super- Reserve also provides course offerings vised institutions. The SNC Mod is a to staff at state banking agencies. multi-year, interagency, information Training activities in 2009 are summatechnology effort led by the Federal rized in the table opposite. Reserve to improve the efficiency and effectiveness of the IT systems that Examiner Commissioning Program support the SNC Program. SNC Mod focuses on a complete rewrite of the The Examiner Commissioning Program current legacy systems to take advan- (ECP) involves approximately 22 tage of modern technology to enhance weeks of instruction. Individuals move and extend the system’s capabilities. A through a combination of classroom ofsignificant milestone was reached in ferings, self-paced assignments, and December 2009 when the project team on-the-job training over a period of two implemented the second phase of SNC to five years. Achievement is measured Mod. This phase of the project was pri- by two professionally validated profimarily focused on improving the data ciency examinations: the first proficollection and validation processes ciency exam is required of all ECP parincluding (1) collection of additional ticipants; the second proficiency exam data elements to further describe the is offered in two specialty areas— credits; (2) collection of Basel II met- safety and soundness, and consumer rics at the credit level; (3) collection of affairs. A third specialty, in information SNC data from banks that are partici- technology, requires that individuals pants in syndicated loans; (4) ability to earn the Certified Information Systems collect SNC data from some banks on Auditor certification offered by the

Banking Supervision and Regulation 125 TrainingforBankingSupervisionandRegulation,2009 Numberofenrollments Instructionaltime Coursesponsor Numberof ortype FederalReserve fed S er t a a l te ba a n n k d ing tr ( a a i p n p in ro g x d im ay a s te )1 courseofferings personnel agencypersonnel FederalReserveSystem.... 2,322 369 730 146 FFIEC..................... 501 266 260 65 TheOptionsInstitute2 ..... 16 6 3 1 RapidResponse™.......... 9,968 1,393 10 73 1. Trainingdaysareapproximate.Systemcourseswerecalculatedusingfivedaysasanaverage,withFFIEC coursescalculatedusingfourdaysasanaverage. 2. TheOptionsInstitute,aneducationalarmoftheChicagoBoardOptionsExchange,providesathree-dayseminarontheuseofoptionsinriskmanagement. Information Systems Audit Control As- Act, the Bank Merger Act, the Change sociation. In 2009, 164 examiners in Bank Control Act, the Federal passed the first proficiency exam and Reserve Act, and the International 98 passed the second proficiency exam Banking Act. In administering these (75 in safety and soundness and 23 in statutes, the Federal Reserve acts on a consumer affairs). variety of proposals that directly or indirectly affect the structure of the U.S. banking system at the local, regional, Continuing Professional and national levels; the international Development operations of domestic banking organi- Other formal and informal learning op- zations; or the U.S. banking operations portunities are available to examiners, of foreign banks. The proposals conincluding other schools and programs cern BHC formations and acquisitions, offered within the System and FFIEC- bank mergers, and other transactions sponsored schools. System programs involving bank or nonbank firms. In are also available to state and federal 2009, the Federal Reserve acted on 633 banking agency personnel. The Rapid proposals representing 2,143 individual Response™ program, introduced in applications filed under the five stat- 2008, offers System and state personnel utes. As a result of the declining eco- 60–90 minute teleconference presenta- nomic conditions, an increased number tions on emerging issues or urgent of these proposals involved banking ortraining needs associated with imple- ganizations in less than satisfactory mentation or issuance of new laws, financial condition. regulations, or guidance. Bank Holding Company Act Regulation of the Under the Bank Holding Company Act, U.S. Banking Structure a corporation or similar legal entity The Federal Reserve administers five must obtain the Federal Reserve’s apfederal statutes that apply to BHCs, proval before forming a BHC through financial holding companies, member the acquisition of one or more banks in banks, and foreign banking organ- the United States. Once formed, a BHC izations—the Bank Holding Company must receive Federal Reserve approval

126 96th Annual Report, 2009 before acquiring or establishing addi- company borrows money to buy the tional banks. Also, BHCs generally shares, the transaction increases the may engage in only those nonbanking company’s debt and decreases its activities that the Board has previously equity. The Federal Reserve may object determined to be closely related to to stock repurchases by holding compabanking under section 4(c)(8) of the nies that fail to meet certain standards, Bank Holding Company Act. Depend- including the Board’s capital adequacy ing on the circumstances, these activi- guidelines. In 2009, the Federal ties may or may not require Federal Reserve acted on one stock repurchase Reserve approval in advance of their proposal by a BHC. commencement.8 The Federal Reserve also reviews When reviewing a BHC application elections submitted by BHCs seeking or notice that requires prior approval, financial holding company status under the Federal Reserve may consider the the authority granted by the Grammfinancial and managerial resources of Leach-Bliley Act. Bank holding comthe applicant, the future prospects of panies seeking financial holding comboth the applicant and the firm to be pany status must file a written acquired, the convenience and needs of declaration with the Federal Reserve. the community to be served, the poten- In 2009, 16 domestic financial holding tial public benefits, the competitive company declarations and one foreign effects of the proposal, and the appli- bank declaration were approved. cant’s ability to make available to the Federal Reserve information deemed Bank Merger Act necessary to ensure compliance with applicable law. In the case of a foreign The Bank Merger Act requires that all banking organization seeking to acquire proposals involving the merger of incontrol of a U.S. bank, the Federal sured depository institutions be acted Reserve also considers whether the foron by the relevant federal banking eign bank is subject to comprehensive agency. The Federal Reserve has prisupervision or regulation on a consolimary jurisdiction if the institution surdated basis by its home-country superviving the merger is a state member visor. In 2009, the Federal Reserve bank. Before acting on a merger proacted on 250 applications and notices posal, the Federal Reserve considers filed by BHCs to acquire a bank or a the financial and managerial resources nonbank firm, or to otherwise expand of the applicant, the future prospects of their activities, including proposals inthe existing and combined organizavolving private equity firms. tions, the convenience and needs of the A BHC may repurchase its own community(ies) to be served, and the shares from its shareholders. When the competitive effects of the proposed merger. The Federal Reserve also must 8. Since 1996, the act has provided an expe- consider the views of the U.S. Departdited prior notice procedure for certain permis- ment of Justice regarding the competisible nonbank activities and for acquisitions of tive aspects of any proposed bank smallbanksandnonbankentities.Sincethattime merger involving unaffiliated insured theacthasalsopermittedwell-runbankholding companies that satisfy certain criteria to com- depository institutions. In 2009, the mence certain other nonbank activities on a de Federal Reserve approved 61 merger novo basis without first obtaining Federal applications under the act. Reserveapproval.

Banking Supervision and Regulation 127 Change in Bank Control Act proval to establish foreign branches. When reviewing proposals to establish The Change in Bank Control Act re- domestic branches, the Federal Reserve quires 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 BHC to obtain approval from the ties to be conducted. When reviewing relevant federal banking agency before proposals for foreign branches, the completing the transaction. The Federal Federal Reserve considers, among other Reserve is responsible for reviewing things, the condition of the bank and changes in the control of state member the bank’s experience in international banks and BHCs. In its review, the banking. In 2009, the Federal Reserve Federal Reserve considers the financial acted on new and merger-related position, competence, experience, and branch proposals for 1,503 domestic integrity of the acquiring person; the branches and granted prior approval for effect of the proposed change on the the establishment of three new foreign financial condition of the bank or BHC branches. being acquired; the future prospects of State member banks must also obtain the institution to be acquired; the effect Federal Reserve approval to establish of the proposed change on competition financial subsidiaries. These subsidiin any relevant market; the complete- aries may engage in activities that are ness of the information submitted by financial in nature or incidental to the acquiring person; and whether the financial activities, including securitiesproposed change would have an ad- related and insurance agency-related verse effect on the Deposit Insurance activities. In 2009, one financial sub- Fund. A proposed transaction should sidiary application was approved. not jeopardize the stability of the institution or the interests of depositors. Overseas Investments by During its review of a proposed trans- U.S. Banking Organizations action, the Federal Reserve may contact other regulatory or law enforcement agencies for information about U.S. banking organizations may engage relevant individuals. In 2009, the Fed- in a broad range of activities overseas. eral Reserve approved 119 change in Many of the activities are conducted control notices related to state member indirectly through Edge Act and agreebanks and BHCs, including proposals ment corporation subsidiaries. Alinvolving private equity firms. though most foreign investments are made under general consent procedures that involve only after-the-fact notifica- Federal Reserve Act tion to the Federal Reserve, large and other significant investments require Under the Federal Reserve Act, a prior approval. In 2009, the Federal member bank may be required to seek Reserve approved 47 applications and Federal Reserve approval before exnotices for overseas investments by panding its operations domestically or U.S. banking organizations, many of internationally. State member banks which represented investments through must obtain Federal Reserve approval an Edge Act or agreement corporation. to establish domestic branches, and all member banks (including national banks) must obtain Federal Reserve ap-

128 96th Annual Report, 2009 International Banking Act Public Notice of Federal Reserve Decisions The International Banking Act, as Certain decisions by the Federal amended by the Foreign Bank Supervi- Reserve that involve an acquisition by sion Enhancement Act of 1991, rea BHC, a bank merger, a change in quires foreign banks to obtain Federal control, or the establishment of a new Reserve approval before establishing U.S. banking presence by a foreign branches, agencies, commercial lending bank are made known to the public by company subsidiaries, or representative an order or an announcement. Orders offices in the United States. state the decision, the essential facts of In reviewing proposals, the Federal the application or notice, and the basis Reserve generally considers whether for the decision; announcements state the foreign bank is subject to compreonly the decision. All orders and anhensive supervision or regulation on a nouncements are made public immediconsolidated basis by its home-country ately; they are subsequently reported in supervisor. It also considers whether the Board’s weekly H.2 statistical rethe home-country supervisor has conlease. The H.2 release also contains ansented to the establishment of the U.S. nouncements of applications and nooffice; the financial condition and tices received by the Federal Reserve resources of the foreign bank and its upon which action has not yet been existing U.S. operations; the managerial taken. For each pending application resources of the foreign bank; whether and notice, the related H.2 gives the the home-country supervisor shares indeadline for comments. The Board’s formation regarding the operations of website (www.federalreserve.gov) prothe foreign bank with other supervisory vides information on orders and anauthorities; whether the foreign bank nouncements as well as a guide for has provided adequate assurances that U.S. and foreign banking organizations information concerning its operations that wish to submit applications or noand activities will be made available to tices to the Federal Reserve. the Federal Reserve, if deemed necessary to determine and enforce compliance with applicable law; whether the Enforcement of Other Laws foreign bank has adopted and impleand Regulations mented procedures to combat money laundering and whether the home coun- The Federal Reserve’s enforcement retry of the foreign bank is developing a sponsibilities also extend to the disclolegal regime to address money laundersure of financial information by state ing or is participating in multilateral efmember banks and the use of credit to forts to combat money laundering; and purchase and carry securities. the record of the foreign bank with respect to compliance with U.S. law. In 2009, the Federal Reserve approved Financial Disclosures by seven applications by foreign banks to State Member Banks establish branches, agencies, or representative offices in the United States. State member banks that are not members of BHCs and that issue securities registered under the Securities Exchange Act of 1934 must disclose cer-

Banking Supervision and Regulation 129 tain information of interest to investors, credit obtained from foreign lenders by including annual and quarterly financial U.S. citizens. reports and proxy statements. By stat- Several regulatory agencies enforce ute, the Board’s financial disclosure the Board’s securities credit regularules must be substantially similar to tions. The SEC, the Financial Industry those of the SEC. At the end of 2009, Regulatory Authority (formed through 14 state member banks were registered the combination of the National Assowith the Board under the Securities ciation of Securities Dealers and the Exchange Act. regulation, enforcement, and arbitration functions of the New York Stock Exchange), and the Chicago Board Securities Credit Options Exchange examine brokers and Under the Securities Exchange Act, the dealers for compliance with Regulation Board is responsible for regulating T. With respect to compliance with credit in certain transactions involving Regulation U, the federal banking the purchasing or carrying of securities. agencies examine banks under their re- The Board’s Regulation T limits the spective jurisdictions; the FCA and the amount of credit that may be provided NCUA examine lenders under their reby securities brokers and dealers when spective jurisdictions; and the Federal the credit is used to purchase debt and Reserve examines other Regulation U equity securities. The Board’s Regula- lenders. tion U limits the amount of credit that may be provided by lenders other than Federal Reserve Membership brokers and dealers when the credit is used to purchase or carry publicly held At the end of 2009, 2,288 banks were equity securities if the loan is secured members of the Federal Reserve Sysby those or other publicly held equity tem and were operating 57,663 securities. The Board’s Regulation X branches. These banks accounted for applies these credit limitations, or mar- 34 percent of all commercial banks in gin requirements, to certain borrowers the United States and for 71 percent of and to certain credit extensions, such as all commercial banking offices. Á

131 Consumer and Community Affairs The Board’s Division of Consumer and • outreach to national and local gov- Community Affairs (DCCA) has pri- ernment agencies, consumer and mary responsibility for carrying out the community groups, academia, and Board’s consumer protection program. industry to gain a broad range of DCCA augments its dedicated expertise perspectives, and to inform policy in consumer protection law, regulation, decisions and effective practices; and and policy with resources from other • support for national and local agenfunctions of the Board and the Federal cies and organizations that work to Reserve System to write and interpret protect and promote community deregulations, educate and inform con- velopment and economic empowersumers, and enforce laws and regula- ment to historically underserved tions for consumer financial products communities. and services. Key elements of the division’s program include Rulemaking and Regulations • rulemaking, utilizing a team of attorneys to write regulations that implement legislation, update regulations Credit Card Reform to respond to changes in the marketplace, design consumer-tested disclo- In May 2009, the Credit Card Accountsures to provide consumers consis- ability, Responsibility, and Disclosure tent and vital information on Act of 2009 (the Credit Card Act) financial products, and prohibit un- codified and expanded existing Federal fair and deceptive acts and practices; Reserve regulations prohibiting unfair • supervision and enforcement of state credit card practices. Among other member banks and bank holding things, the new rules ban harmful praccompanies and their nonbank affili- tices and require greater transparency ates to ensure that consumer protec- in the disclosure of the terms and contion rules are being followed; ditions of credit card accounts. • consumer complaint and inquiry pro- Throughout 2009, the Federal Reserve cesses to assist consumers in resolv- worked to implement the Credit Card ing grievances with their financial Act. institutions and to answer their ques- Consistent with the effective dates tions; set by Congress in the legislation, the • consumer education to inform con- Federal Reserve’s rulemakings to sumers about what they need to implement the Credit Card Act were know when making decisions about divided into three stages. As discussed their financial services options; below, the Board has completed the • research to understand the implica- first two stages of rulemaking. The tions of policy on consumer financial third stage will be completed later in markets; 2010.

132 96th Annual Report, 2009 Stage One Periodic Statements Must Be Mailed 21 Days in Advance The first stage of the Board’s implementation of the Credit Card Act The rules require creditors to mail or includes provisions with an effective deliver periodic statements for credit date of August 2009.1 cards at least 21 days before the payment due date and the expiration of 45-Day Notice Requirement for any grace period. This requirement Significant Changes must be met before creditors can treat a consumer’s payment as late or impose The new rules require creditors to pro- additional finance charges. vide written notice to consumers 45 days before increasing an annual per- Stage Two centage rate (APR) on, or making another significant change to the terms The second stage of the Board’s impleof, a credit card account. The notice rementation of the Credit Card Act quirement is triggered by increases in includes provisions with an effective rates applicable to purchases, cash date of February 22, 2010.2 advances, and balance transfers. Creditors must also provide notice when changes are made to the terms that are Restricting Rate Increases for required to be disclosed at account Existing Balances opening, including those terms that are most important to consumers and that An increase in the interest rate that apcan have a significant impact on the plies to existing balances on a credit cost of credit for a consumer: key pen- card account can come as a costly suralty fees, transaction fees, fees imposed prise to consumers who relied on the for the issuance or availability of rate in effect at the time they opened credit, any grace period, and the bal- the account or used the account for ance computation method. transactions. Subject to certain exceptions, the new rules generally prohibit credit card issuers from increasing the Consumer’s Right to Reject Rate rates and fees that apply to existing Increase or Change in Terms balances, including when an account is In addition to the advance notice, con- closed, when an account is acquired by sumers must be informed of their right another institution, and when the balto reject the increase or change before ance is transferred to another account it goes into effect. If a consumer rejects issued by the same creditor. The excepthe increase or change, the creditor tions include temporary rates that exmay not impose a fee or charge, treat pire after a specified period, rates that the account as in default, or require im- vary with an index, and accounts that mediate repayment of the balance on are more than 60 days delinquent. the account. 1. See press release (July 15, 2009), 2. See press release (January 12, 2010), www.federalreserve.gov/newsevents/press/bcreg/ www.federalreserve.gov/newsevents/press/bcreg/ 20090715a.htm. 20100112a.htm.

Consumer and Community Affairs 133 Evaluation of Consumer’s student to apply for a credit card or Ability to Pay other open-end credit product if the offer is made on or near a college cam- Under the new rules, credit card issuers pus or at an event sponsored by a colare required to establish and maintain lege. In addition, colleges must pubreasonable policies and procedures to licly disclose their agreements with consider a consumer’s ability to make credit card issuers for marketing credit required minimum payments each bill- cards, and card issuers must make ing cycle (based on the full credit line annual reports to the Board regarding and including any mandatory fees) be- those agreements. fore opening a new credit card account or increasing the credit limit for an existing account. Reasonable policies and Restricting Over-the-Limit Fees procedures include consideration of at least one of the following in assessing The rules generally require creditors to theconsumer’sabilitytopay:(1)thecon- obtain a consumer’s express election sumer’s ratio of debt to income; (2) the (or “opt in”) to the payment of transacconsumer’s ratio of debt to assets; or tions that exceed the account’s credit (3) the income the consumer will have limit before the creditor may impose after paying existing debt obligations. any fee for those transactions. Credit card issuers are also prohibited from imposing more than one over-the-limit Age Restrictions fee per billing cycle and may not impose an over-the-limit fee for the same The rules also impose specific require- transaction in more than three consecuments for opening a credit card account tive billing cycles. or increasing the credit limit on an ex- The rules also prohibit credit card isisting account when the consumer is suers from under the age of 21. In particular, an issuer cannot issue a credit card to a • assessing an over-the-limit fee beconsumer younger than 21 unless their cause the issuer did not promptly reapplication includes either: (1) informa- plenish the consumer’s available tion indicating that the underage con- credit (such as after the consumer sumer has independent ability to make makes a payment); the required minimum payments for the • conditioning the amount of available account, or (2) the signature of a co- credit on the consumer’s consent to signer over age 21 who has the ability payment of over-the-limit transacto make those payments and who as- tions; and sumes joint liability for any debt on the • imposing an over-the-limit fee if the account. consumer’s credit limit is exceeded solely because of accrued interest charges or fees on the account. Rules for Marketing Credit Cards to Students Additional Consumer Protections The rules also prohibit creditors from offering a college student any tangible The wide-ranging consumer protection items (such as t-shirts, gift cards, or regulations adopted by the Board also magazine subscriptions) to induce the include

134 96th Annual Report, 2009 • Credit card issuers are required to Overdraft Services and establish procedures to ensure that Gift Card Rules the administrator of an estate can resolve the outstanding credit card bal- Restrictions on Overdraft Fees ance of a deceased accountholder in In November, the Board announced a timely manner. rules that prohibit financial institutions • Credit card issuers are required to alfrom charging consumers fees for paylocate a consumer’s payment in ing overdrafts on automated teller maexcess of the required minimum paychine (ATM) and one-time debit card ment first to the balance with the transactions, unless a consumer opts in, highest rate. or affirmatively consents, to overdraft • Credit card fees charged to a credit services for these transactions.3 Overcard account during the first year draft fees can be particularly costly in after account opening may not ex- connection with debit card overdrafts ceed 25 percent of the initial credit because the dollar amount of the fee limit. may considerably exceed the dollar • Credit card issuers may not impose amount of the overdraft. interest charges on balances for days Consumers often are enrolled in in previous billing cycles as a result overdraft services automatically, withof the loss of a grace period (a prac- out their express consent. Consumer tice sometimes referred to as testing by the Board indicated that “double-cycle billing”). Card issuers many consumers are unaware that they also are prohibited from imposing can incur overdrafts for ATM or oneinterest charges on the portion of the time debit transactions, believing inbalance that has been repaid when a stead that these transactions will be consumer pays some but not all of a declined. In contrast, consumer testing balance prior to expiration of a grace by the Board showed that consumers period. generally want their checks and auto- • Credit card issuers may not charge a mated clearing house (ACH) transacfee for making a payment except for tions paid even if the payment results payments involving an expedited ser- in an overdraft fee being assessed. vice by a service representative of the issuer. Opt-In Requirement • Credit card issuers must disclose on The Board’s rules require institutions the periodic statement sent to conto provide consumers with the right to sumers: (1) the amount of time and opt in, or affirmatively consent, to the total cost (interest and principal) ininstitution’s overdraft service for ATM volved in paying the consumer’s baland one-time debit card transactions. ance in full by making only the re- The notice of the opt-in right must be quired minimum payments; and (2) provided, and the consumer’s affirmathe monthly payment amount retive consent obtained, before fees or quired to pay off the consumer’s balance in 36 months and the total cost (interest and principal) of repaying 3. See press release (November 12, 2009), the balance in 36 months. www.federalreserve.gov/newsevents/press/bcreg/ 20091112a.htm.

Consumer and Community Affairs 135 charges may be assessed on the con- be used to buy goods or services at a sumer’s account for paying such over- single merchant or affiliated group of drafts. The opt-in requirement applies merchants, and network-branded gift to both existing and new accounts. cards, which are redeemable at any merchant that accepts the card brand (such as Visa or MasterCard). Protections for Consumers Declining Overdraft Coverage Dormancy, Inactivity, or Service The rules prohibit institutions from Fees and Expiration Dates conditioning the payment of overdrafts for checks, ACH transactions, or other types of transactions on the consumer The proposed rules would prohibit dorconsenting to the institution’s payment mancy, inactivity, and service fees on of overdrafts for ATM and one-time gift cards unless: (1) there has been at debit card transactions. For consumers least one year of inactivity on the gift who do not consent to the institution’s card; (2) no more than one such fee is overdraft service for ATM and one- charged per month; and (3) the contime debit card transactions, the rules sumer is given clear and conspicuous require institutions to provide those disclosures about the fees on the card consumers with account terms, condi- and before the card is purchased. tions, and features that are otherwise The proposed rules would also proidentical to those they provide to con- vide that expiration dates for funds sumers who do consent. The rules underlying a gift card must be at least include a model form developed five years from the date the card was through consumer testing that institu- issued or the date when funds were last tions may use to satisfy the opt-in no- loaded onto the card. This information tice requirement. would have to be clearly and conspicu- The Board’s overdraft rules are ously disclosed on the card and before issued under the Electronic Fund the card is purchased. Transfer Act and have an effective date of July 1, 2010. Additional Disclosure Requirements Restrictions on Gift Card The proposed rules also would require Fees and Expiration Dates the disclosure of all other fees imposed in connection with a gift card. These In November, the Board proposed rules disclosures would have to be provided that would restrict the fees and expiraon or with the card and prior to purtion dates that may apply to gift cards. chase. The proposed rules also would The rules would protect consumers require the disclosure on the card of a from certain unexpected costs and toll-free telephone number and, if one would require that gift card terms and is maintained, a website that a conconditions be clearly stated.4 sumer may use to obtain fee informa- The Board’s proposed rules genertion or replacement cards. ally cover retail gift cards, which can The Board’s proposed rules would implement statutory requirements set 4. See press release (November 16, 2009), forth in the Credit Card Act that www.federalreserve.gov/newsevents/press/bcreg/ become effective on August 22, 2010. 20091116a.htm.

136 96th Annual Report, 2009 Mortgage and Home Equity justable rates, prepayment penalties, Lending Reform and negative amortization. Specifically, the proposal would The Board proposed significant new include several requirements: rules designed to (1) improve the disclosures consumers receive in connec- • At application, lenders would have to tion with closed-end mortgages and provide consumers with a one-page home-equity lines of credit (HELOCs) list of key questions to ask about the and (2) provide new consumer protecloan being offered. The new disclotions for all home-secured credit.5 The sures are designed to answer those Board also adopted new rules to implequestions. ment provisions of 2009’s Helping • The information consumers receive Families Save Their Homes Act and within three days after application the Mortgage Disclosure Improvement would highlight risky mortgage fea- Act of 2008 (MDIA). tures (such as possible payment To shop for and understand the cost increases or negative amortization). of a home-secured loan, consumers • For adjustable-rate mortgages, lendmust be able to identify and understand ers would be required to show conthe key terms that determine whether a sumers how their payments might particular loan is appropriate for them. change, including by illustrating the The Board, working with a consultant, highest monthly amount the conconducted focus groups and one-on-one sumer might pay during the life of cognitive interviews with more than the loan. 180 consumers from nine metropolitan • The computation of the APR would areas across the United States in order be revised to include most fees and to understand consumers’ key concerns settlement costs, making it a better when shopping for home-secured cremeasure of the total cost of the loan. dit. The results of these sessions in- • Disclosures would show consumers formed the Board’s rulemaking, which in a simple graph how their loan’s aims to ensure that required disclosures APR compares to the average rate are presented in clear, understandable offered to borrowers with excellent language and formatting so as to procredit. vide consumers with essential informa- • In addition to the early disclosures tion at the appropriate time in the loan provided at application, lenders process. would also be required to provide final disclosures to consumers at least Providing Meaningful Disclosures three days before the loan closing. about Mortgages • For adjustable-rate mortgages, lenders would have to notify consumers The Board proposed rules in July 2009 60 days in advance of a change in to make disclosures about closed-end their monthly payment. (Currently, mortgages more meaningful and useful notice may be given 25 days in to consumers by highlighting potenadvance.) tially risky loan features, such as ad- • Creditors would have to provide monthly statements to consumers with loans that have payment options 5. See press release (July 23, 2009), that could result in negative www.federalreserve.gov/newsevents/press/bcreg/ 20090723a.htm. amortization.

Consumer and Community Affairs 137 Early Disclosures for complete the transaction simply be- Mortgage Loans cause disclosures were provided or because the consumer has applied for In May 2009, the Board issued final a loan. rules revising the disclosure requirements for mortgage loans in order to The new rules also permit a consumer ensure that consumers receive informa- to waive the waiting periods and expetion about loan costs earlier in the dite closing to address a personal finanmortgage process.6 These new rules cial emergency, such as foreclosure. implement provisions of MDIA and were effective July 30, 2009. The new rules expand on rules pub- Anti-Steering Protections lished by the Board in July 2008, which require, among other things, that Disclosures alone may not always be a creditor give a consumer transaction- sufficient to protect consumers from specific information about costs shortly unfair practices. For example, yield after the consumer applies for a closed- spread premiums, which are payments end mortgage loan secured by the con- from a lender to a mortgage broker or sumer’s principal dwelling (“early dis- loan officer (loan originator) based on closures”). These early disclosures the interest rate, can create incentives must be provided before the consumer for mortgage loan originators to “steer” pays any fee other than a reasonable borrowers to riskier loans with higher fee for obtaining the consumer’s credit rates for which the loan originators will history. The May 2009 final rules apply receive greater compensation. Consumthese provisions to loans secured by a ers generally are not aware of the mortdwelling even when it is not the con- gage broker’s or loan officer’s conflict sumer’s principal dwelling, such as a of interest and cannot reasonably prosecond home. tect themselves against it. Yield spread Moreover, these rules require that: premiums may provide some benefit to consumers who choose to pay a higher • Creditors must deliver or mail early rate so that the lender will fund origidisclosures at least seven business nation costs that would otherwise be days before closing. paid by the consumer. • If the APR contained in the early To prevent mortgage loan originators disclosures becomes inaccurate (for from steering consumers to more exexample, due to a change in loan pensive loans, the Board proposed rules terms), creditors must provide corthat would rected disclosures to the consumer at least three business days before • prohibit payments to a mortgage broclosing. ker or a loan officer based on the • The disclosures must inform the conloan’s interest rate or other terms, sumer that they are not obligated to and • prohibit mortgage brokers or loan officers from steering consumers to a lender offering less favorable terms 6. See press release (May 8, 2009), in order to increase their www.federalreserve.gov/newsevents/press/bcreg/ compensation. 20090508a.htm.

138 96th Annual Report, 2009 Home Equity Lines of Credit the consumer 45 days in advance of (HELOCs) the change. The proposal would also improve the form and content of In July 2009, the Board proposed rules these notices. to enhance consumer protections for • Lenders could not terminate an HELOCs and improve the timing, conaccount for delinquency until paytent, and format of information that ment is more than 30 days late. creditors provide to consumers at appli- • When a consumer’s credit line has cation and throughout the life of such been suspended or reduced, creditors accounts. would have to provide additional information about the reasons for the The proposed rules would require ceraction and the consumer’s right to tain disclosures: request reinstatement. • At application, the lengthy, generic disclosure consumers currently re- Notifying Consumers When ceive would be replaced with a Mortgage Loans Are Sold or new one-page summary of the ba- Transferred sic information and risks about One of the consumer protection provi- HELOCs. • Within three days after receiving sions of the Helping Families Save Their Home Act aims to ensure that a consumer’s application for a consumers know who owns their mort- HELOC, lenders would be required gage loan. Because mortgages may be to provide disclosures specifically sold and transferred several times, bortailored to the actual credit terms for rowers can face difficulties in deterwhich the consumer qualifies. These mining who owns their loan and who disclosures would provide informato contact about their loan. The Helption about costs and risky mortgage ing Families Save Their Home Act, features in a tabular format. • At account opening, lenders would which was enacted in May 2009, requires a purchaser or assignee that acprovide final disclosures in the same quires a mortgage loan to provide the format, allowing consumers to more required disclosures to consumers in easily compare them with earlier diswriting within 30 days of acquiring the closures. • Throughout the life of the HELOC loan. Although the statutory provision became effective immediately upon enplan, lenders would provide enactment, in November 2009, the Board hanced periodic statements showing issued interim final rules which prothe total amount of interest and fees vide guidance for complying with the charged for the statement period and statute.7 the year to date. Private Education Loan Rules The proposed rules also would enhance certain consumer protections applicable In 2009, the Board revised Truth in to HELOCs: Lending Act rules for private education • To the extent a lender can change 7. See press release (November 16, 2009), any terms of a consumer’s HELOC www.federalreserve.gov/newsevents/press/bcreg/ plan, the lender would have to notify 20091116b.htm.

Consumer and Community Affairs 139 loans—loans made to a consumer by a tion. These disclosures must include private lender in whole or in part for specific information about the rate, postsecondary educational expenses.8 fees, and other terms of the loan that The Board’s rules implement provi- are offered to the consumer. The credisions of the Higher Education Opportu- tor must disclose, for example, estinity Act (HEOA) and apply to loan mates of the total repayment amount applications received by creditors on or based on both the current interest rate after February 14, 2010. and the maximum interest rate that may be charged. The creditor must also disclose the monthly payment at the Improved Disclosure maximum rate of interest. To enhance disclosure about private education loans, the Board worked with 30-Day Period to a consultant to conduct one-on-one Accept or Reject Loan cognitive interviews with consumers in order to develop effective disclosures Under the Board’s rules, a consumer that consumers can use to understand has the right to accept the rates and the costs and features of these loans. terms offered at any time within 30 The rules specify disclosures that days after receiving the transactioncreditors must provide at three different specific disclosure provided at times in the loan origination process: approval. (1) with the loan application or solicitation, (2) when the loan is approved, and (3) after the consumer accepts the Three-Day Right to Cancel loan but at least three days before funds are disbursed. A creditor must provide additional dis- Under the Board’s rules, with appliclosures after a consumer accepts a prications and solicitations, creditors must vate education loan. A consumer has provide consumers general information the right to cancel the loan without about loan rates, fees, and terms, penalty for up to three business days including an example of the total cost after receipt of this disclosure and the of a loan based on the maximum interloan funds may not be disbursed until est rate the creditor can charge. The the three-day period expires. disclosure must also inform the consumer about the availability of federal student loans, their interest rates, and Prohibition on Co-Branding where the consumer can find additional information regarding those loans. The rules prohibit creditors from using Creditors must also provide a set of an educational institution’s name, logo, transaction-specific disclosures when or mascot in its marketing materials to the loan is approved and at consumma- imply that the educational institution endorses the loans offered by the creditor, unless the creditor and educational institution have a preferred lender arrangement under which the educational 8. See press release (July 30, 2009), institution issues a permissible endorsewww.federalreserve.gov/newsevents/press/bcreg/ 20090730a.htm. ment of the creditor’s loans.

140 96th Annual Report, 2009 Consumer Credit Reporting and trols, staff training, oversight of third- Risk-Based Pricing Rules party service providers, and periodic self-evaluations. Credit reports are used to determine The rules also require furnishers to whether, and on what terms, consumers include the consumer’s credit limit (if may obtain credit and other important applicable) among the information proproducts and services, and are also vided to a credit bureau. The Board widely used to determine a consumer’s and other agencies also published an eligibility for employment, insurance, advance notice of proposed rulemaking and rental housing. Therefore, it is esseeking to identify additional consumer sential that the substantive information information that furnishers should be included in those reports is accurate. In required to provide to credit bureaus. 2009, the Board worked with other federal financial agencies to implement provisions of the Fair and Accurate Right to Submit Disputes Directly to Credit Transactions Act, which amends Information Furnisher the Fair Credit Reporting Act, to impose new responsibilities on credit in- Under the credit reporting rules, if a formation furnishers and allow con- consumer believes his or her credit resumers to play a more active role in port includes inaccurate information, ensuring the accuracy of their own the consumer may submit a dispute dicredit reports. rectly to the furnisher of the information and the furnisher must investigate the dispute. If the furnisher’s investiga- Credit Reporting Rules tion reveals that the information reported to a credit bureau was inaccu- Accuracy of Information rate, the furnisher must promptly notify Reported to Credit Bureaus each credit bureau to which the inaccu- In July, the Board collaborated with rate information was provided and proother federal financial regulatory agen- vide corrected information. The rules cies and the Federal Trade Commission become effective July 1, 2010. to publish rules and guidelines promoting the accuracy and integrity of infor- Risk-Based Pricing Rules mation furnished to credit bureaus and other consumer reporting agencies.9 In December, the Board, along with the The rules require entities that furnish Federal Trade Commission, announced consumer information to credit bureaus rules requiring creditors to notify con- (furnishers) to establish and implement sumers when, based on the consumer’s reasonable written policies and procecredit report, the creditor provides dures to ensure the accuracy and integcredit on less favorable terms than it rity of the information that is reported provides to other consumers. For examabout consumers. Furnishers’ policies ple, if a consumer, because of informaand procedures should address matters tion in his or her credit report, receives including recordkeeping, internal cona mortgage with an APR higher than that offered to a substantial proportion of other consumers by that creditor, 9. See press release (July 2, 2009), such that the consumer’s cost of credit www.federalreserve.gov/newsevents/press/bcreg/ 20090702a.htm. is significantly higher, the creditor must

Consumer and Community Affairs 141 send the consumer a “risk-based pric- collect and share consumer informaing” notice.10 tion.11 Risk-based pricing refers to the prac- The Board and other agencies develtice of setting or adjusting the price oped the model privacy notice based and other terms of credit offered or on extensive consumer testing that inextended to a particular consumer to volved approximately 1,000 consumers reflect the risk of nonpayment by that from five locations across the United consumer. Information from a consum- States. Consumer testing confirmed the er’s credit report is often used in evalu- effectiveness of the model notice as ating the risk posed by the consumer. compared with other privacy notices, The rules require that a notice including a form of notice commonly include a statement that the terms used by financial institutions. offered to the consumer may be less To ensure that privacy information is favorable than the terms offered to con- provided to consumers in a form that is sumers with better credit histories. The readable and understandable, the model notice also must contain a statement in- privacy notice uses a standardized forming the consumer that he or she tabular format and presents information may obtain a free copy of his or her in a question-and-answer format. The credit report from the credit reporting rules specify the format, typeface, font agency identified by the creditor in the size, and presentation to make it easy notice. for consumers to find specific informa- The rules give creditors the option of tion on the form and compare informaproviding consumers with a free credit tion provided by various institutions. A score and information about their credit financial institution that uses the model score as an alternative to providing form obtains a “safe harbor” for comrisk-based pricing notices. Creditors pliance with the regulatory requirethat use the credit score disclosure al- ments for privacy notices. ternative generally must provide free The rule, which was issued under credit scores to any consumer who ap- Regulation P, became effective on plies for credit before the consumer December 31, 2009. becomes obligated for the credit. The rules become effective on January 1, Community Reinvestment 2011. Act Rules Information Privacy Rules In June, the Board, along with other federal financial regulators, proposed revisions to regulations under the Com- In November, the Board, along with munity Reinvestment Act (CRA) that seven other federal regulatory agencies, would require the Board to consider released a model privacy notice delow-cost education loans provided to signed to make it easier for consumers low-income borrowers when assessing to understand how financial institutions a bank’s record of meeting community credit needs under the CRA. Under 10. See press release (December 22, 2009), 11. See press release (November 17, 2009), www.federalreserve.gov/newsevents/press/bcreg/ www.federalreserve.gov/newsevents/press/bcreg/ 20091222b.htm. 20091117a.htm.

142 96th Annual Report, 2009 current CRA regulations, education consumer complaint analyses. Staff loans are considered consumer loans, members also participate in interagency which may not be evaluated as part of activities that promote uniformity in a CRA assessment in some cases. The examination principles and standards. proposed revision reflects statutory Examinations are the Federal Rechanges made to the CRA by the serve’s primary method of enforcing Higher Education Opportunity Act.12 compliance with consumer protection The proposal would also incorporate laws and assessing the adequacy of risk into the CRA regulations statutory lan- management systems for consumer proguage allowing the Board to consider tection. During the 2009 reporting capital investments, loan participations, period, the Reserve Banks conducted and other ventures undertaken in coop- 282 consumer compliance examinations eration with minority- and women- of the System’s 782 state member owned financial institutions and low- banks and one foreign banking organiincome credit unions when assessing a zation.13 bank’s CRA record. Community Reinvestment Act Compliance Oversight and Enforcement The Community Reinvestment Act The Board’s Division of Consumer and (CRA) requires that the Federal Community Affairs supports and over- Reserve and other federal banking and sees supervisory policy and examinathrift agencies encourage financial intion procedures for consumer protecstitutions to help meet the credit needs tion and community reinvestment laws of the local communities in which they in the oversight of state-chartered, do business, consistent with safe and depository institutions, and foreign sound operations.14 To carry out this banking organizations that are members mandate, the Federal Reserve of the Federal Reserve System. In addition, the division oversees the efforts of • examines state member banks to asthe Reserve Banks to ensure that consess their compliance with the CRA; sumer protection laws and regulations • analyzes applications for mergers are fully and fairly enforced. Division and acquisitions by state member staff provide guidance and expertise to the Reserve Banks on consumer protection regulations, bank application 13. The foreign banking organizations examanalysis and processing, examination ined by the Federal Reserve are organizations and enforcement techniques, examiner thatoperateundersection25or25AoftheFedtraining, and emerging issues. The staff eral Reserve Act (Edge Act and agreement cordevelop and update examination poli- porations)andstate-charteredcommerciallending cies, procedures and guidelines, as well companiesownedorcontrolledbyforeignbanks. TheseinstitutionsarenotsubjecttotheCommuas review Reserve Bank supervisory renity Reinvestment Act and typically engage in ports, examination work products, and relatively few activities covered by consumer protectionlaws. 14.BoardofGovernorsoftheFederalReserve System, Federal Deposit Insurance Corporation 12. See press release (June 24, 2009), (FDIC), Office of the Comptroller of the Curwww.federalreserve.gov/newsevents/press/bcreg/ rency (OCC), and Office of Thrift Supervision 20090624a.htm. (OTS).

Consumer and Community Affairs 143 banks and bank holding companies Mergers and Acquisitions in in relation to CRA performance; and Relation to the CRA • disseminates information on community development techniques to bank- During 2009, the Board considered and ers and the public through commu- approved four banking merger applicanity affairs offices at the Reserve tions: Banks. • An application by Allied Irish Banks, The Federal Reserve assesses and rates p.l.c., Dublin, Ireland, and its subsidthe CRA performance of state member iary, M&T Bank Corporation, Bufbanks in the course of examinations falo, NY, to acquire Provident Bancconducted by staff at the 12 Reserve shares Corporation, Baltimore, MD, Banks. During the 2009 reporting was approved in May. period, the Reserve Banks conducted • An application by Morgan Stanley, CRA examinations of 229 banks: 40 New York, NY, to acquire 9.9 perwere rated “Outstanding,” 187 were cent of Heritage Bank, N.A., New rated “Satisfactory,” and two were York, NY, was approved in June. rated “Needs to Improve.”15 • An application by Morgan Stanley, In June 2009, the Federal Reserve New York, NY, to acquire 9.9 perand other federal banking and thrift cent of Chinatrust Financial Holding regulatory agencies proposed two revi- Company, Ltd., Taipei, Taiwan, Resions to the CRA that would incorpo- public of China, was approved in rate new statutory requirements into the June. CRA regulations.16 The first revision • An application by Morgan Stanley, would implement Section 1031 of the New York, NY, to acquire 9.9 per- Higher Education Opportunity Act, cent of United Western Bancorp, which requires the agencies to consider Inc., Denver, CO, was approved in low-cost education loans provided to October. low-income borrowers when assessing a financial institution’s record of meet- (Two other protested applications were ing community credit needs. The sec- withdrawn by the applicants.) ond revision would incorporate the Members of the public had the op- CRA statutory language that allows the portunity to submit comments on the agencies to consider and take into applications; their comments raised account capital investments, loan par- various issues. Some comments referticipations, and other ventures between enced pricing information on residennonminority- and nonwomen-owned tial mortgage loans and concerns that financial institutions and minority- and minority applicants were more likely women-owned institutions and low- than nonminority applicants to receive income credit unions. higher-priced mortgages. Other comments alleged that certain minority groups received preferential treatment in comparison to other minority 15.The2009reportingperiodforexamination groups; that lenders failed to make data includes examinations with end dates credit available to certain minority betweenJuly1,2008,andJune30,2009. groups and to low- and moderate- 16. See press release (June 24, 2009), income individuals and in low- and www.federalreserve.gov/newsevents/press/bcreg/ 20090624a.htm. moderate-income geographies; that

144 96th Annual Report, 2009 lenders deliberately omitted reporting and statistical expertise to the examinarace information about certain appli- tion and ensures that fair lending laws cants, information that is required by are enforced consistently and rigorthe Home Mortgage Disclosure Act ously throughout the Federal Reserve (HMDA); and that lenders had not ful- System. filled their CRA responsibilities. In The Federal Reserve enforces the addition, some commenters claimed ECOA and the provisions of the Fair that lenders engaged in high-cost Housing Act that apply to lending inpredatory lending and less-than- stitutions. The ECOA prohibits credisatisfactory loan servicing activities tors from discriminating against any that contributed to the current foreclo- applicant, in any aspect of a credit sure crisis. transaction, on the basis of race, color, The Board also considered 51 appli- religion, national origin, sex or marital cations with outstanding issues involv- status, or age. In addition, creditors ing compliance with consumer protec- may not discriminate against an applition statutes and regulations, including cant because the applicant receives fair lending laws and the CRA; 34 of income from a public assistance prothose applications were approved and gram or has exercised, in good faith, 17 were withdrawn. The number of any right under the Consumer Credit applications with CRA issues, con- Protection Act. The Fair Housing Act sumer compliance issues, or both was prohibits discrimination in residential somewhat lower in 2009 than in 2008, real estate-related transactions, includas was the total number of all applica- ing the making and purchasing of tions received, due, in part, to the mortgage loans, on the basis of race, financial crisis in the banking industry. color, religion, sex, handicap, familial However, the applications reviewed status, or national origin. contained significantly more complex Pursuant to the ECOA, if the Board fair lending concerns than in previous has reason to believe that a creditor has years. engaged in a pattern or practice of discrimination in violation of the ECOA, the matter will be referred to the De- Fair Lending Enforcement partment of Justice (DOJ). The DOJ reviews the referral and determines The Federal Reserve is committed to whether further investigation is warensuring that the institutions it super- ranted. A DOJ investigation may result vises comply fully with the federal fair in a public civil enforcement action or lending laws—the Equal Credit Oppor- settlement or the DOJ may decide intunity Act (ECOA) and the Fair Hous- stead to return the matter to the Federal ing Act. Fair lending reviews are con- Reserve for administrative enforceducted regularly within the supervisory ment. When a matter is returned to the cycle. Additionally, examiners may Federal Reserve, staff ensure that the conduct fair lending reviews outside of institution takes all appropriate correcthe usual supervisory cycle, if war- tive action. ranted by fair lending risk. When ex- During 2009, the Board referred the aminers find evidence of potential dis- following six matters to the DOJ: crimination, they work closely with the division’s Fair Lending Enforcement • One referral involved redlining, or Section, which brings additional legal discrimination against potential bor-

Consumer and Community Affairs 145 rowers based upon the racial compo- If a fair lending violation does not consition of their neighborhoods, in vio- stitute a pattern or practice that is relation of the ECOA and the Fair ferred to the DOJ, the Federal Reserve Housing Act. Based on an analysis acts on its own to ensure that the violaof the bank’s lending practices, its tion is remedied by the bank. Most marketing, the location of its lenders readily agree to correct fair branches, and its delineated assess- lending violations. In fact, lenders ment area under the CRA, the Board often take corrective steps as soon as determined that the bank avoided they become aware of a problem. Thus, lending in minority neighborhoods. the Federal Reserve generally uses in- • Two referrals involved discrimina- formal supervisory tools (such as tion in mortgage pricing, in violation memoranda of understanding between of the ECOA and the Fair Housing the bank’s board of directors and the Act. In one matter, the Board found Reserve Bank) or board resolutions to that Hispanic and African-American ensure that violations are corrected. If borrowers paid higher annual per- necessary to protect consumers, howcentage rates (APRs) and overages ever, the Board can and does bring than non-Hispanic white borrowers. public enforcement actions. In another matter, the Board found that African-American borrowers Evaluating Pricing Discrimination paid higher APRs than non-Hispanic Risk by Analyzing HMDA Data white borrowers. Legitimate pricing and Other Information factors failed to explain the pricing disparities in either matter. The two previously mentioned referrals • Two referrals involved discrimina- involving mortgage-pricing discrimination on the basis of marital status, in tion resulted from a process of targeted violation of the ECOA. One referral pricing reviews that the Federal involved a bank’s policy and practice Reserve initiated when Home Mortgage of requiring spousal guarantees on Disclosure Act (HMDA) pricing data commercial loans, in violation of first became available in 2005. Board Regulation B. In the other referral, staff developed—and continues to an institution improperly required refine—HMDA screens that identify spousal signatures for its agricultural, institutions that may warrant further consumer, and commercial loans, in review on the basis of an analysis of violation of Regulation B. HMDA pricing data. Because HMDA • One referral involved discrimination data lack many of the factors lenders on the basis of age, in violation of routinely use to make credit decisions the ECOA. The lender offered cus- and set loan prices, such as information tomers over 50 years of age mem- about a borrower’s creditworthiness bership in a special club with prefer- and loan-to-value ratios, HMDA data ential credit features, including a 25 alone cannot be used to determine basis point discount on non-mortgage whether a lender discriminates. Thus, loans. The ECOA generally prohibits Board staff analyze HMDA data in creditors from considering age when conjunction with other supervisory inevaluating creditworthiness, except formation to evaluate a lender’s risk for that a creditor may consider the age engaging in discrimination. of an applicant 62 years or older in Using 2008 HMDA pricing data— the applicant’s favor. the most recent year for which the data

146 96th Annual Report, 2009 Analyzing HMDA Data Enacted by Congress in 1975, the Home between 2007 and 2008 (about 31 per- Mortgage Disclosure Act (HMDA) re- cent), led by a steep reduction in conquires most mortgage lenders located in ventionallending.Theanalysisalsoprometropolitan areas to collect data about vides a detailed assessment of the theirhousing-relatedlendingactivity,re- dramaticgrowthbetween2007and2008 port the data annually to the federal in home lending backed by the Federal government, and make the data publicly Housing Administration’s (FHA) mortavailable. Data reporting requirements gageinsuranceprogram. haveexpandedinrecentyearstocapture As in recent years, the 2008 HMDA reporting lenders’ pricing information data show that most reporting institufor higher-priced consumer mortgage tions originated few if any higher-priced loans. loans in 2008: 53 percent of the lenders An article published in September originated less than 10 higher-priced 2009 by Federal Reserve staff in the loansthatyearand30percentoriginated Federal Reserve Bulletin uses 2008 no higher-priced loans. Of the 8,388 HMDA data to describe the market for home lenders reporting HMDA data, higher-pricedloansandpatternsoflend- 947 made 100 or more higher-priced ing across loan products, borrowers, and loans. neighborhoods of different races and in- The HMDA data also show that the comes.1 The analysis documents the majority of all loan originations were sharp contraction in total home lending nothigherpriced;infact,owinginlarge part to the mortgage market turmoil that 1. Robert B. Avery, Neil Bhutta, Kenneth P. first showed signs of emerging in late Brevoort, Glenn B. Canner, and Christa N. Gibbs, 2006, the incidence of higher-priced “The2008HMDAData:TheMortgageMarketdurlending fell from a high watermark of ingaTurbulentYear,”April2010(revises2009draft release,includesreviseddata),www.federalreserve. 29 percent in 2006 to 18 percent in gov/pubs/bulletin/2010/pdf/hmda08final.pdf. 2007andto12percentin2008. are publicly available—Federal Reserve as part of the institution’s next examiexaminers performed a pricing dis- nation or outside the usual supervisory crimination risk assessment for each in- cycle. stitution that was identified through the Even if an institution is not identi- HMDA screening process. These risk fied through HMDA screening, examassessments incorporated not just the iners might still conclude that the instiinstitution’s HMDA data but also the tution is at risk for engaging in pricing strength of the institution’s fair lending discrimination and perform a pricing compliance program; past supervisory review. The Federal Reserve supervises experience with the institution; con- many institutions that are not required sumer complaints against the institu- to report data under HMDA. Also, tion; and the presence of fair lending many of the HMDA-reporting institurisk factors, such as discretionary pric- tions supervised by the Federal Reserve ing. On the basis of these comprehen- originate few higher-priced loans and, sive assessments, Federal Reserve staff therefore, report very little pricing data. determined which institutions would For these institutions, examiners anareceive a targeted pricing review. De- lyze other available information to aspending on the examination schedule, sess pricing-discrimination risk and, the targeted pricing review could occur when appropriate, perform a pricing

Consumer and Community Affairs 147 AnalyzingHMDAData—continued Overall, the incidence of higher- Also, the data indicate that the incipricedlendingfellnotablybecauselend- dence of higher-priced lending varies ers were unwilling or unable to extend greatly among borrowers of different credit to borrowers perceived to entail races and ethnicities. In 2008, 17.1 perhigher risk. Also, the incidence of cent of African-American borrowers and higher-priced lending in 2008 was af- 15.4 percent of Hispanic borrowers refected by the general “flight to quality” ceived higher-priced first-lien conventhat tended to increase loan prices rela- tional home purchase loans, compared tive to the yield on Treasury securities with 6.5 percent of non-Hispanic white and cause some loans to fall above the and 3.3 percent of Asian borrowers. A price reporting threshold even though similar pattern is found among those same loans would not have government-backed loans (those insured crossed the threshold prior to the finan- by the FHA or guaranteed by the Decialmarketturmoil. partment of Veterans Affairs), but the The HMDA data show that the inci- differences across racial and ethnic dence of higher-price lending varies by groupsaremuchsmaller. product type: higher-risk loans, such as BecauseHMDAdatalackinformation those for manufactured homes, show the about credit risk and other legitimate greatest incidence of higher-priced lend- pricing factors, HMDA data alone caning (in 2008 more than two-thirds of not determine whether the observed theseloansarehigherpriced);lower-risk pricing disparities and market segmentaloans, such as those for first-lien mort- tion reflect discrimination. When anagagesandjunior-lienloans,haveamuch lyzed in conjunction with other fair lower incidence of higher-priced lend- lending risk factors and supervisory ining.Onlysevenpercentoffirst-liencon- formation,however,theHMDAdatacan ventional home purchase loans and 11 facilitate fair lending supervision and percent of comparable junior-lien loans enforcement. (See “Fair Lending Enwere reported as higher-priced in 2008. forcement”inthischapter.) review. During a targeted pricing risk, especially related to credit tightenreview, staff analyze additional infor- ing and loan modification activities. mation, including potential pricing fac- Lenders remain cautious and continue tors that are not available in the to reevaluate their lending practices. HMDA data, to determine whether any Some policies to tighten credit stanpricing disparity by race or ethnicity is dards may fall disproportionately on fully attributable to legitimate factors, minorities and raise fair lending conor whether any portion of the pricing cerns. For example, some lenders have disparity may be attributable to illegal implemented tighter credit standards in discrimination. specific geographic markets, or have otherwise limited lending activity in certain geographic areas. In addition, Monitoring Emerging the rapid increase of loan modifications Fair Lending Issues and other loss mitigation efforts threat- During the past year, economic condi- ens to outpace compliance management tions have shown signs of improve- programs. ment; however, certain trends in credit In response to these trends, the Fedmarkets continue to pose fair lending eral Reserve continues to carefully

148 96th Annual Report, 2009 monitor lenders’ practices for potential regulation. The civil money penalties fair lending violations. Additionally, are payable to the Federal Emergency the Federal Reserve, in conjunction Management Agency (FEMA) for dewith other Federal Financial Institu- posit into the National Flood Mitigations Examination Council (FFIEC) tion Fund. agencies, revised the Interagency Fair During 2009, the Board imposed Lending Examination Procedures to civil money penalties (CMPs) against better protect consumers from discrimi- seven state member banks. The dollar natory practices.17 The updated proce- amount of the penalties, which were dures revise examination guidance for assessed via consent orders, totaled detecting pricing, steering, reverse $221,205. redlining, and redlining violations. In accordance with these procedures, the Coordination with Other Federal Reserve conducts examinations Federal Banking Agencies to (1) evaluate whether lenders’ policies may violate fair lending laws by The member agencies of the FFIEC dehaving an illegal disparate impact on velop uniform examination principles, minorities, and (2) identify steering, standards, procedures, and report forredlining, reverse redlining, and other mats. In 2009, the FFIEC issued the fair lending violations. following work products: • Interagency Examination Procedures Flood Insurance for the Servicemembers Civil Relief Act (SCRA) – The procedures are The National Flood Insurance Act imused to determine institution compliposes certain requirements on loans seance with SCRA, including provicured by buildings or mobile homes losions related to interest rate reduccated in, or to be located in, areas tion to six percent for active duty determined to have special flood hazservicemembers, foreclosure protecards. Under the Federal Reserve’s tion, and protection of servicemem- Regulation H, which implements the bers’ rights with regard to suspenact, state member banks are generally sion of life insurance premiums, prohibited from making, extending, intaxes, and business obligations.18 creasing, or renewing any such loan • Interagency Questions and Answers unless the building or mobile home and Regarding Flood Insurance – The any personal property securing the loan questions and answers supersede the are covered by flood insurance for the 1997 questions and answers docuterm of the loan. The law requires the ment, and it supplements other Board and other federal financial instirecent guidance and interpretations tution regulatory agencies to impose issued by the agencies and FEMA.19 civil money penalties when they find a pattern or practice of violations of the 18. Federal Reserve Board, Banking In- 17. The FFIEC member agencies are the formation and Regulation, Supervision, Con- BoardofGovernorsoftheFederalReserveSys- sumer Affairs Letters, www.federalreserve.gov/ tem, the Federal Deposit Insurance Corporation boarddocs/caletters/2009/0902/caltr0902.htm. (FDIC),theOfficeoftheComptrolleroftheCur- 19. Federal Reserve Board, Banking Inrency (OCC), the Office of Thrift Supervision formation and Regulation, Supervision, Con- (OTS), and the National Credit Union Adminis- sumer Affairs Letters, www.federalreserve.gov/ tration(NCUA). boarddocs/caletters/2009/0903/caltr0903.htm.

Consumer and Community Affairs 149 • Interagency Fair Lending Examina- • Interagency Examination Procedures tion Procedures (revised) – The re- for the Real Estate Settlement Procevised examination procedures reflect dures Act (RESPA) (revised) – The significant changes in credit markets, revised examination procedures incredit products, and credit practices corporate the changes to RESPA that since the procedures were last up- HUD issued in its 2008 final RESPA dated. The procedures clarify exami- reform rule (73 F.R. 68204), which nation procedures related to pricing, included both technical and substeering, redlining, broker activity, stantive changes to its Regulation X. performing examinations with small The key technical changes provide sample sizes, and data accuracy.20 streamlined mortgage servicing dis- • Interagency Examination Procedures closure language, eliminate outdated for Regulation Z (revised) – The re- escrow account provisions regarding vised examination procedures incor- the phase-in period, and permit an porate the 2008 amendments to “average charge” to be listed on the Regulation Z. The amendments were Good Faith Estimate (GFE) and designed to protect consumers in the HUD-1/1A Settlement Statement. mortgage market from unfair, abu- The key substantive changes include sive, or deceptive lending and servic- implementation of a standardized and ing practices. Among other things, binding GFE form and revised HUDthe changes apply protections to a 1/1A Settlement Statement.23 newly defined category of “higher- • Interagency Examination Procedures priced mortgages” that includes vir- for Regulation DD (revised) – The tually all closed-end subprime loans revised examination procedures insecured by a consumer’s principal corporate changes to Regulation DD dwelling.21 that address depository institutions’ • Interagency Examination Procedures disclosure practices related to overfor the Home Mortgage Disclosure drafts. The changes require institu- Act (revised) – The revised examina- tions to disclose the aggregate dollar tion procedures incorporate the 2008 amounts charged for overdraft fees amendments to Regulation C for and returned item fees on a periodic reporting pricing information on statement and, for institutions that higher-priced loans. The changes to provide account balance information Regulation C conformed the thresh- through an automated system, to proold for rate spread reporting to the vide a balance that does not include definition of “higher-priced mortgage additional funds that may be made loans” included in 2008 amendments available to cover overdrafts.24 to Regulation Z.22 20. Federal Reserve Board, Banking In- sumer Affairs Letters, www.federalreserve.gov/ formation and Regulation, Supervision, Con- boarddocs/caletters/2009/0910/caltr0910.htm. sumer Affairs Letters, www.federalreserve.gov/ 23. Federal Reserve Board, Banking Inboarddocs/caletters/2009/0906/caltr0906.htm. formation and Regulation, Supervision, Con- 21. Federal Reserve Board, Banking In- sumer Affairs Letters, www.federalreserve.gov/ formation and Regulation, Supervision, Con- boarddocs/caletters/2009/0911/caltr0911.htm. sumer Affairs Letters, www.federalreserve.gov/ 24. Federal Reserve Board, Banking Inboarddocs/caletters/2009/0909/caltr0909.htm. formation and Regulation, Supervision, Con- 22. Federal Reserve Board, Banking In- sumer Affairs Letters, www.federalreserve.gov/ formation and Regulation, Supervision, Con- boarddocs/caletters/2009/0914/caltr0914.htm.

150 96th Annual Report, 2009 Training for Bank Examiners the Commercial Lending Essentials for Consumer Affairs course, which pro- Ensuring that financial institutions vides assistant examiners with the funcomply with laws that protect consum- damentals of commercial lending. ers and encourage community reinvest- Board and Reserve Bank staff memment is an important part of the bank bers are charged with providing upexamination and supervision process. dates to the System’s content mapping As the number and complexity of con- initiative. This mapping tool, which sumer financial transactions grow, provides a detailed view of training training for the examiners who review content in each and every System the organizations under the Federal course, allows staff to more quickly Reserve’s supervisory responsibility identify and revise course materials becomes even more important. that may be affected by regulatory, le- The consumer compliance examiner gal, or other changes. This year, training curriculum consists of six FedLearn skill level definitions were courses focused on various consumer identified for each training objective protection laws, regulations, and ex- for consumer compliance courses and amination concepts. In 2009, the Board were included in the content map. held 11 training sessions for 158 Sys- In addition to providing core training tem consumer compliance examiners for non-commissioned assistant examand professional staff, 25 state examin- iners, the examiner curriculum emphaers, and one examiner from another sizes the importance of continuing regulatory agency. Several courses use professional development for all exama combination of instructional methods: iners. Opportunities for continuing de- (1) specially developed computer-based velopment include special projects and instruction that includes interactive assignments, self-study programs, rotaself-check exercises, and (2) classroom tional assignments, the opportunity to instruction focused on case studies. instruct at System schools, mentoring To keep the course materials current, programs, and an annual senior exam- Board and Reserve Bank staff routinely iner forum. For example, in response to review examiner training materials, up- an ever-changing regulatory environdating subject matter and adding new ment, System staff conducted two real elements as appropriate. Periodically, estate workshops for experienced exstaff members conduct in-depth reviews amination staff. The focus of the workof a course curriculum, including the shops was the new and revised mortcourse objectives, content, and presen- gage rules and the RESPA reform. In tation methods. During 2009, staff re- addition, in 2009 the System continued viewed two curricula: the Consumer to offer Rapid Response sessions, a Affairs Risk-focused Examination mass-training effort using multi-media Techniques course, which provides to deliver training, focusing on 12 training on all major aspects of risk- time-sensitive or emerging consumer focused supervision, including scoping compliance topics. These sessions were and risk assessment, report writing, rat- designed, developed, and presented to ings, supervisory enforcement actions, System staff within days or weeks of and the Board’s referral processes; and perceived need.

Consumer and Community Affairs 151 Agency Reports on Compliance tional origin, or sex when not perwith Consumer Protection Laws mitted by the regulation. The Board reports annually on compli- The Office of Thrift Supervision (OTS) ance with consumer protection laws by and the Office of the Comptroller of entities supervised by federal agencies. the Currency (OCC) each initiated one This section summarizes data collected formal Regulation B-related public enfrom the 12 Federal Reserve Banks, the forcement action during the reporting FFIEC member agencies, and other period, while the Federal Deposit Infederal enforcement agencies.25 surance Corporation (FDIC) initiated 13.26 There were no other enforcement Regulation B (Equal actions by FFIEC agencies. The Fed- Credit Opportunity) eral Trade Commission (FTC) filed a complaint against a mortgage company The FFIEC agencies reported that ap- alleging that it violated Regulation B proximately 81 percent of the institu- (and the FTC Act). tions examined during the 2009 report- The other agencies that enforce the ing period were in compliance with ECOA—the Farm Credit Administra- Regulation B, compared with 85 per- tion (FCA), the Department of Transcent for the 2008 reporting period. The portation (DOT), the Securities and most frequently cited violations in- Exchange Commission (SEC), the volved Small Business Administration, and the Grain Inspection, Packers and Stock- • failure to provide notice of approval, yards Administration of the Department counteroffer, or adverse action within of Agriculture—reported substantial 30 days after receiving a completed compliance among the entities they sucredit application; pervise. The FCA’s examination activi- • failure to provide a written notice of ties revealed that most Regulation B denial or other adverse action to a violations involved either: (1) creditors’ credit applicant, containing the spefailure to request or provide informacific reason for the adverse action, tion for government monitoring puralong with other required informaposes or (2) creditors providing inadtion; equate statements of specific reasons • failure to collect information about for adverse actions. None of these applicants seeking credit primarily agencies initiated formal enforcement for the purchase or refinancing of a actions relating to Regulation B during principal residence, including applithe reporting period. cants’ race, ethnicity, sex, marital status, and age, for government monitoring purposes; and • improperly collecting information on applicants’ race, color, religion, na- 26.Publicenforcementactionsarecategorized by regulation throughout the report. Because 25.Becausetheagenciesusedifferentmethods some enforcement actions include violations of to compile the data, the information presented more than one regulation, the overall sum of heresupportsonlygeneralconclusions.The2009 actions derived from each regulation will be reporting period was July 1, 2008, through June greater than the actual total number of enforce- 30,2009. mentactionsinitiated,whichwas30.

152 96th Annual Report, 2009 Regulation E (Electronic in compliance with Regulation M, Fund Transfers) compared with 99 percent for the 2008 reporting period. The FFIEC agencies The FFIEC agencies reported that apdid not issue any public enforcement proximately 94 percent of the instituactions specific to Regulation M during tions examined during the 2009 reportthe period. ing period were in compliance with Regulation E, which is comparable with the 2008 reporting period. The Regulation P (Privacy of most frequently cited violations in- Consumer Financial Information) volved failure to The FFIEC agencies reported that ap- • investigate and determine whether an proximately 98 percent of the instituerror occurred and provide the tions examined during the 2009 reportresults to the consumer within 10 ing period were in compliance with business days of receiving a notice Regulation P, compared with 97 perof error from a consumer; cent for the 2008 reporting period. The • provisionally credit the consumer’s most frequently cited violations inaccount for the amount of an alleged volved failure to error when an investigation into the • provide a clear and conspicuous inialleged error cannot be completed tial privacy notice to customers; within 10 business days; • provide initial disclosures that con- • provide customers with a clear and conspicuous annual notice reflecting tain required information, including the institution’s privacy policies and limitations on the types of transfers practices; and permitted and error-resolution proce- • disclose the institution’s information dures, at the time a consumer consharing practices in initial, annual, tracts for an electronic fund transfer and revised privacy notices. service; and • provide a written explanation to the The OCC initiated one formal Regulaconsumer when an investigation de- tion P-related enforcement action durtermines that no error or a different ing the reporting period, while the error has occurred. FDIC initiated five.27 There were no other enforcement actions by FFIEC The OCC initiated one formal Regulaagencies. tion E-related enforcement action during the reporting period, while the FDIC initiated five. There were no Regulation Z (Truth in Lending) other enforcement actions by FFIEC The FFIEC agencies reported that 92 agencies or the SEC. The FTC filed percent of the institutions examined three actions against companies for during the 2009 reporting period were violating Regulation E and settled two in compliance with Regulation Z, comcases brought in 2008. pared with 81 percent for the 2008 re- Regulation M (Consumer Leasing) 27. The FDIC’s reported information in this The FFIEC agencies reported that 100 area relates to Part 332—Privacy of Consumer percent of the institutions examined Financial Information—of the agency’s reguladuring the 2009 reporting period were tionsandnotRegulationP.

Consumer and Community Affairs 153 porting period. The most frequently period were in compliance with Regucited violations involved lation AA, which is comparable with the 2008 reporting period. The OTS • failure to accurately disclose the initiated three formal Regulation AAfinance charge in closed-end credit related enforcement actions, the OCC transactions; initiated one, and the FDIC initiated six • failure to accurately disclose the during the reporting period. There were APR in a closed-end credit transac- no other enforcement actions by FFIEC tion; agencies. • failure to disclose the fact that a creditor has or will acquire an interest in a property purchased as part of Regulation CC (Availability a transaction; and • on certain residential mortgage trans- of Funds and Collection of Checks) actions, failure to provide a good faith estimate of the required disclosures before consummation, or not The FFIEC agencies reported that 90 later than three business days after percent of institutions examined during receipt of a written loan application. the 2009 reporting period were in compliance with Regulation CC, compared In addition, 182 banks supervised by with 89 percent for the 2008 reporting the Federal Reserve, FDIC, OCC, and period. The most frequently cited viola- OTS were required, under the Inter- tions involved failure to agency Enforcement Policy in Regulation Z, to reimburse a total of approxi- • make available on the next business mately $3.14 million to consumers for day the lesser of $100 or the aggreunderstating APRs or finance charges gate amount of checks deposited that in their consumer loan disclosures. are not subject to next-day availabil- The OTS and the OCC each initiated ity; one formal Regulation Z-related en- • follow procedures when invoking the forcement action during the reporting exception for large-dollar deposits; period, while the FDIC had 12. There • provide required information when were no other enforcement actions by placing an exception hold on an FFIEC agencies. The DOT continued account; and to prosecute one air carrier for its alleged improper handling of credit card • make funds deposited from local and refund requests and other Federal Avia- certain other checks available for tion Act violations. The FTC filed two withdrawal within the times presettlements and issued three consent or- scribed by the regulation. ders involving alleged violations of Regulation Z. The OCC initiated four formal Regulation CC-related enforcement actions Regulation AA (Unfair or during the reporting period, while the Deceptive Acts or Practices) FDIC initiated six. There were no other enforcement actions by FFIEC The FFIEC agencies reported that more agencies. than 99 percent of the institutions examined during the 2009 reporting

154 96th Annual Report, 2009 Regulation DD (Truth in Savings) Reserve also responds to consumer inquiries on a broad range of banking The FFIEC agencies reported that 87 topics, including consumer protection percent of institutions examined during questions. the 2009 reporting period were in com- In late 2007, the Federal Reserve espliance with Regulation DD, compared tablished Federal Reserve Consumer with 86 percent for the 2008 reporting Help (FRCH) to centralize the processperiod. The most frequently cited violaing of consumer complaints and inquirtions involved ies. In 2009, its second full year of op- • failure to provide account disclosures eration, FRCH processed 53,904 cases. containing all required information; Of these cases, half (26,979) were in- • inappropriate use of the phrase quiries and half (26,925) were com- “annual percentage yield” in an ad- plaints, with most cases received divertisement without providing re- rectly from consumers. Approximately quired additional terms and condi- three percent of cases were referred tions; from other agencies. • failure to provide account disclosures While consumers can contact FRCH clearly and conspicuously, in writing, by telephone, fax, mail, e-mail, or onand in a form that the consumer may line, most FRCH consumer contacts keep; and occurred by telephone (78 percent). • failure to provide timely, subsequent disclosures before maturity of time accounts. ComplaintsagainstStateMemberBanks andSelectedNonbankSubsidiariesofBank The OTS and the OCC each initiated HoldingCompaniesaboutRegulated Practices,byRegulation/Act,2009 one formal Regulation DD-related enforcement action during the reporting period, while the FDIC initiated nine. Regulation/Act Number There were no other enforcement RegulationAA(UnfairorDeceptiveActs actions by FFIEC agencies. orPractices).............................. 82 RegulationB(EqualCreditOpportunity)..... 49 RegulationBB(CommunityReinvestment)... 2 Responding to Consumer RegulationC(HomeMortgageDisclosure)... 4 RegulationCC(ExpeditedFunds Complaints and Inquiries Availability).............................. 265 RegulationD(ReserveRequirements)........ 8 RegulationDD(TruthinSavings)............ 283 The Federal Reserve investigates com- RegulationE(ElectronicFundsTransfers).... 142 RegulationG(Disclosure/Reportingof plaints against state member banks and CRA-RelatedAgreements)................ 1 selected nonbank subsidiaries of bank RegulationH(NationalFloodInsuranceAct/ InsuranceSales).......................... 13 holding companies, and forwards com- RegulationM(ConsumerLending)........... 2 plaints against other creditors and busi- RegulationP(PrivacyofConsumerFinancial Information).............................. 35 nesses to the appropriate enforcement RegulationQ(PaymentofInterest)........... 7 RegulationV(FairandAccurateCredit agency.28 Each Reserve Bank investi- Transactions)............................. 6 gates complaints against state member RegulationZ(TruthinLending)............. 508 FairCreditReportingAct.................... 83 banks and selected nonbank subsidi- FairDebtCollectionPracticesAct........... 52 aries in its District. The Federal FairHousingAct............................ 1 HomeOwnershipCounseling................ 1 HOPA(HomeownersProtectionAct)......... 3 RealEstateSettlementProceduresAct....... 80 28. Effective September 14, 2009, CA Letter RighttoFinancialPrivacyAct............... 11 09-08,www.federalreserve.gov/boarddocs/caletters/ Total....................................... 1,638 2009/0908/caltr0908.htm.

Consumer and Community Affairs 155 ComplaintsagainstStateMemberBanksandSelectedNonbankSubsidiariesofBank HoldingCompaniesaboutRegulatedPractices,byProductType,2009 Allcomplaints Complaintsinvolvingviolations SubjectofComplaint/ ProductType Number Percent Number Percent Total...................................... 1638 100 86 5 Discriminationalleged Realestateloans......................... 24 1.5 3 0.2 Otherloans.............................. 7 0.4 0 0 Nondiscriminationcomplaints Checkingaccounts....................... 561 34.2 38 2.3 Realestateloans......................... 398 24.3 16 1 Creditcards............................. 213 13 13 .8 Nevertheless, 40 percent (10,643) of (7 percent). The most common real escomplaint submissions were made on- tate complaints by problem code reline, and the online form page received lated to: “credit – other rates, terms, nearly 395,000 visits during the year. and fees” (13 percent), payment errors and delays (12 percent), credit denied other (10 percent), and escrow account Consumer Complaints problems (7 percent); complaints by Complaints against state member banks product code related to: home-purchase and selected nonbank subsidiaries of loans (51 percent), home refinance and bank holding companies totaled 8,073 closed-end loans (23 percent), and in 2009. Nearly 40 percent (3,151) of home equity credit lines (19 percent).29 these complaints were closed without The most common credit card cominvestigation pending the receipt of plaints related to debt collection pracadditional information from consumers. tices (12 percent), “other rates, terms, Of the remaining complaints, 67 per- and fees” (10 percent), and billing error cent (3,284) involved unregulated prac- resolutions (10 percent). tices and 33 percent (1,638) involved Thirty-one regulated complaints alregulated practices. leging discrimination were received. Of these, 18 complaints (one percent of total regulated complaints) alleged dis- Complaints about crimination on the basis of prohibited Regulated Practices borrower traits or rights.30 Fifty percent The majority of regulated practice complaints concerned checking accounts (34 percent), real estate (26 per- 29. Real estate loans include adjustable-rate cent), and credit cards (13 percent). mortgages; residential construction loans; openend home equity lines of credit; home improve- The most common checking account ment loans; home purchase loans; home complaints related to insufficient funds refinance/closed-end loans; and reverse mortor overdraft charges and procedures gages. (52 percent), funds availability not as 30.Prohibitedbasisincludes:race,color,religion, national origin, sex, marital status, age, expected (9 percent), disputed withapplicant income derived from public assistance drawal of funds (7 percent), and forgprograms or applicant reliance on provisions of ery, fraud, embezzlement, or theft theConsumerCreditProtectionAct.

156 96th Annual Report, 2009 of discrimination complaints were re- foreclosures; depository forgery, fraud, lated to the age of the applicant or bor- embezzlement, or theft; and opening rower. Thirty-three percent of discrimi- and closing deposit accounts. nation complaints were related to the race, color, national origin, or ethnicity of the applicant or borrower. The most Complaint Referrals common violations where discrimination was alleged involved real estate In 2009, the Federal Reserve forwarded loans and other loans. 18,360 complaints against other banks In 75 percent of investigated com- and creditors to the appropriate regulaplaints against state member banks and tory agencies and government offices selected nonbank subsidiaries of bank for investigation. To minimize the time holding companies, evidence revealed required to re-route complaints to these that banks or subsidiaries correctly agencies, referrals were transmitted handled the situation. Of the remaining electronically. 25 percent, ten percent are open cases The Federal Reserve forwarded eight that are in process, 5 percent were complaints to the Department of Housdeemed violations of law, one percent ing and Urban Development (HUD) was regarding general errors, and the that alleged violations of the Fair remainder primarily involved factual Housing Act.31 The Federal Reserve’s disputes or litigated matters. The most investigation of these complaints recommon violations involved checking vealed no evidence of illegal credit disaccounts, real estate loans, and credit crimination. cards. Consumer Inquiries Complaints About Unregulated Practices The Federal Reserve received 26,979 As required by Section 18(f) of the consumer inquiries in 2009, covering a Federal Trade Commission Act, the wide range of topics. The top three Board continued to monitor complaints consumer protection issues documented about banking practices not subject to with specific codes were: adverse existing regulations, with a focus on action notices received pursuant to the instances of potential unfair or decep- Equal Credit Opportunity Act (11 pertive practices. In 2009, the Board re- cent); pre-approved credit solicitations ceived 3,304 complaints against state (7 percent); and depository forgery, member banks and selected nonbank fraud, embezzlement or theft (3 persubsidiaries of bank holding companies cent). Consumers were typically dithat involved these unregulated prac- rected to other resources, including tices. Most complaints were related to other federal agencies or written matechecking account activity (35 percent), rials, to address their inquiries. real estate concerns (25 percent), and credit cards (9 percent). More specifically, consumers most frequently complained about issues involving insuffi- 31.Amemorandumofunderstandingbetween cient funds or overdraft charges and HUD and the federal bank regulatory agencies procedures; credit card interest rates, requires that complaints alleging a violation of terms, and fees; debt collection/ theFairHousingActbeforwardedtoHUD.

Consumer and Community Affairs 157 Supporting Community The MORE initiative aims to en- Economic Development hance the System’s response to the foreclosure crisis by improving under- The Board’s Division of Consumer and standing of the incidents and under- Community Affairs (DCCA) works to lying causes of foreclosures, working promote community economic develop- to mitigate the impact of foreclosures ment and fair access to credit for low- on individual borrowers and communiand moderate-income communities and ties, and enhancing the System’s compopulations. As a decentralized func- munication of important research and tion, the Community Affairs Offices policy findings to consumers, financial (CAOs) at each of the 12 Reserve institutions, community development Banks design activities to respond to practitioners, state and local governthe specific needs of the communities ments, and federal policymakers. they serve, with oversight from Board As part of the MORE initiative, for staff. The CAOs provide information example, the System is conducting a and promote awareness of investment study of the uses of funds distributed opportunities to financial institutions, under the Neighborhood Stabilization government agencies, and organizations Program (NSP), which was established that serve low- and moderate-income by HUD to stabilize communities that communities and populations. Simi- have suffered from foreclosures and larly, the Board’s CAO promotes and abandonment. In 2009, the System socoordinates Systemwide, high-priority licited input from various local stakeefforts; in particular, Board community holders, which will serve as the founaffairs staff focus on issues that have dation of a report to be issued in the public policy implications. spring of 2010 to describe the uses of NSP funds and to identify best practices for future funding expenditures. In Foreclosures and addition, the Board worked with the Neighborhood Stabilization Federal Reserve Banks of Boston and In 2009, issues related to high rates of Cleveland on a publication addressing foreclosure continued to dominate the issues related to the acquisition and System’s community affairs agenda. disposition of real estate owned (REO), While each Reserve Bank addressed a class of property owned by a lender, the impact of foreclosure on low- typically a bank, after an unsuccessful and moderate-income communities— sale at a foreclosure auction. In addithrough programming tailored to the tion, the System’s Foreclosure Toolkit, particular needs of communities in a web-based resource center for bortheir Districts—the entire System co- rowers, housing counselors, and comordinated resources, knowledge, and munity development practitioners, was expertise related to mortgage markets updated to provide links to new inforto address the foreclosure problem mation on outreach programs and to through the Mortgage Outreach and allow for further customization at the Research Efforts (MORE) Initiative.32 District-level. The Board also partnered with NeighborWorks America® (NWA) 32.SeeFederalReserveBoard,CommunityDeagain in 2009 to continue to leverage velopment, Mortgage Foreclosure Resources, the System’s resources with those of www.federalreserve.gov/consumerinfo/foreclosure. htm.

158 96th Annual Report, 2009 CRA Did Not Cause the Subprime Mortgage Crisis As the recent financial crisis unfolded, CRA (independent nonbank institutions) many theories emerged about its under- accounted for about half of all higherlying causes, including some claims that priced mortgage originations (a proxy the Community Reinvestment Act for subprime originations). Second, (CRA) encouraged commercial banks about 60 percent of higher-priced origiand savings institutions (banking institu- nations went to middle- or highertions) to undertake high-risk mortgage income borrowers or neighborhoods, lending. populations not targeted by the CRA. TheBoardrebutsclaimsthattheCRA Finally, and perhaps most tellingly, only lies at the root of the crisis by making sixpercentofallhigher-pricedmortgage thefollowingpoints. originations were extended by CRAregulated lenders (and their affiliates) to The language and enforcement of the either lower-income borrowers or neigh- CRAdo not portend excessively risky borhoods in the lenders’ CRA assesslendingbybanks. ment areas (the geographies that are the focusofCRAevaluations). The CRA encourages banking institutions to extend credit to low- and moderate-income (LMI) neighborhoods Mortgage defaults and foreclosures and households within the framework of have been severe even in middle- and safe and sound operation. Moreover, the higher-income neighborhoods, areas CRAdoesnotstipulateminimumtargets thatarenotthefocusoftheCRA. or even goals for the volume of loans, Analysis of data on non-prime mortservices, or investments banking institu- gages (subprime and near-prime loans) tions must provide. Finally, while from First American LoanPerformance subprime mortgage lending grew most (LP) finds that the 90-days-or-more designificantly in the early to mid 2000’s, linquency rate (as of August 2008) for the CRA rules and enforcement process loans originated between January 2006 have not changed substantively since and April 2008 is very high across ge- 1995.Thesethreeconsiderationsweaken ographies regardless of income. Simithe theoretical link between the CRA larly, data from RealtyTrac on forecloand the subprime mortgage boom and sure filings between January 2006 and bust. August 2008 indicate that about 70 percent of filings have taken place in Only a small portion of subprime middle- or higher-income neighbormortgage originations in 2005 and hoods, and filings have increased more 2006 can reasonably be linked to the sharply in middle- or higher-income CRA. areasthaninthelower-incomeareastar- Data collected under the Home Mort- geted by the CRA. It is important to gage Disclosure Act in 2005 and 2006 note, however, that the LP and Realalso suggest a tenuous link between the tyTrac data do not identify borrower CRA and subprime mortgage lending. income, tempering the conclusions one First, institutions not covered by the candrawfromthesedata.

Consumer and Community Affairs 159 the NWA network to address commu- Other Community nity stabilization in the wake of the Development Initiatives record number of foreclosures.33 As Beyond foreclosure and neighborhood part of the partnership, the Board costabilization issues, DCCA provided sponsored the Neighborhood Stabilizaimportant policy leadership in several tion Symposium, a featured program at areas in 2009. The Federal Reserve NWA’s December 2009 Training Insti- Banks of Boston and San Francisco tute in Washington, D.C. Federal published Revisiting the CRA: Perspec- Reserve Board Governor Elizabeth tives on the Future of the Community Duke delivered opening remarks at the Reinvestment Act, a compendium of symposium, which featured discussions policy recommendations regarding the and presentations of strategies and best modernization of the Community Reinpractices in neighborhood stabilizavestment Act. The Boston and San tion.34 The symposium attracted an Francisco Banks, together with the audience of approximately 400 local Board, co-hosted a policy discussion practitioners and policymakers. that introduced the publication and In 2009, the Board also hosted a seattracted leaders from the financial serries of forums to address the availabilvices industry, community advocates, ity of affordable rental housing. Topics foundations, think tanks, and academic addressed in the series included the institutions. particular problems of tenants that rent In addition, the Federal Reserve properties from owners in foreclosure, Bank of San Francisco partnered with strategies for managing scattered site the Board and the Community Develproperties, policies designed to create opment Financial Institutions Fund to rental property from REO inventories, host a Community Development Fifinancing of small multifamily propernance Summit in Washington, D.C. ties, and strategies for reviving the The summit brought together leaders in market for Low Income Housing Tax community development finance and Credits (LIHTCs). The Federal Reserve featured a robust discussion of strate- Bank of St. Louis partnered with the gies to respond to the economic crisis. Board for the LIHTC forum and pub- The San Francisco Bank’s Center for lished a collection of policy papers fea- Community Development Finance pubtured at the forum.35 lished materials that served as the basis for the discussion entitled The Economic Crisis and Community Development Finance: An Industry Assessment.36 The Federal Reserve Bank of 33.FederalReserveBoard,CommunityDevel- Boston also partnered with the Board opment, Resources for Stabilizing Communities, and the Aspen Institute to follow-up on www.federalreserve.gov/communitydev/ stablecommunities.htm. a System initiative begun in 2004 to 34.FederalReserveBoard,NewsandEvents, address the scale and sustainability of Testimony and Speeches, December 9, 2009, “KeystoSuccessfulNeighborhoodStabilization,” www.federalreserve.gov/newsevents/speech/ duke20091209a.htm. 35. Federal Reserve Board, Community De- 36. Federal Reserve Bank of San Francisco, velopment, Innovative Ideas for Innovating CommunityDevelopment,Publications,Working the LIHTC Market, www.federalreserve.gov/ Papers, www.frbsf.org/publications/community/ communitydev/other20091110a1.pdf. wpapers/2009/wp2009-05.pdf.

160 96th Annual Report, 2009 Consumer Education and Outreach: Meeting Consumers Where They Are In today’s complex and ever-changing “Having trouble keeping up with consumerfinancialservicesmarketplace, your mortgage payments? Are it is critical that consumers know where you facing foreclosure? Don’t be they can go for reliable information to taken advantage of—it shouldn’t assist them in making financial choices, hurttogethelp.GotoFederalReandbeabletospotascamoradealthat serve.gov and click on 5 Tips for is “too good to be true.” The Federal AvoidingForeclosureScams.” Reserve has a wealth of unbiased, Messages on avoiding foreclosure and research-based consumer information, scams were later expanded, with ads and, throughout the year, DCCA en- running in theaters over Labor Day gaged in innovative ways to expand its weekend. outreach to connect consumers with The Board also alerted consumers to theseresources. changes in laws and regulations that In 2009, high foreclosure rates gave have increased consumer credit card risetoconcernsaboutnewrisksforvul- protections. With sweeping new rules nerable consumers in the mortgage mar- being implemented in 2009 and 2010 ketplace. With concern about an in- (see “Credit Card Reform” in this chapcrease in foreclosure-related scams, the ter), the Board wanted consumers to Board was among the first federal bank- have information about their accounts ing agencies to reach out to consumers andrights,soitranadditionalmovieads to warn them. Board staff conducted re- over Thanksgiving weekend to encoursearch to determine the most effective age wise credit card usage, directing strategy for delivering short information viewers to 5 Tips for Getting the Most pieces to the greatest number of people. fromYourCreditCard.”1 Data indicates that consumers go to the movies even in a down economy, so the Board began running ads in movie the- 1. See Federal Reserve Board, Consumer Inaters in April that focused on helping formation, www.federalreserve.gov/consumerinfo/ consumersavoidforeclosurescams: fivetips_creditcard.htm. community organizations by hosting a vation in financial services for lowforum on subsidies in community de- and moderate-income consumers and velopment. underserved populations. Leading re- In April, the System held the sixth searchers presented original and objecbiennial System Community Affairs tive research designed to inform inno- Officer’s Research Conference.37 The vative market and product development conference, entitled Innovative Finan- through a framework that addressed cial Services for the Underserved: Op- (1) individual consumer preferences portunities and Outcomes, explored the and behaviors with respect to consumer role, processes, and outcomes of inno- finance products, (2) influences affecting market participation, such as financial education and institutional struc- 37.FederalReserveBoard,CommunityDevel- tures, (3) effects of mortgage products opment,CommunityAffairsConferences,“Inno- on performance and wealth creation, vative Financial Services for the Underserved: and (4) approaches for shaping market Opportunities and Outcomes,” www.kc.frb.org/ carc2009/. participation.

Consumer and Community Affairs 161 ConsumerEducationandOutreach: MeetingConsumersWhereTheyAre—continued The Board also took steps to expand new tool complements other interactive its Internet presence in order to provide calculatorsonthewebsite,includingcalconsumers with easier access to infor- culators that focus on mortgages and mation. In 2009, the Board began devel- mortgage refinancing. DCCA also oping an interactive, user-friendly web- expanded its popular 5 Tips series, with site that focused on new credit card new information on shopping for a rules released in early 2010.2 The Board mortgage.5 developed a similar consumer education The Board is also accessible to conwebpage on new rules for overdraft pro- sumers through Federal Reserve Contectionproducts.3 sumer Help (FRCH), a consumer com- DCCA developed other new, web- plaint website.6 This site includes based consumer resources and updated information about bank products and existingmaterials.Inthespringof2009, services and consumers’ rights, as well a new interactive Credit Card Repay- as links to other useful websites that ment Calculator was added to the Fed- provide information about recognizing eral Reserve’s website.4 The calculator and reporting scams. In fact, nearly 100 helps consumers estimate how long it scams were reported through FRCH in will take to pay their credit card bills 2009 and were sent to the appropriate under different payment scenarios. This federal authorities for investigation and prosecution. 2. See Federal Reserve Board, Consumer Information,www.federalreserve.gov/creditcard. 3. See Federal Reserve Board, Consumer In- 5. See Federal Reserve Board, Consumer Information, www.federalreserve.gov/consumerinfo/ formation, www.federalreserve.gov/consumerinfo/ wyntk_overdraft.htm. fivetips.htm. 4. See Federal Reserve Board, Consumer Infor- 6. See Federal Reserve Board, Consumer Information,www.federalreserve.gov/creditcardcalculator. mation,www.federalreserveconsumerhelp.gov. Meeting Data and Analysis Needs cials responsible for data collection to discuss existing data available from The Federal Reserve made a concerted federal, state, and local sources to effort to address the data needs of commonitor economic and housing condimunity development practitioners in tions in low- and moderate-income 2009. The Federal Reserve Bank of neighborhoods, as well as the limita- Philadelphia hosted a conference in tions of the data and efforts to improve June entitled Understanding the Housthe quality and availability of data to ing and Mortgage Markets: What Data address community development needs. Do We Have? What Data Do We In addition, several Reserve Banks Need?38 The conference brought todeveloped survey instruments to monigether researchers and government offitor economic conditions in low- and moderate-income communities. For 38. Federal Reserve Bank of Philadelphia, Community Development, Community Development Events. 2009, “Understanding the Housing community-development/events/understandingandMortgageMarkets:WhatDataDoWeHave? housing-and-mortgage/data-workshop-final- What Data Do We Need?,” www.phil.frb.org/ agenda.pdf.

162 96th Annual Report, 2009 example, the Federal Reserve Bank of Among the significant topics of dis- Kansas City developed the LMI Survey, cussion for the Council in 2009 were a quarterly survey that measures the economic conditions of low- and • the Credit Card Accountability Remoderate-income communities and the sponsibility and Disclosure Act of organizations that serve them.39 The 2009 (the Credit Card Act); survey results are used to construct five • proposed changes to Regulation Z indicators of economic conditions in regarding disclosures that consumers low- and moderate-income communi- receive in connection with closedties and two indicators of the condition end mortgages and home-equity lines of organizations serving them. The LMI of credit and amendments that would Survey is available on the Reserve provide new consumer protections Bank’s website and provides a gauge for home-secured credit; for service providers, policymakers, • proposed rules regarding overdraft and others to evaluate and respond to services; changes in the economic conditions for • issues related to foreclosures; and low- and moderate-income individuals. • strategies and challenges related to neighborhood stabilization. Consumer Advisory Council The Credit Card Act The Board’s Consumer Advisory Council (the Council)—whose members represent consumer and community or- In the June and October meetings, the ganizations, the financial services in- Council addressed certain provisions of dustry, academic institutions, and state the Credit Card Act amending the agencies—advises the Board of Gover- Truth in Lending Act (TILA) and pronors on matters of Board-administered posed amendments to Regulation Z laws and regulations as well as other (Truth in Lending) to protect consumconsumer-related financial services ers who use credit cards from a number issues. Council meetings, open to the of potentially costly practices (see public, were held in March, June, and “Credit Card Reform”). October. For a list of members of the The Credit Card Act prohibits credi- Council, see the “Federal Reserve Sys- tors from opening a new credit card tem Organization” section in this re- account or increasing the credit limit port; also, visit the Board’s website for for an existing account unless the transcripts of Council meetings.40 creditor considers the consumer’s ability to make the required payments under the terms of the account. Industry 39. Federal Reserve Bank of Kansas City, representatives encouraged the Board CommunityDevelopment,Research,LMISurvey, to adopt a broad, flexible approach rewww.kc.frb.org/home/subwebnav.cfm?level= garding issuers’ evaluation of a con- 3&theID=11201&SubWeb=3. sumer’s ability to pay, stating that issu- 40. The transcript from the March meeting is availableatwww.federalreserve.gov/aboutthefed/ ers should be permitted to use an array cac_20090326.pdf. The transcript from the June of factors in underwriting, including meeting is available at www.federalreserve.gov/ generic and custom credit scores as aboutthefed/cac_20090618.pdf. The transcript well as institutions’ internal informafrom the October meeting is available at tion that is statistically derived from www.federalreserve.gov/aboutthefed/ cac_20091022.pdf. their portfolios. Consumer representa-

Consumer and Community Affairs 163 tives expressed concern about the abil- pirically; and that the overall standards ity of regulators to review and validate for penalty fees should be subject to issuers’ underwriting models and meth- rigorous validation. Industry represodologies due to their proprietary na- entatives supported the adoption of a ture and about the use of credit scores flexible set of criteria to consider in defor underwriting rather than a holistic termining the reasonableness and proassessment of consumers’ ability to re- portionality of penalty fees and encourpay their full potential indebtedness. aged the inclusion of portfolio-based In response to the Board’s proposed analysis and issuers’ loss rates as facrules to implement the ability-to-pay tors in addition to those specifically provision, industry members expressed listed in the statute. support for the proposed rule requiring For over-the-limit fees, consumer consideration of existing obligations as representatives urged the Board to enwell as income or assets in assessing sure that issuers provide appropriate consumers’ ability to make the required disclosures regarding the opt-in reminimum payments, but noted the chal- quirement for extensions of credit that lenge in obtaining income information exceed the account’s credit limit and to for existing customers. They encour- require that consumers who do not opt aged the Board to include payment his- in nevertheless receive the same tory as an additional factor in the account terms, conditions, and features ability-to-pay analysis and to permit provided to consumers who do opt in. use of modeled income, based on em- A consumer representative encouraged pirically derived and statistically sound the Board to prohibit the assessment of models, as a substitute for reported over-the-limit fees due to credit-line reincome. Consumer representatives cau- ductions. An industry representative tioned that regulators should closely stated that the opt-in requirement for monitor such modeling. Industry repre- the over-the-limit feature will help to sentatives also supported the proposed regulate the reasonableness of that fee. rule requiring issuers to estimate mini- A consumer representative expressed mum payments based on a consumer’s the view that the opt-in requirement for utilization of the full credit line, but over-the-limit transactions and fees will encouraged the Board to clarify that the foster consumer choice and competition analysis would take into account only in the marketplace, but urged regulators the credit line offered by the particular to monitor the ways in which issuers issuer, not the full utilization of a con- communicate the change to consumers. sumer’s other credit lines. A consumer Industry representatives encouraged the representative expressed the view that Board to allow issuers to begin informissuers should consider the full utiliza- ing consumers in advance of the retion of all credit lines in determining quirement’s February 22, 2010, impleability to pay. mentation date that creditors obtain a Regarding penalty fees associated consumer’s express consent before imwith credit card accounts, consumer posing over-the-limit fees. representatives expressed the view that Regarding the statutory requirement any fees should be reasonably related that issuers reevaluate interest rate to the cost incurred by the creditor as a increases that are based on the credit result of the violation, as verified by risk of the consumer, market condiempirical data; that basing fees on de- tions, or other factors, industry repreterrence should also be supported em- sentatives encouraged the Board to

164 96th Annual Report, 2009 adopt a broad set of criteria for issuers pressed support for the opt-out apto consider in making such decisions. proach, which they stated would allow Consumer representatives expressed the consumers to retain control of their view that issuers’ rate-setting and re- financial situation while averting potenpricing methodologies should be sub- tial operational disruptions at the point ject to rigorous scrutiny and validation of sale and alleviating the burden on by regulators. institutions to gain affirmative consent Industry representatives generally from existing account-holders. One pointed to the emergence of a new member suggested that the Board adopt business model in the credit card indus- an opt-out approach for current try as issuers adjust to the elimination accounts and an opt-in approach for of “back-end” risk-management tools new accounts as of a certain date. such as repricing and turn to more Industry representatives also supported stringent “front-end” underwriting and the idea that financial institutions overall higher pricing. should be permitted to price differently those accounts that do not allow overdrafts for ATM withdrawals and one- Overdraft Services time debit transactions, compared to accounts that allow the payment of At the March meeting, Council mem- such overdrafts. bers discussed the Board’s proposed A consumer representative stated amendments to Regulation E (Elec- that surveys show that consumers want tronic Fund Transfer Act), which a choice about whether overdrafts are would provide consumers with certain paid for debit-card transactions and that choices relating to the use of overdraft consumers generally want the transacservices and the assessment of over- tion to be declined. Consumer repredraft fees (see “Overdraft Services and sentatives generally supported the Gift Card Rules”). The proposed rules opt-in approach, which they stated would prohibit financial institutions would provide incentives for institufrom imposing a fee on a consumer’s tions to communicate clearly about asset account for paying an overdraft overdraft services to their customers. for an ATM or one-time debit card They also expressed the view that institransaction unless the consumer is tutions should not be permitted to alter given notice of the right to opt out of the account terms, conditions, or feathe institution’s overdraft service, and tures for consumers who do not opt in the consumer does not opt out. As an compared to those who do opt in. Acalternative approach, the proposal cording to one consumer representative, would require a consumer’s affirmative if banks change their business models consent, or opt-in, before such over- to move away from free checking drafts could be paid by the financial in- accounts, any account fee should be stitution and a fee imposed on the con- uniform and applied to all accountsumer’s account for the service. holders. One member also urged the Members commended the Board for Board to adopt substantive protections its work on the proposed overdraft regarding overdraft services, such as rules and incorporation of feedback limiting the number of overdrafts a from the Council in prior meetings. consumer could be charged for during Several industry representatives ex- a year.

Consumer and Community Affairs 165 Closed-End Mortgages and fore consummation, even if nothing has Home Equity Lines of Credit changed since the early TILA disclosure was provided. The proposal sets In July 2009, the Board proposed out two alternative approaches to adchanges to the disclosures that consum- dress changes to loan terms and settleers receive in connection with closed- ment charges during the three-businessend mortgage loans and home equity day waiting period: receiving a new lines of credit (HELOCs) with the goal disclosure (and new waiting period) if of improving their content and format any changes occur, or only when the to make them more useful to consum- APR becomes inaccurate or a variable ers (see “Mortgage and Home Equity rate feature is added. Consumer repre- Lending Reform”). These disclosures sentatives and an industry member enare required by the Board’s Regulation dorsed a strict three-day rule requiring Z. Many of the changes are based on a new disclosure and waiting period, the consumer testing conducted in con- with no waivers permitted. Other nection with the review of Regulation industry representatives supported a Z. Council members strongly com- more flexible approach, such as allowmended the Board’s work on the dis- ing consumers to waive the three-day closures and the use of extensive con- standard so that the closing could take sumer testing to inform the content and place, and setting a threshold, with a de format of the disclosures. Several minimis exception, for the type or members urged the Board to do further amount of changes that would trigger a testing regarding consumers’ experi- new disclosure and waiting period. ences with mortgage transactions. The Board’s proposal would also For closed-end mortgages, the amend Regulation Z to provide limits Board’s proposal would revise the cal- on compensation to mortgage brokers culation of the finance charge and and to creditors’ employees who origiannual percentage rate (APR) so that nate loans, prohibiting certain payments they better capture most fees and costs to originators based on the loan’s terms paid by consumers in connection with or conditions. Several industry reprethe loan. Several industry representa- sentatives expressed the view that the tives cautioned against including addi- rule should apply only to loan originational fees, such as third-party charges, tors, not to institutions that function as in the APR because such a calculation mortgage brokers, such as credit could mean that more loans will unions, community banks, or mortgage exceed the high-cost threshold under broker businesses; they stated that a federal and state laws. A consumer rep- broader application of the rule would resentative supported including all fees have the effect of diminishing competiin the APR to make it a more useful tion. Consumer representatives supnumber for consumers and suggested ported the rule and its classifications that fees should be amortized over according to function, opposing any exa typical refinancing period or the ac- ception for brokers. One member urged tual term of the loan, whichever is the Board to consider means to ensure shorter. that the rules regarding compensation The Board’s proposal would require are applied consistently to banks and the creditor to provide a “final” TILA non-banks. In response to the proposdisclosure that the consumer must al’s prohibition on directing, or “steerreceive at least three business days be- ing,” consumers to transactions that are

166 96th Annual Report, 2009 not in their best interest in order to be triggered when the lender receives increase the originator’s compensation, complete information from the borboth industry and consumer representa- rower. tives urged the Board to set forth a clearer, bright-line rule for what would constitute steering. A consumer repre- Foreclosure Issues sentative noted that there is less risk of steering when a consumer is presented In each of its meetings in 2009, the with multiple loan options. Council discussed loss-mitigation ef- Regarding HELOCs, the Board’s forts for mortgages, including the Adproposal would prohibit creditors from ministration’s Making Home Affordterminating an account for payment- able Program, the performance of related reasons unless the consumer has modified mortgages, and other issues failed to make a required minimum related to foreclosures. Members generperiodic payment for more than 30 ally agreed on the need for more comdays after the due date for that pay- prehensive and detailed data collection ment. An industry member supported about mortgage delinquencies, foreclothe 30-day timeframe, but a consumer sures, and real estate owned (REO) representative urged the Board to adopt properties. a 60-day delinquency timeframe, con- Regarding the federal Making Home sistent with the new delinquency period Affordable mortgage modification proin the credit card context. The Board’s gram, consumer representatives exproposal also would establish a new pressed concern about the capacity of safe harbor for suspensions and credit- servicers to handle the volume of relimit reductions and would impose quests and associated documentation, additional requirements regarding rein- as well as delays in moving borrowers stating accounts that have been tempo- from trial modifications to permanent rarily suspended or reduced. Some modifications. They also stated that members noted the impact on small some foreclosures are being filed while businesses when HELOCs are sus- the borrower is in the trial modification pended or the credit limit is reduced. period. Industry representatives stated Consumer representatives expressed the that the need to fully document and view that there should be a clear ap- completely underwrite loan modificapeals process regarding line suspen- tions under the federal program leads sions or reductions and that the lender to longer processing timeframes and should bear the costs associated with compliance challenges. They also exreinstating accounts, especially if later pressed the view that, in the early analysis shows that the line should not stages of the federal modification prohave been changed. Industry represen- gram, servicers were hampered by a tatives also supported an appeals pro- lack of detailed technical guidelines cess, but stated that consumers should and little advance notice of changes to bear some of the cost, which could be the program, specifically noting the refunded if the appeal is successful. An need for definition around the netindustry representative supported the present-value model. proposed 30-day timeframe for lenders Later in 2009, some members to complete an investigation of a re- pointed to signs of progress in the fedquest for reinstatement, but encouraged eral modification program, such as the clarification that the time period would increasing number of trial modifica-

Consumer and Community Affairs 167 tions initiated and borrowers evaluated through the modification process. for trial modifications. Industry repre- Members cited examples of successful sentatives stated that, while participat- collaborations among lenders, servicers, ing servicers have increased their staff- and nonprofit groups to engage in ing and resources to implement the direct outreach with borrowers. modification program, they face strict Several consumer and industry reprecompliance requirements regarding sentatives endorsed a focus on princidocumentation, as well as operational pal write-downs as a key way to challenges in adjusting to changes to achieve sustainable modifications, and the program. Members agreed on the some members also suggested greater need for uniform loss-mitigation pro- use of short sales in cases where an cesses and guidelines to increase effi- affordable modification cannot be ciency and reduce confusion among achieved. Several consumer representaservicers and borrowers. One member tives expressed support for judicial noted that while most borrowers with mortgage modifications in the banktrial modifications are making their ruptcy context and court-mediated resopayments, some are not able to do so lution programs as additional tools to because of economic hardship, such as deal with foreclosures. Industry reprejob loss. Members generally agreed sentatives cautioned that judicial modithat the federal program does not ad- fications should be a last resort and equately address the situations of job- should have reasonable limitations, less borrowers or those who are under- such as being permitted only for water on their loans. subprime loans, and that the primary A consumer representative expressed focus should be on achieving affordconcern about the lack of information able modified payments for borrowers. provided to borrowers who are denied Consumer and industry representatives a loan modification and the absence of disagreed about the value of second an appeals process for the federal pro- liens and the appropriate treatment of gram. Members commended the Board those loans both in the federal modififor its work on fair-lending issues, cation program and in the safety-andparticularly in the context of loan soundness context. modifications. A consumer representative also urged the Board to monitor Neighborhood Stabilization fair-lending issues related to the maintenance and disposition of REO proper- Throughout 2009, the Council disties by lenders. cussed the effects of foreclosures on Members raised concerns about the the surrounding community, particuincreasing prevalence of for-profit fore- larly in areas where foreclosures are closure consultants and foreclosure concentrated, and efforts such as the scams and emphasized the need for en- federal Neighborhood Stabilization forcement against such entities and Program (NSP) to address the chalwarnings to consumers about not pay- lenges of stabilizing communities. ing up-front fees for counseling or Members noted the negative effects of modification services. A consumer rep- REO and vacant properties on neighresentative urged the provision of more borhoods, such as increased vandalism resources for legitimate counseling and crime, and the impact on the deciagencies and legal services organiza- sionmaking process of other homeowntions to help guide distressed borrowers ers who are struggling to stay current

168 96th Annual Report, 2009 on their mortgage. They expressed and vacant and abandoned properties, concern about banks not maintaining such as a clearinghouse for REO proptheir REO properties or not completing erties between servicers and communiforeclosure sales, leading to “toxic ties. However, members also described titles,” and urged federal regulators to the difficulties in working with local increase oversight of regulated institu- governments regarding acquisition of tions regarding these issues. One mem- REO properties due to the lack of stanber urged lenders and servicers to be dard purchase agreements. Members attentive to the valuation process in the noted that nonprofit groups face sigsale of REO properties and the effects nificant challenges in addressing REO of their property-disposition activities issues, from holding troubled properties on housing prices and to focus on to finding credit-worthy homebuyers selling REO properties to owner- and managing scattered-site rental occupants. properties. Finally, one member urged Members described challenges in the that further guidance be provided reimplementation of the Neighborhood garding the implementation of the Pro- Stabilization Program (NSP), such as a tecting Tenants at Foreclosure Act of lack of government infrastructure in 2009. some communities for managing the influx of federal funds and the reim- Other Discussion Topics bursement feature of the program. They noted that, given the relatively short At the March meeting, the Council adimplementation timeframe for the NSP, dressed issues related to the availability many local governments have opted for and quality of credit, particularly for less complicated projects such as land consumers and small businesses. Membanks or closing-cost assistance, rather bers discussed measures that aim to rethan more complex acquisition and re- store the flow of critically important habilitation efforts. They also pointed credit as well as the current state of to some positive developments, such as lending, including the types and quality the NSP’s provision of technical assis- of credit products and terms that are tance and a move toward collaborative available to consumers. efforts on the local level, often led by An industry representative comcommunity development organizations. mented on the experience of credit card They expressed support for initiatives issuers, which face increased funding to capitalize community development costs and a sharp increase in loan financial institutions (CDFIs) and other losses and are responding by repricing community development groups that and cutting credit lines; he also noted can play important roles in neighbor- that Congressional action is likely to hood revitalization. Members noted that impact the overall business model of the CDFI industry serves as a key the credit card industry and access to funding source for small businesses credit. One member stated that and other economic development ac- increased monthly payments and intertivities, particularly in low- and est rates for credit cards can exacerbate moderate-income communities. the cyclical problems that consumers One member noted that the National and the industry are facing; another Community Stabilization Trust is work- member expressed concern that indiing to provide tools to address the vidual issuers’ actions in terms of riskissues of neighborhood stabilization based pricing for credit cards may

Consumer and Community Affairs 169 work to increase systemic risk. Some viders, such as credit unions or insurmembers also noted that credit cards ance companies. Several members and home-equity lines of credit are key noted that non-depository institutions sources of capital for small businesses, benefited from government intervenwhich face difficulties when those tions during the financial crisis and sources of funding are cut off. should be subject to the responsibilities A consumer representative stated of CRA in exchange for such benefits. that some consumers are still being Members also expressed support for offered credit products that raise con- expanding the CRA to cover financial cerns, and an industry representative services and products beyond lending. noted the need for quality products that One member noted that over the years will help bring people who have expe- regulators have added products for rienced foreclosures or bankruptcy dur- which institutions can receive CRA ing the crisis back into the conven- credit, but that the process of measurtional credit market. One member ing the impact of such products needs urged attention to potentially problem- improvement. A consumer representaatic credit products, such as tax refund tive suggested that CRA coverage anticipation loans and short-term loans should be extended to members of fedfrom banks, which may become more erally protected classes, such as racial appealing to cash-strapped borrowers and ethnic groups, women, and persons who cannot access other forms of with disabilities, to ensure fair lending credit. One member pointed to the need and the availability of quality financial for both access to credit and quality of products and services for those indicredit and the difficulties faced by indi- viduals. viduals who have thin or no credit Several industry representatives files; the member urged the Federal noted that the CRA’s original purpose Reserve to study options for generating focused on serving low- and moderatealternative sources of credit data to income communities from which deanalyze consumers who do not have a posits were taken and cautioned that traditional credit file. expanding the CRA, whether to include Members praised the Federal Re- other products and institutions or to adserve’s steps to bolster the markets for dress fair-lending issues, could dilute securitized assets and recommended that purpose and the regulation’s imfurther attention to the markets for pact. An industry representative also Small Business Administration loans expressed concern about the burden of and affordable multifamily financing complying with the CRA, particularly through the Low Income Housing Tax for smaller institutions. Both consumer Credit. and industry members agreed that any At the June meeting, Council mem- reexamination of the CRA should bers focused on the future of the Com- include attention to the quality and susmunity Reinvestment Act (CRA), tainability of credit, not just the quanincluding possible changes in light of tity of credit. developments in the financial services Also at the June meeting, members industry. Members discussed the idea provided input on the Board’s rulemakof extending the CRA beyond deposi- ing regarding the Secure and Fair Entory institutions, such as to non-bank forcement for Mortgage Licensing Act affiliates of depository institutions or to (SAFE Act). Some members expressed other non-bank financial services pro- the view that loss-mitigation personnel

170 96th Annual Report, 2009 should be exempt from the SAFE Act’s Board to adopt a “grandfathering” aplicensing requirements. Several mem- proach for existing originators and to bers supported applying the require- set stricter requirements for education ments to personnel who provide refi- and testing for loan officers at regunancings. One member encouraged the lated depository institutions. Á

171 Federal Reserve Banks The Federal Reserve Banks provide imputed costs and imputed profit are “payment services” to depository and collectively referred to as the privatecertain other institutions, distribute the sector adjustment factor (PSAF).2 Over nation’s currency and coin to deposi- the past 10 years, Reserve Banks have tory institutions, and serve as fiscal recovered 97.8 percent of their priced agents and depositories for the U.S services costs, including the PSAF (see government and other entities. The table, next page).3 Reserve Banks also contribute to setting national monetary policy and supervision and regulation of banks and other financial entities operating in the linked to the pro forma financial statements at theendofthischapter. United States (discussed in the preced- 2. In addition to income taxes and the return ing chapters of this report). onequity,thePSAFincludesthreeotherimputed costs:interestondebt,salestaxes,andanassessment for deposit insurance by the Federal De- Developments in Federal posit Insurance Corporation (FDIC). Board of Reserve Priced Services Governors assets and costs that are related to priced services are also allocated to priced ser- Federal Reserve Banks provide a range vices;intheproformafinancialstatementsatthe of payment and related services to endofthischapter,Boardassetsarepartoflongdepository institutions, including col- term assets, and Board expenses are included in operatingexpenses. lecting checks, operating an automated On March, 31, 2009, the Board of Governors clearinghouse (ACH) service, transferrequested public comment on a proposal to rering funds and securities, and providing place the current correspondent bank model a multilateral settlement service. The underlying the PSAF calculation with a model Reserve Banks charge fees for provid- based on elements derived from publicly traded firms more broadly. The Board is currently anaing these “priced services.” lyzing further the proposed publicly traded firm The Monetary Control Act of 1980 model and an alternate model based on a peer requires that the Federal Reserve estab- group of publicly traded payments processors lish fees for priced services provided to thatwassuggestedbyseveralcommenters. 3. Effective December 31, 2006, the Reserve depository institutions so as to recover, Banks implemented the Financial Accounting over the long run, all direct and indi- Standards Board’s Statement of Financial rect costs actually incurred as well as AccountingStandards(SFAS)No.158,Employthe imputed costs that would have been ers’AccountingforDefinedBenefitPensionand incurred—including financing costs, Other Postretirement Plans [Accounting StandardsCodification(ASC)Topic715(ASC715), taxes, and certain other expenses—and Compensation-Retirement Benefits], which has the return on equity (profit) that would resultedintherecognitionofa$478.3millionrehave been earned if a private business duction in equity related to the priced services’ firm had provided the services.1 The benefitplansthrough2009.Includingthisreductioninequity,whichrepresentsadeclineineconomicvalue,resultsincostrecoveryof93.0percent for the 10-year period. For details on how 1. Financial data reported throughout this implementing ASC 715 affected the pro forma chapter—includingrevenue,otherincome,costs, financialstatements,refertonotes3and5atthe income before taxes, and net income—can be endofthischapter.

172 96th Annual Report, 2009 PricedServicesCostRecovery,2000−2009 Millionsofdollarsexceptasnoted Operating Revenuefrom Targetedreturn Total Costrecovery Year services1 expensesand onequity3 costs (percent)4,5 imputedcosts2 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 2009....................... 675.4 707.5 19.9 727.5 92.8 2000–2009................. 9,185.2 8,537.2 859.0 9,396.3 97.8 Note: Hereandelsewhereinthischapter,componentsmaynotsumtototalsoryieldpercentagesshownbecause ofrounding. 1. Forthe10-yearperiod,includesrevenuefromservicesof$8,600.9millionandotherincomeandexpense(net) of$584.3million. 2. Forthe10-yearperiod,includesoperatingexpensesof$8,113.8million,imputedcostsof$140.8million,and imputedincometaxesof$282.5million. 3. For2009,inlightofuncertaintyaboutthelong-termeffectthatthepaymentofinterestonreservebalancesheld bydepositoryinstitutionsattheReserveBankswouldhaveonthelevelofclearingbalances,thePSAFhasbeenadjustedtoreflecttheactualclearingbalancelevelsmaintainedthroughout2009. 4. Revenuefromservicesdividedbytotalcosts. 5. Forthe10-yearperiod,costrecoveryis93.0percent,includingthenetreductioninequityrelatedtoASC715 reportedbythepricedservicesin2009. In 2009, Reserve Banks recovered The Reserve Banks are engaged in a 92.8 percent of total priced services number of technology initiatives that costs of $727.5 million, including the will modernize their priced services PSAF.4 Revenue from priced services processing platforms over the next sevamounted to $662.7 million, other eral years. The Banks are developing income was $12.7 million, and costs and planning to implement a new endwere $707.5 million, resulting in a net to-end electronic check-processing sysloss to priced services of $32.1 mil- tem to improve the efficiency and relialion.5 During the year, the Banks raised bility of their current check-processing prices, reduced operating costs, and ac- operations. They also continued efforts celerated the consolidation of their to migrate the FedACH and Fedwire check-processing infrastructure to Funds services off a mainframe system improve their overall cost recovery. and to a distributed environment. These efforts, however, were not sufficient to offset reduced net income on Commercial Check-Collection clearing balances and increased pension Service costs. In 2009, Reserve Banks recovered 92.8 4. Totalcostisthesumofoperatingexpenses, percent of the total costs of their comimputedcosts(interestondebt,interestonfloat, mercial check-collection service, sales taxes, and the FDIC assessment), imputed including the PSAF. The Banks’ operincometaxes,andthetargetedreturnonequity. ating expenses and imputed costs to- 5. Other income is revenue from investment taled $514.6 million. Revenue from opof clearing balances net of earnings credits, an amounttermednetincomeonclearingbalances. erations totaled $481.7 million and

Federal Reserve Banks 173 ActivityinFederalReservePricedServices,2007–2009 Thousandsofitems Percentchange Service 2009 2008 2007 2008to2009 2007to2008 Commercialcheck................. 8,584,929 9,545,424 10,001,289 −10.1 –4.6 CommercialACH.................. 9,966,260 10,040,388 9,363,429 −0.7 7.2 Fedwirefundstransfer.............. 127,357 134,220 137,555 –5.1 –2.4 Nationalsettlement................. 464 469 505 –1.1 7.2 Fedwiresecuritiestransfer.......... 10,519 11,717 10,110 –10.2 15.9 Note: Activityincommercialcheckisthetotalnumberofcommercialcheckscollected,includingprocessedand fine-sortitems;incommercialACH,thetotalnumberofcommercialitemsprocessed;inFedwirefundstransferand securitiestransfer,thenumberoftransactionsoriginatedonlineandoffline;andinnationalsettlement,thenumberof settlemententriesprocessed. other income totaled $9.2 million, The Reserve Banks continued the resulting in a net loss of $23.7 million. consolidation of their check-processing Check-service fee revenue in 2009 offices in 2009. Because of the rapid decreased $123.5 million from 2008.6 adoption of electronic check process- Reserve Banks handled 8.6 billion ing, the Banks were able to reduce checks in 2009, a decrease of 10.1 per- their check-processing infrastructure cent from 2008 (see table above). The more quickly than originally expected. decline in Reserve Bank check volume By year-end 2009, the Banks were prohas been influenced by nationwide cessing paper checks at two sites natrends away from the use of checks and tionwide, down from 13 at year-end toward greater use of electronic pay- 2008. This reduction is part of the ment methods.7 By year-end 2009, Reserve Banks’ multiyear initiative, 98.6 percent of Reserve Bank check begun in 2003, to reduce the number of deposits and 94.3 percent of Reserve offices at which Banks process checks Bank check presentments were being to meet their long-run cost-recovery remade through Check 21 products.8 quirement under the Monetary Control Act of 1980. 6. In 2008, the Reserve Banks discontinued Commercial Automated thetransportationofcommercialchecksbetween their check-processing offices. As a result, in Clearinghouse Services 2009, there were no costs or imputed revenues associatedwiththetransportationofcommercial In 2009, the Reserve Banks recovered checks between Reserve Bank check-processing 93.4 percent of the total costs of their offices. commercialACHservices,includingthe 7. The Federal Reserve System’s retail pay- PSAF.ReserveBankoperatingexpenses ments research suggests that the number of andimputedcoststotaled$98.5million. checks written in the United States has been declining since the mid-1990s. For details, see RevenuefromACHoperationstotaled Federal Reserve System, “The 2007 Federal $92.9 million and other income totaled Reserve Payments Study: Noncash Payment $1.8million,resultinginanetlossof$3.8 TrendsintheUnitedStates,2003-2006”(December2007),www.frbservices.org/files/communications/pdf/research/2007_payments_study.pdf. 8. TheReserveBanksalsooffernon-Check21 percent of Reserve Banks’ deposit volume was electronic-presentment products. In 2009, 1.3 presentedtopayingbanksusingtheseproducts.

174 96th Annual Report, 2009 Check 21 — Five Years Later TheCheckClearingforthe21stCentury Check 21 addressed these issues indi- Act(Check21),whichbecameeffectiveon rectly by creating a new negotiable October28,2004,promisedamoderniza- paper instrument, called a substitute tion of the nation’s largely paper-based check, that when properly prepared check-clearing system. In the five years would be the legal equivalent of an since,considerableprogresshasbeenmade original check. The law required banks toward achieving the act’s purpose of that were either unable or unwilling to improvingtheoverallefficiencyofthena- accept checks electronically to accept tion’spaymentssystembyfosteringinno- substitute checks in place of the origivationinthecheck-collectionsystem. nals. This statutory change, in turn, fa- When Check 21 was enacted, the na- cilitated “check truncation,” whereby tion’s retail payments system was al- banks could stop forwarding original ready undergoing a transformation checksforcollectionorreturnandapply driven by changes in technology, rules, check-imaging technology in a more roand consumer and business preferences. bust fashion to achieve the efficiencies Federal Reserve research had revealed and cost savings associated with electhat, in 2003, the number of electronic troniccheckclearing. payments had surpassed the number of The Federal Reserve Banks began check payments for the first time. How- offering Check 21 services as soon as ever, the modernization of the check- the law became effective. Initially, the collection system was stymied by laws move toward electronic check clearing that let banks demand that original unfolded gradually as many banks tried checks be presented for payment. The to determine how best to apply the banking industry’s extensive reliance on provisions of the new law. The use of the physical movement of checks be- the Reserve Banks’ Check 21 services came apparent after the terrorist attacks accelerated after banks developed their of September 11, 2001, when air traffic business strategies and made the came to a standstill resulting in delays investments necessary to support the intheclearingofmanychecks. exchange of check images. Banks million. The Reserve Banks processed items are found, it generates a report 10.0billioncommercialACHtransactions, displaying all IAT items for a given adecreaseof0.7percentfrom2008.ACH business day. volumes were down slightly because of lowergrowthratesinindustryACHvol- Fedwire Funds and National ume,includingchecksconvertedatlock- Settlement Services boxlocations. A new industry ACH format related In 2009, Reserve Banks recovered 92.1 to cross-border transactions, the Inter- percent of the costs of their Fedwire national ACH Transaction (IAT) for- Funds and National Settlement Sermat, was introduced in 2009. To help vices, including the PSAF. Reserve depository institutions meet their com- Bank operating expenses and imputed pliance obligations for international costs totaled $69.3 million in 2009. ACH transactions, the Reserve Banks Revenue from these operations totaled began offering an IAT report service. $64.4 million, and other income This service searches incoming files for amounted to $1.3 million, resulting in a a given processing day and, if any IAT net loss of $3.6 million.

Federal Reserve Banks 175 Check21—continued initially focused on collecting checks The rapid decline in the use of paper electronically rather than receiving their checks has allowed the Reserve Banks check presentments electronically. As a to reduce their processing infrastructure result of the disparity in adoption rates for paper checks more quickly than on the collection and presentment sides, originally expected. In 2003, the Banks Federal Reserve Bank substitute check processed checks at 45 offices nationvolume peaked in October 2007, at 13.9 wide; by early 2010, only one Reserve million per day, which represented 34 Bank office processed paper checks. percent of Reserve Bank presentment This infrastructure consolidation has volume. enabled the Banks to significantly re- The extensive use of costly substitute duce check-processing costs, including checks by the Reserve Banks was a the costs to physically transport paper transitional phenomenon, however, as an checks. increasing number of banks began ac- The transformation of the nation’s cepting check presentments electroni- check-clearing system has also benefited cally. In December 2009, almost 99 per- retail and institutional bank customers. cent of Reserve Bank check deposits The Reserve Banks’ consolidation of were electronic while 94 percent of check-processing sites has resulted in check presentments were electronic. the reclassification of checks from non- The re-engineering of the process by local to local, reducing the maximum which banks return checks has lagged permissible hold periods for deposited that of the forward check collection. checks under Regulation CC. Beginning More recently, however, the use of in 2010, nonlocal checks, as a class, no Reserve Bank electronic check return longer exist. Some banks have also productshasbeguntoaccelerateand,by extended deposit cutoff hours at December 2009, 91 percent of check re- branches and ATMs, and have begun to turns were deposited electronically and offertheircustomersremotedepositcapalmost 51 percent were delivered elec- ture services, which allow checks to be tronically. depositedelectronicallyforcollection. Fedwire Funds Service bank funds transfers used to fund or settle underlying customer payment ob- The Fedwire Funds Service allows parligations. This message format provides ticipants to use their balances at the space to include identifying infor- Reserve Banks to transfer funds to mation about originators and beneficiaother participants. In 2009, the number ries of transfers, improving payment of Fedwire funds transfers originated transparency and assisting banks in risk by depository institutions decreased 5.1 management and transparency. percent from 2008, to approximately 127 million. The average daily value of Fedwire funds transfers in 2009 was National Settlement Service $2.5 trillion. In 2009, the Reserve Banks imple- The National Settlement Service is a mented an enhanced Fedwire Funds multilateral settlement system that Service message format to include allows participants in private-sector additional information about cover pay- clearing arrangements to settle transacments. Cover payments are bank-to- tions using Federal Reserve balances.

176 96th Annual Report, 2009 In 2009, the service processed settle- compared with credit float of $1,193.4 ment files for 41 local and national million in 2008.10 private-sector arrangements. The Reserve Banks processed slightly more Developments in than 10,500 files that contained almost Currency and Coin 464,000 settlement entries for these arrangements in 2009. The Federal Reserve Board issues the nation’s currency (in the form of Fed- Fedwire Securities Service eral Reserve notes), and the Federal Reserve Banks distribute currency and In 2009, the Reserve Banks recovered coin through depository institutions. 93.8 percent of the total costs of their The Reserve Banks also receive cur- Fedwire Securities Service, including rency and coin from circulation the PSAF. The Banks’ operating ex- through these institutions. penses and imputed costs for providing The Reserve Banks received 35.2 this service totaled $25.1 million in billion Federal Reserve notes from cir- 2009. Revenue from the service totaled culation in 2009, a 4.1 percent decrease $23.7 million, and other income totaled from 2008, and made payments of 35.8 $0.5 million, resulting in a net loss of billion notes into circulation in 2009, a $0.9 million. 5.1 percent decrease from 2008. The Fedwire Securities Service Although Reserve Bank payments into allows participants to transfer electroni- circulation decreased to pre-financialcally to other participants in the service crisis levels, receipts from circulation certain securities issued by the U.S. decreased to a greater extent, likely be- Treasury, federal government agencies, cause consumers typically hold more government-sponsored enterprises, and currency in times of economic uncercertain international organizations.9 In tainty. The value of currency in circula- 2009, the number of non-Treasury se- tion increased 4.1 percent in 2009, to curities transfers processed via the ser- $887.8 billion, following a significant vice decreased 10.2 percent from 2008, increase in 2008. The Banks received to approximately 10.5 million. 65.3 billion coins from circulation in 2009, a 1.4 percent increase from 2008, and they made payments of 68.9 billion Float coins into circulation, a 4.7 percent decrease from 2008. The Federal Reserve had daily average Board staff worked with Treasury, credit float of $1,976.4 million in 2009, the U.S. Secret Service, and the Reserve Banks’ Currency Technology Office to develop a more-secure design for the $100 Federal Reserve note. The 9. Theexpenses,revenues,volumes,andfeesreportedherearefortransfersofsecuritiesissuedby federalgovernmentagencies,government-sponsored enterprises,andcertaininternationalorganizations. 10. Credit float occurs when the Reserve ReserveBanksprovideTreasurysecuritiesservices Banks present items for collection to the paying intheirroleastheU.S.Treasury’sfiscalagent.These bank prior to providing credit to the depositing servicesarenotconsideredpricedservices.Forde- bank(debitfloatoccurswhentheReserveBanks tails,seethe“TreasurySecuritiesService”section credit the depositing bank prior to presenting laterinthischapter. itemsforcollectiontothepayingbank).

Federal Reserve Banks 177 new design was unveiled on April 21, able expenses amounted to $450.3 mil- 2010. lion, compared with $461.1 million in The Reserve Banks continued imple- 2008 (see table, next page). Support for menting a program to extend the useful Treasury programs accounted for 93.8 life of the System’s BPS 3000 high- percent of the cost, and support for speed currency-processing machines. other entities accounted for 6.2 percent. The program will replace the operating The Reserve Banks actively monitor systems of the current equipment, program expenses, and they strive to which will help improve the Reserve contain these costs while providing the Banks’ processing efficiency. By year- resources necessary to accomplish proend 2009, the Banks had upgraded 90 gram objectives. of 131 machines. They expect to complete the program in 2010. Treasury Securities Services Reserve Banks are in the early stages of developing a new cash auto- The Reserve Banks work closely with mation platform that will facilitate con- Treasury’s Bureau of the Public Debt trol of the Banks’ cash operations and in support of the borrowing needs of improve their efficiency, provide an ex- the federal government. The Banks pansive and responsive management in- auction, issue, maintain, and redeem formation reporting system with supe- securities; provide customer service; rior and flexible reporting tools, and operate the automated systems supfacilitate business continuity and con- porting paper U.S. savings bonds and tingency planning, and enhance the book-entry marketable Treasury securisupport provided to Reserve Bank cus- ties (bills, notes, and bonds). Treasury tomers and business partners. In 2009, securities services consist of retail sethe Banks refined the design for the curities programs (which primarily new system. serve individual investors) and wholesale securities programs (which serve institutional customers). Developments in Fiscal Agency and Government Depository Services Retail Securities Programs As fiscal agents and depositories for The Reserve Banks continued to supthe federal government, the Federal port Treasury’s efforts to improve the Reserve Banks auction Treasury securi- quality and efficiency of securities serties, process electronic and check pay- vices provided to retail customers. The ments for Treasury, collect funds owed Banks process paper U.S. savings to the federal government, maintain bonds transactions and book-entry mar- Treasury’s bank account, and invest ketable Treasury securities transactions Treasury balances. The Reserve Banks for securities held in Legacy Treasury also provide certain fiscal agency and Direct, Treasury’s first application dedepository services to other entities; signed to support retail customers who these services are primarily related to purchase marketable Treasury securibook-entry securities. ties. Reserve Bank operating expenses Treasury and other entities fully re- for the retail securities programs were imbursed the Reserve Banks for the $73.7 million in 2009, compared with costs of providing fiscal agency and $72.4 million in 2008. Although the depository services. In 2009, reimburs- Banks’ staffing levels declined slightly

178 96th Annual Report, 2009 ExpensesoftheFederalReserveBanksforFiscalAgencyandDepositoryServices, 2007–2009 Thousandsofdollars Agencyandservice 2009 2008 2007 DepartmentoftheTreasury BureauofthePublicDebt Treasuryretailsecurities................................ 73,678.5 72,373.7 74,149.2 Treasurysecuritiessafekeepingandtransfer............. 8,814.6 9,304.7 8,687.7 Treasuryauction....................................... 30,215.8 37,071.6 41,372.0 Computerinfrastructuredevelopmentandsupport........ 2,333.2 4,463.7 3,558.7 Otherservices.......................................... 1,375.0 909.9 724.5 Total.............................................. 116,417.0 124,123.7 128,492.1 FinancialManagementService Paymentservices ...................................... 104,354.8 108,218.5 105,326.8 Collectionservices..................................... 37,967.5 49,179.7 50,738.1 Cash-managementservices.............................. 49,045.7 48,676.4 44,742.7 Computerinfrastructuredevelopmentandsupport........ 66,958.5 65,058.6 70,999.9 Otherservices.......................................... 7,392.9 7,577.4 7,245.7 Total.............................................. 265,719.3 278,710.6 279,053.2 OtherTreasury Total.............................................. 40,390.3 27,017.2 19,609.6 Total,Treasury......................................... 422,526.6 429,851.5 427,154.9 OtherFiscalPrincipals Total,otheragencies................................... 27,757.9 31,292.3 31,031.1 Totalreimbursableexpenses............................ 450,284.5 461,143.9 458,186.0 Note: Numbersinboldreflectrestatementsduetorecategorization. in response to lower activity levels, the reinvestments of maturing securities, associated costs savings were offset by fewer purchases of new securities, and other cost increases. higher dollar values of outgoing securi- During the year, the Reserve Banks ties transfers. began working with the Bureau of the The Reserve Banks also printed and Public Debt on an initiative that will mailed more than 20 million savings improvethequality,consistency,andef- bonds in 2009, an 11.4 percent ficiencyofsupportprovidedtoretailse- decrease from 2008. The decline in curities customers. Treasury’s Retail Legacy Treasury Direct holdings and in E-Servicesinitiativeaimstolowercosts the number of paper savings bonds whileprovidingahigh-qualitycustomer printed and mailed aligns with the Buserviceexperience,providingmoreoppor- reau of the Public Debt’s strategic goal tunities for customer self-service, and to transition retail customers from these eliminatingduplicativeprocesses. legacy products to Treasury’s web- Consistent with the trend from previ- based Treasury Direct application, ous years, both the Legacy Treasury which supports investments in book- Direct and paper savings bonds pro- entry Treasury securities and electronic grams experienced volume declines in savings bonds. 2009. The Legacy Treasury Direct system held $49.9 billion (par value) of Wholesale Securities Programs Treasury securities as of December 31, a 21.2 percent decrease from 2008. The Reserve Banks also support whole- This decrease is attributable to fewer sale securities programs through the

Federal Reserve Banks 179 sale, issuance, safekeeping, and transfer compared with $108.2 million in 2008. of marketable Treasury securities. In The decline in costs is primarily attribsupport of Treasury’s strategic goal to utable to the staff reductions in the finance government operations effec- Banks’ Treasury check operations. tively at the lowest overall cost, the In 2009, the Reserve Banks pro- Banks worked to contain costs in the cessed 1.2 billion ACH payments for auction and book-entry securities Treasury, an increase of 5.4 percent services. Reserve Bank operating ex- from 2008. The Banks also processed penses in 2009 in support of Treasury 202.2 million Treasury checks, a securities auctions were $30.2 million, decrease of 25.0 percent from 2008. compared with $37.1 million in 2008. The decrease in Treasury checks is The decline in costs is attributable to roughly equivalent to the increase exlower staffing levels resulting from the perienced in 2008 due to the economic implementation of the new Treasury stimulus payments issued that year. auction application in April 2008. In The increase in the number of ACH 2009, the Banks conducted 283 Trea- payments (relative to check payments) sury securities auctions, compared with is consistent with Treasury’s long- 263 in 2008. The increase in the num- standing goal to make all payments ber of auctions was attributable in part electronically. Similar to the experience to the reintroduction of the seven-year of the commercial check-collection ser- Treasury note, which is auctioned vice discussed earlier in this chapter, monthly. the proportion of Treasury checks pre- In addition, operating expenses asso- sented to the Reserve Banks for prociated with securities safekeeping and cessing in image form continued to transfer activities were $8.8 million in increase as the number of depository 2009, compared with $9.3 million in institutions depositing checks in image 2008. The cost decline is attributable to form with the Banks increased. By the lower volume of Treasury security year-end 2009, 99.1 percent of Treatransfers during the year, due in part to sury checks presented to the Banks consolidation of some Treasury securi- were presented in image form. The ties dealers. In 2009, the number of shift in form from paper to images has Fedwire Treasury securities transfers increased the efficiency of processing decreased 22.0 percent from 2008, to Treasury checks, and resulted in lower approximately 10.0 million. staffing levels at the Banks and lower costs to the Treasury. The Reserve Banks support Trea- Payments Services sury’s ongoing effort to convert paper The Reserve Banks work closely with checks to electronic payments through Treasury’s Financial Management Ser- support of the Go Direct initiative vice and other government agencies to (www.godirect.org), which focuses on process payments to individuals and converting check benefit payments to companies. The Banks process elec- direct deposit. In 2009, more than tronic and paper-based disbursements 692,000 check payments were consuch as Social Security and veterans’ verted to direct deposit, an increase of benefits, income tax refunds, and other 20.0 percent from the number of contypes of payments. Reserve Bank oper- versions in 2008. The Banks also operating expenses for payments-related ac- ate an international electronic payment tivity totaled $104.4 million in 2009, service that supports government bene-

180 96th Annual Report, 2009 fitandotherpaymentstomorethan150 tutions submitted $452.2 billion in tax countries. In 2009, the Banks processed payments through FR-ETA. nearly$24.0billionininternationalpay- The Reserve Banks also process ments, compared with $22.5 billion in paper federal tax deposit coupons sub- 2008. During the year, the Banks mitted by depository institutions. The improvedoperationalefficiencybyreduc- Banks processed 24.6 million coupons ingthenumberofserviceprovidersused with a dollar value of $42.1 billion in tomakeinternationalpayments. 2009, compared with 29.5 million coupons with a dollar value of $54.9 billion in 2008. There are expected to be Collection Services further declines in paper tax coupon The Reserve Banks also work closely payments in the coming years as the with Treasury’s Financial Management federal government continues to pro- Service to collect funds owed the fed- mote participation in electronic tax eral government—such as federal payment mechanisms. taxes—and fees for its goods and ser- In support of the collection of funds vices. to pay for goods and services provided Reserve Bank operating expenses re- by the federal government, the Reserve lated to collections services totaled Banks operate Pay.gov, a Treasury pro- $38.0 million in 2009, compared with gram that allows the public to use the $49.2 million in 2008. The decline in Internet to authorize and initiate paycosts is due to the transition of two ments to federal agencies. During the collection programs from the Reserve year, the Pay.gov program was Banks to a commercial bank at the end expanded to include several new agenof 2008. cies. In 2009, Pay.gov processed trans- Throughout 2009, the Reserve Banks actions worth $64.9 billion, compared and Treasury continued work on the with $44.1 billion in 2008. Collections and Cash Management The Reserve Banks also operate soft- Modernization (CCMM) initiative, a ware that supports the settlement of multiyear Treasury effort to simplify, transactions from Pay.gov and two modernize, and improve the services, other Treasury collection programs. In systems, and processes supporting 2009, the Banks processed 62.9 million Treasury’s collections and cash man- transactions valued at $99.5 billion, agement programs. The Banks actively compared with 46.4 million transacsupport various aspects of the CCMM tions valued at $74.9 billion in 2008. initiative, including development of As part of the CCMM initiative, the new applications to support both col- Banks are developing a more broadly lection of funds and monitoring of col- based settlement framework that will lateral pledged to government pro- support several additional collection grams. applications. It is scheduled to replace To support the collection of federal the current system in 2010. taxes, the Reserve Banks operate sev- The Reserve Banks also support the eral systems to process both electronic government’s centralized delinquent and paper tax payments. For example, debt-collection program. Specifically, the Banks operate the Federal Elec- the Banks developed software that fatronic Tax Application (FR-ETA), a cilitates the collection of delinquent same-day electronic federal tax pay- debts owed to federal agencies and ment system. In 2009, depository insti- states by matching federal payments

Federal Reserve Banks 181 against delinquent debts, including which improves the timeliness of past-due child support payments owed accounting data to support better finanto custodial parents. The Banks helped cial analysis and decisionmaking. Treasury collect more than $4.8 billion To support Treasury’s investment through this program in fiscal year programs, the Reserve Banks continued 2009. to maintain several software applications. Treasury investments are fully collateralized, and the Banks monitor Treasury Cash-Management the collateral pledged to Treasury. The Services Banks also monitor collateral pledged Treasury maintains an operating cash to other Treasury programs, such as account at the Reserve Banks to sup- collateral pledged to secure public port the various transactions discussed funds held on deposit at financial instiin the preceding sections of this chap- tutions. In addition, as part of the ter, and it may instruct the Banks to CCMM initiative, the Banks began invest funds from its account in working with the Financial Manageinterest-bearing accounts with qualified ment Service to develop a new collatdepository institutions. eral application that will replace the The Reserve Banks provide legacy applications and provide support collateral-management and collateral- to other new cash-management applicamonitoring services for Treasury’s tions developed as part of the CCMM investment programs and other Trea- initiative. sury programs that have collateral requirements. Reserve Bank operating Computer Infrastructure and expenses related to these programs and Other Treasury Services other cash-management initiatives totaled $49.0 million in 2009, compared The Reserve Banks operate a webwith $48.7 million in 2008. The slight application infrastructure and provide cost increase is due to additional work other technology-related services to associated with application develop- Treasury. The infrastructure supports ment initiatives supporting Treasury’s multiple Treasury applications, prima- CCMM initiative. rily for the Financial Management During 2009, the Reserve Banks Service. continued to support Treasury’s effort Reserve Bank operating expenses for to modernize its financial management the infrastructure and other technologyprocesses, with a focus on improving related services—the costs of which are centralized government accounting and shared by the Financial Management reporting functions. The Banks worked Service and the Bureau of the Public with Treasury to identify potential, Debt—were $67.0 million in 2009, long-term efficiency improvements in compared with $65.1 in 2008. The the way the Banks account for govern- web-application infrastructure accounts ment payments and collections. The for the majority of the costs, and the Banks also collaborated with the Finan- Banks worked closely with Treasury to cial Management Service on several contain these costs, even as the number ongoing software development efforts. of applications supported by the infra- For example, the Banks support Trea- structure continued to increase. sury’s Governmentwide Accounting Although the Reserve Banks primaand Reporting Modernization initiative, rily work with the Financial Manage-

182 96th Annual Report, 2009 ment Service and Bureau of the Public Developments in Use of Federal Debt on fiscal programs, the Banks Reserve Intraday Credit also support other fiscal programs, such The Board’s Payment System Risk as Treasury’s debt-management pro- (PSR) policy governs the use of Fedgram and its exchange stabilization eral Reserve Bank intraday credit, also fund. Reserve Bank operating expenses known as daylight overdrafts. for these programs were $40.4 million A daylight overdraft occurs when an in 2009, compared with $27.0 million institution’s account activity creates a in 2008. The cost increase is primarily negative balance in the institution’s due to the development and imple- Federal Reserve account at any time in mentation of a debt-management applithe operating day.11 Daylight overdrafts cation. enable institutions to send payments more freely throughout the day than if Services Provided to Other Entities institutions were limited strictly by their available funds balance. In 2009, When permitted by federal statute or institutions held on average about $900 when required by the Secretary of the billion in their Federal Reserve Treasury, the Reserve Banks provide accounts overnight, but the daily value fiscal agency and depository services of funds transferred over just the Fedto other domestic and international eral Reserve’s funds transfer system entities. was about $2.5 trillion. Book-entry securities issuance and In December 2008, the Board apmaintenance activities account for a proved revisions to its PSR policy that significant amount of the work perwill become effective in late 2010 or formed for other entities, with the maearly 2011.12 The revisions will, in jority performed for the Federal Home part, allow eligible institutions to col- Loan Mortgage Association, the Fedlateralize daylight overdrafts and pay eral National Mortgage Association, no fee for these overdrafts. The and the Government National Mortgage Reserve Banks have begun work to Association. modify the systems they use to record The Reserve Banks also process paid collateral pledges and to track daylight postal money orders for the United overdrafts. In March 2009, the Board States Postal Service, activity that implemented an interim policy change accounts for roughly a quarter of the for eligible foreign banking organiza- Banks’ costs for services provided to other non-Treasury entities. Reserve Bank operating expenses for services 11. When an institution ends a day with a provided to other entities were $27.8 negative balance, the institution incurs an overmillion in 2009, compared with $31.3 night overdraft. The Federal Reserve strongly million in 2008. The decline in costs is discourages overnight overdrafts by imposing due in part to staff reductions in the penaltiesandtakingadministrativeactionagainst institutions that incur them repeatedly. Institu- Banks’ postal money orders processing tionsthatrequireovernightcreditareencouraged operations. Like Treasury checks, toapproachtheFederalReserve’sdiscountwinpostal money orders are processed pri- dowtoborrowfundsasnecessary. marily in image form now, resulting in 12. DetailsabouttherevisionstothePSRpolicy are available at www.federalreserve.gov/ operational improvements and lower newsevents/press/other/20081219a.htm, and the staffing levels at the Banks and lower currentpolicyisavailableatwww.federalreserve. costs to the U.S. Postal Service. gov/paymentsystems/psr_policy.htm.

Federal Reserve Banks 183 tions (FBOs).13 The interim policy light overdrafts decreased to about $55 allows highly rated FBOs to use a billion in 2009, a decrease of about 67 streamlined procedure to apply for a percent from 2008.15 Daylight overdraft max cap and allows these institutions fees paid by institutions also dropped to use 100 percent of their capital mea- sharply as daylight overdraft levels sure in calculating the deductible decreased. In 2008, institutions paid amount for daylight overdraft pricing. about $52 million in daylight overdraft To remain eligible for the higher de- fees but only $4 million in 2009. ductible value under the new policy, an The usage of daylight overdrafts FBO must have collateral pledged to its spiked amid the market turmoil near Reserve Bank equal to or greater than the end of 2008, but dropped sharply the amount of its deductible. Under the as various liquidity programs initiated previous policy, FBOs were eligible to by the Federal Reserve took effect (see use up to 35 percent of their capital the chart, next page). During this measure in the calculation of the de- period, the Federal Reserve also began ductible and net debit cap. FBOs intro- paying interest on balances held at the duce greater risks than do U.S.- Reserve Banks, increased its lending chartered institutions in terms of the under the Term Auction Facility, and timeliness and scope of available su- began purchasing governmentpervisory information and other super- sponsored enterprise mortgage-backed visory issues that may arise because of securities. These measures tended to the cross-border nature of the FBO’s increase balances institutions held at business (for example, application of the Banks, which decreased the dedifferent legal regimes). mand for intraday credit. In 2008, reserve balances averaged $180 billion and spiked about 400 percent, to an Recent Trends in average of about $900 billion in 2009. Daylight Overdraft Usage Furthermore, in 2009 the rate paid on During the periods of extreme market reserve balances remained, on average, stress in 2008, the level of daylight about nine basis points more than the overdrafts spiked and then dropped to effective federal funds rate, which is historical lows as balances institutions the rate at which depository institutions held at the Reserve Banks spiked to lend balances to each other overnight. historically high levels. Both daylight This spread gives institutions incentive overdrafts and Federal Reserve account to hold higher balances at the Federal balances have remained at these his- Reserve, and it has likely contributed toric levels throughout 2009. The average level of average daylight overdrafts in 2009 was about $10 billion, or about 84 percent lower than the average 2008 eachminuteoftheFedwireoperatingday(9p.m. level.14 The average level of peak day- to6:30p.m.ETor21.5hours).Thissumisthen divided by the number of minutes in the day (1,291 minutes) to arrive at the average overdraft. 13. Details about the interim changes are 15. Peak overdrafts are calculated daily by available at www.federalreserve.gov/payment summingthenegativebalancesofallinstitutions systems/psr_policy.htm#streamproc. onaminute-by-minutebasisthroughouttheFed- 14. Averageoverdraftsarecalculateddailyby wire operating day (9 p.m. to 6:30 p.m. ET or summingallnegativebalancesincurredbyinsti- 21.5 hours). The most negative of these minutetutions across the Federal Reserve System for by-minutebalancesisthepeakoverdraft.

184 96th Annual Report, 2009 AggregateDaylightOverdrafts,2008−2009 to very low daylight overdraft usage services through dedicated connections. throughout the System. A large majority of the value transferred through the Banks’ financial services flow through FedLine Direct con- Electronic Access to nections, of which there were 256 at Reserve Bank Services year-end 2009, 20 fewer than a year The Reserve Banks provide several earlier. options to enable customers to access Like FedLine Direct, FedLine Comthe Banks’ financial services informa- mand enables computer-to-computer tion and payment services electroni- access. It provides an unattended, cally. Most depository institutions that batch-file solution to certain services at directly access the Banks’ Fedwire a cost lower than that for FedLine Funds, Fedwire Securities, and Direct. There were 39 FedLine Com- FedACH services do so using FedLine mand connections at year-end 2009, 22 Advantage connections, which provide more than a year earlier. web-based access. There were 5,673 Many institutions access Reserve FedLine Advantage connections at Bank information services and perform year-end 2009, 10 fewer than at year- limited transaction services through end 2008. FedLine Web. There were 2,979 Fed- The Reserve Banks’ largest custom- Line Web connections at year-end ers use FedLine Direct connections, 2009, 43 more than a year earlier. which enable unattended computer-to- Also in 2009, the Federal Reserve computer access to the Banks’ financial Banks completed the Tier 1 Data De-

Federal Reserve Banks 185 livery Service, a cross-business file In 2009, the Reserve Banks approved transfer utility for nonpayment services. the following initiatives: This service replaces the BulkData service previously used to transfer low- • the consolidation of all Reserve risk files between the Federal Reserve Bank helpdesk functions into a na- Banks and customers. tional IT helpdesk • a strategy to consolidate and centrally manage Reserve Bank servers Information Technology and storage • a network strategy that adopts an en- In 2009, the Federal Reserve Banks terprise approach to the provision, continued to develop and implement operation, and management of hardtheir information technology (IT) stratware and software that provide data, egy by strengthening IT governance, video, and voice communication for managing information security risk, and the Reserve Banks. analyzing and coordinating the System’s IT investments. In 2009, Federal Reserve Informa- Examinations of the tion Technology (FRIT)16 continued to Federal Reserve Banks lead Reserve Bank efforts to transition to a more-robust information security Section 21 of the Federal Reserve Act model. FRIT initiated a transition to a requires the Board of Governors to new information security assurance order an examination of each Reserve program for infrastructure systems, Bank at least once a year. The Board based on guidance from the National performs its own reviews and engages Institute of Science and Technology.17 a public accounting firm. The public The new assurance program will allow accounting firm annually audits the the System to combined financial statements of the Reserve Banks (see the “Federal • have a defined and consistent view Reserve Banks Combined Financial of information security roles and re- Statements” in the “Audits of the Fedsponsibilities, eral Reserve System” section of this re- • enhance the security controls assess- port) as well as the annual financial ment testing program, and statements of each of the 12 Banks and • introduceanISriskmanagementfunc- the consolidated limited liability comtionatalllevelsoftheorganization. pany (LLC) entities. The Reserve Banks use the framework established by the Committee of Sponsoring Organizations of the Tread- 16. FRIT supplies national infrastructure and way Commission (COSO) to assess business line technology services to the Federal ReserveSystem,andprovidesthoughtleadership their internal controls over financial reregardingtheSysteminformationtechnologyar- porting, including the safeguarding of chitectureandbusinessuseoftechnology. assets. In 2009, the Reserve Banks 17. NIST is a non-regulatory federal agency further enhanced their processes under withintheU.S.DepartmentofCommercewhose missionistopromoteU.S.innovationandindus- the guidance of the COSO framework trial competitiveness by advancing measurement and the Sarbanes-Oxley Act of 2002. science, standards, and technology in ways that Within this framework, the manageenhance economic security and improve quality ment of each Reserve Bank annually oflife.

186 96th Annual Report, 2009 provides an assertion letter to its board the audits of the consolidated LLC enof directors that confirms adherence to tities that are associated with Federal COSO standards. Similarly, each LLC Reserve actions to address the financial annually provides an assertion letter to crisis and are consolidated in the the board of directors of the Federal financial statements of the New York Reserve Bank of New York (the New Reserve Bank.18 To ensure auditor in- York Reserve Bank). A public account- dependence, the Board requires that ing firm issues an attestation report to D&T be independent in all matters reeach Bank’s board of directors and to lating to the audit. Specifically, D&T the Board of Governors. may not perform services for the In 2009, the Board engaged Deloitte Reserve Banks or others that would & Touche LLP (D&T) to audit the in- place it in a position of auditing its dividual and combined financial state- own work, making management deciments of the Reserve Banks and those of the consolidated LLC entities. Fees 18. EachLLCreimbursestheBoardofGovernors for D&T’s services totaled $10 million. forthefeesrelatedtotheauditofitsfinancialstate- Of the total fees, $2 million were for mentsfromtheentity’savailablenetassets. Income,Expenses,andDistributionofNetEarnings oftheFederalReserveBanks,2009and2008 Millionsofdollars Item 2009 2008 Currentincome............................................................ 54,463 41,046 Currentexpenses........................................................... 5,979 4,870 Operatingexpenses1..................................................... 3,694 3,232 Interestpaidtodepositoryinstitutionsandearningscreditsgranted2........ 2,187 901 Interestexpenseonsecuritiessoldunderagreementstorepurchase......... 98 737 Currentnetincome......................................................... 48,484 36,175 Netadditionsto(deductionsfrom,−)currentnetincome..................... 4,820 3,341 ProfitonsalesofU.S.Treasurysecurities................................. 0 3,769 Profitonsalesoffederalagencyandgovernment-sponsoredenterprise mortgage-backedsecurities............................................. 879 ... Profitonforeignexchangetransactions................................... 172 1,266 Netincome(loss)fromconsolidatedlimitedliabilitycompanies............ 5,588 −1,693 Provisionsforloanrestructuring3......................................... −2,621 ... Otheradditions4......................................................... 802 ... AssessmentsbytheBoardofGovernors..................................... 888 853 ForBoardexpenditures................................................... 386 352 Forcurrencycosts....................................................... 502 500 Changeinfundedstatusofbenefitplans..................................... 1,007 –3,159 ComprehensiveincomebeforedistributionstoTreasury...................... 53,423 35,504 Dividendspaid............................................................. 1,428 1,190 Transferredtosurplusandchangeinaccumulatedother comprehensiveincome................................................... 4,564 2,626 DistributionstoU.S.Treasury5.............................................. 47,431 31,689 1. Includesanetperiodicpensionexpenseof$663millionin2009and$160millionin2008. 2. InOctober2008,theReserveBanksbegantopayinteresttodepositoryinstitutionsonqualifyingbalances. 3. RepresentstheeconomiceffectoftheinterestratereductionmadepursuanttotheApril17,2009,restructuring oftheAmericanInternationalGroup,Inc.loan. 4. Includesdividendsonpreferredsecurities,unrealizedgainonTermAsset-BackedSecuritiesLoanFacilityloans, andcompensationpaidbyCitigroup,Inc.andBankofAmericaCorporationfortheNewYorkReserveBank’sand RichmondReserveBank’scommitmentstoprovidefundingsupport,netofrelatedexpenses. 5. InterestonFederalReservenotes. ... Notapplicable.

Federal Reserve Banks 187 sions on behalf of the Reserve Banks, Expenses totaled $6,867 million or in any other way impairing its audit ($3,694 million in operating expenses, independence. In 2009, one Reserve $2,187millionininterestpaidtodeposi- Bank engaged D&T for nonaudit con- toryinstitutionsonreservebalancesand sulting services for which the fees were earningscreditsgrantedtodepositoryinimmaterial. stitutions,$98millionininterestexpense TheBoard’sannualexaminationofthe on securities sold under agreements to ReserveBanksincludesawiderangeof repurchase,$386millioninassessments off-site and on-site oversight activities, forBoardofGovernorsexpenditures,and conducted primarily by the Division of $502 million for currency costs).19 Net Reserve Bank Operations and Payment additionstoanddeductionsfromcurrent Systems.Divisionpersonnelmonitorthe netincomeshowedanetprofitof$4,820 activitiesofeachBankandLLConanon- million,whichconsistsof$879millionin goingbasisandconductacomprehensive realized gains on federal agency and on-sitereviewofeachBankatleastonce government-sponsored enterprise morteverythreeyears. gage-backed securities (GSE MBS), The reviews also include an assess- $5,588 million in net income associated ment of the internal audit function’s withconsolidatedLLCs,$802millionof conformance to International Standards otheradditions,and$172millioninunfor the Professional Practice of Inter- realizedgainsoninvestmentsdenominated nal Auditing, conformance to applica- in foreign currencies revalued to reflect ble policies and procedures, and the au- currentmarketexchangerates.Thesenet dit department’s efficiency. additionswereoffsetbya$2,621million To assess compliance with the poli- provision for loan restructuring.20 Divicies established by the Federal Re- dendspaidtomemberbanks,setat6perserve’s Federal Open Market Commit- centofpaid-incapitalbysection7(1)of tee (FOMC), the division also reviews the Federal Reserve Act, totaled $1,428 the accounts and holdings of the Sys- million,$238millionmorethanin2008; tem Open Market Account (SOMA) at thisreflectsanincreaseinthecapitaland the New York Reserve Bank and the surplus of member banks and a conseforeign currency operations conducted quentincreaseinthepaid-incapitalstock by that Reserve Bank. In addition, oftheReserveBanks. D&T audits the year-end schedule of DistributionstotheU.S.Treasuryinthe participated asset and liability accounts formofinterestonFederalReservenotes and the related schedule of participated totaled$47,431millionin2009,upfrom income accounts. The FOMC receives $31,689millionin2008;thedistributions the external audit reports and a report equal net income after the deduction of on the division’s examination. dividendspaidandtheamountnecessary 19. Effective October 9, 2008, the Reserve Income and Expenses Banks began paying explicit interest on reserve balances held by depository institutions at the The table on the previous page summa- Reserve Banks as authorized by the Emergency rizes the income, expenses, and distri- EconomicStabilizationActof2008. butions of net earnings of the Reserve 20. Represents the economic effect of the reduction of the interest note on loans made to Banks for 2009 and 2008. Income in AmericanInternationalGroup,Inc.priortoApril 2009 was $54,463 million, compared 17, 2009, as part of the loan restructuring that with $41,046 million in 2008. occurredonthatdate.

188 96th Annual Report, 2009 SOMAHoldingsandLoansoftheFederalReserveBanks,2009and2008 Millionsofdollarsexceptasnoted Averagedaily Current Average assets(+)/ income(+)/ interestrate Item liabilities(−) expense(−) (percent) 2009 2008 2009 2008 2009 2008 U.S.Treasurysecurities1......................... 659,483 548,254r 22,873 25,532r 3.47 4.66r Government-sponsoredenterprisedebtsecurities1.. 98,093 3,983r 2,048 99r 2.09 2.49r Federalagencyandgovernment-sponsored enterprisemortgage-backedsecurities2......... 473,855 ... 20,407 ... 4.31 ... Investmentsdenominatedinforeigncurrencies3... 24,898 24,220r 296 623 1.19 2.57 Centralbankliquidityswaps4..................... 177,688 161,778r 2,168 3,606 1.22 2.23r Securitiespurchasedunderagreementstoresell.... 3,616 86,227r 13 1,891 0.36 2.19r OtherSOMAassets5............................. 458 ... 1 ... 0.22 ... Securitiessoldunderagreementstorepurchase.... −67,837 −55,169r −98 −737 0.14 1.34 OtherSOMAliabilities6.......................... −182 ... ... ... ... ... TotalSOMAholdings........................... 1,370,072 769,293r 47,708 31,014 3.48 4.03r Primary,secondary,andseasonalcredit........... 40,405 32,254r 204 512 0.50 1.59r Termauctioncredit.............................. 291,487 174,025r 786 3,305 0.27 1.90r Totalloanstodepositoryinstitutions............ 332,892 206,279r 990 3,817 0.30 1.85r Asset-BackedCommercialPaperMoneyMarket MutualFundLiquidityFacility(AMLF)........ 7,653 21,101r 73 470 0.95 2.24 PrimaryDealerCreditFacility(PDCF)andother broker-dealercredit............................ 7,502 28,401r 36 511 0.48 1.80r CreditextendedtoAmericanInternationalGroup, Inc.(AIG),net7............................... 39,099 18,742r 3,996 2,367 10.22 12.63r TermAsset-BackedSecuritiesLoanFacility (TALF)8....................................... 23,228 ... 414 ... 1.78 ... Totalloanstoothers............................ 77,482 68,244r 4,519 3,348 5.83 4.91r Totalloans...................................... 409,374 274,523r 5,509 7,165 1.35 2.61r TotalSOMAholdingandloans................. 1,779,4461,043,816r 53,217 38,179 2.99 3.66r r Restatementsduetochangesinpreviouslyreporteddataandrecategorization. 1. Facevalue,netofunamortizedpremiumsanddiscounts. 2. Facevalueofthesecurities,whichistheremainingprincipalbalanceoftheunderlyingmortgages,netofunamortizedpremiumsanddiscounts.Doesnotincludeunsettledtransactions. 3. Includesaccruedinterest.Investmentsdenominatedinforeigncurrenciesarerevalueddailyatmarketexchange rates. 4. Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhenthe foreigncurrencyisreturnedtotheforeigncentralbank.Thisexchangerateequalsthemarketexchangerateused whentheforeigncurrencywasacquiredfromtheforeigncentralbank. 5. Cashandshort-terminvestmentsrelatedtothefederalagencyandgovernment-sponsoredenterprisemortgagebackedsecuritiesportfolio. 6. Relatedtothepurchasesoffederalagencyandgovernment-sponsoredenterprisemortgage-backedsecuritiesthat thesellerfailstodeliveronthesettlementdate. 7. Averagedailybalanceincludesoutstandingprincipalandcapitalizedinterestnetofunamortizeddeferredcommitmentfeesandallowanceforloanrestructuring,andexcludesundrawnamountsandcreditextendedtoconsolidatedlimitedliabilitycompanies. 8. Representstheremainingprincipalbalance.ExcludesamountnecessarytoadjustTALFloanstofairvalueat December31,whichisreportedin“Otherassets”ontheStatementofConditionoftheFederalReserveBanksin Table9Ainthe“StatisticalTables”sectionofthisreport. ... Notapplicable. to equate the Reserve Banks’ surplus to statement for each Reserve Bank for paid-incapital. the years 1914 through 2009; table 9 is In the “Statistical Tables” section of a statement of condition for each this report, table 10 details the income Reserve Bank, and table 13 gives the and expenses of each Reserve Bank for number and annual salaries of officers 2009, and table 11 shows a condensed and employees for each Reserve Bank.

Federal Reserve Banks 189 A detailed account of the assessments decreased to 3.47 percent and 2.09 perand expenditures of the Board of Gov- cent, respectively, in 2009. The average ernors appears in the “Board of Gover- rate for federal agency and GSE MBS nors Financial Statements” in the “Au- was 4.31 percent in 2009. The average dits of the Federal Reserve System” interest rates for securities purchased section of this report. under agreements to resell and securities sold under agreements to repur- SOMA Holdings and Loans chase were 0.36 percent and 0.14 percent, respectively, in 2009. Investments The Reserve Banks’ average net daily denominated in foreign currencies and holdings of securities and loans during central bank liquidity swaps earned 2009 amounted to $1,779,446 million, interest at average rates of 1.19 percent an increase of $735,630 million from and 1.22 percent, respectively, in 2009. 2008 (see table, previous page). SOMA Securities Holdings Lending The average daily holdings of Treasury In 2009, average daily primary, secondsecurities increased by $111,229 mil- ary, and seasonal credit extended lion, to an average daily amount of increased $8,151 million to $40,405 $659,483 million. The average daily million, and term auction credit holdings of GSE debt securities extended under the Term Auction Faincreased by $94,110 million, to an cility increased $117,462 million to average daily amount of $98,093 mil- $291,487 million. The average rate of lion. The average daily holdings of fed- interest earned on primary, secondary, eral agency and GSE MBS totaled and seasonal credit decreased to 0.50 $473,855 million. The increases are percent in 2009, from 1.59 percent in due to the purchase of Treasury securi- 2008, while the average interest rate on ties, GSE debt securities, and federal term auction credit decreased to 0.27 agency and GSE MBS through the percent in 2009, from 1.90 percent in large-scale asset purchase program. 2008. Average daily holdings of securities During 2008, the Federal Reserve espurchased under agreements to resell in tablished several lending facilities un- 2009 were $3,616 million, a decrease der authority of section 13(3) of the of $82,611 million from 2008, while Federal Reserve Act. These facilities the average daily balance of securities included the Primary Dealer Credit Fasold under agreements to repurchase cility (PDCF), the Asset-Backed Comwas $67,837 million, an increase of mercial Paper Money Market Mutual $12,668 million from 2008. Average Fund Liquidity Facility (AMLF), and daily holdings of investments denomi- the American International Group, Inc. nated in foreign securities in 2009 were (AIG) credit extension. Amounts $24,898 million, compared with funded by the Reserve Banks under $24,220 million in 2008. The average these programs are recorded as loans daily balance of central bank liquidity by the Banks. During 2009, the averswap drawings was $177,688 million in age daily holdings under the PDCF and 2009 and $161,778 million in 2008. AMLF were $7,502 million and $7,653 The average rates of interest earned million, respectively, with average rates on the Reserve Banks’ holdings of of interest earned of 0.48 percent and Treasury and GSE debt securities 0.95 percent, respectively. The average

190 96th Annual Report, 2009 KeyFinancialDataforConsolidatedLimitedLiabilityCompanies(LLCs),2009and2008 Millionsofdollars CommercialPaper Item Fundin ( g C F P a F c F il ) i 1 tyLLC T L A L L C F 1 MaidenLaneLLC1 2009 2008 2009 2009 2008 NetportfolioassetsoftheconsolidatedLLCsandthenet positionoftheNewYorkReserveBank(FRBNY)and subordinatedinterestholders Netportfolioassets2.................................... 14,233 334,910 298 28,140 30,635 LiabilitiesofconsolidatedLLCs........................ −173 −812 0 −1,137 −4,951 Netportfolioassetsavailable3........................... 14,060 334,098 298 27,003 25,684 LoansextendedtotheconsolidatedLLCsbythe FRBNY4......................................... 9,379 333,020 0 29,233 29,086 Otherbeneficialinterests4,5............................. ... ... 102 1,248 1,188 Totalloansandotherbeneficialinterests................. 9,379 333,020 102 30,481 30,274 Cumulativechangeinnetassetssincetheinception oftheprogram6 AllocatedtoFRBNY................................... 4,681 1,078 20 −2,230 −3,402 Allocatedtootherbeneficialinterests................... ... ... 176 −1,248 −1,188 Cumulativechangeinnetassets......................... 4,681 1,078 196 −3,478 −4,590 SummaryofconsolidatedLLCnetincome,includinga reconciliationoftotalconsolidatedLLCnetincometo theconsolidatedLLCnetincomerecordedbyFRBNY Portfoliointerestincome7............................... 4,224 1,707 0 1,476 1,561 InterestexpenseonloansextendedbyFRBNY8......... −598 −620 0 −146 −268 Interestexpense—other................................. 0 0 −2 −61 −332 Portfolioholdingsgains(losses)......................... 8 3 0 −102 −5,497 Professionalfees....................................... −30 −12 −1 −55 −54 Netincome(loss)ofconsolidatedLLCs................. 3,604 1,078 −3 1,112 −4,590 Less:Netincome(loss)allocatedtootherbeneficial interests........................................... ... ... 699 −61 −1,188 Netincome(loss)allocatedtoFRBNY.................. 3,604 1,078 −702 1,173 −3,402 Add:InterestexpenseonloansextendedbyFRBNY, eliminatedinconsolidation......................... 598 620 0 146 268 Netincome(loss)recordedbyFRBNY.................. 4,202 1,698 −7029 1,319 −3,134 1. CPFFLLCwasformedtoprovideliquiditytothecommercialpapermarket.TALFLLCwasformedin2009to purchaseassetsoftheTermAsset-BackedSecuritiesLoanFacility,whichwasformedtoimprovemarketconditions forasset-backedsecurities.MaidenLaneLLCwasformedtoacquirecertainassetsofBearStearns;MaidenLaneII LLCandMaidenLaneIIILLCwereformedtoacquirecertainassetsofAIGanditssubsidiaries. 2. TALF,MaidenLane,MaidenLaneII,andMaidenLaneIIIholdingsarerecordedatfairvalue.Fairvaluereflectsanestimateofthepricethatwouldbereceiveduponsellinganassetifthetransactionweretobeconductedin anorderlymarketonthemeasurementdate.CPFFholdingsarerecordedatbookvalue,whichincludesamortized costandrelatedfees. 3. RepresentsthenetassetsavailableforrepaymentofloansextendedbyFRBNYandotherbeneficiariesofthe consolidatedLLCs. 4. Bookvalue.Includesaccruedinterest. 5. TheotherbeneficialinterestholdersaretheU.S.TreasuryforTALFLLC,JPMorganChaseforMaidenLane LLC,andAIGforMaidenLaneIILLCandMaidenLaneIIILLC. 6. RepresentstheallocationofthechangeinnetassetsandliabilitiesoftheconsolidatedLLCsthatareavailable forrepaymentoftheloansextendedbyFRBNYandtheotherbeneficiariesoftheconsolidatedLLCs.Thedifferencesbetweenthefairvalueofthenetassetsavailableandthefacevalueoftheloans(includingaccruedinterest)are indicativeofgainsorlossesthatwouldbeincurredbythebeneficiariesiftheassetshadbeenfullyliquidatedat pricesequaltothefairvalue. 7. Interestincomeisrecordedwhenearnedandincludesamortizationofpremiums,accretionofdiscounts,and paydowngainsandlosses. 8. InterestexpenserecordedbyeachconsolidatedLLContheloansextendedbyFRBNYiseliminatedwhenthe LLCsareconsolidatedinFRBNY’sfinancialstatementsand,asaresult,theconsolidatedLLCs’netincome(loss) recordedbyFRBNYisincreasedbythisamount. 9. FRBNYearned$1,025milliononTALFloansduringtheyearendedDecember31,2009,whichoffsetsthenet lossattributabletoTALFLLC.EarningsonTALFloansincludeinterestincomeof$414million,gainsonthevaluationof$557million,andadministrativefeesof$54million. ... Notapplicable.

Federal Reserve Banks 191 KeyFinancialDataforConsolidatedLLCs,2009and2008—continued Millionsofdollars MaidenLaneIILLC1 MaidenLaneIIILLC1 TotalLLCs 2009 2008 2009 2008 2009 2008 15,912 19,195 22,797 27,256 81,380 411,996 −2 −2 −3 −48 −1,315 −5,813 15,910 19,193 22,794 27,208 80,065 406,183 16,005 19,522 18,500 24,384 73,117 406,012 1,037 1,003 5,193 5,022 7,580 7,213 17,042 20,525 23,693 29,406 80,697 413,225 −95 −329 0 0 2,654 −2,653 −1,037 −1,003 −899 −2,198 −3,184 −4,389 −1,132 −1,332 −899 −2,198 −530 −7,042 1,088 302 3,032 517 9,820 4,087 −238 −27 −296 −45 −1,278 −960 −33 −103 −171 −28 −267 −463 −604 −1,499 −1,239 −2,633 −1,937 −9,626 −12 −5 −27 −9 −125 −80 201 −1,332 1,299 −2,198 6,213 −7,042 −34 −1,003 1,299 −2,198 1,903 −4,389 235 −329 0 0 4,310 −2,653 238 27 296 45 1,278 960 473 −302 296 45 5,588 −1,693 daily balance of credit extended to AIG acquired financial assets and financial in 2009 was $39,099 million, which liabilities pursuant to the policy objecearned interest at an average rate of tives. The consolidated LLCs were 10.22 percent. determined to be variable interest entities, and the New York Reserve Bank Investments of the is considered to be the primary benefi- Consolidated LLCs ciary of each.22 Consistent with gener- Additional lending facilities established during 2008 and 2009, under authority 22. AVIEisanentityforwhichthevalueofthe of section 13(3) of the Federal Reserve beneficiaries’financialinterestsintheentitychanges withchangesinthefairvalueofitsnetassets.AVIE Act, involved creating and lending to isconsolidatedbythefinancialinterestholderthat consolidated LLCs.21 isdeterminedtobetheprimarybeneficiaryofthe The consolidated LLCs were funded VIEbecausetheprimarybeneficiarywillabsorba by the New York Reserve Bank, and majorityoftheVIE’sexpectedlosses,receiveamajorityoftheVIE’sexpectedresidualgains,oritis mostcloselyassociatedwiththeVIE.Todetermine 21. For further information on the establish- whetheritistheprimarybeneficiaryofaVIE,the mentandpolicyobjectivesoftheseconsolidated ReserveBankevaluatestheVIE’sdesignandcapi- LLCs, see the “Monetary Policy and Economic talstructureandtherelationshipsamongthevariable Developments”sectionofthisreport. interestholders.

192 96th Annual Report, 2009 ally accepted accounting principles, the long-term facility redevelopment proassets and liabilities of these LLCs gram that now involves renovation of have been consolidated with the assets the Bank’s headquarters building. The and liabilities of the New York Reserve New York Reserve Bank completed a Bank in the preparation of the state- program to enhance the business resilments of condition included in this re- iency of its information technology port.23 The proceeds at the maturity or systems and to upgrade facility support the liquidation of the consolidated for the Bank’s open market operations, LLCs’ assets will be used to repay the central bank services, and data center loans extended by the New York Re- operations. The New York Reserve serve Bank. Information regarding the Bank also leased space in a nearby of- Reserve Banks’ lending to the consoli- fice building to accommodate staff dated LLCs and the asset portfolios of growth. The Richmond Reserve Bank each consolidated LLC is as described completed the construction of a new in the table on the previous page. parking garage adjacent to its headquarters building. Security-enhancement programs con- Federal Reserve Bank Premises tinued at several facilities, including the construction of security improve- Several Reserve Banks took action in ments to the Richmond Reserve Bank’s 2009 to upgrade and refurbish their faheadquarters building, the construction cilities. The multiyear renovation proof a remote vehicle-screening facility gram at the New York Reserve Bank’s for the Philadelphia Reserve Bank, and headquarters building continued, while the design of a remote vehiclethe St. Louis Reserve Bank continued a screening facility for the Dallas Reserve Bank. Additionally, the San Francisco Re- 23. Asaconsequenceoftheconsolidation,theex- serve Bank continued its efforts to sell tensionsofcreditfromtheNewYorkReserveBank the former Seattle Branch building. to the consolidated LLCs are eliminated, the net assetsoftheconsolidatedLLCsappearasassetsin For more information, see table 14 table9inthe“StatisticalTables”sectionofthisre- in the “Statistical Tables” section of port,andtheliabilitiesoftheconsolidatedLLCsto this report, which details the acquientities other than the New York Reserve Bank, sition costs and net book value of includingthosewithrecourseonlytotheportfolio the Federal Reserve Banks and holdingsoftheconsolidatedLLCs,areincludedin “Otherliabilities”instatisticaltable9A. Branches. Á

Federal Reserve Banks 193 Pro Forma Financial Statements for Federal Reserve Priced Services ProFormaBalanceSheetforFederalReservePricedServices,December31,2009and2008 Millionsofdollars Item 2009 2008 Short-termassets(Note1) Imputedreserverequirementson clearingbalances................ 317.4 418.8 Imputedinvestments.................. 4,112.9 6,211.4 Receivables.......................... 49.8 60.0 Materialsandsupplies................ 1.5 2.1 Prepaidexpenses..................... 19.4 29.2 Itemsinprocessofcollection......... 449.7 983.1 Totalshort-termassets......... 4,950.7 7,704.7 Long-termassets(Note2) Premises............................. 346.3 441.1 Furnitureandequipment.............. 81.4 113.0 Leases,leaseholdimprovements,and long-termprepayments........... 76.3 76.7 Prepaidpensioncosts................. 77.1 0.0 PrepaidFDICasset................... 31.2 ... Deferredtaxasset.................... 231.4 313.2 Totallong-termassets......... 843.7 944.0 Totalassets.......................... 5,794.5 8,648.7 Short-termliabilities Clearingbalances.................... 3,173.6 4,188.5 Deferred-availabilityitems............ 1,728.3 2,779.8 Short-termdebt...................... 0.0 0.0 Short-termpayables.................. 146.9 573.5 Totalshort-termliabilities..... 5,048.8 7,541.8 Long-termliabilities Long-termdebt...................... 0.0 0.0 Accruedbenefitcosts................. 436.8 605.6 Totallong-termliabilities...... 436.8 605.6 Totalliabilities....................... 5,485.5 8,147.4 Equity(includingaccumulatedother comprehensivelossof $478.3millionand $690.6millionatDecember31, 2009and2008,respectively)..... 309.0 501.3 Totalliabilitiesandequity(Note3)... 5,794.5 8,648.7 Note: Componentsmaynotsumtototalsbecauseofrounding.Amountsinboldreflectrestatementsduetorecategorization.Theaccompanyingnotesareanintegralpartoftheseproformapricedservicesfinancialstatements.

194 96th Annual Report, 2009 ProFormaIncomeStatementforFederalReservePricedServices,2009and2008 Millionsofdollars Item 2009 2008 Revenuefromservicesprovidedto depositoryinstitutions(Note4)......... 662.7 773.4 Operatingexpenses(Note5)................ 713.8 808.7 Incomefromoperations.................... −51.1 –35.3 Imputedcosts(Note6) Interestonfloat.......................... −3.2 –22.4 Interestondebt.......................... 0.0 0.0 Salestaxes.............................. 9.1 9.4 FDICInsurance.......................... 3.4 9.2 0.5 –12.5 Incomefromoperationsafter imputedcosts......................... −60.3 −22.8 Otherincomeandexpenses(Note7) Investmentincome....................... 16.6 181.2 Earningscredits.......................... −3.9 12.7 –80.7 100.4 Incomebeforeincometaxes................ −47.6 77.6 Imputedincometaxes(Note6)............. −15.5 24.2 Netincome................................ −32.1 53.4 Memo:Targetedreturnonequity(Note6)... 19.9 66.5 Note: Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartof theseproformapricedservicesfinancialstatements. ProFormaIncomeStatementforFederalReservePricedServices,byService,2009 Millionsofdollars Commercial Commercial Fedwire Fedwire Item Total check ACH funds securities collection Revenuefromservices(Note4)................. 662.7 481.7 92.9 64.4 23.7 Operatingexpenses(Note5).................... 713.8 520.1 98.8 69.8 25.2 Incomefromoperations........................ −51.1 −38.4 −5.9 −5.4 −1.4 Imputedcosts(Note6)......................... 9.2 6.0 1.6 1.3 0.4 Incomefromoperationsafterimputedcosts...... −60.3 −44.3 −7.5 −6.6 −1.9 Otherincomeandexpenses,net(Note7)........ 12.7 9.2 1.8 1.3 0.5 Incomebeforeincometaxes.................... −47.6 −35.2 −5.7 −5.4 −1.4 Imputedincometaxes(Note6)................. −15.5 −11.5 −1.9 −1.8 −0.5 Netincome.................................... −32.1 −23.7 −3.8 −3.6 −0.9 Memo:Targetedreturnonequity(Note6)....... 19.9 14.4 2.9 2.0 0.7 Costrecovery(percent)(Note8)................ 92.8 92.8 93.4 92.1 93.8 Note: Componentsmaynotsumtototalsbecauseofrounding.Theaccompanyingnotesareanintegralpartof theseproformapricedservicesfinancialstatements.

Federal Reserve Banks 195 FEDERALRESERVEBANKS NotestoProFormaFinancialStatementsforPricedServices (1) Short-TermAssets TheimputedreserverequirementonclearingbalancesheldatReserveBanksbydepositoryinstitutionsreflectsatreatmentcomparabletothatofcompensatingbalancesheldatcorrespondentbanksby respondentinstitutions.Thereserverequirementimposedonrespondentbalancesmustbeheldasvault cashorasbalancesmaintainedataReserveBank;thus,aportionofpricedservicesclearingbalances heldwiththeFederalReserveisshownasrequiredreservesontheassetsideofthebalancesheet.Another portionoftheclearingbalancesisusedtofinanceshort-termandlong-termassets.Theremainderofclearingbalancesanddepositbalancesarisingfromfloatareassumedtobeinvestedinaportfolioofinvestments,shownasimputedinvestments. Receivables are comprised of fees due the Reserve Banks for providing priced services and the shareofsuspense-accountanddifference-accountbalancesrelatedtopricedservices. Materialsandsuppliesaretheinventoryvalueofshort-termassets. Prepaidexpensesincludesalaryadvancesandtraveladvancesforpriced-servicepersonnel. ItemsinprocessofcollectionaregrossFederalReservecashitemsinprocessofcollection(CIPC), statedonabasiscomparabletothatofacommercialbank.Theyreflectadjustmentsforintra-System itemsthatwouldotherwisebedouble-countedonaconsolidatedFederalReservebalancesheet;adjustments for items associated with nonpriced items (such as those collected for government agencies); and adjustments for items associated with providing fixed availability or credit before items are receivedandprocessed.AmongthecoststoberecoveredundertheMonetaryControlActisthecostof float, or net CIPC during the period (the difference between gross CIPC and deferred-availability items,whichistheportionofgrossCIPCthatinvolvesafinancingcost),valuedatthefederalfunds rate. (2) Long-TermAssets Long-termassetsconsistoflong-termassetsusedsolelyinpricedservices,thepriced-serviceportionoflong-termassetssharedwithnonpricedservices,anestimateoftheassetsoftheBoardofGovernorsusedinthedevelopmentofpricedservices,animputedprepaidFDICasset(seeNote6),anda deferred tax asset related to the priced services pension and postretirement benefits obligation (see Note3). (3) LiabilitiesandEquity Underthematched-bookcapitalstructureforassets,short-termassetsarefinancedwithshort-term payablesandclearingbalances.Long-termassetsarefinancedwithlong-termliabilitiesandcoreclearingbalances.Asaresult,noshort-orlong-termdebtisimputed.Othershort-termliabilitiesinclude clearingbalancesmaintainedatReserveBanks.Otherlong-termliabilitiesconsistofaccruedpostemployment, postretirement, and qualified and nonqualified pension benefits costs and obligations on capitalleases. EffectiveDecember31,2006,theReserveBanksimplementedtheFinancialAccountingStandard Board’s(FASB)StatementofFinancialAccountingStandards(SFAS)No.158,Employers’AccountingforDefinedBenefitPensionandOtherPostretirementPlans(codifiedinFASBAccountingStandardsCodification(ASC)Topic715(ASC715),Compensation-RetirementBenefits),whichrequires anemployertorecordthefundedstatusofitsbenefitplansonitsbalancesheet.Inordertoreflectthe funded status of its benefit plans, the Reserve Banks recognized the deferred items related to these plans, which include prior service costs and actuarial gains or losses, on the balance sheet. This resultedinanadjustmenttothepensionandbenefitplansrelatedtopricedservicesandtherecognitionofanassociateddeferredtaxassetwithanoffsettingadjustment,netoftax,toaccumulatedother comprehensiveincome(AOCI),whichisincludedinequity.TheReserveBankpricedservicesrecognizedanetpensionassetin2009andanetpensionliabilityin2008.Theincreaseinthefundedstatus resultedinacorrespondingchangeinAOCIof$(212.3)millionin2009. TosatisfytheFDICrequirementsforawell-capitalizedinstitution,equityisimputedat10percent oftotalrisk-weightedassets.

196 96th Annual Report, 2009 (4) Revenue Revenuerepresentsfeeschargedtodepositoryinstitutionsforpricedservicesandisrealizedfrom each institution through one of two methods: direct charges to an institution’s account or charges againstitsaccumulatedearningscredits(seeNote7). (5) OperatingExpenses Operatingexpensesconsistofthedirect,indirect,andothergeneraladministrativeexpensesofthe ReserveBanksforpricedservicesplustheexpensesoftheBoardofGovernorsrelatedtothedevelopmentofpricedservices.Boardexpenseswere$7.8millionin2009and$7.2millionin2008. Effective January 1, 1987, the Reserve Banks implemented SFAS No. 87, Employers’Accounting forPensions(codifiedinASC715).Accordingly,theReserveBankpricedservicesrecognizedqualifiedpension-planoperatingexpensesof$121.2millionin2009and$28.8millionin2008.Operating expenses also include the nonqualified pension expense of $2.3 million in 2009 and $5.4 million in 2008.TheimplementationofSFASNo.158(ASC715)doesnotchangethesystematicapproachrequired by generally accepted accounting principles to recognize the expenses associated with the Reserve Banks’ benefit plans in the income statement. As a result, these expenses do not include amounts related to changes in the funded status of the Reserve Banks’ benefit plans, which are reflectedinAOCI(seeNote3). Theincomestatementbyservicereflectsrevenue,operatingexpenses,imputedcosts,otherincome andexpenses,andcostrecovery.Certaincorporateoverheadcostsnotcloselyrelatedtoanyparticular pricedserviceareallocatedtopricedservicesbasedonanexpense-ratiomethod.Corporateoverhead wasallocatedamongthepricedservicesduring2009and2008asfollows(inmillions): 2009 2008 Check...................................................... 22.0 31.0 ACH ....................................................... 5.0 4.6 FedwireFunds ............................................ 3.3 3.5 FedwireSecurities ........................................ 1.8 1.9 Total ....................................................... 32.1 41.2 (6) ImputedCosts Imputedcostsconsistofincometaxes,returnonequity,interestondebt,salestaxes,anFDICassessment,andinterestonfloat.Manyimputedcostsarederivedfromtheprivate-sectoradjustmentfactor(PSAF)model.Thecostofdebtandtheeffectivetaxratearederivedfrombankholdingcompany data,whichservesastheproxyforthefinancialdataofarepresentativeprivate-sectorfirm,andare used to impute debt and income taxes in the PSAF model. The after-tax rate of return on equity is basedonthereturnsoftheequitymarketasawholeandisappliedtotheequityonthebalancesheet toimputetheprofitthatwouldhavebeenearnedhadtheservicesbeenprovidedbyaprivate-sector firm.OnOctober9,2008,theFederalReservebeganpayinginterestonrequiredreserveandexcess balancesheldbydepositoryinstitutionsatReserveBanksasauthorizedbytheEmergencyEconomic StabilizationActof2008.In2009,incontrasttopreviousyearsandinlightoftheuncertaintyabout thelong-termeffectthatthischangewouldhaveonthelevelofclearingbalancesonthebalancesheet, theequityusedtodeterminetheimputedprofitwasadjustedtoreflectactualclearingbalancelevels maintainedthroughout2009. Interestisimputedonthedebtassumednecessarytofinancepriced-serviceassets;however,nodebt wasimputedin2009or2008. Effectivein2007,theReserveBankpricedservicesimputedaone-timeFDICassessmentcredit.In 2009,thecreditoffset$8.0millionoftheimputed$11.4millionassessment,resultinginzeroremainingcredit.TheimputedFDICassessmentalsoreflectstheincreasedratesandnewassessmentcalculationmethodologyapprovedin2009,whichresultedinaprepaidFDICassetof$31.2milliononthe pricedservicesbalancesheet. Interestonfloatisderivedfromthevalueoffloattoberecovered,eitherexplicitlyorthroughperitemfees,duringtheperiod.FloatcostsincludecostsfortheCheck,FedwireFunds,NationalSettlementService,ACH,andFedwireSecuritiesservices. Float cost or income is based on the actual float incurred for each priced service. Other imputed costsareallocatedamongpricedservicesaccordingtotheratioofoperatingexpenses,lessshipping expenses,foreachservicetothetotalexpenses,lessthetotalshippingexpenses,forallservices.

Federal Reserve Banks 197 ThefollowingshowsthedailyaveragerecoveryofactualfloatbytheReserveBanksfor2009in millionsofdollars: Totalfloat ...................................................... –1,974.1 Unrecoveredfloat .............................................. 4.7 Floatsubjecttorecovery ....................................... –1,978.8 Sourcesofrecoveryoffloat As-ofadjustments ........................................... 2.3 Directcharges ............................................... 10.9 Per-itemfees ................................................. –1,992.0 Unrecoveredfloatincludesfloatgeneratedbyservicestogovernmentagenciesandbyothercentral bankservices.As-ofadjustmentsanddirectchargesrefertofloatthatiscreatedbyinterterritorycheck transportationandtheobservanceofnon-standardholidaysbysomedepositoryinstitutions.Suchfloat mayberecoveredfromthedepositoryinstitutionsthroughadjustmentstoinstitutionreserveorclearingbalancesorbybillinginstitutionsdirectly.Floatrecoveredthroughdirectchargesandper-itemfees is valued at the federal funds rate; credit float recovered through per-item fees has been subtracted fromthecostbasesubjecttorecoveryin2009. (7) OtherIncomeandExpenses Otherincomeandexpensesconsistofinvestmentandinterestincomeonclearingbalancesandthe cost of earnings credits. Investment income on clearing balances for 2009 and 2008 represents the average coupon-equivalent yield on three-month Treasury bills plus a constant spread, based on the returnonaportfolioofinvestments.BeforeOctober9,2008,thereturnwasappliedtothetotalclearing balance maintained, adjusted for the effect of reserve requirements on clearing balances. As a resultoftheFederalReservepayinginterestonrequiredreserveandexcessbalancesheldbydepositoryinstitutionsatReserveBanksbeginninginOctober2008(seeNote6),theinvestmentreturnisappliedonlytotherequiredportionoftheclearingbalance.Otherincomealsoincludesimputedinterest ontheportionofclearingbalancessetasideasrequiredreserves.Expensesforearningscreditsgranted to depository institutions on their clearing balances are based on a discounted average couponequivalentyieldonthree-monthTreasurybills. (8) CostRecovery Annual cost recovery is the ratio of revenue, including other income, to the sum of operating expenses,imputedcosts,imputedincometaxes,andtargetedreturnonequity.

199 The Board of Governors and the Government Performance and Results Act The Government Performance and summary of the Federal Reserve’s Results Act (GPRA) of 1993 requires goals and objectives, as set forth in the that federal agencies, in consultation most recently released strategic and with Congress and outside stakehold- performance plans, are listed below. ers, prepare a strategic plan covering a Updated documents will be posted on multiyear period and submit an annual the website as they are completed. performance plan and performance report. Although the Federal Reserve is Mission not covered by the GPRA, the Board of Governors voluntarily complies with The mission of the Board is to foster the spirit of the act. the stability, integrity, and efficiency of the nation’s monetary, financial, and payment systems to promote optimal Strategic Plan, Performance macroeconomic performance. Plan, and Performance Report The Board’s strategic plan articulates Goals and Objectives the Board’s mission, sets forth major The Federal Reserve has six primary goals, outlines strategies for achieving goals with interrelated and mutually rethose goals, and discusses the environinforcing elements. ment and other factors that could affect their achievement. It also addresses issues that cross agency jurisdictional Goal lines, identifies key quantitative measures of performance, and discusses the Conduct monetary policy that promotes evaluation of performance. the achievement of the statutory objec- The performance plan includes spe- tives of maximum employment and cific targets for some of the perfor- stable prices. mance measures identified in the strategic plan and describes the operational Objectives processes and resources needed to meet those targets. It also discusses valida- v Stay abreast of recent developments tion of data and verification of results. in and prospects for the U.S. econ- The performance report discusses the omy and financial markets, and in Board’s performance in relation to its those abroad, so that monetary policy goals. decisions will be well informed. The strategic plan, performance plan, v Enhance our knowledge of the strucand performance report are available tural and behavioral relationships in on the Board’s website, at www. the macroeconomic and financial federalreserve.gov/boarddocs/rptcongress. markets, and improve the quality of The Board’s mission statement and a the data used to gauge economic per-

200 96th Annual Report, 2009 formance, through developmental re- vised by the Federal Reserve with search activities. applicable laws, rules, regulations, v Implement monetary policy effec- policies, and guidelines through a tively in rapidly changing economic comprehensive and effective supervicircumstances and in an evolving sion program. financial market structure. v Contribute to the development of Goal U.S. international policies and procedures, in cooperation with the U.S. Develop regulations, policies, and pro- Department of the Treasury and other grams designed to inform and protect agencies, with respect to global consumers, to enforce federal consumer financial markets and international protection laws, to strengthen market institutions. competition, and to promote access to v Promote understanding of Federal banking services in historically under- Reserve policy among other govern- served markets. ment policy officials and the general public. Objectives v Be a leader in, and help shape the Goal national dialogue on, consumer protection in financial services. Promote a safe, sound, competitive, v Promote, develop, and strengthen efand accessible banking system and fective communications and collabostable financial markets. rations within the Board, the Federal Reserve Banks, and other agencies Objectives and organizations. v Promote overall financial stability, Goal manage and contain systemic risk, and identify emerging financial prob- Provide high-quality professional overlems early so that crises can be sight of Reserve Banks. averted. v Provide a safe, sound, competitive, Objective and accessible banking system through comprehensive and effective v Produce high-quality assessments and supervision of U.S. banks, bank and oversight of Federal Reserve System financial holding companies, foreign strategies, projects, and operations, banking organizations, and related including adoption of technology to entities. At the same time, remain meet the business and operational sensitive to the burden on supervised needs of the Federal Reserve. The institutions. oversight process and outputs should v Enhance efficiency and effectiveness, help Federal Reserve management while remaining sensitive to the bur- foster and strengthen sound internal den on supervised institutions, by ad- control systems, efficient and reliable dressing the supervision function’s operations, effective performance, procedures, technology, resource allo- and sound project management and cation, and staffing issues. should assist the Board in the effecv Promote compliance by domestic and tive discharge of its oversight responforeign banking organizations super- sibilities.

Government Performance and Results Act 201 Goal Objectives Foster the integrity, efficiency, and ac- v Develop appropriate policies, overcessibility of U.S. payment and settle- sight mechanisms, and measurement ment systems. criteria to ensure that the recruiting, training, and retention of staff meet Board needs. Objectives v Establish, encourage, and enforce a climate of fair and equitable treatv Develop sound, effective policies and ment for all employees regardless of regulations that foster payment sysrace, creed, color, national origin, tem integrity, efficiency, and accessiage, or sex. bility. Support and assist the Board in v Provide strategic planning and finanoverseeing U.S. dollar payment and cial management support needed for securities settlement systems by sound business decisions. assessing their risks and risk- v Provide cost-effective and secure inmanagement approaches against relformation resource management serevant policy objectives and standards. vices to Board divisions, support v Conduct research and analysis that divisional distributed-processing recontributes to policy development quirements, and provide analysis on and increases the Board’s and others’ information technology issues to the understanding of payment system dy- Board, Reserve Banks, other finannamics and risk. cial regulatory institutions, and central banks. Goal v Efficiently provide safe, modern, secure facilities and necessary support Foster the integrity, efficiency, and ef- for activities conducive to efficient fectiveness of Board programs. and effective Board operations. Á

203 Federal Legislative Developments In May 2009, President Obama signed changes in terms, and advertiseinto law two significant pieces of legis- ments. lation that include provisions affecting • The second rule protected consumers the Federal Reserve: the Credit Card by prohibiting certain unfair acts or Accountability, Responsibility, and Dis- practices, such as unexpected inclosure Act of 2009 (Pub. L. No. 111- creases in interest rates, with respect 24) (the “Credit Card Act”), which to consumer credit card accounts. aims to improve practices in the credit The requirements of the Credit Card card market, and the Helping Families Act that pertain to credit cards or other Save Their Homes Act of 2009 (Pub. open-end credit for which the Board L. No. 111-22), which seeks to restore has rulemaking authority become effecstability to the housing markets. Foltive in three stages. The first set of prolowing is a summary of the key provivisions requires creditors to provide sions of these laws as they relate to written notice to consumers 45 days Federal Reserve System functions. before the creditor increases the annual percentage rate (APR) on a credit card The Credit Card Act account or makes a significant change to the terms of a credit card account. The Federal Reserve played a key role These notices also must inform conin the development of the Credit Card sumers of their right to cancel the Act, which introduces new substantive credit card account before the increase and disclosure requirements for credi- or change goes into effect. If a contors in an effort to strengthen consumer sumer exercises this right, the creditor protections in the credit card market. generally is prohibited from applying Among other things, the Credit Card the increase or change to the account Act amends the Truth in Lending Act prior to account closure. In addition, and the Electronic Fund Transfer Act, creditors are required to mail or deliver which are administered by the Board. periodic statements for credit cards at Several provisions of the Credit Card least 21 days before payment is due. Act build on protections previously These Credit Card Act provisions beadopted by the Board. Specifically, in came effective on August 20, 2009 (90 December 2008, the Board adopted two days after enactment). The Board apfinal rules pertaining to open-end credit proved interim final rules to implement (other than credit secured by a home): these provisions on July 15, 2009. A second set of Credit Card Act pro- • The first rule made comprehensive visions protects consumers from certain changes to Regulation Z (which types of increases in credit card interest implements the Truth in Lending rates and changes in terms. It does so Act), including amendments that af- by prohibiting, with certain exceptions, fect credit card applications and so- increases to an interest rate during the licitations, account-opening disclo- first year after an account has been sures, periodic statements, notices of opened, as well as increases to an

204 96th Annual Report, 2009 interest rate that applies to an existing item on or near a college campus to incredit card balance. In addition, if a duce college students to apply for or consumer makes a payment in excess participate in an open-end consumer of the minimum payment amount, credit plan. creditors are required to allocate those In addition, for each credit card excess funds first to the card balance account, creditors must provide the with the highest interest rate, and then consumer with a payment due date that to each successive balance with the is the same day each month, and with a next highest rate, until the payment is disclosure setting forth the time and exhausted. Creditors also are prohibited cost of paying off the card balance if from only minimum monthly payments are made. This second set of provisions be- • using the “two-cycle” billing method came effective on February 22, 2010 to impose interest charges;1 (nine months after enactment). The • charging over-the-limit fees unless Board approved final rules to implethe cardholder has agreed to allow ment these provisions on January 12, the issuer to complete over-the-limit 2010. transactions; and A third group of Credit Card Act • charging excessive fees on cards provisions addresses the reasonableness with low credit limits. and proportionality of penalty fees and The Credit Card Act also requires periodic review of rate increases by that before opening a credit card creditors. Under these provisions, the account, or increasing the account Board is charged with establishing limit, creditors consider the consumer’s standards for creditors to use in assessability to make the required payments ing whether or not a penalty fee or under the card agreement. Furthermore, charge is reasonable and proportional the Credit Card Act prohibits creditors to the corresponding violation or omisfrom issuing a credit card to, or estab- sion. In developing these standards, the lishing an open-end credit plan on Board must consider the cost sustained behalf of, a consumer who is younger by the creditor for the violation or than the age of 21, unless the creditor omission, the effect of the fee in detereither determines that the consumer has ring omissions or violations by the the independent ability to make the re- cardholder, the cardholder’s conduct, quired payments or obtains the signa- and other factors the Board considers ture of a parent or other cosigner with necessary or appropriate. In addition, the ability to do so. Creditors are fur- under certain circumstances, a credit ther prohibited from offering a tangible card issuer who increases a cardholder’s interest rate is required to review the cardholder’s account at least every 1. The“two-cycle”billingmethodhasseveral six months and assess whether a permutations. Generally, a card issuer that uses decrease in the rate is warranted due to the two-cycle method assesses interest not only a change in such factor(s). On March on the balance for the current billing cycle but alsoonbalancesondaysintheprecedingbilling 3, 2010, the Board issued a proposed cycle. The two-cycle method results in greater rule to implement the third group of interestchargesforconsumerswhopaytheirbal- Credit Card Act provisions. These proance in full one month (and therefore generally visions will become effective on qualify for a grace period) but not the next August 22, 2010 (15 months after enmonth (and therefore generally lose the grace period). actment).

Federal Legislative Developments 205 The Credit Card Act also amends foreclosure. The Helping Families Act provisions of the Electronic Fund included a variety of provisions in- Transfer Act and generally prohibits tended to encourage modification of the imposition of dormancy, inactivity, home mortgages either in default or or service fees with respect to a gift facing imminent default, including certificate, store gift card, or general- through the HOPE for Homeowners use prepaid card. The Credit Card Act Program previously established by the provides an exception to this general Housing and Economic Recovery Act prohibition if there has been at least of 2008 (HERA) (Pub. L. No. 110one year of inactivity, no more than 289). For example, the Helping Famione fee is charged per month, and the lies Act included provisions that permit consumer is provided with clear and the Secretary of Housing and Urban conspicuous disclosures about the fees. Development (HUD) to authorize the In addition, the Credit Card Act pro- modification of federally guaranteed hibits the sale or issuance of a gift cer- rural housing loans and loans guarantificate, store gift card, or general-use teed by the Federal Housing Adminisprepaid card that is subject to an expi- tration (FHA) either in default or facration date of less than five years. ing imminent default, and to make These provisions will become effective payments to residential mortgage lendon August 22, 2010. The Board final- ers in order to offset certain costs assoized rules to implement these provi- ciated with modification. The Helping sions on March 23, 2010. Families Act also provides certain lia- The Credit Card Act also mandates bility protections to loan servicers who that creditors post their credit card make modifications in compliance with agreements on their Internet sites, and the Act. provide these agreements to the Board. Described below are three provisions The Board is required to establish and of the Act that directly relate to the acmaintain a central repository so that the tivities and functions of the Federal public may easily access and retrieve Reserve or the banking organizations these agreements. Finally, the Credit supervised by the Federal Reserve. Card Act requires the Board to conduct and complete several studies, and to make several reports to Congress, on GAO Audit Authority college credit card agreements, the reduction of consumer credit availability, Title VIII of the Helping Families Act and the use of credit cards by small authorizes the Comptroller General of businesses. the U.S. Government Accountability Office (GAO) to conduct audits, including on-site examinations, of all the The Helping Families Save credit facilities authorized by the Board Their Homes Act under section 13(3) of the Federal Reserve Act (12 U.S.C. § 343) for a On May 20, 2009, President Obama single and specific partnership or corsigned into law the Helping Families poration in order to protect financial Save Their Homes Act (the “Helping stability and promote the flow of credit Families Act”) (Pub. L. No. 111-22), during the financial crisis. which, among other things, introduced Under this provision, the GAO has new measures to aid families facing full authority to audit the special lend-

206 96th Annual Report, 2009 ing facilities that the Federal Reserve spect to the Federal Reserve. For established under section 13(3) for example, all of the Federal Reserve’s American International Group, Inc.; supervisory and regulatory functions Citigroup, Inc.; and Bank of America are subject to audit by the GAO to the Corporation, and to facilitate the acqui- same extent as the supervisory and sition of The Bear Stearns Company, regulatory functions of the other fed- Inc. by JP Morgan Chase & Co., eral banking agencies. including Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III Temporary Increase in FDIC LLC. The Helping Families Act pro- Borrowing Authority hibits an officer or employee of the GAO from disclosing to any person The Helping Families Act also includes outside the GAO information obtained measures designed to preserve confiin audits or examinations conducted dence in the deposit insurance fund and under this authority and maintained as assist the Federal Deposit Insurance confidential by the Board or the Fed- Corporation (FDIC) in recovering any eral Reserve Banks. costs of emergency assistance provided Title VI of the Helping Families Act to help maintain financial stability duralso clarifies the GAO’s authority to ing the financial crisis. audit the programs established by the Specifically, the Helping Families Treasury Department under the Act increases, from $30 billion to $100 Troubled Asset Relief Program billion, the amount the FDIC may bor- (TARP), including the Term Asset- row from the Treasury for deposit in- Backed Securities Loan Facility surance purposes. In addition, until (TALF), which is a joint program of December 31, 2010, the Helping Famithe Federal Reserve and Treasury. The lies Act allows the Secretary of the Emergency Economic Stabilization Act Treasury, after consulting with the of 2008 (EESA) (Pub. L. No. 110- President, to allow the FDIC to borrow 343), which established the TARP, ex- up to $500 billion from Treasury if the pressly authorizes the GAO to audit the Secretary determines that the increase programs and activities of the Treasury is necessary after receiving the written under the TARP for purposes of con- recommendations of the Board of Diducting ongoing oversight of the activi- rectors of the FDIC and the Board of ties and performance of the TARP. Sec- Governors of the Federal Reserve Systion 601 of the Helping Families Act tem (each by a vote of not less than clarifies and ensures the GAO’s ability two-thirds of the members of the reto audit the TALF for purposes of as- spective board). sessing the performance of the TARP. The Helping Families Act also per- Taken together, these provisions pro- mits the FDIC, with the concurrence of vide the GAO with the authority to au- the Secretary of the Treasury, to make dit the terms, conditions, and opera- special assessments on depository institions of the TALF, including those tution holding companies, in addition aspects of the TALF that are adminis- to insured depository institutions, to tered by the Federal Reserve, as neces- recover any losses that the Deposit Insary to understand and assess the per- surance Fund may incur as a result of formance of, and risks to, the TARP. actions taken by the FDIC under the These provisions augment the systemic risk exception to the least-cost GAO’s existing audit authority with re- resolution requirements in the Federal

Federal Legislative Developments 207 Deposit Insurance Act (12 U.S.C. § FDIC, or the respective designee of 1823(c)(4)(G)). In establishing any each. The Helping Families Act transsuch assessment rate, the FDIC must ferred all responsibilities of the Overconsider the types of entities that bene- sight Board to the Secretary of HUD fit from any action taken or assistance and converted the Oversight Board into provided, economic conditions, the an advisory body with responsibility effects on the industry, and such other for advising the Secretary regarding the factors as the FDIC deems appropriate program. and relevant to the action taken or the The Helping Families Act also gives assistance provided. HUD additional flexibility with respect Moreover, the Helping Families Act to the fees assessed for providing govextends, until December 31, 2013, the ernment insurance to mortgages refiincrease from $100,000 to $250,000 in nanced under the program. Specifically, FDIC deposit insurance coverage for the Act permits HUD to assess an upinsured depository institutions and front premium of up to 3 percent, and National Credit Union Administration an annual premium of up to 1.5 per- (NCUA) share insurance coverage for cent, of the principal balance of the insured credit unions. This increase in new mortgage, taking into considerdeposit and share insurance initially ation the financial integrity and purwas enacted as part of the EESA, but pose of the program. Previously, the only through December 31, 2009. upfront and annual premiums were fixed at 3 percent and 1.5 percent of the principal balance of the new mort- The HOPE for gage, respectively. Additionally, the Homeowners Program Helping Families Act allows HUD to Title II of the Helping Families Act make payments to the servicer for makes several changes to the HOPE loans refinanced under the program, for Homeowners Program, a voluntary and to originators for new loans made program designed to allow qualified, through the program to encourage refiat-risk mortgage borrowers to refinance nancings for eligible borrowers. HUD their existing mortgages into new mort- is also given greater flexibility in estabgage loans guaranteed by the FHA, lishing the percentage of any apprecisubject to certain conditions and re- ation realized by a borrower on the strictions. As originally enacted, the property refinanced into the program Board of Directors of the program (the that the borrower must share with “Oversight Board”) was provided HUD. HUD is permitted to share its authority to establish requirements and portion of any appreciation received standards for the program, prescribe with either a senior or subordinate regulations, and issue guidance to mortgage holder whose loans were refiimplement those requirements and stan- nanced pursuant to the program. The dards. The Oversight Board is com- Helping Families Act makes several posed of the Secretary of HUD, the other technical changes to the program Chairman of the Board of Governors of to decrease administrative burdens, the Federal Reserve System, the Secre- such as streamlining certifications and tary of the Treasury, and the Chairper- allowing conformity with current FHA son of the Board of Directors of the practices to the extent possible. Á

Records

211 Record of Policy Actions of the Board of Governors This report provides a summary other than those backed by commercial account of actions taken by the Board real estate, to be accepted as collateral on questions of policy in 2009 as for the TALF. The final rule is effective implemented through (1) rules and January 8, 2010. regulations, (2) policy statements and Votesforthisaction:ChairmanBernanke, other actions, (3) special liquidity Vice Chairman Kohn, and Governors facilities and other initiatives, and (4) Warsh,Duke,andTarullo. discount rates for depository institutions. All actions were approved by a Regulation D unanimous vote of the Board members, Reserve Requirements of unless indicated otherwise. More infor- Depository Institutions mation on the actions with italicized dates is available via the online version of the Annual Report, from the “Read- Regulation I ing Rooms” on the Board’s FOIA web Issue and Cancellation of page, and on request from the Board’s Federal Reserve Bank Freedom of Information Office. Capital Stock [Docket Nos. R-1334, R-1350, and Rules and Regulations R-1307] On May 18, 2009, the Board approved Regulation A final rules (1) to direct Federal Reserve Extensions of Credit by Banks to pay interest on certain bal- Federal Reserve Banks ances held at Reserve Banks by or on behalf of certain depository institutions, [Docket No. R-1371] (2) to authorize the establishment of “excess balance accounts” at Reserve On December 4, 2009, the Board Banks for the maintenance of excess approved a final rule establishing a balances of eligible institutions, (3) to process by which the Federal Reserve increase from three to six the permis- Bank of New York may determine the sible number of transfers or withdraweligibility of credit rating agencies for als from savings deposits by check, the Term Asset-Backed Securities Loan debit card, or similar order payable to Facility (TALF), a special liquidity third parties, and (4) to authorize memfacility. (See ‘‘Special Liquidity Facili- ber banks to enter into pass-through ties and Other Initiatives’’ for further arrangements. One of the final rules discussion of the TALF.) The rule revises provisions of the interim final establishes criteria for determining the rule issued in October 2008 amending eligibility of agencies to issue credit Regulation D. Those revisions relate to ratings for asset-backed securities, the payment of interest on respondent

212 96th Annual Report, 2009 balances maintained in the accounts of Regulation H “ineligible” pass-through correspon- Membership of dents (correspondent institutions ineli- State Banking Institutions gible to receive interest on balances in the Federal Reserve System maintained on their own behalf at the Federal Reserve), and the final rules implement other conforming amend- Regulation Y ments to Regulation D and Regulation Bank Holding Companies I. The final rules are effective July 2, and Change in Bank Control 2009. [Docket R-1332] Votesforthisaction:ChairmanBernanke, Vice Chairman Kohn, and Governors On January 27, 2009, the Board ap- Warsh,Duke,andTarullo. proved a final rule to provide a temporary exemption for state member banks and bank holding companies participat- Regulation E ing in the Asset-Backed Commercial Electronic Fund Transfers Paper Money Market Mutual Fund Liquidity Facility (AMLF), a special li- [Docket No. R-1343] quidity facility. Under the exemption, which was approved as an interim On November 5, 2009, the Board ap- measure in September 2008, assetproved a final rule that prohibits finan- backed commercial paper held by these cial institutions from paying overdrafts institutions as a result of their particion ATM (automated teller machine) pation in the AMLF is exempt from the and one-time debit card transactions, Board’s leverage risk-based capital unless the consumer affirmatively con- guidelines. The final rule is effective sents, or opts in, to the overdraft ser- January 30, 2009. (The Board subvice for those types of transactions. Be- sequently announced that the AMLF fore opting in, a consumer must be would expire on February 1, 2010.) provided with a notice that explains the Votesforthisaction:ChairmanBernanke, financial institution’s overdraft ser- Vice Chairman Kohn, and Governors vices, including any associated fees, WarshandDuke. and the consumer’s choices. The amendments prohibit financial institutions from discriminating against con- [Docket No. R-1361] sumers who do not opt in, and institu- On June 23, 2009, the Board, acting tions must provide consumers who do with the Federal Deposit Insurance not opt in with the same terms, condi- Corporation, Office of the Comptroller tions, and features (including pricing) of the Currency, and Office of Thrift that they provide to consumers who do Supervision, approved a joint interim opt in. The final rule, which includes a final rule with request for comment to model opt-in notice, is effective Janu- provide that mortgage loans modified ary 19, 2010, and compliance is man- under the Department of the Treasury’s datory July 1, 2010. Home Affordable Mortgage Program (HAMP, formerly Making Home Af- Votesforthisaction:ChairmanBernanke, fordable Program) will retain the risk Vice Chairman Kohn, and Governors weight assigned to the loan before the Warsh,Duke,andTarullo.

Record of Policy Actions of the Board of Governors 213 modification. The modified loans must 2009 (except for the amendment recontinue to meet other applicable pru- moving the sample clauses, which is dential criteria. On November 2, 2009, effective January 1, 2012). the Board and the other banking agen- Votesforthisaction:ChairmanBernanke, cies approved the interim final rule as a Vice Chairman Kohn, and Governors final rule with a clarification that mort- Warsh,Duke,andTarullo. gage loans whose HAMP modifications are in the trial period, and not yet per- Regulation S manent, qualify for the rule’s risk- Reimbursement for based capital treatment. The final rule Providing Financial Records; is effective December 21, 2009. Recordkeeping Requirements Votes for these actions: Chairman Ber- for Certain Financial Records nanke, Vice Chairman Kohn, and GovernorsWarsh,Duke,andTarullo. [Docket No. R-1325] Regulation P On September 2, 2009, the Board approved a revision to Regulation S to Privacy of Consumer change the rates and conditions under Financial Information which a government agency must reimburse a financial institution for costs [Docket No. R-1280] incurred in producing customer financial records under the Right to Finan- On October 26, 2009, the Board, acting cial Privacy Act. The final rule is efwith the Federal Deposit Insurance fective January 1, 2010. Corporation, Office of the Comptroller of the Currency, Office of Thrift Super- Votesforthisaction:ChairmanBernanke, vision, National Credit Union Adminis- Vice Chairman Kohn, and Governors tration, Federal Trade Commission, Warsh,Duke,andTarullo. Commodity Futures Trading Commission, and Securities and Exchange Regulation V Commission, approved a final rule to Fair Credit Reporting implement the privacy-notice and optout provisions of the Gramm-Leach- [Docket Nos. R-1203 and R-1255] Bliley Act. Under the act, institutions must notify consumers of their On January 26, 2009, the Board, acting information-sharing practices and in- with the Federal Deposit Insurance form consumers of their right to opt Corporation (FDIC), Office of the out of certain sharing practices. The Comptroller of the Currency (OCC), rule includes a model privacy form that Office of Thrift Supervision (OTS), will make it easier for consumers to National Credit Union Administration understand how financial institutions (NCUA), and Federal Trade Commiscollect and share information about sion (FTC), approved technical correcthem. Financial institutions may rely on tions to the rules regarding affiliate the model form as a safe harbor when marketing, identity-theft red flags, and providing privacy notices. The rule, address discrepancies. The amendments which also removes sample clauses are effective May 14, 2009, except for now included in an appendix to the the instructions to appendix C, which regulation, is effective December 31, are effective January 1, 2010.

214 96th Annual Report, 2009 Votesforthisaction:ChairmanBernanke, and information about their score. The Vice Chairman Kohn, and Governors final rules are effective January 1, WarshandDuke. 2011. Votesforthisaction:ChairmanBernanke, [Docket No. R-1300] Vice Chairman Kohn, and Governors Warsh,Duke,andTarullo. On May 29, 2009, the Board, acting with the FDIC, OCC, OTS, NCUA, and FTC, approved final rules to implement certain provisions of the Regulation W Fair and Accurate Credit Transactions Transactions Between Act regarding entities that furnish Member Banks and Their Affiliates information about consumers (furnishers) to consumer reporting agencies. [Docket No. R-1330] Under the rules, furnishers must establish reasonable policies and procedures On January 27, 2009, the Board to ensure the accuracy and integrity of approved a final rule to extend to Octothe information they provide. The rules ber 30, 2009, a temporary exemption also identify the circumstances under for member banks from certain proviwhich a furnisher must investigate a sions of section 23A of the Federal consumer’s direct dispute about the Reserve Act and the Board’s Regulaaccuracy of information in his or her tion W. The exemption, which was credit report. The rules are effective approved as an interim measure in Sep- July 1, 2010. tember 2008, increases the capacity of member banks to enter into securities- Votesforthisaction:ChairmanBernanke, financing transactions with their affili- Vice Chairman Kohn, and Governors ates. The final rule is effective January Warsh,Duke,andTarullo. 30, 2009. The Board allowed the rule to expire on October 30, 2009. [Docket No. R-1316] Votesforthisaction:ChairmanBernanke, On December 17, 2009, the Board, act- Vice Chairman Kohn, and Governors WarshandDuke. ing with the FTC, approved final rules to implement the risk-based-pricing provisions of the Fair and Accurate [Docket No. R-1331] Credit Transactions Act. Under the final rules, a creditor must generally pro- On January 27, 2009, the Board apvide a consumer with a risk-based- proved a final rule to provide a temppricing notice when the creditor, on the orary exemption for member banks basis of the consumer’s credit report, participating in the Asset-Backed Comprovides credit to the consumer on less mercial Paper Money Market Mutual favorable terms than it provides to Fund Liquidity Facility (AMLF), a speother consumers. The rules provide cial liquidity facility. The exemption creditors with several methods for from certain provisions of section 23A determining which consumers must of the Federal Reserve Act and the receive notices and include exceptions Board’s Regulation W was approved as to the notice requirement, such as when an interim measure in September 2008 a creditor provides consumers who and increases the capacity of participatapply for credit with a free credit score ing institutions to purchase asset-

Record of Policy Actions of the Board of Governors 215 backed commercial paper from affili- quest for comment to allow bank holdated money market mutual funds. The ing companies that are either S-Corps final rule is effective January 30, 2009. or mutual bank holding companies to (The Board subsequently announced include in tier 1 capital all subordinated that the AMLF would expire on Febru- debt issued to Treasury under TARP, ary 1, 2010.) provided that the subordinated debt will count toward the limit on the Votesforthisaction:ChairmanBernanke, amount of other restricted core capital Vice Chairman Kohn, and Governors WarshandDuke. includable in tier 1 capital. In addition, the interim final rule will allow small bank holding companies that are S-Corps or mutual bank holding com- Regulation Y panies to exclude such debt from treat- Bank Holding Companies ment as “debt” for purposes of the and Change in Bank Control debt-to-equity standard under the Board’s Small Bank Holding Company [Docket No. R-1193] Policy Statement. The final rule is ef- On March 16, 2009, the Board ap- fective July 1, 2009, and the interim fiproved a final rule to delay until March nal rule is effective June 1, 2009. 31, 2011, the effective date of new lim- Votesforthisaction:ChairmanBernanke, its on the inclusion of trust preferred Vice Chairman Kohn, and Governors securities and other restricted core Warsh,Duke,andTarullo. capital elements in tier 1 capital under the Board’s capital adequacy guidelines for bank holding companies. The new Regulation Z limits were scheduled to take effect on Truth in Lending March 31, 2009, but were delayed in view of financial market conditions and [Docket No. R-1340] in order to promote stability in the financial markets and the banking On May 7, 2009, the Board approved industry as a whole. amendments to implement the Mortgage Disclosure Improvement Act Votesforthisaction:ChairmanBernanke, Vice Chairman Kohn, and Governors (MDIA) that are intended to provide Warsh,Duke,andTarullo. consumers with disclosures earlier in the mortgage process. In July 2008, the Board issued final rules requiring [Docket Nos. R-1336 and R-1356] creditors to provide consumers with On May 20, 2009, the Board approved transaction-specific cost disclosures a final rule to allow bank holding com- shortly after receiving an application panies to include in tier 1 capital with- for a closed-end loan secured by a conout restriction senior perpetual pre- sumer’s principal dwelling. The MDIA ferred stock issued to the Department expedites the effective date of these of the Treasury (Treasury) under the disclosure requirements by about two Troubled Asset Relief Program months, to July 30, 2009, as well as (TARP). This rule makes final the rule broadens and adds to the requirements. approved as an interim measure in Under the Board’s amendments to October 2008. The Board also ap- implement these requirements, creditors proved an interim final rule with re- must (1) provide early cost disclosures

216 96th Annual Report, 2009 for loans secured by dwellings other Votesforthisaction:ChairmanBernanke, than a consumer’s principal dwelling Vice Chairman Kohn, and Governors Warsh,Duke,andTarullo. (such as a second home); (2) wait seven days after providing the early disclosures before closing the loan; and [Docket No. R-1353] (3) provide new disclosures that include a revised annual percentage On July 27, 2009, the Board approved rate (APR), and wait an additional final amendments to revise the disclothree days before closing the loan, if a sure requirements for private education change occurs that makes the APR in loans, consistent with the requirements the early disclosures inaccurate beyond of the Higher Education Opportunity a specified tolerance. The amendments Act. Under the amendments, creditors allow a consumer to expedite a loan that extend loans expressly for postsecclosing in order to address a personal ondary educational expenses must profinancial emergency, such as foreclo- vide disclosures about a loan’s terms sure. The amendments are effective and features on or with the loan appli- July 30, 2009. cation and must disclose information about federal student loan programs Votesforthisaction:ChairmanBernanke, that may offer less costly alternatives. Vice Chairman Kohn, and Governors Creditors must also provide additional Warsh,Duke,andTarullo. disclosures when a loan is approved and when it is consummated. The new [Docket No. R-1364] disclosure requirements do not apply to education loans made, insured, or guar- On July 15, 2009, the Board approved anteed by the federal government, or in an interim final rule with request for certain other situations (such as a credit comment to implement certain provi- card advance used to fund educational sions of the Credit Card Accountability expenses). The amendments also in- Responsibility and Disclosure Act. The clude restrictions on using the name, interim final rule requires creditors to emblem, or mascot of an educational provide written notice to consumers 45 institution in a way that implies the indays before increasing an APR on a stitution endorses a creditor’s loans. credit card account or making a signifi- The amendments, which include model cant change to the terms of an account. disclosure forms, are effective Septem- Creditors must also inform consumers, ber 14, 2009, and compliance is manin the same notice, of their right to datory February 14, 2010. cancel the account before the increase Votesforthisaction:ChairmanBernanke, or change goes into effect. If a con- Vice Chairman Kohn, and Governors sumer does so, the creditor is generally Warsh,Duke,andTarullo. prohibited from applying the increase or change to the account. In addition, [Docket R-1378] creditors must generally mail or deliver periodic statements for credit cards and On November 10, 2009, the Board apother open-end consumer credit proved an interim final rule with reaccounts at least 21 days before pay- quest for comment to implement a rement is due. The interim final rule is quirement in the Helping Families Save effective August 20, 2009. Their Homes Act that consumers receive written notice after their mort-

Record of Policy Actions of the Board of Governors 217 gage loan has been sold or transferred. trolled by a Reserve Bank. The Board Under the act, a purchaser or assignee also voted to voluntarily apply the polthat acquires a mortgage loan must icy to the residential mortgage assets provide the required disclosures in held by the Maiden Lane limited liabilwriting within 30 days. The interim fi- ity companies, which were formed by nal rule is effective November 20, the Federal Reserve Bank of New York 2009, and compliance is mandatory to facilitate the acquisition of The Bear January 19, 2010. Stearns Companies, Inc. by JPMorgan Chase & Co. and to help stabilize the Votesforthisaction:ChairmanBernanke, American International Group, Inc. Vice Chairman Kohn, and Governors Warsh,Duke,andTarullo. Votesforthisaction:ChairmanBernanke, Vice Chairman Kohn, and Governors WarshandDuke. Regulation GG Prohibition on Funding of Unlawful Internet Gambling Interagency Questions and Answers Regarding [Docket No. R-1298] Flood Insurance [Docket No. R-1311] On November 25, 2009, the Board, acting jointly with the Department of the On July 14, 2009, the Board, acting Treasury, approved a final rule to with the Federal Deposit Insurance extend the compliance date for the joint Corporation, Office of the Comptroller regulation implementing certain proviof the Currency, Office of Thrift Supersions of the Unlawful Internet Gamvision, National Credit Union Adminisbling Enforcement Act by six months, tration, and Farm Credit Administrato June 1, 2010. tion, approved final revised Interagency Votesforthisaction:ChairmanBernanke, Questions and Answers Regarding Vice Chairman Kohn, and Governors Flood Insurance. The questions and an- Warsh,Duke,andTarullo. swers are intended to help financial institutions meet their responsibilities under federal flood insurance legislation Policy Statements and and to increase public understanding of flood insurance regulation. The revised Other Actions questions and answers, which supplement other guidance or interpretations Homeownership Preservation issued by the agencies and the Federal Policy for Residential Mortgage Emergency Management Agency, are Assets effective September 21, 2009, and supersede the agencies’ questions and an- On January 23, 2009, the Board ap- swers issued in 1997. (The Board also proved a policy, developed pursuant to approved the issuance of five proposed section 110 of the Emergency Eco- new questions and answers for public nomic Stabilization Act, to help pre- comment.) vent avoidable foreclosures on residen- Votesforthisaction:ChairmanBernanke, tial mortgage assets that are subject to Vice Chairman Kohn, and Governors section 110 and that are owned or con- Warsh,Duke,andTarullo.

218 96th Annual Report, 2009 Maximum Maturity from the affiliation or resign from the of Primary Credit Loans Reserve Bank’s board within 60 days of the earlier of the date that (1) the di- On November 12, 2009, the Board ap- rector becomes aware of the impermisproved a reduction in the maximum sible affiliation or (2) the Board inmaturity of primary credit loans at the forms the Reserve Bank of the change discount window for depository institu- in character of the company. A Class C tions from 90 days to 28 days, effective director who holds stock in a company January 14, 2010. Before August 2007, that becomes a bank holding company the maximum available term of pri- or who holds stock that otherwise mary credit was generally overnight. becomes an impermissible holding The Federal Reserve lengthened the must either divest the stock or resign maximum maturity to 30 days (on from the Reserve Bank’s board within August 17, 2007) and then to 90 days 60 days of the earlier of the date that (on March 16, 2008) in order to en- (1) the director becomes aware of the hance banks’ access to term funds and impermissible stockholding or (2) the thus support their ability to lend to Board informs the Reserve Bank of the households and businesses. change in character of the company. Votesforthisaction:ChairmanBernanke, The revisions also clarify the rules re- Vice Chairman Kohn, and Governors garding a Class C director’s indirect Warsh,Duke,andTarullo. ownership in a financial stock issuer. Votesforthisaction:ChairmanBernanke, Policy Governing Eligibility, Vice Chairman Kohn, and Governors Qualifications, and Rotation for Duke and Tarullo. Absent and not voting: Directors of Federal Reserve GovernorWarsh. Banks and Their Branches Special Liquidity Facilities On November 17, 2009, the Board and Other Initiatives approved revisions to its eligibility, qualifications, and rotation policy for The Board modified certain aspects of Federal Reserve Bank and Branch the special liquidity facilities and other directors. The revisions address situainitiatives that were previously impletions in which previously permissible mented to promote financial stability affiliations or stockholdings may beand support critical institutions. For come impermissible for Class B and more information on the establishment Class C directors, as a result of a comand purposes of the facilities and initiapany’s change in character. (Class B tives discussed in this section, see the and Class C directors represent the Board’s 2008 Annual Report. public and may not be an officer, a director, or an employee of a bank; in addition, Class C directors may not Special Liquidity Facilities own stock in a bank.) If a Class B or Class C director is affiliated with a On January 27, 2009, the Board company (an officer, a director, or an extended its authorizations for the folemployee of a company) that becomes lowing facilities until October 30, a bank holding company or that other- 2009: Primary Dealer Credit Facility wise becomes an impermissible affilia- (PDCF), Asset-Backed Commercial tion, the director must either resign Paper Money Market Mutual Fund Li-

Record of Policy Actions of the Board of Governors 219 quidity Facility (AMLF), Commercial TAF.) The Board and the FOMC sus- Paper Funding Facility (CPFF), and pended TSLF auctions backed by Money Market Investor Funding Facil- schedule 1 collateral (Treasury, agencyity (MMIFF). (On January 7, 2009, the debt, and agency-guaranteed mortgage- Board had announced changes to the backed securities), effective July 1, MMIFF, including its economic param- 2009, and the TSLF Options Program eters and the set of eligible investors (TOP), effective with the maturity of for the facility.) The Board and the outstanding June TOP options. The Federal Open Market Committee Board and the FOMC also reduced the (FOMC) approved extending their au- frequency and size of TSLF auctions thorizations for the Term Securities backed by schedule 2 collateral (sched- Lending Facility (TSLF) until October ule 1 collateral and investment-grade 30, 2009. All of the extensions were corporate, municipal, mortgage-backed, subject to the same collateral, interest and asset-backed securities) from every rate, and other conditions previously two weeks to every four weeks, in established. The facilities had been amounts of $75 billion, and stated that scheduled to expire on April 30, 2009. amounts auctioned under the TSLF (Further extensions are discussed in may be reduced further, if warranted by this section.) market conditions. Votesforthisaction:ChairmanBernanke, Votesforthisaction:ChairmanBernanke, Vice Chairman Kohn, and Governors Vice Chairman Kohn, and Governors WarshandDuke. Warsh,Duke,andTarullo. On June 23, 2009, the Board extended Note: On September 24, 2009, the its authorizations for the following fa- Board announced reductions in the cilities until February 1, 2010: AMLF, amounts of 84-day TAF auctions, as CPFF, and PDCF. The Board and the well as reductions in the maturities of FOMC approved extending their autho- those auctions. The Board and the rizations for the TSLF until February 1, FOMC also announced reductions in 2010. All of the extensions were sub- the amounts of schedule 2 TSLF aucject to the same collateral, interest rate, tions. On December 16, 2009, the and other conditions previously estab- Board and the FOMC announced that lished. The Board reaffirmed that its they anticipated the following facilities authorization for the MMIFF would ex- would expire on February 1, 2010: pire on October 30, 2009. The Board AMLF, CPFF, PDCF, and TSLF. The also trimmed the size and changed the Board and the FOMC also announced terms of some facilities, in light of that they expected the amounts proimproving financial conditions and re- vided under the TAF would continue to duced usage of the facilities. Specifi- be scaled back in early 2010. cally, the Board reduced the amounts auctioned at biweekly Term Auction Term Asset-Backed Securities Facility (TAF) auctions from $150 bil- Loan Facility lion to $125 billion, effective July 13, 2009, and stated that TAF funding may The Board authorized the Term Assetbe reduced further, if warranted by Backed Securities Loan Facility market conditions. (See ‘‘Discount (TALF) in November 2008 in order to Rates for Depository Institutions in increase credit availability and support 2009’’ for further discussion of the economic activity by facilitating the

220 96th Annual Report, 2009 issuance of asset-backed securities are based on one- and two-year Lon- (ABS) collateralized by consumer and don interbank offered (Libor) swap small business loans. On February 6 rates and are more closely matched to and February 23, 2009, the Board ap- the duration of the underlying ABS proved revisions to the TALF’s terms collateral. The Board also announced and conditions, including interest rates other technical clarifications to the proon loans, collateral haircuts, a revised gram. definition of eligible borrowers, and On April 30, 2009, the Board apadditional specifications for ABS col- proved an expansion of the eligible collateral. (Unless otherwise indicated, lateral for TALF loans to include newly Board actions on the TALF in 2009 issued commercial mortgage-backed sewere approved by the unanimous vote curities (CMBS) and newly issued seof Chairman Bernanke, Vice Chairman curities backed by insurance-premium- Kohn, and Governors Warsh, Duke, finance loans. The inclusion of newly and Tarullo.) On March 3, 2009, the issued CMBS as eligible collateral for Board and the Department of the Trea- TALF loans helps prevent defaults on sury (Treasury) announced the launch economically viable commercial propof the TALF for eligible holders of erties, increases the capacity of current ABS backed by newly and recently holders of maturing mortgages to make originated auto, credit card, and student additional loans, and facilitates the sale loans and by small business loans guar- of distressed properties. The inclusion anteed by the Small Business Adminis- of insurance-premium ABS facilitates tration. the flow of credit to small businesses. On March 19, 2009, the Board ap- The Board also authorized TALF loans proved an expansion of the eligible col- with maturities of five years to finance lateral for loans extended under the purchases of newly issued CMBS, ABS TALF to include ABS backed by backed by student loans, and ABS mortgage-servicing advances, loans or backed by loans guaranteed by the leases relating to business equipment, Small Business Administration. In leases of vehicle fleets, and non-auto addition, some of the interest on collatfloorplan loans. In addition, the Board eral financed with a five-year loan may expanded the list of eligible auto- be diverted toward an accelerated rerelated receivables. ABS backed by payment of the loan, especially in the mortgage-servicing advances were ad- fourth and fifth years. ded to improve servicers’ ability to On May 18, 2009, the Board apwork with homeowners to prevent proved an expansion of the eligible colavoidable foreclosures. The other new lateral for TALF loans to include cer- ABS categories complement the con- tain high-quality CMBS issued before sumer and small business loan catego- January 1, 2009 (legacy CMBS), in ries that were already eligible. order to improve legacy CMBS mar- On April 21, 2009, the Board ap- kets and thereby facilitate the issuance proved the establishment of two new of new CMBS, which in turn helps interest rates for certain fixed-rate loans borrowers finance new purchases of extended under the TALF that are col- commercial properties or refinance exlateralized by ABS with weighted aver- isting commercial mortgages on better age lives to maturity of less than two terms. years and that do not benefit from a On June 22, 2009, the Board apgovernment guarantee. These new rates proved (1) an alternate lending rate for

Record of Policy Actions of the Board of Governors 221 TALF-eligible collateral consisting of ensure that TALF collateral complies ABS that are collateralized by private with the Federal Reserve’s high stanstudent loans and have a prime-based dards for credit quality, transparency, coupon and (2) other clarifying and and simplicity of structure. technical changes to the TALF’s terms Note: On December 16, 2009, the and conditions. The alternate lending Board and the FOMC announced that rate was established to help make prithe anticipated expiration dates for the vate student loans more affordable and TALF remained set at June 30, 2010, more readily available. for loans backed by newly issued Votes for this action: Chairman Bernanke CMBS, and March 31, 2010, for loans and Governors Warsh, Duke, and Tarullo. backed by all other types of collateral. Absent and not voting: Vice Chairman Kohn. On June 30, 2009, the Board ap- Other Initiatives proved an increase in the administrative fee charged to TALF borrowers Bank of America Corporation from 5 basis points to (1) 10 basis points for loans collateralized by ABS On January 15, 2009, the Board, as and (2) 20 basis points for loans collat- part of a package of coordinated eralized by CMBS (newly issued and actions with the Department of the legacy). Treasury (Treasury) and the Federal On July 6, 2009, the Board approved Deposit Insurance Corporation (FDIC), an adjustment to the haircuts applied to authorized the Federal Reserve Bank of any loans extended under TALF to Richmond to enter into an agreement Treasury-sponsored Public-Private In- with Bank of America Corporation unvestment Funds (PPIFs). The haircuts der which the Reserve Bank would were increased so that, if a PPIF bor- make certain residual financing availrowed from the TALF, the combined able to Bank of America in connection Treasury-supplied and TALF-supplied with a designated pool of approxidebt would be no greater than the total mately $118 billion in assets. (The amount of TALF debt that would be Board also approved the issuance of a available, leveraging the PPIF equity letter to the Secretary of the Treasury alone. recommending that the Secretary in- On August 13, 2009, the Board, act- voke the systemic-risk exception to the ing with Treasury, approved an exten- least-cost-resolution requirements in the sion of the TALF through March 31, Federal Deposit Insurance Act to per- 2010, for TALF loans against newly mit the FDIC to participate in the proissued ABS and eligible legacy CMBS. posed agreement with Bank of Because new CMBS transactions can America.) In September 2009, Bank of take more time to arrange, TALF loans America paid an exit fee to terminate against newly issued CMBS were the term sheet with the Federal Reextended through June 30, 2010. TALF serve, Treasury, and the FDIC related loans had been previously authorized to the residual financing arrangement through December 31, 2009. and related guarantee protections. On September 29, 2009, the Board Votes for these actions: Chairman Berapproved an enhanced credit review nanke, Vice Chairman Kohn, and Goverprocess for TALF-eligible ABS to help norsWarsh,Kroszner,andDuke.

222 96th Annual Report, 2009 American International Group, Inc. the FDIC would guarantee debt issued by certain special-purpose entities, On March 1, 2009, the Board approved including Public-Private Investment a restructuring of the government’s as- Funds, established to acquire legacy sistance to American International assets from banking organizations. Group, Inc. (AIG) that, together with Votesforthisaction:ChairmanBernanke, new capital to be provided by Treasury, Vice Chairman Kohn, and Governors would help stabilize the company, en- Warsh,Duke,andTarullo. hance the company’s capital and liquidity, and facilitate the orderly completion of AIG’s global divestiture Discount Rates for program. As part of the restructuring, the Board authorized the Federal Depository Institutions Reserve Bank of New York to (1) ex- in 2009 change a portion of AIG’s existing outstanding debt under the revolving Under the Federal Reserve Act, the credit facility for preferred equity interboards of directors of the Federal Reests in special-purpose vehicles (SPVs) serve Banks must establish rates on that would hold all of the equity interdiscount window loans to depository est in two AIG insurance subsidiaries, institutions at least every 14 days, sub- (2) provide up to approximately $8.5 ject to review and determination by the billion in new loans to SPVs estab- Board of Governors. lished by domestic life insurance subsidiaries of AIG to facilitate the securitization of designated blocks of existing life insurance policies held by Primary Credit the parent insurance companies, and (3) modify the interest rate payable un- Primary credit, the Federal Reserve’s der the revolving credit facility. Upon main lending program for depository completion of these transactions, the institutions, is extended at a rate above maximum amount available under the the federal funds rate target set by the revolving credit facility would be re- Federal Open Market Committee duced. (FOMC). It is typically made available, with minimal administration and for Votesforthisaction:ChairmanBernanke, very short terms, as a backup source of Vice Chairman Kohn, and Governors Warsh,Duke,andTarullo. liquidity to depository institutions that, in the judgment of the lending Federal Reserve Bank, are in generally sound Treasury Legacy Loans Program financial condition. On March 16, 2008, the Board announced a tempo- On September 9, 2009, the Board ap- rary change to the Reserve Banks’ disproved the issuance of a letter to the count window lending practices to Secretary of the Treasury recommend- allow the provision of term financing ing that the Secretary invoke the for as long as 90 days. On November systemic-risk exception in the Federal 17, 2009, the Board announced a re- Deposit Insurance Act to allow the duction in the maximum maturity of FDIC and Treasury to implement the such financing to 28 days effective Legacy Loans Program under which January 14, 2010.

Record of Policy Actions of the Board of Governors 223 Throughout 2009, the primary credit bidding process as the rate at which all rate was 1⁄ 2 percent.1 bids can be fulfilled, up to the maximum auction amount and subject to a minimum bid rate. Starting on January Secondary and Seasonal Credit 12, 2009, the minimum bid rate was set Secondary credit is available in appro- at a level equal to the rate of interest priate circumstances to depository insti- that banks earn on excess reserve baltutions that do not qualify for primary ances. Previously, the minimum bid credit. The secondary credit rate is set rate for TAF auctions was determined at a spread above the primary credit based on a measure of the average rate. Throughout 2009, the spread was expected overnight federal funds rate set at 50 basis points. over the term of the credit being auc- Seasonal credit is available to tioned. At every TAF auction in 2009, smaller depository institutions to meet the resulting interest rate on TAF credit liquidity needs that arise from regular was equal to the minimum bid rate, swings in their loans and deposits. The which remained at 1⁄ 4 percent throughrate on seasonal credit is calculated out the year. every two weeks as an average of se- The Federal Reserve conducted regulected money-market yields, typically lar $150 billion auctions of 28- and 84resulting in a rate close to the federal day TAF credit throughout the first half funds rate target. of 2009.3 On June 25, 2009, in view of At year-end, the secondary and sea- the improvement in financial market sonal credit rates were 1 percent and conditions and the associated decline in 0.15 percent, respectively.2 the demand for TAF funds, the Board announced a reduction in the amount auctioned to $125 billion and noted Term Auction Facility Credit that TAF funding would be reduced In December 2007, the Federal Reserve gradually further if market conditions established a temporary Term Auction continued to improve. The amounts Facility (TAF). Under the TAF, the auctioned in August and September Federal Reserve auctions term funds to were reduced to $100 billion and $75 depository institutions that are in gen- billion, respectively. On September 24, erally sound financial condition and are 2009, the Board announced that the eligible to borrow under the primary amounts offered at auctions of 28-day credit program. The amount of each credit would be maintained at $75 auction is determined in advance by the billion per auction to ensure that an ad- Federal Reserve, and the interest rate equate volume of funding was availon TAF credit is determined by the able in the period leading up to yearend and over year-end. The amounts offered at 84-day auctions were re- 1. The spread of the primary credit rate over duced to $50 billion effective in OctotheFOMC’stargetratewasordinarily100basis ber and to $25 billion in November and points.In2007,theBoardapprovedanarrowing ofthisspreadto50basispointsandin2008,ap- December, and the maturities of those proved a further narrowing to 25 basis points. Throughout2009,theFOMCmaintainedatarget range for the federal funds rate of 0 to 1⁄4 per- 3. For more information on TAF auctions, cent. including minimum bid rates and the auction- 2. Forcurrentandhistoricaldiscountrates,see determined rates on TAF credit, see www.frbdiscountwindow.org/. federalreserve.gov/monetarypolicy/taf.htm.

224 96th Annual Report, 2009 operations were aligned with the matu- Votes on Changes to Discount rity dates in the cycle for 28-day funds. Rates for Depository Institutions With the completion of that transition, the auction schedule for 2010 was con- About every two weeks during 2009, verted to a single cycle of 28-day funds the Board approved proposals by the offered every 28 days. On December 12 Reserve Banks to maintain the for- 16, 2009, the Federal Reserve indicated mulas for computing the secondary and that it expected that amounts provided seasonal credit rates as well as the aucunder the Term Auction Facility would tion method by which the TAF credit continue to be scaled back in early rate is set. In 2009, the Board did not 2010. approve any changes in the primary credit rate. Á

225 Minutes of Federal Open Market Committee Meetings The policy actions of the Federal Open sion, they are identified in the minutes Market Committee, contained in the and a summary of the reasons for their minutes of its meetings, are presented dissent is provided. in the Annual Report of the Board of Policy directives of the Federal Open Governors pursuant to the requirements Market Committee are issued to the of section 10 of the Federal Reserve Federal Reserve Bank of New York as Act. That section provides that the the Bank selected by the Committee to Board shall keep a complete record of execute transactions for the System the actions taken by the Board and by Open Market Account. In the area of the Federal Open Market Committee domestic open market operations, the on all questions of policy relating to Federal Reserve Bank of New York open market operations, that it shall operates under instructions from the record therein the votes taken in con- Federal Open Market Committee that nection with the determination of open take the form of an Authorization for market policies and the reasons under- Domestic Open Market Operations and lying each policy action, and that it a Domestic Policy Directive. (A new shall include in its annual report to Domestic Policy Directive is adopted at Congress a full account of such each regularly scheduled meeting.) In actions. the foreign currency area, the Federal The minutes of the meetings contain Reserve Bank of New York operates the votes on the policy decisions made under an Authorization for Foreign at those meetings as well as a summary Currency Operations, a Foreign Curof the information and discussions that rency Directive, and Procedural Inled to the decisions. In addition, four structions with Respect to Foreign Curtimes a year, starting with the October rency Operations. Changes in the 2007 Committee meeting, a Summary instruments during the year are reof Economic Projections is published ported in the minutes for the individual as an addendum to the minutes. The meetings.1 descriptions of economic and financial conditions in the minutes and the Summary of Economic Projections are 1. AsofJanuary1,2009,theFederalReserve based solely on the information that Bank of New York was operating under the was available to the Committee at the Domestic Policy Directive approved at the Detime of the meetings. cember15−16,2008,Committeemeetingandthe Members of the Committee voting Authorization for Foreign Currency Operations approved by notation vote on September 21, for a particular action may differ 2008.Theotherpolicyinstruments(theAuthoriamong themselves as to the reasons for zationforDomesticOpenMarketOperations,the their votes; in such cases, the range of Foreign Currency Directive, and Procedural Intheir views is noted in the minutes. structionswithRespecttoForeignCurrencyOperations)ineffectasofJanuary1,2009,wereap- When members dissent from a deciprovedattheJanuary29−30,2008,meeting.

226 96th Annual Report, 2009 Meeting Held on Mr.Frierson,3DeputySecretary,Of- January 27–28, 2009 ficeoftheSecretary,Boardof Governors A meeting of the Federal Open Market Mr.Struckmeyer,DeputyStaffDirec- Committee was held in the offices of tor,OfficeofStaffDirectorfor the Board of Governors of the Federal Management,BoardofGovernors Reserve System in Washington, D.C., Ms.Bailey,DeputyDirector,Division on Tuesday, January 27, 2009, at 1:30 ofBankingSupervisionand p.m. and continued on Wednesday, Regulation,BoardofGovernors January 28, 2009, at 9:00 a.m. Mr.English,DeputyDirector,Division Present: ofMonetaryAffairs,Boardof Mr.Bernanke,Chairman Governors Mr.Dudley,ViceChairman Mr.Blanchard,AssistanttotheBoard, Ms.Duke OfficeofBoardMembers,Board Mr.Evans ofGovernors Mr.Kohn Mr.Lacker Messrs.ReifschneiderandWascher, Mr.Lockhart AssociateDirectors,Divisionof Mr.Warsh ResearchandStatistics,Boardof Ms.Yellen Governors Mr.Bullard,Ms.Cumming,Mr.Hoe- Mr.Levin,AssociateDirector,Divinig,Ms.Pianalto,andMr.Rosen- sionofMonetaryAffairs,Board gren,AlternateMembersofthe ofGovernors FederalOpenMarketCommittee Ms.Shanks,4AssociateSecretary,Of- Messrs.Fisher,Plosser,andStern, ficeoftheSecretary,Boardof PresidentsoftheFederalReserve Governors BanksofDallas,Philadelphia, andMinneapolis,respectively Mr.Reeve,DeputyAssociateDirector, DivisionofInternationalFinance, Mr.Madigan,SecretaryandEconomist BoardofGovernors Ms.Danker,DeputySecretary Mr.Luecke,AssistantSecretary Mr.Sichel,DeputyAssociateDirector, Mr.Skidmore,AssistantSecretary DivisionofResearchandStatis- Ms.Smith,AssistantSecretary tics,BoardofGovernors Mr.Alvarez,GeneralCounsel Mr.Meyer,SeniorAdviser,Division Mr.Ashton,2AssistantGeneral ofMonetaryAffairs,Boardof Counsel Governors Mr.Sheets,Economist Mr.Stockton,Economist Mr.Oliner,SeniorAdviser,Division ofResearchandStatistics,Board Messrs.Altig,Clouse,Connors,KaofGovernors min,Slifman,Tracy,andWilcox, AssociateEconomists Ms.Dynan,AssistantDirector,DivisionofResearchandStatistics, Ms.Mosser,TemporaryManager,Sys- BoardofGovernors temOpenMarketAccount Mr.Small,ProjectManager,Division Ms.Johnson,3SecretaryoftheBoard, ofMonetaryAffairs,Boardof OfficeoftheSecretary,Boardof Governors Governors 2. AttendedWednesday’ssessiononly. 4. Attended portion of the meeting on Tues- 3. Attendedportionofthemeetingthatwasa daythatwasajointsessionoftheBoardandthe jointsessionoftheBoardandtheFOMC. FOMC.

Minutes of FOMC Meetings, January 227 Ms.Kusko,SeniorEconomist,Divi- WilliamC.Dudley,PresidentoftheFedsionofResearchandStatistics, eralReserveBankofNewYork,with BoardofGovernors ChristineM.Cumming,FirstVice PresidentoftheFederalReserveBank Mr.Gust,SeniorEconomist,Division ofNewYork,asalternate. ofInternationalFinance,Boardof JeffreyM.Lacker,PresidentoftheFederal Governors ReserveBankofRichmond,withEric C.Rosengren,PresidentoftheFederal Messrs.DriscollandKing,Econo- ReserveBankofBoston,asalternate. mists,DivisionofMonetary Affairs,BoardofGovernors CharlesL.Evans,PresidentoftheFederal ReserveBankofChicago,withSandra Ms.Beattie,3AssistanttotheSecre- Pianalto,PresidentoftheFederalRetary,OfficeoftheSecretary, serveBankofCleveland,asalternate. BoardofGovernors DennisP.Lockhart,PresidentoftheFed- Ms.Low,OpenMarketSecretariat eralReserveBankofAtlanta,with Specialist,DivisionofMonetary JamesB.Bullard,Presidentofthe Affairs,BoardofGovernors FederalReserveBankofSt.Louis, asalternate. Ms.Green,FirstVicePresident,Fed- JanetL.Yellen,PresidentoftheFederal eralReserveBankofRichmond ReserveBankofSanFrancisco,with ThomasM.Hoenig,Presidentofthe Messrs.Fuhrer,Rosenblum,andSni- FederalReserveBankofKansasCity, derman,ExecutiveVicePresi- asalternate. dents,FederalReserveBanksof Boston,Dallas,andCleveland, Annual Organizational Matters respectively By unanimous vote, the following offi- Messrs.HiltonandKrane,Mses. cers of the Federal Open Market Com- MesterandPerelmuter,Messrs. mittee were selected to serve until the Rasche,Rudebusch,andSellon, selection of their successors at the first SeniorVicePresidents,Federal ReserveBanksofNewYork, regularly scheduled meeting of the Chicago,Philadelphia,NewYork, Committee in 2010: St.Louis,SanFrancisco,and KansasCity,respectively BenS.Bernanke Chairman WilliamC.Dudley ViceChairman Mr.Weber,SeniorResearchOfficer, BrianF.Madigan Secretaryand FederalReserveBankofMinne- Economist apolis DeborahJ.Danker DeputySecretary MatthewM.Luecke AssistantSecretary Mr.Hetzel,SeniorEconomist,Federal DavidW.Skidmore AssistantSecretary ReserveBankofRichmond MichelleA.Smith AssistantSecretary ScottG.Alvarez GeneralCounsel ThomasC.Baxter,Jr. DeputyGeneral In the agenda for this meeting, it Counsel was reported that advices of the elec- RichardM.Ashton AssistantGeneral tion of the following members and al- Counsel ternate members of the Federal Open D.NathanSheets Economist Market Committee for a term begin- DavidJ.Stockton Economist ning January 27, 2009, had been re- DavidE.Altig,JamesA.Clouse,Thomas ceived and that these individuals had A.Connors,StevenB.Kamin, LawrenceSlifman,DanielG.Sullivan, executed their oaths of office. JosephS.Tracy,JohnA.Weinberg, The elected members and alternate DavidW.Wilcox,andJohnC.Willmembers were as follows: iams,AssociateEconomists

228 96th Annual Report, 2009 By unanimous vote, the Committee Australiandollars Mexicanpesos adopted several minor amendments to Brazilianreais NewZealanddollars Canadiandollars Norwegiankroner its Program for Security of FOMC In- Danishkroner Poundssterling formation. Euro Singaporedollars Japaneseyen Swedishkronor By unanimous vote, the Federal Koreanwon Swissfrancs Reserve Bank of New York was selected to execute transactions for the B. To hold balances of, and to have System Open Market Account. outstanding forward contracts to receive or to deliver, the foreign currencies listed in Secretary’s note: The Chairman reparagraphAabove. ported that prior to the meeting he had C. To draw foreign currencies and to used his authority under the Commit- permit foreign banks to draw dollars under tee’s Rules of Organization to appoint the reciprocal currency arrangements listed Ms. Mosser as Manager of the System in paragraph 2 below, provided that drawings by either party to any such arrange- Open Market Account until the Comment shall be fully liquidated within 12 mittee selects a replacement manager. monthsafteranyamountoutstandingatthat By unanimous vote, the Committee timewasfirstdrawn,unlesstheCommittee, approved the Authorization for Foreign because of exceptional circumstances, spe- Currency Operations (shown below) cificallyauthorizesadelay. with a clerical amendment that com- D. To maintain an overall open position in all foreign currencies not exceeding bined the list of currencies in 1.A ap- $25.0 billion. For this purpose, the overall proved at the January 2008 meeting open position in all foreign currencies is with the five additional currencies that defined as the sum (disregarding signs) of were approved by the Committee in net positions in individual currencies, September and October 2008 in con- excluding changes in dollar value due to foreignexchangeratemovementsandinternection with temporary reciprocal curest accruals. The net position in a single rency arrangements: foreign currency is defined as holdings of balances in that currency, plus outstanding Authorization for contracts for future receipt, minus outstand- Foreign Currency Operations ing contracts for future delivery of that cur- (Amended January 27, 2009) rency, i.e., as the sum of these elements withdueregardtosign. 1. The Federal Open Market Committee authorizes and directs the Federal Reserve 2. The Federal Open Market Committee Bank of New York, for System Open Mardirects the Federal Reserve Bank of New ket Account, to the extent necessary to York to maintain reciprocal currency arcarry out the Committee’s foreign currency rangements (“swap” arrangements) for the directive and express authorizations by the System Open Market Account for periods Committee pursuant thereto, and in conforup to a maximum of 12 months with the mity with such procedural instructions as following foreign banks, which are among the Committee may issue from time to thosedesignatedbytheBoardofGovernors time: of the Federal Reserve System under Sec- A. To purchase and sell the following tion 214.5 of Regulation N, Relations with foreign currencies in the form of cable Foreign Banks and Bankers, and with the transfers through spot or forward transacapproval of the Committee to renew such tions on the open market at home and arrangementsonmaturity: abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve Act of 1934, with foreign Foreignbank Amountofarrangement (millionsofdollarsequivalent) monetary authorities, with the Bank for International Settlements, and with other in- BankofCanada 2,000 ternationalfinancialinstitutions: BankofMexico 3,000

Minutes of FOMC Meetings, January 229 Any changes in the terms of existing swap 6. All operations undertaken pursuant to arrangements, and the proposed terms of the preceding paragraphs shall be reported any new arrangements that may be autho- promptly to the Foreign Currency Subcomrized, shall be referred for review and ap- mittee and the Committee. The Foreign provaltotheCommittee. Currency Subcommittee consists of the Chairman and Vice Chairman of the Com- 3. All transactions in foreign currencies mittee, the Vice Chairman of the Board of undertaken under paragraph 1.A. above Governors, and such other member of the shall, unless otherwise expressly authorized Board as the Chairman may designate (or by the Committee, be at prevailing market in the absence of members of the Board rates. For the purpose of providing an serving on the Subcommittee, other Board investment return on System holdings of members designated by the Chairman as alforeign currencies or for the purpose of adternates, and in the absence of the Vice justing interest rates paid or received in Chairman of the Committee, the Vice connection with swap drawings, transac- Chairman’salternate).MeetingsoftheSubtions with foreign central banks may be uncommittee shall be called at the request of dertakenatnon-marketexchangerates. any member, or at the request of the Man- 4. It shall be the normal practice to ar- ager, System Open Market Account (“Manrange with foreign central banks for the co- ager”), for the purposes of reviewing recent ordination of foreign currency transactions. or contemplated operations and of consult- In making operating arrangements with for- ing with the Manager on other matters reeign central banks on System holdings of lating to the Manager’s responsibilities. At foreign currencies, the Federal Reserve the request of any member of the Subcom- Bank of New York shall not commit itself mittee, questions arising from such reviews to maintain any specific balance, unless and consultations shall be referred for deauthorized by the Federal Open Market termination to the Federal Open Market Committee. Any agreements or understand- Committee. ings concerning the administration of the 7. TheChairmanisauthorized: accountsmaintainedbytheFederalReserve A. With the approval of the Commit- Bank of New York with the foreign banks tee, to enter into any needed agreement or designated by the Board of Governors ununderstanding with the Secretary of the der Section 214.5 of Regulation N shall be Treasuryaboutthedivisionofresponsibility referred for review and approval to the for foreign currency operations between the Committee. SystemandtheTreasury; 5. Foreign currency holdings shall be in- B. To keep the Secretary of the Treavested to ensure that adequate liquidity is sury fully advised concerning System formaintainedtomeetanticipatedneedsandso eign currency operations, and to consult that each currency portfolio shall generally with the Secretary on policy matters relathave an average duration of no more than ingtoforeigncurrencyoperations; 18 months (calculated as Macaulay dura- C. From time to time, to transmit aption).Suchinvestmentsmayincludebuying propriate reports and information to the or selling outright obligations of, or fully National Advisory Council on International guaranteed as to principal and interest by, a MonetaryandFinancialPolicies. foreign government or agency thereof; buy- 8. Staff officers of the Committee are ing such securities under agreements for authorized to transmit pertinent information repurchase of such securities; selling such on System foreign currency operations to securitiesunderagreementsfortheresaleof appropriateofficialsoftheTreasuryDepartsuch securities; and holding various time ment. and other deposit accounts at foreign institutions. In addition, when appropriate in 9. All Federal Reserve Banks shall parconnection with arrangements to provide ticipate in the foreign currency operations investment facilities for foreign currency for System Account in accordance with holdings, U.S. Government securities may paragraph 3G(1) of the Board of Goverbe purchased from foreign central banks nors’ Statement of Procedure with Respect underagreementsforrepurchaseofsuchse- toForeignRelationshipsofFederalReserve curitieswithin30calendardays. BanksdatedJanuary1,1944.

230 96th Annual Report, 2009 By unanimous vote, the Foreign Cur- Procedural Instructions rency Directive was reaffirmed in the with respect to form shown below: Foreign Currency Operations (Amended January 27, 2009) In conducting operations pursuant to the Foreign Currency Directive authorization and direction of the Federal (Reaffirmed January 27, 2009) Open Market Committee as set forth in the Authorization for Foreign Currency Opera- 1. System operations in foreign curren- tions and the Foreign Currency Directive, cies shall generally be directed at counter- the Federal Reserve Bank of New York, ing disorderly market conditions, provided through the Manager, System Open Market that market exchange rates for the U.S. dol- Account (“Manager”), shall be guided by lar reflect actions and behavior consistent the following procedural understandings withIMFArticleIV,Section1. with respect to consultations and clearances with the Committee, the Foreign Currency 2.ToachievethisendtheSystemshall: Subcommittee, and the Chairman of the A. Undertake spot and forward pur- Committee,unlessotherwisedirectedbythe chasesandsalesofforeignexchange. Committee. All operations undertaken pur- B. Maintain reciprocal currency suant to such clearances shall be reported (“swap”) arrangements with selected for- promptlytotheCommittee. eigncentralbanks. 1. The Manager shall clear with the Sub- C. Cooperate in other respects with committee (or with the Chairman, if the central banks of other countries and with Chairman believes that consultation with internationalmonetaryinstitutions. theSubcommitteeisnotfeasibleinthetime available): 3. Transactions may also be undertaken: A. Any operation that would result in A. To adjust System balances in light a change in the System’s overall open posiofprobablefutureneedsforcurrencies. tion in foreign currencies exceeding $300 B. To provide means for meeting Sysmillion on any day or $600 million since tem and Treasury commitments in particuthe most recent regular meeting of the larcurrencies,andtofacilitateoperationsof Committee. theExchangeStabilizationFund. B. Any operation that would result in C. For such other purposes as may be a change on any day in the System’s net expresslyauthorizedbytheCommittee. position in a single foreign currency exceeding $150 million, or $300 million 4. System foreign currency operations when the operation is associated with reshallbeconducted: paymentofswapdrawings. A. In close and continuous consulta- C. Any operation that might generate tion and cooperation with the United States asubstantialvolumeoftradinginaparticu- Treasury; larcurrencybytheSystem,eventhoughthe B. In cooperation, as appropriate, with change in the System’s net position in that foreignmonetaryauthorities;and currencymightbelessthanthelimitsspeci- C. Inamannerconsistentwiththeobfiedin1.B. ligationsoftheUnitedStatesintheInterna- D. Any swap drawing proposed by a tional Monetary Fund regarding exchange foreign bank not exceeding the larger of arrangementsunderIMFArticleIV. (i) $200 million or (ii) 15 percent of the sizeoftheswaparrangement. By unanimous vote, the Committee 2. The Manager shall clear with the approved the Procedural Instructions Committee (or with the Subcommittee, if with Respect to Foreign Currency Op- the Subcommittee believes that consultation erations, with the addition of the clari- with the full Committee is not feasible in fying phrase “unless otherwise directed the time available, or with the Chairman, if the Chairman believes that consultation by the Committee” in the first senwiththeSubcommitteeisnotfeasibleinthe tence: timeavailable):

Minutes of FOMC Meetings, January 231 A. Any operation that would result in A. TobuyorsellU.S.Governmentsea change in the System’s overall open posi- curities, including securities of the Federal tion in foreign currencies exceeding $1.5 Financing Bank, and securities that are billion since the most recent regular meet- direct obligations of, or fully guaranteed as ingoftheCommittee. to principal and interest by, any agency of B. Any swap drawing proposed by a the United States in the open market, from foreign bank exceeding the larger of (i) or to securities dealers and foreign and in- $200 million or (ii) 15 percent of the size ternational accounts maintained at the Fedoftheswaparrangement. eral Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the 3. The Manager shall also consult with System Open Market Account at market the Subcommittee or the Chairman about prices, and, for such Account, to exchange proposedswapdrawingsbytheSystemand maturing U.S. Government and Federal about any operations that are not of a rouagency securities with the Treasury or the tinecharacter. individual agencies or to allow them to ma- By unanimous vote, the Committee turewithoutreplacement; approved several amendments to the B. To buy or sell in the open market Authorization for Domestic Open Mar- U.S. Government securities, and securities that are direct obligations of, or fully guarket Operations (shown below). The anteed as to principal and interest by, any amendments consolidate language auagency of the United States, for the System thorizing repurchase agreements and Open Market Account under agreements to reverse repurchase agreements into one resell or repurchase such securities or obliparagraph, add a paragraph authorizing gations (including such transactions as are commonly referred to as repo and reverse the use of agents to execute transacrepo transactions) in 65 business days or tions in certain mortgage-backed seculess, at rates that, unless otherwise exrities (MBS), and add language to the pressly authorized by the Committee, shall final paragraph that reflects the Com- be determined by competitive bidding, after mittee’s current focus on using the applying reasonable limitations on the volume of agreements with individual countercomposition and size of the Federal parties. Reserve’s balance sheet as instruments of monetary policy. The final paragraph 2. In order to ensure the effective conduct of open market operations, the Federal now specifies that decisions to make Open Market Committee authorizes the material changes in the composition Federal Reserve Bank of New York to use and size of the portfolio of assets held agents in agency MBS-related transactions. in the System Open Market Account 3. In order to ensure the effective conduring the period between meetings of duct of open market operations, the Federal the Federal Open Market Committee Open Market Committee authorizes the will be made in the same manner as Federal Reserve Bank of New York to lend on an overnight basis U.S. Government sedecisions to change the intended level curities held in the System Open Market of the federal funds rate during the in- Account to dealers at rates that shall be termeeting period: determined by competitive bidding. The Federal Reserve Bank of New York shall Authorization for Domestic Open set a minimum lending fee consistent with Market Operations the objectives of the program and apply (Amended January 27, 2009) reasonable limitations on the total amount of a specific issue that may be auctioned 1. The Federal Open Market Committee and on the amount of securities that each authorizes and directs the Federal Reserve dealer may borrow. The Federal Reserve Bank of New York, to the extent necessary Bank of New York may reject bids which tocarryoutthemostrecentdomesticpolicy could facilitate a dealer’s ability to control directive adopted at a meeting of the Com- a single issue as determined solely by the mittee: FederalReserveBankofNewYork.

232 96th Annual Report, 2009 4. In order to ensure the effective con- In light of its program to purchase duct of open market operations, while as- large quantities of agency debt and sistingintheprovisionofshort-terminvestmortgage-backed securities, the Commentsforforeignandinternationalaccounts mittee voted to suspend temporarily the maintained at the Federal Reserve Bank of New York and accounts maintained at the Guidelines for the Conduct of System Federal Reserve Bank of New York as fis- Operations in Federal Agency Issues cal agent of the United States pursuant to (last amended January 28, 2003). Mr. Section 15 of the Federal Reserve Act, the Lacker dissented, stating that he views Federal Open Market Committee authorizes targeted purchases of agency debt and and directs the Federal Reserve Bank of New York (a) for System Open Market mortgage-backed securities as distort- Account, to sell U.S. Government securities ing credit markets and would prefer to such accounts on the bases set forth in that the Desk instead purchase Treaparagraph 1.A under agreements providing sury securities. for the resale by such accounts of those se- The remainder of the Committee’s curitiesin65businessdaysorlessonterms meeting was conducted as a joint meetcomparable to those available on such transactions in the market; and (b) for New ing with the Board of Governors in York Bank account, when appropriate, to order to facilitate policy discussion of undertakewithdealers,subjecttothecondi- developments with regard to the Systions imposed on purchases and sales of setem’s liquidity facilities and balance curities in paragraph l.B, repurchase agreesheet during the intermeeting period ments in U.S. Government and agency securities,andtoarrangecorrespondingsale and to consider the need for changes in and repurchase agreements between its own the System’s approach to using those account and such foreign, international, and tools. fiscal agency accounts maintained at the Bank. Transactions undertaken with such accounts under the provisions of this para- Market Developments and Open graph may provide for a service fee when Market Operations appropriate. The Manager of the System Open Mar- 5. In the execution of the Committee’s ket Account reported on recent develdecision regarding policy during any interopments in domestic and foreign finanmeeting period, the Committee authorizes and directs the Federal Reserve Bank of cial markets. The Manager also New York, upon the instruction of the reported on System open market opera- Chairman of the Committee, to adjust tions in Treasury securities and in somewhat in exceptional circumstances the agency debt and mortgage-backed sedegree of pressure on reserve positions and curities during the period since the hencetheintendedfederalfundsrateandto take actions that result in material changes Committee’s December 15–16 meeting. in the composition and size of the assets in By unanimous vote, the Committee the System Open Market Account other ratified these transactions. There were than those anticipated by the Committee at no open market operations in foreign its most recent meeting. Any such adjustcurrencies for the System’s account ment shall be made in the context of the during the period since the Commit- Committee’s discussion and decision at its most recent meeting and the Committee’s tee’s December 15–16 meeting. long-run objectives for price stability and Meeting participants discussed the sustainable economic growth, and shall be potential benefits of conducting open basedoneconomic,financial,andmonetary market purchases of a substantial quandevelopments during the intermeeting pertity of longer-term Treasury securities iod.ConsistentwithCommitteepractice,the Chairman, if feasible, will consult with the for the System Open Market Account. Committeebeforemakinganyadjustment. Participants generally agreed that pur-

Minutes of FOMC Meetings, January 233 chasing such securities could be a use- tioning of global interbank markets and ful adjunct to other monetary policy the commercial paper market after the tools in some circumstances. One par- year-end. ticipant preferred to begin purchasing Most participants interpreted the evi- Treasury securities immediately, as a dence as indicating that credit markets way to increase the monetary base, in still were not working well, and that lieu of expanding programs that aim to the Federal Reserve’s lending prosupport particular segments of the grams, asset purchases, and currency credit markets. Other participants were swaps were providing much-needed prepared to purchase longer-term Trea- support to economic activity by reducsury securities if evolving circum- ing dislocations in financial markets, stances were to indicate that such trans- lowering the cost of credit, and faciliactions would be particularly effective tating the flow of credit to businesses in improving conditions in private and households. Several indicated credit markets. However, they judged that they expected the soon-to-bethat purchases of longer-term Treasury implemented Term Asset-Backed Secusecurities would only modestly im- rities Loan Facility (TALF) to improve prove conditions in private credit mar- liquidity and reduce disruptions in the kets at present, and that completing markets for securities backed by stualready-announced plans to purchase dent loans, credit card receivables, auto large quantities of agency debt and loans, and small business loans guaranmortgage-backed securities and to sup- teed by the Small Business Administraport certain asset-backed securities tion; they also noted that it might markets was, in current circumstances, become necessary to enhance or likely to be a more effective way to expand the TALF or other programs. employ the Federal Reserve balance However, in the view of one particsheet to support credit flows to, and ipant, financial markets—including spending by, households and busi- those for asset-backed securities—were nesses. working reasonably well, given the current high level of pessimism and uncertainty about economic prospects and System Liquidity Programs and asset values, and the System’s lending Balance Sheet and asset-purchase programs were Staff reported on developments in Sys- resulting in undesirable distortions in tem liquidity programs and on changes the allocation of credit. Others noted in the System’s balance sheet since the that such programs could have undesir- Committee’s December 15−16 meeting. able consequences if expanded too far As of January 26, the System’s total or continued too long. Many particiassets and liabilities stood at just under pants agreed that it would be desirable $2 trillion, about $300 billion less than for the System to develop additional on December 17, 2008. The drop, measures of the effects of its programs, which resulted primarily from a decline and they encouraged additional rein foreign central bank drawings on re- search on analytical frameworks that ciprocal currency arrangements and a could inform Federal Reserve policy reduction in issuers’ sales of commer- actions with respect to the size and cial paper to the Commercial Paper composition of its balance sheet. Funding Facility (CPFF), seemed to re- Several meeting participants noted flect some improvement in the func- that the expansion of the Federal Re-

234 96th Annual Report, 2009 serve’s balance sheet along with con- credit markets overall remained setinued growth of the money supply verely disrupted. Most expressed supcould help stabilize longer-run inflation port for extending the termination dates expectations in the face of increasing in order to reassure market participants economic slack and very low inflation that the facilities would remain in place in coming quarters. Over a longer hori- as a backstop to private-sector credit zon, however, the Federal Reserve will arrangements while financial conditions need to scale back its liquidity pro- remained strained; they were prepared grams and the size of its balance sheet to extend the facilities beyond year-end as the economy recovers, to avoid the if conditions warrant. Participants also risk of an unwanted increase in noted that extending the termination expected inflation and a buildup of in- date of these liquidity facilities to flation pressures. Participants observed October 30 would not rule out the posthat many of the Federal Reserve’s li- sibility of closing particular facilities quidity programs are priced so that sooner if improvements in financial they will become unattractive to bor- conditions were to indicate they were rowers as conditions in financial mar- no longer needed to support credit markets improve; these programs will kets and economic activity and to help shrink automatically. In other cases, the preserve price stability. Federal Reserve eventually may have Following the discussion, the Comto take a more active role in scaling mittee voted unanimously to extend the back programs by adjusting their terms termination dates of existing reciprocal and conditions. More generally, the currency arrangements and the Term Federal Reserve may need to develop Securities Lending Facility (TSLF) to additional tools to manage the size of October 30, 2009. The Board of Govits balance sheet and the level of the ernors then voted unanimously to federal funds rate as the economy extend the termination dates of the recovers. As of late January, however, TSLF, the Primary Dealer Credit Facilwith financial conditions strained and ity (PDCF), the Asset-Backed Comthe economic outlook weak, most par- mercial Paper Money Market Mutual ticipants agreed that the Committee Fund Liquidity Facility (AMLF), the should continue to focus on supporting CPFF, and the Money Market Investor the functioning of financial markets Funding Facility (MMIFF) to October and stimulating the economy through 30, 2009. purchases of agency debt and mortgage-backed securities and other Staff Review of the Economic and measures—including the implementa- Financial Situation tion of the TALF—that will keep the size of the Federal Reserve’s balance The information reviewed at the meetsheet at a high level for some time. ing indicated a continued sharp con- Participants also discussed the advis- traction in real economic activity. Sales ability of extending the termination and starts of new homes remained on dates of a number of temporary liquid- a steep downward trend, consumer ity facilities and reciprocal currency ar- spending continued its significant derangements from April 30 to October cline, the deterioration in business 30, 2009. Participants generally were of equipment investment intensified, and the view that, despite modest improve- foreign demand weakened. Conditions ments in some sectors, conditions in in the labor market continued to dete-

Minutes of FOMC Meetings, January 235 riorate rapidly in December: Private Real consumer spending appeared to payroll employment fell sharply, and decline sharply again in the fourth the unemployment rate rose. Industrial quarter, likely reflecting the combined production dropped more severely than effects of decreases in house and equity in earlier months. Headline consumer prices, a weakening labor market, and prices fell in November and December, tight credit conditions. Real spending reflecting declines in consumer energy on goods excluding motor vehicles was prices; core consumer prices were estimated to have fallen noticeably in about flat in those months. While con- December, more than reversing an ditions in some financial markets increase in November. Outlays on showed limited improvement, extraor- motor vehicles edged down in Novemdinary financial stresses remained ap- ber and December following a sharper parent and credit conditions became decline in October. Early indicators of still tighter for households and busi- spending in January pointed to continnesses. ued soft demand. Readings on con- Employment continued to contract. sumer sentiment remained at very low Private nonfarm payrolls fell sharply in levels by historical standards through December, with substantial losses over the end of 2008 and showed little ima wide range of industries. Indicators provement in early January. of job vacancies and hiring declined Real residential construction confurther, and layoffs continued to mount. tracted in November and December. The unemployment rate increased to Single-family housing starts dropped at 7.2 percent in December, the share of a much faster rate in those months than individuals working part time for eco- they had in the first 10 months of the nomic reasons surged, and the labor year. Multifamily starts also fell in force participation rate edged down for those months, as did permit issuance a second consecutive month. for both categories. Housing demand In December, industrial production remained very weak and, although the posted a sharp decline after falling sub- stock of unsold new single-family stantially in November; the contraction homes continued to move down in was broad-based. The decrease in pro- November, inventories of unsold homes duction of consumer goods reflected remained elevated relative to the pace cutbacks in motor vehicle assemblies of sales. Sales of existing single-family as well as in the output of consumer homes dropped less than sales of new durable goods such as appliances, fur- homes in November and turned up in niture, and carpeting. Output in high- December, but the relative strength in tech sectors contracted in the fourth sales of existing homes appeared to be quarter, reflecting reduced production at least partly attributable to increases of semiconductors, communications in foreclosure-related and other disequipment, and computers. The produc- tressed sales. Although the interest rate tion of aircraft and parts recorded an on conforming 30-year fixed-rate mortincrease in December after being held gages declined markedly over the interdown in the autumn by a strike and by meeting period, the Senior Loan Offiproblems with some outsourced com- cer Opinion Survey on Bank Lending ponents. Available forward-looking in- Practices that was conducted in January dicators pointed to a further contraction indicated that banks had tightened in manufacturing output in coming lending standards on prime mortgage months. loans over the preceding three months.

236 96th Annual Report, 2009 The market for nonconforming loans goods. All other major categories of remained severely impaired. Several in- exports moved down as well. More dexes indicated that house prices con- than half of the decline in imports was tinued to decline rapidly. due to a decrease in imports of oil that In the business sector, investment in mostly reflected a dramatic decrease in equipment and software appeared to prices but also some reduction in volcontract noticeably in the fourth quar- ume. All other major categories of imter, with decreases registered in all ma- ports also recorded sizable decreases. jor spending categories. In December, Economic activity in the advanced business purchases of autos and trucks foreign economies appeared to contract moved down. Spending on high-tech sharply in the fourth quarter, as the capital goods appeared to decline in the pace of job losses rose and measures of fourth quarter. Orders and shipments consumer spending on durable goods for many types of equipment declined and business spending on investment in October and November, and imports goods showed declines. In Japan and of capital goods dropped back in those Europe, trade and industrial production months. Forward-looking indicators of dropped steeply, and measures of coninvestment in equipment and software sumer and business sentiment declined. pointed to likely further declines. Con- In Canada, employment fell markedly struction spending related to petroleum in November and December after edgrefining and power generation and dis- ing up in October. Incoming data sugtribution continued to increase briskly gested that economic activity in the in the second half of 2008, responding emerging market economies slowed to the surge in energy prices in the first significantly in the fourth quarter, with half of that year, but real investment real gross domestic product (GDP) for many types of buildings stagnated plunging in several Asian economies or declined. Vacancy rates for office, and appearing little changed in China. retail, and industrial properties contin- Industrial production, trade, and meaued to move up in the fourth quarter, sures of consumer sentiment registered and the results of the January Senior declines across many other countries in Loan Officer Opinion Survey indicated both emerging Asia and Latin America. that financing for new projects had In the United States, overall personal become even more difficult to acquire. consumption expenditure (PCE) prices Real nonfarm inventories (excluding were estimated to have fallen in motor vehicles) appeared to have fallen December, largely reflecting significant in the last few months of 2008. How- reductions in energy prices. Increases ever, with sales declining even more in consumer food prices began to modsharply, the ratio of book-value inven- erate toward the end of 2008. Excludtories to sales increased in October and ing food and energy prices, PCE prices November. appeared to have decelerated over the The U.S. international trade deficit final three months of the year. The narrowed sharply in November, as a moderation in core PCE prices was steep decline in imports outweighed a widespread across categories of goods sizable drop in exports. Much of the and services. After rising rapidly durfall in exports was attributable to a ing the first nine months of the year, decline in exports of fuels, chemicals, producer prices excluding food and and other industrial supplies, which in energy fell sharply in the last three part reflected lower prices for these months of 2008. Measures of longer-

Minutes of FOMC Meetings, January 237 term inflation expectations edged up in stimulus plans. Although implied inearly January, but remained lower than flation compensation derived from they had been in all but the last few Treasury Inflation-Protected Securities weeks of 2008. In December, average (TIPS) increased over the period, this hourly earnings moved up moderately. increase reportedly was largely attribut- The decisions of the Federal Open able to improved trading conditions in Market Committee (FOMC) at its the TIPS market rather than upward re- December 15–16 meeting reportedly visions to inflation expectations. were more aggressive than investors Conditions in short-term funding had been expecting. Market participants markets showed some signs of easing, reportedly were somewhat surprised although significant stresses remained. both by the size of the reduction in the The spreads of London interbank target federal funds rate, to a range of offered rates, or Libor, over com- 0 to 1⁄ 4 percent, and by the statements parable-maturity overnight index swap that policy rates would likely remain rates declined across most maturities low for some time and that the FOMC over the period: The one-month spread might engage in additional nontradi- fell to its lowest level since August tional policy actions such as the pur- 2007; the three-month spread also chase of longer-term Treasury securi- declined but remained elevated. ties. Over the intermeeting period, Though depository institutions contininvestors marked down their expecta- ued to make substantial use of the distions for the path of the federal funds count window, the amount of primary rate, as measured by money market fu- credit outstanding declined. Recent tures rates. The path first moved down auctions of term funds under the Fedimmediately after the December FOMC eral Reserve’s Term Auction Facility meeting. Later in the period, the policy were undersubscribed, although one path tilted lower in response to weaker- auction following the year-end did see than-expected economic data releases a relatively large number of bidders. and increased concerns about the health The TSLF auctions were also underof some financial institutions. In con- subscribed. Use of the PDCF continued trast, yields on medium- and longer- to fall significantly over the period. term nominal Treasury coupon securi- Conditions in markets for repurchase ties increased, on net, over the period. agreements, or repos, also showed Yields dropped sharply following the some signs of improvement. With the release of the FOMC statement, report- overnight Treasury general collateral edly in part because investors inter- repo rate near zero for much of the preted it as suggesting that the Federal period, market participants reportedly Reserve might increase its holdings of were reluctant to lend Treasury collatlonger-term Treasury securities. Those eral out of concern that counterparties price movements were more than might fail to return borrowed securities. reversed after the turn of the year, de- However, the pace of delivery fails spite the worsening economic outlook, continued to run well below the high apparently reflecting a waning of year- rates of September and October, reend safe-haven demands and an antici- flecting in part reductions in transaction pation of substantially increased Trea- volumes as well as industry efforts to sury debt issuance to finance larger- mitigate fails, including the January 5 than-expected deficits associated with recommendation of the Treasury Marthe new Administration’s economic ket Practices Group to implement a

238 96th Annual Report, 2009 financial charge on settlement fails. 30-day A2/P2 CP, which is not eligible Conditions in the market for repo trans- for purchase under the CPFF, dropped actions backed by agency debt and sharply after the beginning of the year mortgage-backed securities also im- as some institutional investors reportproved somewhat, with average bid- edly reentered the market. The dollar asked spreads declining from high amounts of outstanding unsecured levels. financial and nonfinancial CP and The market for Treasury coupon se- ABCP rose slightly, on net, over the incurities showed signs of increased im- termeeting period. This small change pairment late in 2008, followed by was more than accounted for by the some improvement early in 2009. Trad- increase in CP held by the CPFF. In ing volumes fell to very low levels at contrast, credit extended under the the end of 2008, although they recov- AMLF declined over the intermeeting ered a bit after the end of the year. period. Bid-asked spreads in the on-the-run Liquidity in the corporate bond marmarket declined sharply at the begin- ket improved over the intermeeting ning of 2009 after having increased at period, with increases in trading the end of 2008. The on-the-run pre- volume for both investment- and mium for the 10-year nominal Treasury speculative-grade bonds and declines in note was little changed at very elevated bid-asked spreads for speculative-grade levels over the intermeeting period. On bonds. Yields and spreads on corporate balance, the Treasury market remained bonds decreased noticeably, particularly much less liquid than normal. for speculative-grade firms, but spreads Treasury- and government-only remained high by historical standards. money market mutual funds (MMMFs) Gross issuance of bonds by nonfifaced pressures stemming from very nancial investment-grade companies low short-term interest rates, and many remained solid, but issuance of such funds reportedly had waived man- speculative-grade bonds was limited. agement fees in an effort to retain in- Conditions in the leveraged loan marvestors. By contrast, prime MMMFs ket remained very poor and issuance of had net inflows over the intermeeting leveraged syndicated loans was also period. The MMIFF continued to regis- very weak. Secondary market prices for ter no activity despite changes that leveraged loans stayed near record eased some of the terms of the pro- lows and the average bid-asked spread gram. Market participants nonetheless in that market continued to be very pointed to the MMIFF as a potentially wide. The market for commercial important backup facility. mortgage-backed securities (CMBS) Conditions in the commercial paper continued to show signs of strain, with (CP) market improved over the inter- the CMBX index—an index based on meeting period, likely reflecting recent credit default swap (CDS) spreads on measures taken in support of this mar- AAA-rated CMBS—widening during ket, greater demand from institutional the intermeeting period from already investors, and the passing of year-end. very elevated levels. Yields and spreads on 30-day A1/P1 Broad equity market indexes fell nonfinancial and financial CP as well over the intermeeting period. After as on asset-backed commercial paper improving during the early part of the (ABCP) declined modestly and re- intermeeting period, market sentiment mained low. Yields and spreads on toward financial firms appeared to

Minutes of FOMC Meetings, January 239 worsen later in the period. Those fourth quarter, with both mortgage and firms substantially underperformed the consumer credit sharply curtailed due broader market as a number of large to weak household spending and tight and regional banks reported sizable credit conditions. Business debt losses stemming from weak trading expanded only modestly, given the high results, asset write-downs, and addi- cost of borrowing, tighter lending tional increases in loan-loss provisions terms, and the deterioration in the macin anticipation of a further deterioration roeconomic environment. in credit quality. CDS spreads for U.S. Commercial bank credit fell for the bank holding companies rose sharply in second consecutive month in Decemmid-January to near their historical ber. Commercial and industrial loans highs, and equity prices for such com- declined in November and December, panies fell on net, ending the period likely reflecting a combination of below their November lows. A number tighter credit supply and reduced loan of banking organizations issued debt demand as well as some unwinding of through the FDIC’s Temporary Liquid- the surge during September and Octoity Guarantee Program; spreads on ber. The Senior Loan Officer Opinion such debt declined to levels close to Survey conducted in January indicated those on agency debt. The Treasury’s that banks had continued to tighten Troubled Asset Relief Program pro- credit standards and terms on all major vided additional support to several loan categories over the past three banking institutions. In particular, to months. Survey respondents also indisupport financial market stability, the cated that they had reduced the size of Treasury, the FDIC, and the Federal credit lines for a wide range of existing Reserve announced on January 16 that business and household customers. they had entered into an agreement M2 expanded at a considerably more with Bank of America to provide a rapid pace in December than in previpackage of guarantees, liquidity access, ous months. Flows into both demand and capital. Developments at nonbank deposits and savings deposits surged, financial institutions were mixed. possibly reflecting a reallocation of Equity prices of insurance companies wealth towards assets that had governedged down over the period, while ment insurance or guarantees. Small their CDS spreads declined from time deposits also increased strongly, extremely high levels. Hedge funds as banks continued to bid aggressively posted negative average returns in for these deposits. Currency continued December. to grow briskly, apparently boosted by Debt of the domestic nonfinancial solid foreign demand for U.S. banksectors expanded at a somewhat faster notes. In December, retail MMMF balpace in the fourth quarter of 2008 than ances increased modestly after a dein the first three quarters of the year. cline in November. Borrowing by the federal government Conditions in foreign financial marcontinued to surge, boosted by pro- kets were relatively calm over the ingrams aimed at reducing financial mar- termeeting period, although concerns ket strains. Borrowing by state and about bank earnings and the stability of local governments picked up as the the global banking system led to wideconditions in municipal bond market spread declines in equity prices later in improved somewhat. Household debt the period. Governments in major forappeared to have contracted in the eign economies initiated several actions

240 96th Annual Report, 2009 aimed at strengthening the banking sec- with growth in both core and overall tor and easing credit market strains. PCE prices expected to be unusually Sovereign bond yields in the advanced low over the next few years in foreign economies fell early in the response to slack in resource utilization period, likely reflecting declining infla- and relatively flat prices anticipated for tion and expectations of lower policy many commodities and for imports. rates, but moved up subsequently, perhaps in response to concerns about fiscal deficits. The dollar increased on Meeting Participants’ Views and balance against the currencies of major Committee Policy Action U.S. trading partners. In conjunction with this FOMC meeting, all meeting participants—the four Staff Economic Outlook members of the Board of Governors In the forecast prepared for the meet- and the presidents of the twelve Feding, the staff revised down its outlook eral Reserve Banks—provided projecfor economic activity in the first half of tions for economic growth, the unem- 2009, as the implications of weaker- ployment rate, and consumer price than-anticipated economic data releases inflation for each year from 2009 more than offset an upward revision to through 2011. To provide the public the staff’s assumption of the amount of with information about their views of forthcoming fiscal stimulus. Conditions likely longer-term economic trends, and in the labor market deteriorated sharply as additional context for the Commitover the intermeeting period. Industrial tee’s monetary policy discussions, parproduction declined steeply, and house- ticipants agreed to collect and publish, hold and business spending fell more on a quarterly basis, projections of the than anticipated. Sales and starts of longer-run values to which they expect new homes remained on a steep down- these three variables to converge. Partrend. Foreign demand also was weaker ticipants’ projections through 2011, and than expected. Financial markets con- for the longer-run, are described in the tinued to be strained overall, credit Summary of Economic Projections that remained unusually tight for both is attached as an addendum to these households and businesses, and equity minutes. prices had fallen further. The staff’s In their discussion of the economic projections of real GDP growth in the and financial situation and the outlook second half of 2009 and in 2010 were for the economy, participants agreed revised upward slightly, reflecting that the economy had weakened further greater monetary and fiscal stimulus as going into 2009. The incoming data, as well as the effects of more moderate oil well as information received from conprices and long-term interest rates, but tacts in the business and banking comthey continued to show no more than a munities, indicated a sharp and widegradual economic recovery. The staff spread economic contraction both again expected that unemployment domestically and abroad, reflecting in would rise substantially through the be- large part the adverse effects of the inginning of 2010 before edging down tensification of the financial crisis and over the remainder of that year. Fore- the interaction between deteriorating casts for core and overall PCE inflation economic and financial conditions. Parin 2009 and 2010 were little changed, ticipants generally saw credit condi-

Minutes of FOMC Meetings, January 241 tions as extremely tight, with financial absent additional initiatives to stabilize markets fragile and some parts of the the banking system. banking sector under substantial stress. Participants noted that consumers However, modest signs of improvement were continuing to cut back expendiwere evident in some financial tures in response to sharply declining markets—particularly those that were employment, further declines in wealth, receiving support from Federal Reserve and tighter credit conditions. Some parliquidity facilities and other govern- ticipants mentioned that business conment actions. Participants anticipated tacts had indicated that firms were rethat a gradual recovery in U.S. eco- ducing payrolls aggressively and also nomic activity would begin during the freezing wages and salaries, further rethird or fourth quarter of this year as stricting growth in personal income and the economy begins to respond to fiscal thus probably damping consumer stimulus, relatively low energy prices, spending. Looking ahead, participants and continuing efforts to stabilize the anticipated that tax cuts and some other financial sector and increase the avail- elements of the proposed fiscal stimuability of credit. Several participants lus package would add to after-tax innoted that firms’ efforts to control comes and thus boost consumer spendinventories as sales declined had con- ing, though the magnitude of the tributed to the rapid downturn in pro- impetus was far from clear. For examduction and employment in recent ple, unless the cuts were clearly perquarters, but expected that the resulting ceived to be permanent, the boost to absence of widespread inventory over- consumer spending might prove shorthangs might spur a prompt pickup in lived, as was the case with the tax reproduction in many sectors later this bates distributed in the spring of 2008. year once sales begin to level out or Participants saw no indication that turn up. Headline inflation would pick the housing sector was beginning to up some as the effects of previous stabilize. Though sales of existing declines in oil and other commodity homes appeared to have flattened out, a prices wore off. But in an environment large fraction of those transactions of considerable economic slack, little if seemed to have resulted from forecloany inflation pressure from energy or sures or other forced sales; moreover, other import prices, and possible new home sales, housing starts, and declines in inflation expectations, head- permits all continued to decline steeply. line and core inflation were expected to Lower house prices and mortgage rates be quite low for several years. Partici- had increased housing affordability, but pants were, however, quite uncertain concerns that house prices may fall furabout the outlook. All but a few saw ther appeared to be holding back pothe risks to growth as tilted to the tential buyers. downside; in light of financial stresses The pace of commercial construction and tight credit conditions, they saw a also had slowed. A number of particisignificant risk that the economic pants expressed concern that the comrecovery would be both delayed and mercial real estate sector could deterioinitially quite weak. In particular, most rate sharply in the months ahead. They participants saw the renewed deteriora- noted that a large number of commertion in the banking sector’s financial cial real estate mortgages will come condition as posing a significant down- due at a time when banks likely will side risk to the economic outlook still be facing balance-sheet constraints,

242 96th Annual Report, 2009 the ability to securitize commercial real ticipants generally thought that fiscal estate mortgages may remain severely stimulus was a necessary and important restricted, and vacancy rates in com- complement to the steps the Federal mercial properties could well be climb- Reserve and other agencies were taking. Some participants worried that the ing, and that it would help foster ecooutcome could be an increase in de- nomic recovery, but had questions faults on commercial real estate mort- about the details of the proposed legisgages and forced sales of commercial lation and the extent to which it would properties, which could push prices boost demands for and production of down further and generate additional goods and services. losses on banks’ commercial real estate Participants indicated they had been loan portfolios. However, the commer- surprised by the speed and magnitude cial real estate sector had expanded of the slowdown in economic growth more moderately during the recent abroad and the resulting drop in deexpansion than during the expansion of mand for U.S. exports. It was noted the late 1980s, suggesting that the that the surprisingly sharp decline in downturn in the current cycle could be both U.S. exports and imports might milder than that seen in the early also reflect tight credit conditions, 1990s. including the reduced availability of Participants also noted that other trade credit. Moreover, participants did categories of business investment were not expect foreign economies to recontracting; they expected the rapid bound quickly, suggesting that net excontraction to continue in coming quar- ports would not provide much support ters. Equipment investment had de- for U.S. economic activity in coming clined particularly sharply, reflecting quarters. weak sales, tighter credit, and substan- Participants agreed that inflation tial uncertainty about future economic pressures had diminished appreciably conditions and government policies. in recent quarters, and they expected Lower energy and commodity prices, significantly lower headline and core while supporting consumer spending, inflation during the next few years than had reduced investment in oil, gas, and during recent years. Indeed, most anmineral extraction. Outside of the agri- ticipated that inflation will slow for a cultural sector, business contacts had time to rates somewhat lower than reported sizable cutbacks in their those they judge consistent with the planned capital expenditures for 2009. dual goals of price stability and maxi- State and local government budgets mum employment, initially reflecting had come under significant pressure as the recent declines in the prices of the slowing economy led to declining energy and other commodities and later revenues. Several participants noted responding to several years of substanthat governments in their regions were tial economic slack. Many participants responding by cutting spending rather noted some risk of a protracted period than supplementing revenues. The fis- of excessively low inflation, especially cal stimulus bill, which was being con- if inflation expectations were to move sidered by the Congress as the Com- down in response to lower actual inflamittee met, would support state and tion and increasing economic slack, local government spending as well as and a few even saw some risk of deflaboost federal spending, helping to buoy tion. Several others, however, anticidemands for goods and services. Par- pated that longer-run inflation expecta-

Minutes of FOMC Meetings, January 243 tions would remain well anchored, the target range for the federal funds supported in part by the Federal Re- rate at 0 to 1⁄ 4 percent would be approserve’s aggressive expansion of its bal- priate. They also agreed to continue usance sheet and the resulting growth of ing liquidity and asset-purchase prothe monetary base, and therefore grams to support the functioning of thought it unlikely that inflation would financial markets and stimulate the decline below levels they saw as con- economy. Members further agreed that sistent with the dual goals of price sta- these programs were likely to maintain bility and maximum employment. the size of the Federal Reserve’s bal- Moreover, some noted a risk that ance sheet at a high level. Members expected inflation might actually noted that it may be necessary to increase to an undesirably high level if expand these programs, but had somethe public does not understand that the what different views about the best Federal Reserve’s liquidity facilities way of doing so. One member exwill be wound down and its balance pressed the view that it would be best sheet will shrink as economic and to expand holdings of U.S. Treasury sefinancial conditions improve. curities rather than to expand targeted Several participants indicated that liquidity programs. All other members they thought the FOMC should explore indicated that they thought it appropriestablishing quantitative guidelines or ate to continue the program of purchastargets for a monetary aggregate, per- ing agency debt and mortgage-backed haps the growth rate of the monetary securities. Several expressed a willingbase or M2; in their view such guide- ness to expand the size and duration of lines would provide useful information those purchases in the near future; othto the public and help anchor inflation ers stood ready to expand the program expectations. Others were skeptical that if conditions warrant but noted that the a single quantitative measure could ad- program had only recently been impleequately convey the Federal Reserve’s mented and preferred to wait for more current approach to monetary policy information about economic and finanbecause the stimulative effect of the cial developments and the program’s Federal Reserve’s liquidity-providing effects before considering an expanand asset-purchase programs depends sion. not only on the scale but also on the At the conclusion of the discussion, mix of lending programs and securities with Mr. Lacker dissenting, the Compurchases. In addition, a few partici- mittee voted to authorize and direct the pants noted that the sizes of some Fed- Federal Reserve Bank of New York, eral Reserve liquidity programs are until it was instructed otherwise, to exdetermined by banks’ and market par- ecute transactions in the System ticipants’ need to use those programs Account in accordance with the followand thus will tend to increase when ing domestic policy directive: financial conditions worsen and shrink “The Federal Open Market Committee when financial conditions improve; the seeks monetary and financial conditions size and composition of the Federal that will foster price stability and promote Reserve’s balance sheet needs to be sustainable growth in output. To further its able to adjust in response. long-run objectives, the Committee seeks conditions in reserve markets consistent In their discussion of monetary polwithfederalfundstradinginarangefrom0 icy for the intermeeting period, Com- to 1⁄4 percent. The Committee directs the mittee members agreed that keeping Desk to purchase GSE debt and agency-

244 96th Annual Report, 2009 guaranteed MBS during the intermeeting nomic growth and price stability in the period with the aim of providing support to longerterm. the mortgage and housing markets. The The Federal Reserve will employ all timing and pace of these purchases should available tools to promote the resumption depend on conditions in the markets for of sustainable economic growth and to presuch securities and on a broader assessment serve price stability. The focus of the Comof conditions in primary mortgage markets mittee’spolicyistosupportthefunctioning and the housing sector. By the end of the offinancialmarketsandstimulatetheeconsecond quarter of this year, the Desk is omy through open market operations and expected to purchase up to $100 billion in other measures that are likely to keep the housing-related GSE debt and up to $500 size of the Federal Reserve’s balance sheet billion in agency-guaranteed MBS. The atahighlevel.TheFederalReservecontin- SystemOpenMarketAccountManagerand ues to purchase large quantities of agency the Secretary will keep the Committee in- debt and mortgage-backed securities to proformed of ongoing developments regarding vide support to the mortgage and housing the System’s balance sheet that could affect markets, and it stands ready to expand the the attainment over time of the Commit- quantity of such purchases and the duration tee’s objectives of maximum employment of the purchase program as conditions warandpricestability.” rant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such The vote encompassed approval of transactions would be particularly effective the following statement to be released in improving conditions in private credit at 2:15 p.m.: markets. The Federal Reserve will be implementingtheTermAsset-BackedSecu- “The Federal Open Market Committee rities Loan Facility to facilitate the extendecided today to keep its target range for sionofcredittohouseholdsandsmallbusithe federal funds rate at 0 to 1⁄4 percent. nesses. The Committee will continue to The Committee continues to anticipate that monitor carefully the size and composition economic conditions are likely to warrant of the Federal Reserve’s balance sheet in exceptionally low levels of the federal light of evolving financial market developfundsrateforsometime. ments and to assess whether expansions of Information received since the Commitor modifications to lending facilities would tee met in December suggests that the serve to further support credit markets and economy has weakened further. Industrial economic activity and help to preserve production, housing starts, and employment pricestability.” have continued to decline steeply, as consumersandbusinesseshavecutbackspend- Voting for this action: Messrs. Bering. Furthermore, global demand appears to nanke and Dudley, Ms. Duke, Messrs. be slowing significantly. Conditions in Evans, Kohn, Lockhart, and Warsh, some financial markets have improved, in andMs.Yellen. part reflecting government efforts to provide liquidity and strengthen financial insti- Voting against this action: Mr. Lacker. tutions; nevertheless, credit conditions for households and firms remain extremely Mr. Lacker dissented because he pretight. The Committee anticipates that a ferred to expand the monetary base by gradual recovery in economic activity will purchasing U.S. Treasury securities begin later this year, but the downside risks rather than through targeted credit protothatoutlookaresignificant. In light of the declines in the prices of grams. Mr. Lacker was fully supportive energy and other commodities in recent of the significant expansion of the Fedmonths and the prospects for considerable eral Reserve’s balance sheet and the ineconomicslack,theCommitteeexpectsthat tention to maintain the size of the balinflation pressures will remain subdued in ance sheet at a high level. However, coming quarters. Moreover, the Committee sees some risk that inflation could persist while he recognized that spreads were for a time below rates that best foster eco- elevated and volumes low in many

Minutes of FOMC Meetings, January 245 credit markets, he saw no evidence of additional clarity on the longer-run inmarket failures that made targeted flation goal would further enhance Fedcredit programs, including the forth- eral Reserve communications but coming TALF, necessary. Moreover, he would not involve any substantive was concerned that such programs change in monetary policy strategy. channel credit away from other worthy Many participants agreed that establishborrowers, amount to fiscal policy, ing and maintaining a transparent nuwould exacerbate moral hazard, and merical inflation objective would be might be hard to unwind. He sup- helpful—at least to some degree—in ported, instead, maintaining the size of anchoring inflation expectations and the balance sheet at a high level thereby improve the overall effectivethrough purchases of U.S. Treasury se- ness of monetary policy; others judged curities. In his view, such purchases that the potential benefits of an explicit would limit distortions to private credit numerical inflation objective might be flows, minimize adverse incentive largely attained by extending the horieffects, and maintain a clear distinction zon of their regular projections for ecobetween monetary and fiscal policies. nomic activity and inflation. Some It was agreed that the next meeting indicated that the establishment of a of the Committee would be held on numerical inflation objective could be Tuesday, March 17, 2009. The meeting particularly helpful under present ciradjourned at 1:05 p.m. on January 28, cumstances in forestalling an unwel- 2009. come decline in longer-run inflation expectations—and hence in contributing to economic recovery—while also Notation Vote assuring the public that actions taken to By notation vote completed on January counter economic weakness will not 5, 2009, the Committee unanimously lead to high inflation over the longerapproved the minutes of the FOMC run. However, several participants exmeeting held on December 15−16, pressed concern that an initiative to 2008. clarify the Committee’s longer-run inflation objective could be confusing to the public in the current context of eco- Conference Call nomic weakness and financial market On January 16, 2009, the Committee strains. Participants also discussed sevmet by conference call to discuss issues eral technical issues related to the associated with establishing an explicit implementation and communication of numerical objective for inflation. The an explicit numerical inflation objec- Committee made no decisions on tive. They expressed a range of views whether to establish such an objective. about whether such an objective should Most meeting participants expressed be expressed in terms of the consumer the view that an explicit numerical ob- price index or the PCE price deflator, jective for longer-run inflation would the merits of a point value versus a be fully consistent with the Federal Re- range, the length of time over which serve’s dual mandate of promoting policy would aim to achieve any such maximum employment and price stabil- objective, and the frequency with ity and would not impede fostering the which the Committee would reevaluate stability of the financial system. A this framework. At this meeting, the number of participants emphasized that staff also briefed the Committee on the

246 96th Annual Report, 2009 coordinated set of measures for sup- icy. “Appropriate monetary policy” is porting Bank of America that had been defined as the future policy that, based taken by the Treasury, the FDIC, and on current information, is deemed most the Federal Reserve earlier that day. likely to foster outcomes for economic activity and inflation that best satisfy Brian F. Madigan the participant’s interpretation of the Secretary Federal Reserve’s dual objectives of maximum employment and price stabil- Addendum: ity. Longer-run projections represent Summary of Economic Projections each participant’s assessment of the In conjunction with the January 27–28, rate to which each variable would be 2009 FOMC meeting, the members of expected to converge over time under the Board of Governors and the presi- appropriate monetary policy and in the dents of the Federal Reserve Banks, all absence of further shocks. of whom participate in deliberations of FOMC participants viewed the outthe FOMC, provided projections for look for economic activity and inflation economic growth, unemployment, and as having weakened significantly since inflation in 2009, 2010, 2011, and over last October, when their last projections the longer run. Projections were based were made. As indicated in Table 1 on information available through the and depicted in Figure 1, participants conclusion of the meeting, on each par- projected that real GDP would contract ticipant’s assumptions regarding a this year, that the unemployment rate range of factors likely to affect eco- would increase substantially, and that nomic outcomes, and on his or her as- consumer price inflation would be sigsessment of appropriate monetary pol- nificantly lower than in recent years. 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:Projectionsofchangeinrealgrossdomesticproduct(GDP)andofinflationarefromthefourthquarterof thepreviousyeartothefourthquarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentage ratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures(PCE)andthepriceindexfor PCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemployment rateinthefourthquarteroftheyearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentof appropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’sassessmentoftheratetowhicheach variablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershocksto theeconomy.TheOctoberprojectionsweremadeinconjunctionwiththeFOMCmeetingonOctober28−29,2008. 1. Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2. Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthat variableinthatyear. 3. Longer-runprojectionsforcorePCEinflationarenotcollected.

Minutes of FOMC Meetings, January 247

248 96th Annual Report, 2009 Given the strength of the forces cur- tinuing decline in house prices, and the rently weighing on the economy, par- recent sharp reduction in stock market ticipants generally expected that the wealth, and they saw reductions in conrecovery would be unusually gradual sumer demand contributing to further and prolonged: All participants antici- weakness in business investment. Howpated that unemployment would remain ever, participants expected that the substantially above its longer-run sus- economy would begin to recover— tainable rate at the end of 2011, even albeit gradually—during the second absent further economic shocks; a few half of the year, mainly reflecting the indicated that more than five to six effects of fiscal stimulus and of Federal years would be needed for the econ- Reserve measures providing support to omy to converge to a longer-run path credit markets. characterized by sustainable rates of Looking further ahead, participants’ output growth and unemployment and growth projections had a central tenby an appropriate rate of inflation. Par- dency of 2.5 to 3.3 percent for 2010 ticipants generally judged that their and 3.8 to 5.0 percent for 2011. Participrojections for both economic activity pants generally expected that strains in and inflation were subject to a degree financial markets would ebb only of uncertainty exceeding historical slowly and hence that the pace of norms. Nearly all participants viewed recovery in 2010 would be damped. the risks to the growth outlook as Nonetheless, participants generally anskewed to the downside, and all par- ticipated that real GDP growth would ticipants saw the risks to the inflation gain further momentum in 2011, reachoutlook as either balanced or tilted to ing a pace that would temporarily the downside. exceed their estimates of the longer-run sustainable rate of economic growth and would thereby help reduce the The Outlook slack in resource utilization. Most par- Participants’ projections for the change ticipants expected that, absent further in real GDP in 2009 had a central ten- shocks, economic growth would evendency of –1.3 to –0.5 percent, com- tually converge to a rate of 2.5 to 2.7 pared with the central tendency of –0.2 percent, reflecting longer-term trends in to 1.1 percent for their projections last the growth of productivity and the October. In explaining these downward labor force. revisions, participants referred to the Participants anticipated that labor further intensification of the financial market conditions would deteriorate crisis and its effect on credit and substantially further over the course of wealth, the waning of consumer and this year, and nearly all expected that business confidence, the marked decel- unemployment would still be well eration in global economic activity, and above its longer-run sustainable rate at the weakness of incoming data on the end of 2011. Participants’ projecspending and employment. Participants tions for the average unemployment anticipated a broad-based decline in rate during the fourth quarter of 2009 aggregate output during the first half of had a central tendency of 8.5 to 8.8 this year; they noted that consumer percent, markedly higher than last Despending would likely be damped by cember’s actual unemployment rate of the deterioration in labor markets, the 7.2 percent the latest available figure at tightness of credit conditions, the con- the time of the January FOMC meet-

Minutes of FOMC Meetings, January 249 ing. Nearly all participants’ projections projections for total PCE inflation rewere more than a percentage point flected their individual assessments of higher than their previous forecasts the measured rates of inflation consismade last October, reflecting the sharp tent with the Federal Reserve’s dual rise in actual unemployment that oc- mandate for promoting price stability curred during the final months of 2008 and maximum employment. Most paras well as participants’ weaker outlook ticipants judged that a longer-run PCE for economic activity this year. Most inflation rate of 2 percent would be participants anticipated that output consistent with the dual mandate; othgrowth in 2010 would not be substan- ers indicated that 11⁄ 2 or 13⁄ 4 percent intially above its longer-run trend rate flation would be appropriate. Modestly and hence that unemployment would positive longer-run inflation would decline only modestly next year. With allow the Committee to stimulate ecoeconomic activity and job creation gen- nomic activity and support employment erally projected to accelerate in 2011, by setting the federal funds rate tempoparticipants anticipated that joblessness rarily below the inflation rate when the would decline more appreciably that economy is buffeted by a large negayear, as is evident from the central ten- tive shock to demands for goods and dency of 6.7 to 7.5 percent for their services. Participants generally exunemployment rate projections. Partici- pected that core and overall inflation pants expected that the unemployment would converge over time, and that rate would decline further after 2011, persistent economic slack would conand most saw it settling in at a rate of tinue to weigh on inflation outcomes 4.8 to 5.0 percent over time. for the next few years and hence that The central tendency of participants’ total PCE inflation in 2011 would still projections for total PCE inflation this be below their assessments of the apyear was 0.3 to 1.0 percent, about a propriate inflation rate for the longer percentage point lower than the central run. tendency of their projections last October. Many participants noted that recent Risks to the Outlook readings on inflation had been surprisingly low, and some anticipated that Participants continued to view uncerthe unexpected declines in the prices of tainty about the outlook for economic energy and other commodities that had activity as higher than normal.5 The occurred in the latter part of 2008 risks to their projections for real GDP would continue to hold down inflation growth were judged as being skewed to at the consumer level in 2009. Partici- the downside and the associated risks pants also marked down their projec- to their projections for the unemploytions for core PCE inflation this year in ment rate were tilted to the upside. Parlight of their views about the indirect effects of lower energy prices and the 5. Table 2 provides estimates of forecast uninfluence of increased resource slack. certainty for the change in real GDP, the unem- Looking beyond this year, partici- ploymentrate,andtotalconsumerpriceinflation pants’ projections for total PCE infla- overtheperiodfrom1987to2007.Attheendof tion had a central tendency of 1.0 to this summary, the box “Forecast Uncertainty” discussesthesourcesandinterpretationofuncer- 1.5 percent for 2010, 0.9 to 1.7 percent taintyineconomicforecastsandexplainstheapfor 2011, and 1.7 to 2.0 percent over proach used to assess the uncertainty and risks the longer run. Participants’ longer-run attendingparticipants’projections.

250 96th Annual Report, 2009 Table2. Averagehistoricalprojection ing the size, composition, and effecerrorranges tiveness of the fiscal stimulus Percentagepoints package—which was still under consideration at the time of the FOMC Variable 2009 2010 2011 meeting—and of further measures to ChangeinrealGDP1 ... ±1.2 ±1.4 ±1.4 Unemploymentrate1 .... ±0.5 ±0.8 ±1.0 stabilize the banking system. Totalconsumerprices2.. ±0.9 ±1.0 ±0.9 As in October, most participants con- Note: Error ranges shown are measured as plus or tinued to view the uncertainty surminus the root mean squared error of projections that rounding their inflation projections as werereleasedinthewinterfrom1987through2007for higher than historical norms. A slight thecurrentandfollowingtwoyearsbyvariousprivate and government forecasters. As described in the box majority of participants judged the “ForecastUncertainty,”undercertainassumptions,there risks to the inflation outlook as roughly is about a 70 percent probability that actual outcomes forrealGDP,unemployment,andconsumerpriceswill balanced, while the rest viewed these beinrangesimpliedbytheaveragesizeofprojection risks as skewed to the downside. Parerrorsmadeinthepast.FurtherinformationisinDavid ticipants indicated that elevated uncer- ReifschneiderandPeterTulip(2007),“GaugingtheUncertaintyoftheEconomicOutlookfromHistoricalFore- tainty about global growth was cloudcastingErrors,”FinanceandEconomicsDiscussionSe- ing the outlook for prices of energy ries 2007-60 (Board of Governors of the Federal and other commodities and hence con- ReserveSystem,November). 1. Fordefinitions,refertogeneralnoteintable1. tributing to greater uncertainty in their 2. Measureistheoverallconsumerpriceindex,the inflation projections. Many participants pricemeasurethathasbeenmostwidelyusedingovernment and private economic forecasts. Projection is stated that their assessments regarding percent change, fourth quarter of the previous year to the level of uncertainty and balance of thefourthquarteroftheyearindicated.Theslightlynarrisks to the inflation outlook were rowerestimatedwidthoftheconfidenceintervalforinflationinthethirdyearcomparedwiththatforthesec- closely linked to their judgments about ondyearislikelytheresultofusingalimitedsample the uncertainty and risks to the outlook periodforcomputingthesestatistics. for economic activity. Some participants noted the risk that inflation exticipants highlighted the considerable pectations might become unanchored degree of uncertainty about the future and drift downward in response to percourse of the financial crisis and its im- sistently low inflation outcomes, while pact on the real economy; for example, others pointed to the possibility of an rising unemployment and weaker upward shift if investors became congrowth could exacerbate delinquencies cerned that stimulative policy measures on household and business loans, lead- might not be unwound in a timely fashing to higher losses for financial firms ion once the economy begins to and so to a further tightening of credit recover. conditions that would in turn put further downward pressure on spending to Diversity of Views a greater degree than currently foreseen. In addition, some participants Figures 2.A and 2.B provide further noted that a substantial degree of un- details on the diversity of participants’ certainty was associated with gauging views regarding likely outcomes for the stimulative effects of nontraditional real GDP growth and the unemploymonetary policy tools that are now be- ment rate, respectively. For 2009 to ing employed given that conventional 2011, the dispersion in participants’ policy easing was limited by the zero projections for each variable was lower bound on nominal interest rates. roughly the same as for their projec- Others referred to uncertainties regard- tions last October. This dispersion

Minutes of FOMC Meetings, January 251 mainly indicated the diversity of par- inflation. The dispersion in particiticipants’ assessments regarding the pants’ projections for core PCE inflastimulative effects of fiscal policy, the tion in 2009 was noticeably lower than pace of recovery in financial markets, last October, but the dispersion in their and the evolution of households’ de- projections for core inflation in 2010 sired saving rates. The dispersion in and 2011 was markedly wider, reflectparticipants’ longer-run projections re- ing varying assessments about the timflected differences in their estimates re- ing and pace of economic recovery, the garding the sustainable rates of output sensitivity of inflation to slack in growth and unemployment to which resource utilization, the prevalence of the economy would converge under ap- downward nominal wage rigidity, and propriate policy and in the absence of the likelihood that inflation expectaany further shocks. tions will remain firmly anchored. A Figures 2.C and 2.D provide corre- few participants anticipated that inflasponding information regarding the di- tion in 2011 would be close to their versity of participants’ views regarding longer-run projections. However, most the inflation outlook. The dispersion in participants’ projections for total PCE participants’ projections for total PCE inflation in 2011 were below their inflation in 2009 was substantially longer-run projections, primarily regreater than for their projections made flecting the anticipated effects of sublast October, due to increased diversity stantial slack over the next three years; of participants’ views regarding the this inflation gap was about 1⁄ 4 to 1⁄ 2 near-term evolution of prices of energy percentage point for some participants and raw materials and the extent to but exceeded a full percentage point for which changes in those prices would others. be likely to pass through into overall

252 96th Annual Report, 2009

Minutes of FOMC Meetings, January 253

254 96th Annual Report, 2009

Minutes of FOMC Meetings, January 255

256 96th Annual Report, 2009 Forecast Uncertainty The economic projections provided by similar to that experienced in the past the members of the Board of Governors and the risks around the projections are and the presidents of the Federal broadly balanced, the numbers reported Reserve Banks inform discussions of in table 2 would imply a probability of monetary policy among policymakers about 70 percent that actual GDP would and can aid public understanding of the expand between 1.8 percent to 4.2 perbasis for policy actions. Considerable cent in the current year and 1.6 percent uncertainty attends these projections, to 4.4 percent in the second and third however. The economic and statistical years. The corresponding 70 percent models and relationships used to help confidence intervals for overall inflation produce economic forecasts are neces- would be 1.1 percent to 2.9 percent in sarily imperfect descriptions of the real the current year, 1.0 percent to 3.0 perworld. And the future path of the econ- cent in the second year, and 1.1 percent omy can be affected by myriad unfore- to2.9percentinthethirdyear. seen developments and events. Thus, in Because current conditions may differ setting the stance of monetary policy, from those that prevailed on average participants consider not only what over history, participants provide judgappears to be the most likely economic ments as to whether the uncertainty atoutcome as embodied in their projec- tached to their projections of each varitions, but also the range of alternative able is greater than, smaller than, or possibilities, the likelihood of their oc- broadly similar to typical levels of forecurring, 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, including those reported in past Mone- downside, or are broadly balanced. That tary Policy Reports and those prepared is, participants judge whether each variby Federal Reserve Board staff in ableismorelikelytobeaboveorbelow advance of meetings of the Federal their projections of the most likely out- OpenMarketCommittee.Theprojection come. These judgments about the uncererror ranges shown in the table illustrate tainty and the risks attending each parthe considerable uncertainty associated ticipant’s projections are distinct from with economic forecasts. For example, thediversityofparticipants’viewsabout suppose a participant projects that real the most likely outcomes. Forecast un- GDP and total consumer prices will rise certainty is concerned with the risks assteadily at annual rates of, respectively, sociated with a particular projection, 3 percent and 2 percent. If the uncer- rather than with divergences across a tainty attending those projections is numberofdifferentprojections.

Minutes of FOMC Meetings, March 257 Meeting Held on Mr.Struckmeyer,DeputyStaffDirec- March 17–18, 2009 tor,OfficeoftheStaffDirector forManagement,BoardofGovernors A meeting of the Federal Open Market Committee was held in the offices of Ms.BaileyandMr.English,Deputy the Board of Governors of the Federal Directors,DivisionsofBanking SupervisionandRegulationand Reserve System in Washington, D.C., MonetaryAffairs,respectively, on Tuesday, March 17, 2009, at 2:00 BoardofGovernors p.m. and continued on Wednesday, March 18, 2009, at 9:00 a.m. Mr.Blanchard,AssistanttotheBoard, OfficeofBoardMembers,Board Present: ofGovernors Mr.Bernanke,Chairman Messrs.Leahy,Nelson,Reifschneider, Mr.Dudley,ViceChairman andWascher,6AssociateDirec- Ms.Duke tors,DivisionsofInternational Mr.Evans Finance,MonetaryAffairs,Re- Mr.Kohn searchandStatistics,andRe- Mr.Lacker searchandStatistics,respectively, Mr.Lockhart BoardofGovernors Mr.Tarullo Mr.Warsh Mr.Gagnon,VisitingAssociateDirec- Ms.Yellen tor,DivisionofMonetaryAffairs, BoardofGovernors Mr.Bullard,Ms.Cumming,Mr.Hoenig,Ms.Pianalto,andMr.Rosen- Mr.Oliner,SeniorAdviser,Division gren,AlternateMembersofthe ofResearchandStatistics,Board FederalOpenMarketCommittee ofGovernors Messrs.Fisher,Plosser,andStern, Mr.Lewis,Economist,Divisionof PresidentsoftheFederalReserve MonetaryAffairs,BoardofGov- BanksofDallas,Philadelphia, ernors andMinneapolis,respectively Ms.Beattie,6AssistanttotheSecre- Mr.Madigan,SecretaryandEconomist tary,OfficeoftheSecretary, Ms.Danker,DeputySecretary BoardofGovernors Mr.Luecke,AssistantSecretary Mr.Skidmore,AssistantSecretary Ms.Low,OpenMarketSecretariat Ms.Smith,AssistantSecretary Specialist,DivisionofMonetary Mr.Alvarez,GeneralCounsel Affairs,BoardofGovernors Mr.Baxter,DeputyGeneralCounsel Mr.Williams,RecordsManagement Mr.Sheets,Economist Analyst,DivisionofMonetary Mr.Stockton,Economist Affairs,BoardofGovernors Messrs.Altig,Clouse,Connors,Ka- Mr.Sapenaro,FirstVicePresident, min,Slifman,Sullivan,Weinberg, FederalReserveBankofSt. Wilcox,andWilliams,Associate Louis Economists Messrs.FuhrerandRosenblum,Ex- Ms.Mosser,TemporaryManager,SysecutiveVicePresidents,Federal temOpenMarketAccount ReserveBanksofBostonand Ms.Johnson,SecretaryoftheBoard, Dallas,respectively OfficeoftheSecretary,Boardof Governors Mr.Frierson,DeputySecretary,Office oftheSecretary,BoardofGovernors 6. AttendedTuesday’ssessiononly.

258 96th Annual Report, 2009 Messrs.HiltonandSchweitzer,Senior chased in the early weeks of the pro- VicePresidents,FederalReserve gram matured and a large portion was BanksofNewYorkandClevenot renewed through the facility. Priland,respectively mary credit extended by the Federal Messrs.Clark,Gavin,Klitgaard,and Reserve was about unchanged, and Yi,VicePresidents,Federal credit outstanding under the Term Auc- ReserveBanksofKansasCity, tion Facility increased somewhat over St.Louis,NewYork,andPhilathe period as the February auctions exdelphia,respectively perienced higher demand than previous Mr.Weber,SeniorResearchOfficer, auctions. In contrast, credit extended FederalReserveBankofMinne- under the Primary Dealer Credit Facilapolis ity declined somewhat over the intermeeting period, and credit extended under the Asset-Backed Commercial Developments in Financial Markets Paper Money Market Mutual Fund Liand the Federal Reserve’s Balance quidity Facility edged down. Sheet Most meeting participants interpreted the evidence as indicating that credit The Manager of the System Open Mar- markets still were not working well, ket Account reported on recent devel- and that the Federal Reserve’s lending opments in domestic and foreign finan- programs, asset purchases, and curcial markets. The Manager also rency swaps were providing muchreported on System open market opera- needed support to economic activity by tions in Treasury securities and in reducing dislocations in financial maragency debt and agency mortgage- kets, lowering the cost of credit, and backed securities (MBS) during the facilitating the flow of credit to busiperiod since the Committee’s January nesses and households. Participants dis- 27–28 meeting. By unanimous vote, cussed the prospective further increase the Committee ratified those transac- in the Federal Reserve’s balance sheet, tions. There were no open market op- with a focus on the Term Asset-Backed erations in foreign currencies for the Securities Loan Facility (TALF) and System’s account during the period open market purchases of longer-term since the Committee’s January 27–28 assets. meeting. The launch of the TALF was an- Staff reported on recent develop- nounced on March 3. In the initial ments in System liquidity programs phase of the program, the Federal and on changes in the System’s bal- Reserve offered to provide up to $200 ance sheet. As of March 12, the Sys- billion of three-year loans, on a nonretem’s total assets and liabilities were course basis, against AAA-rated assetabout $2 trillion, close to the level of backed securities (ABS) backed by that just before the January 27–28 newly and recently originated auto meeting. Holdings of agency debt and loans, credit card loans, student loans, agency MBS had increased, while for- loans guaranteed by the Small Business eign central bank drawings on recip- Administration, and, potentially, certain rocal currency arrangements had de- other closely related types of ABS. The clined. Credit extended by the Federal Reserve and the Treasury had Commercial Paper Funding Facility previously announced their expectation also had declined, as 90-day paper pur- that the program would be expanded to

Minutes of FOMC Meetings, March 259 accept other types of ABS. The de- vantageous to be able to front-load purmand for TALF funding appeared chases to accommodate the pattern of likely to be modest initially, and some mortgage refinancing. Participants also participants saw a risk that private discussed the relative merits of increasfirms might be reluctant to borrow ing the Federal Reserve’s purchases of from the TALF out of concern about agency MBS versus initiating purpotential future changes in government chases of longer-term Treasury securipolicies that could affect TALF borrow- ties. Some participants remarked that ers. However, other participants antici- experience suggested that purchases of pated that TALF loans would increase Treasury securities would have effects over time as financial market institu- across a variety of long-term debt martions became more familiar with the kets and should ease financial condiprogram. Most participants supported tions generally while minimizing the the expansion of the lending capacity Federal Reserve’s influence on the alof the TALF, subject to receiving addi- location of credit. However, purchases tional capital from the Treasury, and of agency securities could have a more the inclusion of additional categories of direct effect on mortgage rates, thus recently issued, highly rated ABS as providing greater benefits to the housacceptable collateral. However, some ing sector, and on private borrowing participants expressed concern about rates more generally. Also, some parthe risks that might arise from the pos- ticipants were concerned that Federal sible extension of the TALF to include Reserve purchases of longer-term Treaolder and lower-quality assets, noting, sury securities might be seen as an inin particular, the greater uncertainty dication that the Federal Reserve was over the value of such assets. responding to a fiscal objective rather The Federal Reserve’s programs to than its statutory mandate, thus reducbuy direct debt obligations of the fed- ing the Federal Reserve’s credibility reeral housing agencies and agency- garding long-run price stability. Most guaranteed MBS were on track to participants, however, saw this risk as reach their initial targets of $100 bil- low so long as the Federal Reserve was lion and $500 billion, respectively, by clear about the importance of its longthe end of June. Participants agreed term price stability objective and demthat the asset purchase programs were onstrated a commitment to take the helping to reduce mortgage interest necessary steps in the future to achieve rates and improve market functioning, its objectives. thereby providing support to economic In light of the economic and finanactivity. Some participants stated a cial conditions, meeting participants preference for communicating the viewed the expansion of the Federal Committee’s intention regarding such Reserve’s balance sheet that might be purchases in terms of the growth rate associated with these and other proof Federal Reserve holdings rather than grams as appropriate in order to foster a dollar target for total purchases. the dual objectives of maximum em- However, others noted that the pace of ployment and price stability. It was MBS issuance was likely to be espe- noted that the Treasury and the Federal cially brisk over the next few months, Reserve will seek legislation to give in part because of the Administration’s the Federal Reserve tools in addition to new Making Home Affordable pro- interest on reserves to manage the fedgram, and observed that it could be ad- eral funds rate while providing the

260 96th Annual Report, 2009 funding necessary for the TALF and Staff Review of the Economic and other key credit-easing programs. Financial Situation The Committee also took up a proposal to augment the existing network The information reviewed at the March of central bank liquidity swap lines by 17–18 meeting indicated that economic adding several temporary swap lines activity had fallen sharply in recent that could provide foreign currency li- months. The contraction was reflected quidity to U.S. institutions, analogous in widespread declines in payroll emto the arrangements that currently pro- ployment and industrial production. vide U.S. dollar liquidity abroad. There Consumer spending appeared to remain was no evidence that these institutions at a low level after changing little, on were encountering difficulty in meeting balance, in recent months. The housing foreign currency obligations at this market weakened further, and nonrestime, but these facilities would be idential construction fell. Business available should pressures develop in spending on equipment and software the future. The Committee unani- continued to fall across a broad range mously approved the following resolu- of categories. Despite the cutbacks in tion: production, inventory overhangs appeared to worsen in a number of areas. “The Federal Open Market Committee Both headline and core consumer authorizes the Federal Reserve Bank of New York to enter into additional temp- prices edged up in January and Feborary reciprocal currency arrangements ruary. (swap lines) with the Bank of England, the Labor market conditions continued European Central Bank (ECB), the Bank of to deteriorate. Private payroll employ- Japan, and the Swiss National Bank to supment dropped considerably over the port the provision of liquidity in British pounds, euros, Japanese yen, and Swiss three months ending in February. Emfrancs. The swap arrangements with each ployment losses remained widespread foreign central bank shall be subject to the across industries, with the notable exfollowinglimits:anaggregateamountofup ception of health care. Meanwhile, the to£30billionwiththeBankofEngland;an aggregate amount of up to €80 billion with average workweek of production and theECB;anaggregateamountofupto¥10 nonsupervisory workers on private paytrillion with the Bank of Japan; and an rolls continued to be low in February, aggregate amount of up to SwF 40 billion and the number of aggregate hours with the Swiss National Bank. These ar- worked for this group was markedly rangements shall terminate no later than below the fourth-quarter average. The October 30, 2009, unless extended by civilian unemployment rate climbed mutualagreementoftheCommitteeandthe respective foreign central banks. The Com- 1⁄ 2 percentage point in February, to 8.1 mittee also authorizes the Federal Reserve percent. The labor force participation Bank of New York to provide the foreign rate declined in January and February, currencies obtained under the arrangements on balance, likely in response to weakto U.S. financial institutions by means of ened labor demand. The four-week swap transactions to assist such institutions in meeting short-term liquidity needs in moving average of initial claims for their foreign operations. Requests for draw- unemployment insurance continued to ingsonthecentralbankswaplinesanddis- move up through early March, and tribution of the foreign currency proceeds the level of insured unemployed rose to U.S. financial institutions shall be initifurther. ated by the appropriate Reserve Bank and approvedbytheForeignCurrencySubcom- Industrial production fell in January mittee.” and February, with cutbacks again

Minutes of FOMC Meetings, March 261 widespread, and capacity utilization in Housing activity continued to be manufacturing declined to a very low subdued. Single-family starts ticked up level. Although production of light in February, and adjusted permit issumotor vehicles turned up in February, it ance in this sector moved up to a level remained well below the pace of the slightly above starts. Multifamily starts fourth quarter as manufacturers re- jumped in February from the very low sponded to the significant deterioration level in January, and the level of multiin demand over the past few months. family starts was close to where it had The output of high-tech products been at the end of the third quarter of declined as production of computers 2008. Housing demand remained very and semiconductors extended the sharp weak, however. Although the stock of declines that began in the fourth quar- unsold new single-family homes fell in ter of 2008. The production of other January to its lowest level since 2003, consumer durables and business equip- inventories continued to move up relament weakened further, and broad indi- tive to the slow pace of sales. Sales of cators of near-term manufacturing ac- existing single-family homes fell in tivity suggested that factory output January, reversing the uptick seen in would continue to contract over the December. Over the previous 12 next few months. months, the pace of existing home The available data suggested that sales declined much less than that of real consumer spending held steady, on new home sales, reflecting in part balance, in the first two months of this increases in foreclosure-related and year after having fallen sharply over other distressed sales. The weakness in the second half of last year. Real home sales persisted despite historispending on goods excluding motor cally low mortgage rates for borrowers vehicles was estimated to have edged eligible for conforming loans. After up, on balance, in January and Febru- having fallen significantly late last ary. In contrast, real outlays on motor year, rates for conforming 30-year vehicles contracted further in February fixed-rate mortgages fluctuated in a after a decline in January. The financial relatively narrow range during the instrain on households intensified over termeeting period. In contrast, the marthe previous several months; by the end ket for nonconforming loans remained of the fourth quarter, household net severely impaired. House prices continworth for the first time since 1995 had ued to decline. fallen to less than five times disposable Business spending on transportation income, and substantial declines in equipment continued to fall from alequity and house prices continued early ready low levels, and demand both for this year. Consumer sentiment declined high-tech equipment and software and further in February as households for equipment other than high-tech and voiced greater concerns about income transportation dropped sharply in the and job prospects. The Reuters/ fourth quarter. In January, nominal University of Michigan index in early shipments of nondefense capital goods March stood only slightly above its 29- excluding aircraft declined, and new year low reached in November, and the orders fell significantly further. The Conference Board index, which in- fundamental determinants of equipment cludes questions about employment and software spending worsened appreconditions, fell in February to a new ciably: Business output dropped, and low. rising corporate bond yields boosted

262 96th Annual Report, 2009 the user cost of capital in the fourth and emerging Asia. Incoming data for quarter. After holding up surprisingly January and February suggested a furwell through most of last year, outlays ther significant decline in the first on nonresidential structures began to quarter. show declines consistent with the weak In the United States, overall confundamentals for this sector. In real sumer prices increased in January and terms, investment declined for most February, led by an increase in energy types of buildings over the previous prices, after posting sizable declines few months. Census data on book- late last year. Excluding the categories value inventory investment for January of food and energy, consumer prices suggested that firms had further pared edged higher in January and February their stocks; however, sales continued after three months of no change. The to fall more quickly than inventories, producer price index for core intermeapparently exacerbating the overhangs diate materials dropped for a fifth that developed in the second half of month in February, reflecting, in part, 2008. weaker global demand and steep The U.S. international trade deficit declines in the prices of a wide variety narrowed in December and January, as of energy-intensive goods, such as a steep fall in imports more than offset chemicals and plastics. Low readings a decline in exports. All major catego- on overall and core consumer price inries of exports decreased, especially flation in recent months, as well as the sales of industrial supplies, machinery, weakened economic outlook, kept nearand automotive products. All major term inflation expectations reported in categories of imports decreased as well, surveys well below their high levels in with large declines in imports of oil, mid-2008. In contrast, measures of automotive products, and industrial longer-term expectations remained supplies. The drop in the value of oil close to their averages over the past imports reflected a lower price. Imports couple of years. Hourly earnings conof automotive products declined as au- tinued to increase at a moderate rate in tomakers made significant production February. cutbacks throughout North America. The Federal Open Market Commit- Output in the advanced foreign tee’s decision at the January meeting to economies contracted in the fourth leave the target range for the federal quarter, with large reductions in real funds rate unchanged was widely angross domestic product (GDP) in all ticipated by investors and had little imthe major economies and a double-digit pact on short-term money markets. rate of decline in Japan. Trade and Over the intermeeting period, the path investment in those countries were par- for the federal funds rate implied by ticularly weak. Indicators of economic futures rates shifted down somewhat, activity, especially industrial produc- on net, mostly on incoming news about tion, suggested that the pace of con- the financial sector and the economic traction accelerated late in the fourth outlook. Yields on nominal Treasury quarter and into the first quarter. Eco- coupon securities increased over the nomic activity in emerging market period, reportedly because market pareconomies also weakened significantly ticipants had assigned some probability in the fourth quarter. Exports, industrial to the possibility that the Federal production, and confidence indicators Reserve would establish a purchase dropped notably in both Latin America program for longer-term Treasury secu-

Minutes of FOMC Meetings, March 263 rities that was not, in fact, forthcoming; 10-year Treasury notes remained very yields were also reported to have re- high. sponded to concerns over the federal Broad equity price indexes dropped deficit and the growing supply of Trea- significantly, on balance, over the intersury securities. Yields on longer-term meeting period amid continued coninflation-indexed Treasury securities cerns about the health of the financial increased more than those on their sector, uncertainty regarding the effinominal counterparts, leaving longer- cacy of government support to the secterm inflation compensation lower over tor, and a further weakening of the ecothe period, and inflation compensation nomic outlook. Bank stock prices were at shorter horizons was little changed. particularly hard hit, and the credit de- Poor liquidity in the market for Trea- fault swap (CDS) spreads of many sury inflation-protected securities con- banks rose above the peaks recorded tinued to make these readings difficult last fall on anxieties about the financial to interpret. conditions of the largest banking firms. Conditions in short-term funding Stock prices of insurance companies markets were mixed over the inter- dropped sharply over the period, remeeting period. In unsecured interbank flecting concerns about the adequacy of funding markets, spreads of dollar Lon- their capital positions. On March 2, don interbank offered rates (Libor) over American International Group, Inc. comparable-maturity overnight index (AIG), reported losses of more than swap rates trended higher, on net, espe- $60 billion for the fourth quarter of last cially at longer maturities, and forward year, and the Treasury and the Federal spreads increased, evidently on re- Reserve announced a restructuring of newed concerns about the financial the government assistance to AIG to condition of some large banks. Condi- enhance the company’s capital and litions in the commercial paper (CP) quidity to facilitate the orderly complemarket continued to improve, on bal- tion of its global divestiture program. ance, over the intermeeting period. Measures of liquidity in the second- Spreads on 30-day A2/P2-rated CP ary market for speculative-grade corpotrended down further, and those on rate bonds worsened somewhat over AA-rated asset-backed commercial the period but remained significantly paper remained at the lower end of the better than in the fall of 2008. Spreads range recorded over the past year. Con- of yields on both BBB-rated and ditions in repurchase agreement mar- speculative-grade bonds relative to kets for most collateral types improved those on comparable-maturity Treasury over the period, but volumes remained securities were little changed on net. low. The investment- and speculative-grade Trading conditions in the secondary CDS indexes widened significantly, on market for nominal Treasury coupon net, over the intermeeting period. Gross securities showed some limited signs bond issuance by nonfinancial firms of improvement. Average bid-asked was very strong in January and Februspreads for on-the-run nominal Trea- ary, as investment-grade issuance more sury notes were relatively stable near than doubled from its already solid their pre-crisis levels. Daily trading pace in the fourth quarter; speculativevolumes for on-the-run securities, how- grade issuance, however, remained ever, inched lower, and spreads be- sluggish. Trading conditions in the tween the yields of on- and off-the-run leveraged syndicated loan market im-

264 96th Annual Report, 2009 proved slightly, but issuance continued Bank credit continued to decline in to be very weak. The market for com- January and February, and commercial mercial mortgage-backed securities and industrial (C&I) loans decreased (CMBS) also remained under heavy over these months. The February Surstress. Indexes of CDS spreads on vey of Terms of Business Lending AAA-rated CMBS widened to record indicated that C&I loan rate spreads levels, as Moody’s downgraded a large over comparable-maturity market inportionofthe2006and2007vintagesaf- struments rose modestly overall from ter a reevaluation of its rating criteria. the November survey. Commercial real The debt of the domestic private estate loans outstanding also declined nonfinancial sector, which was about over the first part of 2009. In contrast, unchanged in the fourth quarter of last consumer loans on banks’ books year, was estimated to have remained jumped over the first two months of about flat in the first quarter. House- the year because of sizable increases at hold debt appeared to have contracted a few banks that purchased loans from in the first quarter for the second quar- their affiliated finance companies. In ter in a row, primarily as a result of addition, some banks brought consumer declines in both consumer and home loans that had previously been securimortgage debt. Declines in consumer tized back onto their books. After 12 and mortgage debt stemmed, in turn, consecutive months of contraction, resifrom very weak household spending, dential mortgage loans on banks’ books the continued drop in house prices, and increased in February, likely a result of tighter terms and standards for loans. the pickup in refinancing activity. In Business debt was projected to expand contrast, the rise in home equity loans at a moderate pace in the first quarter, slowed noticeably in January and Feblargely because of a burst of corporate ruary. bond issuance. Reflecting heavy bor- Among the advanced foreign econorowing by the Treasury, total debt of mies, headline equity price indexes the domestic nonfinancial sector was generally fell significantly over the projected to have continued to expand period, with the sharpest drops in the in the first quarter, but at a pace below banking sector. In particular, European that recorded in the fourth quarter of bank shares fell steeply as earnings relast year. ports for the fourth quarter came in The rise in M2 slowed in February weaker than expected and fears about from the rapid pace recorded over the the exposure of many western Europrevious few months. Liquid deposits, pean banks to emerging Europe while decelerating, continued to expand increased. The major currencies index briskly. Savings deposits increased of the dollar rose, on net, over the inwhile demand deposits decreased. termeeting period; foremost among the Retail money funds fell in February, contributors to the rise was a signifireflecting sizable outflows from cant appreciation of the dollar against Treasury-only funds, which generally the yen. Financial conditions in emergprovided low yields. Small time depos- ing markets also worsened, with their its also contracted, as the institutions exchange rates and equity prices generthat had been bidding aggressively ally falling and CDS premiums rising a for these retail funds stopped doing bit on balance. so. The expansion in currency re- Several foreign governments and mained robust. central banks took further steps to sup-

Minutes of FOMC Meetings, March 265 port their financial markets and econo- Financial conditions overall were even mies. The Bank of England announced less supportive of economic activity, its intention to purchase substantial with broad equity indexes down sigquantities of government and corporate nificantly amid continued concerns bonds through its Asset Purchase Facil- about the health of the financial sector, ity, after which yields on long-term the dollar stronger, and long-term inter- British gilts fell significantly. In addi- est rates higher. The staff’s projections tion, the British government launched for real GDP in the second half of its Asset Protection Scheme, which in- 2009 and in 2010 were revised down, sured assets placed in the scheme by with real GDP expected to flatten out the Royal Bank of Scotland and Lloyds gradually over the second half of this Bank. The Bank of Japan stated that it year and then to expand slowly next would resume purchases of equities year as the stresses in financial markets held on banks’ balance sheets, an- ease, the effects of fiscal stimulus take nounced plans to purchase corporate hold, inventory adjustments are worked bonds, and began its previously an- through, and the correction in housing nounced purchases of commercial activity comes to an end. The weaker paper. The Swiss National Bank an- trajectory of real output resulted in the nounced that it would purchase both projected path of the unemployment domestic corporate debt and foreign rate rising more steeply into early next currency to increase liquidity. year before flattening out at a high level over the rest of the year. The staff forecast for overall and core personal Staff Economic Outlook consumption expenditures (PCE) infla- In the forecast prepared for the meet- tion over the next two years was reing, the staff revised down its outlook vised down slightly. Both core and for economic activity. The deterioration overall PCE price inflation were in labor market conditions was rapid in expected to be damped by low rates of recent months, with steep job losses resource utilization, falling import across nearly all sectors. Industrial pro- prices, and easing cost pressures as a duction continued to contract rapidly as result of the sharp net declines in oil firms responded to the falloff in de- and other raw materials prices since mand and the buildup of some inven- last summer. tory overhangs. The incoming data on business spending suggested that busi- Meeting Participants’ Views and ness investment in equipment and Committee Policy Action structures continued to decline. Singlefamily housing starts had fallen to a In the discussion of the economic situapost−World War II low in January, and tion and outlook, nearly all meeting demand for new homes remained weak. participants said that conditions had de- Both exports and imports retreated sig- teriorated relative to their expectations nificantly in the fourth quarter of last at the time of the January meeting. The year and appeared headed for compa- slowdown was widespread across secrable declines this quarter. Consumer tors. Large declines in equity prices, a outlays showed some signs of stabiliz- further drop in house prices, and ing at a low level, with real outlays for mounting job losses threatened to furgoods outside of motor vehicles record- ther depress consumer spending, deing gains in January and February. spite some firming in the recent retail

266 96th Annual Report, 2009 sales data and forthcoming tax reduc- Participants did not interpret the uptions. Business capital spending was tick in housing starts in February as the weakening in an environment of uncer- beginning of a new trend, but some tainty and low business confidence. Of noted that there was only limited scope particular note was the apparent sharp for housing activity to fall further. fall in foreign economic activity, which Nonetheless, large inventories of unwas having a negative effect on U.S. sold homes relative to sales and the exports. Credit conditions remained prospect of a continued high level of very tight, and financial markets re- distressed sales would continue to hold mained fragile and unsettled, with pres- down residential investment in the near sures on financial institutions generally term. Several participants noted the intensifying this year. Overall, partici- tentative signs of stabilization in conpants expressed concern about down- sumer spending in January and Februside risks to an outlook for activity that ary. However, others suggested that was already weak. With regard to the strains on household balance sheets outlook for inflation, all participants from falling equity and house prices, agreed that inflation pressures were reduced credit availability, and the fear likely to remain subdued, and several of unemployment could well lead to expressed the view that inflation was further increases in the saving rate that likely to persist below desirable levels. would damp consumption growth in District business contacts indicated the near term. that production and sales were declin- Overall, most participants viewed ing steeply. Some industries that previ- downside risks as predominating in the ously were less affected, such as agri- near term, mainly owing to potential culture and energy, had begun to suffer adverse feedback effects as reduced the effects of the slowdown. Businesses employment and production weighed reported that bank financing was be- on consumer spending and investment, coming more expensive and more diffi- and as the weakening economy boosted cult to obtain. Expenditures were being the prospective losses of financial insticut substantially for a wide range of tutions, leading to a further tightening capital equipment, and spending on of credit conditions. nonresidential structures had recently Looking beyond the very near term, turned down. Inventory liquidation was a number of market forces and policies continuing, but inventory-sales ratios now in place were seen as eventually remained elevated as sales slowed. leading to economic recovery. Notably, Against this backdrop, participants an- the low level of mortgage interest rates, ticipated further employment cutbacks reduced house prices, and the Adminisover coming months, though perhaps at tration’s new programs to encourage a gradually diminishing rate. mortgage refinancing and mitigate fore- Several participants said that the de- closures ultimately could bring about a gree and pervasiveness of the decline lower cost of homeownership, a susin foreign economic activity was one of tained increase in home sales, and a the most notable developments since stabilization of house prices. The the January meeting. In light of this de- household saving rate, which had alvelopment, it was widely agreed that ready risen considerably, would eventuexports were not likely to be a source ally level out and cease to hold back of support for U.S. economic activity in consumption growth. Business inventhe near term. tories would come into line with even a

Minutes of FOMC Meetings, March 267 low level of sales, and the pressure on ments received from financial industry production from inventory drawdowns contacts on their experiences with and would diminish. Fiscal and monetary concerns about recent government propolicies were likely to contribute sig- grams to stabilize the financial system. nificantly to aggregate demand in com- These contacts feared that uncertainties ing quarters. Participants expressed a about future actions the government variety of views about the strength and might take and future regulations it timing of the recovery, however. Some might impose were making it more difbelieved that the natural resilience of ficult to plan and were discouraging market forces would become evident participation in government efforts to later this year. Others, who saw recov- stabilize the financial system. Particiery as delayed and potentially weak, pants agreed that a credible and widely were concerned about a possible fur- understood program to deal with the ther rise in the saving rate and a very troubles of the banking system could slow improvement in financial condi- help restore business and consumer tions. Some participants also cautioned confidence. Many viewed the strengththat, because of the poor functioning of ening of the banking system as essenthe financial system, capital and labor tial for a sustained and robust recovery. were not being allocated to their most In the discussion of monetary policy productive uses, and this failure threat- for the intermeeting period, Committee ened to damp the recovery and reduce members agreed that substantial addithe potential growth of the economy tional purchases of longer-term assets over the medium term. eligible for open market operations Participants saw little chance of a would be appropriate. Such purchases pickup in inflation over the near term, would provide further monetary stimuas rising unemployment and falling ca- lus to help address the very weak ecopacity utilization were holding down nomic outlook and reduce the risk that wages and prices and inflation expecta- inflation could persist for a time below tions appeared subdued. Several ex- rates that best foster longer-term ecopressed concern that inflation was nomic growth and price stability. One likely to persist below desired levels, member preferred to focus additional with a few pointing to the risk of defla- purchases on longer-term Treasury setion.Evenwithoutacontinuationofout- curities, whereas another member preright price declines, falling expectations ferred to focus on agency MBS. Howof inflation would raise the real rate of ever, both could support expanded interest and thus increase the burden of purchases across a range of assets, and debt and further restrain the economy. several members noted that working Some indicators, including share across a range of assets and instruprices and CDS spreads of financial in- ments was appropriate when the effects stitutions, suggested a worsening of of any one tactic were uncertain. Memfinancial market strains since January. bers agreed that the monetary base was However, for the most part, participants likely to grow significantly as a conseviewed conditions in financial markets quence of additional asset purchases; as little changed but remaining extraor- one, in particular, stressed that susdinarily stressed. The large volume of tained increases in the monetary base issuance of investment-grade corporate were important to ensure that policy bonds in recent weeks was a notable was consistently expansionary. Membright spot. Participants shared com- bers expressed a range of views as to

268 96th Annual Report, 2009 the preferred size of the increase in “The Federal Open Market Committee purchases. Several members felt that seeks monetary and financial conditions that will foster price stability and promote the significant deterioration in the ecosustainable growth in output. To further its nomic outlook merited a very substanlong-run objectives, the Committee seeks tial increase in purchases of longer- conditions in reserve markets consistent term assets. In contrast, the potential withfederalfundstradinginarangefrom0 for a large increase over time in the to 1⁄4 percent. The Committee directs the size of the balance sheet from the Desk to purchase GSE debt, GSEguaranteed MBS, and longer-term Treasury TALF program was seen as supporting securities during the intermeeting period a more modest, though still substantial, withtheaimofprovidingsupporttoprivate increase in asset purchases. Ultimately, credit markets and economic activity. The members agreed to undertake addi- timing and pace of these purchases should tional purchases of agency MBS of up depend on conditions in the markets for such securities and on a broader assessment to $750 billion and of agency debt of of private credit market conditions. The up to $100 billion, and they also Committee anticipates that the combination agreed to purchase up to $300 billion of outright purchases and various liquidity of longer-term Treasury securities. The facilities outstanding will cause the size of Committee believed that purchases of the Federal Reserve’s balance sheet to expandsignificantlyincomingmonths.The these amounts would help to promote a Desk is expected to purchase up to $200 return to economic growth and price billion in housing-related GSE debt by the stability. The period for conducting the end of this year. The Desk is expected to agency debt and MBS purchases was purchase at least $500 billion in GSEextended from the next three months to guaranteed MBS by the end of the second quarter of this year and is expected to purthe next nine months; members agreed chase up to $1.25 trillion of these securities to allow the Desk flexibility within this bytheendofthisyear.TheCommitteealso horizon to respond to market condi- directs the Desk to purchase longer-term tions. Treasury purchases were to be Treasury securities during the intermeeting conducted over the next six months. period. Over the next six months, the Desk Members also noted the recent launch is expected to purchase up to $300 billion oflonger-termTreasurysecurities.TheSysof the TALF, and they agreed to temOpenMarketAccountManagerandthe include in the Committee’s statement Secretary will keep the Committee inan indication that the range of assets formed of ongoing developments regarding accepted as eligible collateral for the the System’s balance sheet that could affect TALF was likely to be expanded. Com- the attainment over time of the Committee’s objectives of maximum employment mittee members decided to keep the andpricestability.” target range for the federal funds rate at 0 to 1⁄ 4 percent and to communicate The vote encompassed approval of to the public the Committee’s view that the statement below to be released at the federal funds rate was likely to 2:15 p.m.: remain exceptionally low for an ex- “Information received since the Federal tended period. Open Market Committee met in January At the conclusion of the discussion, indicates that the economy continues to the Committee voted to authorize and contract. Job losses, declining equity and direct the Federal Reserve Bank of housing wealth, and tight credit conditions have weighed on consumer sentiment and New York, until it was instructed otherspending. Weaker sales prospects and diffiwise, to execute transactions in the culties in obtaining credit have led busi- System Account in accordance with the nesses to cut back on inventories and fixed following domestic policy directive: investment. U.S. exports have slumped as a

Minutes of FOMC Meetings, March 269 number of major trading partners have also It was agreed that the next meeting fallen into recession. Although the near- of the Committee would be held on term economic outlook is weak, the Com- Tuesday−Wednesday, April 28–29, mittee anticipates that policy actions to sta- 2009. The meeting adjourned at 1:35 bilize financial markets and institutions, together with fiscal and monetary stimulus, p.m. on March 18, 2009. will contribute to a gradual resumption of sustainableeconomicgrowth. Conference Call In light of increasing economic slack here and abroad, the Committee expects On February 7, 2009, the Committee that inflation will remain subdued. Moremet by conference call in a joint sesover, the Committee sees some risk that inflation could persist for a time below rates sion with the Board of Governors to that best foster economic growth and price discuss the potential role of the Federal stabilityinthelongerterm. Reserve in the Treasury’s forthcoming In these circumstances, the Federal financial stabilization plan. After hear- Reserve will employ all available tools to ing an overview of the version of the promote economic recovery and to preserve pricestability.TheCommitteewillmaintain plan envisioned at the time of the the target range for the federal funds rate at meeting, meeting participants discussed 0 to 1⁄4 percent and anticipates that eco- its principal elements and shared a nomic conditions are likely to warrant exrange of perspectives on its implicaceptionally low levels of the federal funds tions for financial markets and institurate for an extended period. To provide greater support to mortgage lending and tions. The Federal Reserve’s primary housingmarkets,theCommitteedecidedto- direct role in the plan would be day to increase the size of the Federal Re- through an expansion of the previously serve’s balance sheet further by purchasing announced TALF, which would be supup to an additional $750 billion of agency ported by additional funds from the mortgage-backed securities, bringing its total purchases of these securities to up to Troubled Asset Relief Program $1.25 trillion this year, and to increase its (TARP). In the current environment, it purchases of agency debt this year by up to was anticipated that such an expansion $100billiontoatotalofupto$200billion. would provide additional assistance to Moreover, to help improve conditions in financial markets and institutions in private credit markets, the Committee demeeting the credit needs of households cided to purchase up to $300 billion of longer-term Treasury securities over the and businesses and thus would support next six months. The Federal Reserve has overall economic activity. While sevlaunched the Term Asset-Backed Securities eral participants expressed some con- Loan Facility to facilitate the extension of cern that the expansion of the TALF credit to households and small businesses program could increase the Federal Reand anticipates that the range of eligible collateral for this facility is likely to be serve’s exposure to credit risk, the proexpanded to include other financial assets. gram’s requirements for highly rated The Committee will continue to carefully collateral that would exceed the value monitor the size and composition of the of the related loans, in combination Federal Reserve’s balance sheet in light of with the added TARP funds as a backevolving financial and economic developments.” stop against losses, were generally seen as providing the Federal Reserve with Voting for this action: Messrs. Ber- adequate protection. Participants also nanke and Dudley, Ms. Duke, Messrs. discussed the implications of the Evans, Kohn, Lacker, Lockhart, expanded TALF program for the Fed- Tarullo,andWarsh,andMs.Yellen. eral Reserve’s balance sheet over time. Votingagainstthisaction:None. Participants agreed it would be impor-

270 96th Annual Report, 2009 tant to work with the Treasury to ob- Mr.Skidmore,AssistantSecretary tain tools to ensure that any reserves Ms.Smith,AssistantSecretary Mr.Alvarez,GeneralCounsel added to the banking system through Mr.Sheets,Economist this program could be removed at the Mr.Stockton,Economist appropriate time. Messrs.Altig,Clouse,Connors,Kamin,Slifman,Sullivan,Wilcox, Notation Vote andWilliams,AssociateEconomists By notation vote completed on Febru- Ms.Mosser,TemporaryManager,Sysary 17, 2009, the Committee unanitemOpenMarketAccount mously approved the minutes of the FOMC meeting held on January 27–28, Ms.Johnson,SecretaryoftheBoard, OfficeoftheSecretary,Boardof 2009. Governors Brian F. Madigan Secretary Mr.Frierson,7DeputySecretary,OfficeoftheSecretary,Boardof Governors Meeting Held on Mr.Struckmeyer,DeputyStaffDirec- April 28–29, 2009 tor,OfficeoftheStaffDirector forManagement,BoardofGov- A joint meeting of the Federal Open ernors Market Committee and the Board of Ms.BargerandMr.English,Deputy Governors of the Federal Reserve Sys- Directors,DivisionsofBanking tem was held in the offices of the SupervisionandRegulationand Board of Governors in Washington, MonetaryAffairs,respectively, D.C., on Tuesday, April 28, 2009, at BoardofGovernors 2:00 p.m. and continued on Wednes- Mr.Blanchard,AssistanttotheBoard, day, April 29, 2009, at 9:00 a.m. OfficeofBoardMembers,Board ofGovernors Present: Mr.Bernanke,Chairman Messrs.Levin,Nelson,Reifschneider, Mr.Dudley,ViceChairman andWascher,AssociateDirectors, Ms.Duke DivisionsofMonetaryAffairs, Mr.Evans MonetaryAffairs,Researchand Mr.Kohn Statistics,andResearchandSta- Mr.Lacker tistics,respectively,Boardof Mr.Lockhart Governors Mr.Tarullo Mr.Warsh Mr.Meyer,SeniorAdviser,Division Ms.Yellen ofMonetaryAffairs,Boardof Governors Mr.Bullard,Ms.Cumming,Mr.Hoenig,Ms.Pianalto,andMr.Rosen- Mr.Carpenter,DeputyAssociateDigren,AlternateMembersofthe rector,DivisionofMonetary FederalOpenMarketCommittee Affairs,BoardofGovernors Messrs.Fisher,Plosser,andStern, Mr.Palumbo,AssistantDirector,Divi- PresidentsoftheFederalReserve sionofResearchandStatistics, BanksofDallas,Philadelphia, BoardofGovernors andMinneapolis,respectively Mr.Madigan,SecretaryandEconomist Ms.Danker,DeputySecretary Mr.Luecke,AssistantSecretary 7.AttendedWednesday’ssessiononly.

Minutes of FOMC Meetings, April 271 Mr.Small,ProjectManager,Division period since the Committee’s March ofMonetaryAffairs,Boardof 17–18 meeting. By unanimous vote, Governors the Committee ratified those transac- Ms.JudsonandMr.Nichols,8Econo- tions. There were no open market opmists,DivisionsofMonetary erations in foreign currencies for the AffairsandResearchandStatis- System’s account over the intermeeting tics,respectively,BoardofGovperiod. ernors The staff reported on recent develop- Ms.Beattie,AssistanttotheSecretary, ments in System liquidity programs OfficeoftheSecretary,Boardof and on changes in the System’s bal- Governors ance sheet. As of April 22, the Sys- Ms.Low,OpenMarketSecretariat tem’s total assets and liabilities were Specialist,DivisionofMonetary close to $2.2 trillion, about $130 billion Affairs,BoardofGovernors higher than just before the March meeting. System holdings of agency Mr.Barron,FirstVicePresident,FederalReserveBankofAtlanta debt and agency MBS expanded by $215 billion over the same period. Messrs.RosenblumandSniderman, Credit extended through the Federal ExecutiveVicePresidents,Fed- Reserve’s liquidity facilities decreased, eralReserveBanksofDallasand Cleveland,respectively owing, at least in part, to the recent improvement in short-term funding Mr.Hakkio,Ms.Mester,andMessrs. markets. RascheandRolnick,SeniorVice The staff also provided the Commit- Presidents,FederalReserve BanksofKansasCity,Philadel- tee with projections that were intended phia,St.Louis,andMinneapolis, to illustrate the potential evolution of respectively the Federal Reserve’s balance sheet over coming years under a variety of Messrs.Burke,Hornstein,andOlivei, VicePresidents,FederalReserve assumptions about the economic and BanksofNewYork,Richmond, financial outlook and the associated andBoston,respectively path of monetary policy. The general contours of the projections—a rapid Mr.Rich,AssistantVicePresident, FederalReserveBankofNew near-term increase in Federal Reserve York assets and the monetary base, followed by a decline for a time—were the same Developments in Financial Markets in each case, but the timing and magniand the Federal Reserve’s Balance tude varied significantly depending Sheet upon the underlying assumptions. Moreover, many aspects of the eco- The Manager of the System Open Marnomic and financial outlook were subket Account reported on recent develject to substantial risks, implying conopments in domestic and foreign finansiderable uncertainty regarding those cial markets. The Manager also assumptions and the resulting projecreported on System open market operations of the balance sheet and the tions in Treasury securities and in monetary base. agency debt and agency mortgage- The staff briefed the Committee on backed securities (MBS) during the recent developments related to the Term Asset-Backed Securities Loan Fa- 8.AttendedTuesday’ssessiononly. cility (TALF), which was authorized by

272 96th Annual Report, 2009 the Board of Governors last November Staff Review of the under section 13(3) of the Federal Economic Situation Reserve Act. Under the TALF, the Federal Reserve Bank of New York ex- The information reviewed at the April tended three-year loans secured by 28–29 meeting indicated that the pace AAA-rated asset-backed securities of decline in some components of final (ABS); these securities were backed by demand appeared to have slowed new and recently originated loans made recently. Consumer spending firmed in by financial institutions. The first two the first quarter after dropping markmonthly subscriptions of the TALF edly during the second half of 2008. settled during the intermeeting period. Housing activity remained depressed At this meeting, the Committee dis- but seemed to have leveled off in Febcussed the potential benefits of accept- ruary and March. In contrast, busiing newly issued, AAA-rated commer- nesses cut production and employment cial mortgage-backed securities and substantially in recent months—likely insurance premium finance ABS as eli- reflecting, in part, inventory overhangs gible collateral for TALF loans. Meet- that persisted into the early part of the ing participants also discussed the pos- year—and fixed investment continued sibility that some new TALF loans to contract. Headline and core conwould have a longer maturity of five sumer prices rose at a moderate pace years. over the first three months of the year. Secretary’s note: The Board of Gov- Labor market conditions deteriorated ernors subsequently approved the further in March. Private nonfarm paybroadening of the list of TALF-eligible roll employment registered its fifth collateral and the addition of five-year consecutive large monthly decrease, loans to the facility, as announced on with losses widespread across indus- May 1, 2009. tries. Moreover, the average workweek By unanimous vote, the Committee of production and nonsupervisory decided to extend the reciprocal cur- workers on private payrolls ticked rency (“swap”) arrangements with the down in March from the low level re- Bank of Canada and the Banco de corded in January and February, and Mexico for an additional year, begin- total hours worked for this group ning in mid-December 2009; these ar- stayed below the fourth-quarter averrangements are associated with the age. The civilian unemployment rate Federal Reserve’s participation in the climbed to 8.5 percent, and the labor North American Framework Agreement force participation rate edged down of 1994. The arrangement with the from its February level. The four-week Bank of Canada is in the amount of $2 moving average of initial claims for billion equivalent, and that with the unemployment insurance remained el- Banco de Mexico is in the amount of evated in April, and the number of $3 billion equivalent. The vote to re- individuals receiving unemployment new the System’s participation in these benefits relative to the size of the labor swap arrangements was taken at this force reached its highest level since meeting because of the provision in the 1982. arrangements that requires each party Industrial production fell substanto provide six months’ prior notice tially in March and for the first quarter of an intention to terminate its partici- as a whole, with cutbacks widespread pation. across sectors, and manufacturing ca-

Minutes of FOMC Meetings, April 273 pacity utilization decreased to a very The latest readings from the housing low level. First-quarter domestic pro- market suggested that the contraction duction of light motor vehicles reached in housing activity might have moderthe lowest level in more than three de- ated over the first quarter. Singlecades as inventories of such vehicles, family housing starts flattened out in while low, remained high relative to February and March, and, after adjustsales. The output of high-technology ing for activity outside of permitproducts decreased in March and in the issuing areas, the level of permits in first quarter overall, with production of March remained above the level of computers and semiconductors extend- starts. The contraction in the multifaming the downward trend that had begun ily sector also showed signs of slowin the second half of 2008. In contrast, ing, as the drop in starts in the first the production of communications quarter was well below the pace expeequipment edged up in the first quarter. rienced during the fourth quarter of The output of other consumer durables 2008. Recent data also indicated that and business equipment stayed low, housing demand might have stabilized. and broad indicators of near-term Sales of new single-family homes held manufacturing activity suggested that steady in March after edging up in factory output would contract over the February, but the level of such sales next few months. remained low, leaving the supply of The available data suggested that new homes relative to the pace of sales real consumer spending rose moder- very high by historical standards. Existately in the first quarter after having ing home sales in March were slightly fallen in the second half of last year. below the average pace for January and Real spending on goods and services February. Most national indexes of excluding motor vehicles fell in March house prices stayed on a downward trabut was up, on balance, for the first jectory. Lower mortgage rates and quarter as a whole. Real outlays on house prices contributed to an increase new and used motor vehicles expanded in housing affordability. Rates for conin the first quarter following six con- forming 30-year fixed-rate mortgages secutive quarterly declines. Despite the extended the significant decline that upturn in consumer spending, the fun- began late last year. Rates on jumbo damentals for this sector remained loans came down as well, although the weak: Wages and salaries dropped, spread between the rates on jumbo and house prices were markedly lower than conforming loans was still wide and a year ago, and, despite recent in- the market for private-label nonprime creases, equity prices were down sub- MBS remained impaired. stantially from their levels of 12 Real spending on equipment and months earlier. As measured by the software dropped markedly in the first Reuters/University of Michigan survey, quarter, with declines about as steep consumer sentiment strengthened a bit and widespread as in the fourth quarter in early April, as households expressed of 2008. Orders and shipments of nonsomewhat more optimism about long- defense capital goods excluding aircraft term economic conditions; however, fell in March, turning negative again even with this improvement, the mea- after having been flat in February. The sure was only slightly above the his- fundamental determinants of equipment torical low for the series recorded last and software investment stayed weak November. in the first quarter: Business output

274 96th Annual Report, 2009 continued to drop sharply, and credit gesting some moderation in the pace of availability was still tight. In the April contraction of economic activity going Senior Loan Officer Opinion Survey on forward. The first-quarter data also Bank Lending Practices, the net per- offered a few tentative signs that the centages of respondents that reported deceleration of economic activity in they tightened their business lending emerging markets might have started to policies over the previous three abate. In particular, the growth of real months, although continuing to be very gross domestic product (GDP) in China elevated, edged down for the second appeared to pick up on a quarterly consecutive survey. Real spending on basis following fiscal stimulus meanonresidential structures contracted in sures and steps to foster credit expanthe first quarter. Despite the significant sion. cuts in production in recent quarters, In the United States, overall coninventories remained sizable early in sumer prices increased over the first the year, although the overhang ap- three months of 2009 after falling in peared to be less severe than in late the fourth quarter of 2008: Energy 2008. Given the elevated level of prices rebounded somewhat after their inventories, firms continued their ef- substantial late-year drop, and core forts to reduce their stocks. prices picked up. In contrast, the pro- The U.S. international trade deficit ducer price index for core intermediate diminished in February to its lowest materials fell, though at a noticeably level since November 1999, as imports slower pace than in late 2008. Indexes fell and exports rose a bit. Most major of commodity prices rose in March but categories of exports increased, espe- stayed far below their year-earlier valcially sales of consumer goods, and ues. Near-term inflation expectations within that category, pharmaceuticals. increased in early April but did not Exports of capital goods rose despite a appear to influence longer-term expecmodest decrease in exports of aircraft, tations, whose levels in April were still and exports of automotive products at the low end of the range seen over increased following a marked drop in the past few years. Hourly earnings of January; in contrast, exports of services production and nonsupervisory workers declined in February. All major catego- edged up in March. ries of imports decreased. The fall in oil imports was driven by lower volumes as prices moved up slightly; Staff Review of the prices of non-oil imports moved down, Financial Situation but falling volumes accounted for most of the decline in this category. The decision by the Federal Open Mar- Economic conditions again worsened ket Committee (FOMC) at the March in the advanced foreign economies in meeting to leave the target range for the first quarter. Industrial production the federal funds rate unchanged continued to drop through February, was widely anticipated and had little employment declined substantially, and effect on short-term money markets. retail sales were weak. However, indi- However, investors were apparently cators of developments late in the first surprised by the Committee’s anquarter, particularly the purchasing nouncement that it would increase sigmanagers indexes for all of the major nificantly further the size of the Federal advanced economies, increased, sug- Reserve’s balance sheet by purchasing

Minutes of FOMC Meetings, April 275 up to $300 billion in Treasury securi- the low end of their respective ranges ties and expanding purchases of agency overthepastyear.Functioninginthere- MBS and agency debt. In addition, purchase agreement (repo) market market participants reportedly inter- showed additional improvement, as preted the statement that the federal bid-asked spreads and “haircuts” on funds rate was likely to remain excep- most collateral either narrowed or held tionally low “for an extended period” steady, although repo volumes were as stronger than the phrase “for some still low. Consistent with modestly bettime” in the previous statement. Rates ter conditions in the term repo market, on Eurodollar futures contracts and all seven auctions under the Term yields on Treasury and agency securi- Securities Lending Facility were unties fell considerably in response to the dersubscribed over the intermeeting statement. The initial drop in the period, including two auctions that garexpected path for the federal funds rate nered no bids. was reversed over subsequent weeks, Trading conditions in the secondary however, likely in response to the market for nominal Treasury securities somewhat better economic outlook. also showed some signs of improve- Similarly, a portion of the substantial ment. Premiums paid for on-the-run declines in yields on nominal Treasury Treasury securities fell, and average coupon securities that followed the bid asked spreads for Treasury notes FOMC announcement was subse- were relatively stable near their prequently unwound amid the improved crisis levels. Still, daily trading voleconomic outlook, an easing of con- umes for Treasury securities remained cern about financial institutions, and low. perhaps some reversal of flight-to- Broad stock price indexes rose sigquality flows. Yields on inflation- nificantly, reportedly buoyed by anindexed Treasury securities fell a bit nouncements of policy measures to enmore than those on their nominal coun- hance credit markets and clean up terparts, which decreased modestly, on banks’ balance sheets and perhaps by net, over the period. As a result, infla- some reduction in concerns about the tion compensation rose at shorter hori- economic outlook. Financial stocks outzons but changed little at longer hori- performed broader markets, boosted by zons. Poor liquidity in the market for relatively favorable first-quarter earn- Treasury inflation-protected securities ings reports from a few major firms. continued to make these readings diffi- The spread between the forward trend cult to interpret. earnings-price ratio for S&P 500 firms Conditions in short-term funding and an estimate of the real long-run markets improved somewhat over the Treasury yield—a rough gauge of the intermeeting period. In unsecured bank equity risk premium—narrowed during funding markets, spreads of dollar Lon- the intermeeting period but was still don interbank offered rates (Libor) over very high by historical standards. comparable-maturity overnight index Option-implied volatility on the S&P swap (OIS) rates edged down, although 500 index decreased but stayed well Libor fixings beyond the one-month above historical norms. maturity stayed elevated. Spreads on On net, yields on lower-rated A2/P2-rated commercial paper and investment-grade and speculative-grade AA-rated asset-backed commercial corporate bonds dropped, resulting in a paper narrowed a bit, on net, staying at narrowing of spreads in yields on such

276 96th Annual Report, 2009 bonds over those on comparable- M2 expanded rapidly in March. A maturity Treasury securities. Even strong increase in liquid deposits, the so, corporate bond spreads remained largest component of M2, likely reextremely high by historical stand- flected further reallocations by houseards. holds toward safer assets. Retail money Indicators of functioning in the cor- market mutual funds and small time porate bond market—such as bid-asked deposits contracted modestly. Currency spreads estimated by the staff— growth was apparently bolstered by elsuggested that conditions in the spec- evated foreign demand. ulative-grade segment of the market Commercial bank credit contracted had become less strained since last au- in March and was estimated to have tumn. Corresponding measures for dropped again in April. The decline in investment-grade bonds hovered at bank credit in March was due impormoderately elevated levels. The lever- tantly to a decrease in loans to busiaged loan market showed some im- nesses that reflected, in part, paydowns provement over the past few months, with the proceeds of bond issuance. with the average bid-asked spread nar- Commercial real estate loans also fell. rowing and the average bid price mov- Bank lending to households was weak, ing up from a very depressed level. although credit extended under revolv- The basis between an index of credit ing home equity lines of credit again default swap spreads and measures of expanded robustly. Residential mortinvestment-grade corporate spreads—a gage loans on banks’ books fell, on rough proxy for unexploited arbitrage balance, in March and the first part of opportunities in the corporate credit April; banks reportedly sold a considermarket—stayed at high levels, report- able amount of single-family mortgages edly reflecting an ongoing lack of to the government-sponsored enterfinancing capacity at major financial prises. Consumer loans held by banks institutions. No issuance of commercial also shrank, amid heavy securitization. MBS occurred over the intermeeting The Senior Loan Officer Opinion Surperiod. vey conducted in April indicated that The debt of the domestic private banks continued to tighten their credit nonfinancial sector appeared to have standards and terms on all major loan contracted in the first quarter at about categories over the previous three the same pace as in the fourth quarter months. of 2008. Activity in the mortgage mar- Stock markets around the world rose ket reflected mainly refinancing, and substantially over the intermeeting staff estimates indicated that residential period amid somewhat better sentiment mortgage debt contracted again in the regarding economic prospects, reports first quarter, depressed by the very low of better-than-expected performance pace of home sales, falling house from some financial firms in the United prices, and write-downs of nonperform- States and Europe, and continued suping loans. Consumer credit was essen- port from monetary policies. Pressures tially flat in January and February. in bank funding markets seemed to Expansion of nonfinancial business ease over the period: Spreads between debt was tepid, as robust bond issuance both euro and sterling Libor and their was partly offset by declines in com- respective OIS rates narrowed signifimercial paper and bank loans. Federal cantly, and financial conditions in most debt rose briskly in the first quarter. emerging market economies improved.

Minutes of FOMC Meetings, April 277 The dollar depreciated against the other second half of 2009 and in 2010 were major currencies in an environment of revised up, with real GDP expected to seemingly increased investor appetite edge higher in the second half and then for risk. increase moderately next year. The key During the intermeeting period, for- factors expected to drive the acceleraeign authorities took additional steps to tion in activity were the boost to address the weaknesses in their econo- spending from fiscal stimulus, the botmies and financial systems. The Euro- toming out of the housing market, a pean Central Bank and the Bank of turn in the inventory cycle from liqui- Canada, along with several other cen- dation to modest accumulation, and ontral banks in both the advanced and going gradual recovery of financial emerging market economies, cut policy markets. The staff again expected that rates, while the Bank of England and the unemployment rate would rise the Bank of Japan continued their asset through the beginning of 2010 before purchases to provide further monetary edging down over the rest of that year. stimulus. Several governments, includ- The staff forecast for overall and core ing Japan and Taiwan, announced new personal consumption expenditures fiscal stimulus packages, and a number (PCE) inflation over the next two years of European countries took additional was revised up slightly. The staff raised measures to support their banking its near-term estimate of core PCE insectors. flation because recent data on core and overall PCE price inflation came in a bit higher than anticipated. Beyond the Staff Economic Outlook near term, however, the staff antici- In the forecast for the meeting, which pated that the low level of resource utiwas prepared prior to the release of the lization and a gradual decline in inflaadvance estimates of the first-quarter tion expectations would lead to a national income and product accounts, deceleration in core PCE prices. Lookthe staff revised up its outlook for eco- ing out to 2011, the staff anticipated nomic activity in response to recent that financial markets and institutions favorable financial developments as would continue to recuperate, monetary well as better-than-expected readings policy would remain stimulative, fiscal on final sales. Consumer purchases stimulus would be fading, and inflation appeared to have stabilized after falling expectations would be relatively well in the second half of 2008, and the anchored. Under such conditions, the steep decline in the housing sector staff projected that real GDP would seemed to be abating. However, the expand at a rate well above that of its contraction in the labor market per- potential, that the unemployment rate sisted into March, industrial production would decline significantly, and that again fell rapidly, and the broad-based overall and core PCE inflation would decline in equipment and software stay in a low range. investment continued. Conditions in financial markets improved more than Participants’ Views and Committee had been expected: Private borrowing Policy Action rates moved lower, stock prices rose substantially, and some measures of In conjunction with this FOMC meetfinancial stress eased. The staff’s pro- ing, all meeting participants—the five jections for economic activity in the members of the Board of Governors

278 96th Annual Report, 2009 and the presidents of the 12 Federal ther. Adverse global economic and Reserve Banks—provided projections financial conditions would continue for economic growth, the unemploy- to weigh on the demand for U.S. ment rate, and consumer price inflation exports. for each year from 2009 through 2011 Financial market developments over and over a longer horizon. Longer-run the intermeeting period were mainly projections represent each participant’s seen as positive. Equity prices assessment of the rate to which each increased, money markets were funcvariable would be expected to converge tioning better, and corporate issuance over time under appropriate monetary of bonds and convertible securities was policy and in the absence of further relatively brisk. Measures of volatility shocks. Participants’ forecasts through and financial stress moved down and 2011 and over the longer run are de- risk spreads narrowed in many markets, scribed in the Summary of Economic perhaps partly because of investors’ Projections, which is attached as an ad- perceptions of diminished downside tail dendum to these minutes. risks. Even so, risk spreads remained In their discussion of the economic unusually wide and markets continued situation and outlook, participants to be fragile. Despite the improvement agreed that the information received in financial markets, credit conditions since the March meeting provided stayed quite restrictive for many housesome tentative evidence that the pace holds and businesses. The April Senior of contraction in real economic activity Loan Officer Opinion Survey showed was starting to diminish. Participants that a large net fraction of banks had noted that financial market conditions tightened their terms and standards for had generally strengthened, and surveys credit during the previous three and anecdotal reports pointed to a months, albeit a modestly smaller fracpickup in household and business con- tion than indicated by the January surfidence, which nonetheless remained at vey. Moreover, meeting participants very low levels. Some signs pointing noted that the volume of credit toward economic stabilization were extended to households and businesses seen in data on consumer spending, was still contracting as a result of housing, and factory orders. Although shrinking demand, declining credit economic activity was being damped quality, capital constraints on financial by the efforts of businesses to pare institutions, and the limited availability excess inventories, the substantial of financing through securitization mardrawdown in inventories over recent kets. months was viewed as raising the pros- Consumer spending firmed somepects for a gradual expansion in indus- what during the first quarter despite the trial production later this year. Partici- rising unemployment rate and signifipants anticipated that the acceleration cant financial strains. Participants genin final demand and economic activity erally expected that household demand over the next few quarters would be would gradually strengthen over commodest. Growth of consumption expen- ing quarters in response to the rise in ditures was likely to be restrained by household wealth from the substantial the weakness in labor markets and the increase in equity prices that had oclagged effects of past reductions in curred over the intermeeting period as household wealth. Business investment well as the support for income prospending would probably shrink fur- vided by fiscal policy. Nevertheless,

Minutes of FOMC Meetings, April 279 participants judged that the recovery in seemed less propitious; for example, consumer demand over the next few one participant described survey data quarters would be slow, reflecting ad- indicating that firms in the service secverse labor market conditions and con- tor were expecting sales to decrease tinuing adjustments to earlier reduc- further in coming months, and others tions in household wealth. referred to cutbacks in drilling and Some participants referred to the mining. possibility that activity in the housing The economies of many key trading market might finally be approaching a partners were seen as experiencing trough. Indicators of new home sales quite severe contractions. Participants appeared to be stabilizing, and inven- noted that banking institutions in a tories of unsold homes diminished number of countries remained exposed somewhat. Participants also reported to substantial further losses, and the some signs that the decline in home process of repairing the balance sheets prices might be slowing. of such institutions would likely con- Labor market conditions were still tinue to restrain growth in those econodeteriorating. Unemployment claims mies over coming quarters and hence were exceptionally elevated, and the damp the outlook for U.S. export deratio of permanent job cuts to tempo- mand. A few countries did show some rary layoffs was substantially higher signs that weakness was abating, perthan in previous economic downturns. haps reflecting, in part, rapid imple- Staff reductions were under way even mentation of fiscal stimulus; furtherat traditionally stable employers such more, the recent firming of commodity as hospitals and nonprofit institutions. prices gave an indication that global An unusually large proportion of em- weakness might be starting to subside. ployed persons indicated that they were Although the near-term economic engaged in part-time work because outlook had improved modestly since they could not obtain full-time jobs. March, participants emphasized the ten- Participants cited the magnitude of tative nature of the incoming data, the retrenchment in production and which are volatile and subject to revicapital spending, but they also noted sion. The experience of previous recesthat manufacturing surveys and infor- sions underscored the challenges of mal contacts suggested a noticeable identifying the onset of economic upturn in business sentiment: A num- recovery using real-time indicators. ber of participants highlighted regional Also, empirical analysis of past episurveys reporting that greater numbers sodes in the United States and abroad of industrial firms anticipated that their in which economic downturns had been orders and shipments would start triggered by financial crises generally expanding over the next six months. concluded that such contractions tended Some participants expected that a to be more severe and protracted than gradual strengthening of retail sales other recessions. Moreover, participants would lead to an abatement of the continued to see significant downside decline in capital investment and would risks to the economic outlook. In partend to induce manufacturers to begin ticular, while financial strains and risk rebuilding depleted stocks of inven- spreads had lessened somewhat over tories later this year, thereby reinforc- the intermeeting period, participants ing the pickup in industrial production. agreed that the global financial system The outlook in some other sectors remained vulnerable to further shocks.

280 96th Annual Report, 2009 In discussing the Supervisory Capital years, and they saw some risk that el- Assessment Program, which was being evated unemployment and low capacity conducted jointly by the Federal utilization could cause inflation to Reserve and other bank supervisory au- remain persistently below the rates that thorities, a number of participants they judged as most consistent with noted that investors were concerned sustainable economic growth and price that the upcoming publication of stress stability. Nonetheless, recent monthly test results might trigger volatility in readings on consumer price inflation financial markets. Some participants had been above the low rates observed also referred to mounting losses in late last year, and survey measures of commercial real estate, which could longer-run inflation expectations had have substantial adverse consequences remained reasonably stable, leading for regional banks and other financial many participants to judge that the risk institutions with significant concentra- of a protracted period of deflation had tions of such assets. diminished. Some participants high- Looking further ahead, participants lighted the potential pitfalls of making considered a number of factors that inflation projections based on contemwould be likely to restrain the pace of poraneously available measures of economic recovery over the medium resource slack, especially during term. Strains in credit markets were periods when the economy was facing expected to recede only gradually as large supply shocks and significant secfinancial institutions continued to re- toral reallocation. Several participants build their capital and remained cau- referred to contacts who had expressed tious in their approach to asset-liability concerns that the expansion of the Fedmanagement, especially given that the eral Reserve’s balance sheet might not outlook for credit performance was be reversed in a sufficiently timely likely to improve slowly. Some manner and hence that inflation could sectors—such as financial services and rise above rates consistent with price residential construction—might well stability. account for a smaller share of the econ- In their discussion of monetary polomy in coming years, and the resulting icy for the intermeeting period, Comreallocation of labor across sectors mittee members agreed that the Federal could weigh on labor markets for some Reserve’s large-scale securities purtime. Households would likely remain chases were providing financial stimucautious, and their desired saving rates lus that would contribute to the gradual would be relatively high over the resumption of sustainable economic extended period that would be required growth in a context of price stability. to bring their stock of wealth back up Members also agreed that it would be to more normal levels relative to appropriate to continue making purincome. The stimulus from fiscal pol- chases in accordance with the amounts icy was expected to diminish over time that had previously been announced— as the government budget moved to a that is, up to $1.25 trillion of agency sustainable path. Demand for U.S. ex- MBS and up to $200 billion of agency ports would also take time to revive, debt by the end of this year, and up to reflecting the gradual recovery of ma- $300 billion of Treasury securities by jor trading partners. autumn. Some members noted that a Most participants expected inflation further increase in the total amount of to remain subdued over the next few purchases might well be warranted at

Minutes of FOMC Meetings, April 281 some point to spur a more rapid pace eral Reserve’s balance sheet to expand sigof recovery; all members concurred nificantly in coming months. The Desk is expected to purchase up to $200 billion in with waiting to see how the economy housing-related agency debt by the end of and financial conditions respond to the this year. The Desk is expected to purchase policy actions already in train before at least $500 billion in agency MBS by the deciding whether to adjust the size or endofthesecondquarterofthisyearandis timing of asset purchases. The Com- expected to purchase up to $1.25 trillion of mittee reaffirmed the need to monitor these securities by the end of this year. The Desk is expected to purchase up to $300 carefully the size and composition of billionoflonger-termTreasurysecuritiesby the Federal Reserve’s balance sheet in the end of the third quarter. The System light of economic and financial devel- Open Market Account Manager and the opments. The Committee also dis- Secretary will keep the Committee incussed its strategy for communicating formed of ongoing developments regarding the System’s balance sheet that could affect the anticipated path of its asset purthe attainment over time of the Commitchases and the circumstances under tee’s objectives of maximum employment which adjustments to that path would andpricestability.” be appropriate. All members agreed The vote encompassed approval of that the statement should note that the the statement below to be released at timing and overall amounts of the 2:15 p.m.: Committee’s asset purchases would continue to be evaluated in light of the “Information received since the Federal evolving economic outlook and condi- Open Market Committee met in March indicates that the economy has continued to tions in financial markets. contract, though the pace of contraction At the conclusion of the discussion, appears to be somewhat slower. Household the Committee voted to authorize and spending has shown signs of stabilizing but direct the Federal Reserve Bank of remains constrained by ongoing job losses, New York, until it was instructed other- lower housing wealth, and tight credit. wise, to execute transactions in the Weak sales prospects and difficulties in obtaining credit have led businesses to cut System Account in accordance with the back on inventories, fixed investment, and following domestic policy directive: staffing. Although the economic outlook has improved modestly since the March “The Federal Open Market Committee meeting, partly reflecting some easing of seeks monetary and financial conditions financial market conditions, economic acthat will foster price stability and promote tivity is likely to remain weak for a time. sustainable growth in output. To further its Nonetheless, the Committee continues to long-run objectives, the Committee seeks anticipate that policy actions to stabilize conditions in reserve markets consistent financialmarketsandinstitutions,fiscaland withfederalfundstradinginarangefrom0 monetary stimulus, and market forces will to 1⁄4 percent. The Committee directs the contribute to a gradual resumption of sus- Desk to purchase agency debt, agency tainable economic growth in a context of MBS, and longer-term Treasury securities pricestability. during the intermeeting period with the aim In light of increasing economic slack of providing support to private credit mar- here and abroad, the Committee expects kets and economic activity. The timing and that inflation will remain subdued. Morepace of these purchases should depend on over, the Committee sees some risk that inconditionsinthemarketsforsuchsecurities flation could persist for a time below rates and on a broader assessment of private that best foster economic growth and price credit market conditions. The Committee stabilityinthelongerterm. anticipates that the combination of outright In these circumstances, the Federal purchases and various liquidity facilities Reserve will employ all available tools to outstanding will cause the size of the Fed- promote economic recovery and to preserve

282 96th Annual Report, 2009 pricestability.TheCommitteewillmaintain cepted; detailed background informathe target range for the federal funds rate at tion on special purpose vehicles; and 0 to 1⁄4 percent and anticipates that ecocontracts with private-sector firms that nomic conditions are likely to warrant exhad been engaged to help carry out ceptionally low levels of the federal funds rate for an extended period. As previously some of these programs. In the Comannounced, to provide support to mortgage mittee’s discussion of these issues, it lending and housing markets and to was noted that disclosing the identities improve overall conditions in private credit of individual borrowers would very markets, the Federal Reserve will purchase likely discourage use of the Federal a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 Reserve’s liquidity and credit facilities billion of agency debt by the end of the because prospective borrowers would year. In addition, the Federal Reserve will be concerned that their creditors and buy up to $300 billion of Treasury securi- counterparties would see borrowing ties by autumn. The Committee will confrom the Federal Reserve as a sign of tinue to evaluate the timing and overall financial weakness. The resulting amounts of its purchases of securities in light of the evolving economic outlook and stigma would undermine the effectiveconditionsinfinancialmarkets.TheFederal ness of those programs in promoting Reserve is facilitating the extension of financial stability and economic recredit to households and businesses and covery. supporting the functioning of financial mar- It was agreed that the next meeting kets through a range of liquidity programs. The Committee will continue to carefully of the Committee would be held on monitor the size and composition of the Tuesday−Wednesday, June 23–24, Federal Reserve’s balance sheet in light of 2009. The meeting adjourned at 11:50 financialandeconomicdevelopments.” a.m. on April 29, 2009. Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Notation Vote Evans, Kohn, Lacker, Lockhart, Tarullo,andWarsh,andMs.Yellen. By notation vote completed on April 7, Votingagainstthisaction:None. 2009, the Committee unanimously approved the minutes of the FOMC meet- Governor Kohn reported to the Com- ing held on March 17–18, 2009. mittee on the progress of a Federal Brian F. Madigan Reserve workgroup in its review of the Secretary information provided to the public regarding Federal Reserve programs and Addendum: activities. That review was being con- Summary of Economic Projections ducted to identify opportunities for providing additional information to the In conjunction with the April 28–29, public without compromising the Fed- 2009, FOMC meeting, the members of eral Reserve’s mandated policy objec- the Board of Governors and the presitives. The workgroup had been devot- dents of the Federal Reserve Banks, all ing particular attention to approaches to of whom participate in deliberations of enhancing the transparency of the Fed- the FOMC, submitted projections for eral Reserve’s liquidity and credit fa- output growth, unemployment, and incilities, including regular reporting on flation in 2009, 2010, 2011, and over the number, types, and concentration of the longer run. Projections were based borrowers from each program; the on information available through the amount and nature of collateral ac- end of the meeting and on each partici-

Minutes of FOMC Meetings, April 283 pant’s assumptions about factors likely relative to the projections they made at to affect economic outcomes, including the time of the January FOMC meethis or her assessment of appropriate ing, but they continued to expect a monetary policy. “Appropriate mone- recovery in sales and production to tary policy” is defined as the future begin during the second half of 2009. path of policy that the participant With the strong adverse forces that deems most likely to foster outcomes have been acting on the economy for economic activity and inflation that likely to abate only slowly, participants best satisfy his or her interpretation of generally expected a gradual recovery: the Federal Reserve’s dual objectives All anticipated that unemployment, of maximum employment and stable though declining in coming years, prices. Longer-run projections represent would remain well above its longer-run each participant’s assessment of the sustainable rate at the end of 2011; rate to which each variable would be most indicated they expected the econexpected to converge over time under omy to take five or six years to conappropriate monetary policy and in the verge to a longer-run path characterabsence of further shocks. ized by a sustainable rate of output As indicated in table 1 and depicted growth and by rates of unemployment in figure 1, all FOMC participants pro- and inflation consistent with the Fedjected that real GDP would contract eral Reserve’s dual objectives, but sevthis year, that the unemployment rate eral said full convergence would take would increase in coming quarters, and longer. Participants projected very low that inflation would be slower this year inflation this year; most expected inflathan in recent years. Almost all partici- tion to edge up over the next few years pants viewed the near-term outlook for toward the rate they consider consistent economic activity as having weakened with the dual objectives. Most par- Table1. EconomicprojectionsofFederalReserveGovernorsandReserveBankpresidents, April2009 Percent Centraltendency1 Range2 Variable Longer Longer 2009 2010 2011 2009 2010 2011 Run Run ChangeinrealGDP .. −2.0to−1.3 2.0to3.0 3.5to4.8 2.5to2.7 −2.5to−0.5 1.5to4.0 2.3to5.0 2.4to3.0 Januaryprojection.. −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 Unemploymentrate... 9.2to9.6 9.0to9.5 7.7to8.5 4.8to5.0 9.1to10.0 8.0to9.6 6.5to9.0 4.5to5.3 Januaryprojection.. 8.5to8.8 8.0to8.3 6.7to7.5 4.8to5.0 8.0to9.2 7.0to9.2 5.5to8.0 4.5to5.5 PCEinflation ........ 0.6to0.9 1.0to1.6 1.0to1.9 1.7to2.0 −0.5to1.2 0.7to2.0 0.5to2.5 1.5to2.0 Januaryprojection.. 0.3to1.0 1.0to1.5 0.9to1.7 1.7to2.0 −0.5to1.5 0.7to1.8 0.2to2.1 1.5to2.0 CorePCEinflation3 .. 1.0to1.5 0.7to1.3 0.8to1.6 0.7to1.6 0.5to2.0 0.2to2.5 Januaryprojection.. 0.9to1.1 0.8to1.5 0.7to1.5 0.6to1.5 0.4to1.7 0.0to1.8 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andofinflationarefromthefourthquarterof thepreviousyeartothefourthquarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentage ratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures(PCE)andthepriceindexfor PCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemployment rateinthefourthquarteroftheyearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentof appropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’sassessmentoftheratetowhicheach variablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershocksto theeconomy.TheJanuaryprojectionsweremadeinconjunctionwiththeFOMCmeetingonJanuary27–28,2009. 1.Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2.Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthat variableinthatyear. 3.Longer-runprojectionsforcorePCEinflationarenotcollected.

284 96th Annual Report, 2009

Minutes of FOMC Meetings, April 285 ticipants—though fewer than in Jan- quarter would make firms more likely uary—viewed the risks to the growth to increase production as their sales outlook as skewed to the downside. stabilize and then begin to turn up later Most participants saw the risks to the this year. Participants expected, howinflation outlook as balanced; fewer ever, that recoveries in consumer than in January viewed those risks as spending and residential investment initilted to the downside. With few ex- tially would be damped by further deceptions, participants judged that their terioration in labor markets, still-tight projections for economic activity and credit conditions, and a continuing, if inflation remained subject to a degree less pronounced, decline in house of uncertainty exceeding historical prices. Moreover, they anticipated that norms. very low capacity utilization, sluggish growth in sales, and the high cost and limited availability of financing would The Outlook contribute to further weakness in busi- Participants’ projections for 2009 real ness fixed investment this year. GDP growth had a central tendency of Looking further ahead, participants’ negative 2.0 percent to negative 1.3 projections for real GDP growth in percent, somewhat below the central 2010 had a central tendency of 2.0 to tendency of negative 1.3 percent to 3.0 percent, and those for 2011 had a negative 0.5 percent for their January central tendency of 3.5 to 4.8 percent. projections. Participants noted that the Participants generally expected that data received between the January and strains in credit markets and in the April FOMC meetings pointed to a banking system would ebb slowly, and larger decline in output and employ- hence that the pace of recovery would ment during the first quarter than they continue to be damped in 2010. But had anticipated at the time of the Janu- they anticipated that the upturn would ary meeting. However, participants also strengthen in 2011 to a pace exceeding saw recent indications that the eco- the growth rate of potential GDP as nomic downturn was slowing in the financial conditions continue to imsecond quarter, and they continued to prove, and that it would remain above expect that sales and production would that rate long enough to eliminate slack begin to recover—albeit gradually— in resource utilization over time. Sevduring the second half of the year, re- eral participants anticipated that rapid flecting the effects of monetary and fis- growth in the monetary base in cal stimulus and of measures to support 2009—a result of the Federal Reserve’s credit markets and stabilize the finan- sizable purchases of longer-term cial system along with market forces. assets—would result in a more pro- In particular, participants noted some nounced pickup in output and employimprovement in financial conditions in ment growth in 2010 and a somewhat recent months, signs that consumer quicker convergence to longer-run eqspending was leveling out, and tenta- uilibrium. Most participants expected tive indications that activity in the that, absent further shocks, real GDP housing sector might be nearing its bot- growth eventually would converge to a tom. In addition, they observed that the rate of 2.5 to 2.7 percent per year, relarge reduction in stocks of unsold flecting longer-term trends in the goods that resulted from firms’ aggres- growth of productivity and the labor sive inventory cutting during the first force.

286 96th Annual Report, 2009 In light of their expectation that the The central tendency of participants’ recovery will begin gradually, with out- projections for 2009 PCE inflation was put initially rising at a below-potential 0.6 to 0.9 percent, an interval that is rate, participants anticipated that labor somewhat narrower but neither higher market conditions would continue to nor lower than the central tendency of deteriorate over the remainder of this their January projections. Looking year. Their projections for the average beyond this year, participants’ projecunemployment rate during the fourth tions for total PCE inflation had central quarter of 2009 had a central tendency tendencies of 1.0 to 1.6 percent for of 9.2 to 9.6 percent, noticeably higher 2010 and 1.0 to 1.9 percent for 2011. than the actual unemployment rate of The central tendency of projections for 8.5 percent in March—the latest read- core inflation in 2009 was 1.0 to 1.5 ing available at the time of the April percent; those for 2010 and 2011 were FOMC meeting. All participants re- 0.7 to 1.3 percent and 0.8 to 1.6 pervised up their forecasts of the unem- cent, respectively. Most participants ployment rate at the end of this year expected that economic slack, though relative to their January projections, re- diminishing, would continue to damp flecting the sharper-than-expected rise inflation pressures for the next few in actual unemployment that occurred years and hence that total PCE inflation during the first quarter as well as the in 2011 would still be below their asdownward revisions in their forecasts sessments of its appropriate longer-run of output growth in 2009. Most partici- level. Some thought that persistent ecopants anticipated that growth next year nomic slack would be accompanied by would not substantially exceed its declining inflation over the next few longer-run sustainable rate and hence years. Most, however, projected that, as that the unemployment rate would the economy recovers, inflation would decline only modestly in 2010; some increase gradually and move toward also pointed to the friction of a re- their individual assessments of the allocation of resources away from measured rate of inflation consistent shrinking economic sectors as likely to with the Federal Reserve’s dual manrestrain progress in reducing unemploy- date for maximum employment and ment. With output growth and job price stability. Several participants, notcreation generally projected to pick up ing that the public’s longer-run inflaappreciably in 2011, participants antici- tion expectations have not changed appated that joblessness would decline preciably, anticipated that inflation more noticeably, as evident from the would return more promptly to levels central tendency of 7.7 to 8.5 percent consistent with their judgments about for their projections of the unemploy- appropriate longer-run inflation. ment rate in late 2011. Even so, they In April as in January, the central expected that the unemployment rate at tendency of projections of the longerthe end of 2011 would still be declin- run inflation rate was 1.7 to 2.0 pering toward its longer-run sustainable cent. Most participants judged that a level. Participants projected that unem- longer-run PCE inflation rate of 2 perployment would decline further after cent would be consistent with the Fed- 2011; most saw the unemployment rate eral Reserve’s dual mandate; others eventually converging to 4.8 to 5.0 per- indicated that inflation of 11⁄ 2 or 13⁄ 4 cent. percent would be appropriate. Modestly

Minutes of FOMC Meetings, April 287 positive longer-run inflation would Table2. Averagehistoricalprojection allow the Committee to stimulate eco- errorranges nomic activity and support employment Percentagepoints by setting the federal funds rate tempo- Variable 2009 2010 2011 rarily below the inflation rate when the ChangeinrealGDP1 ... ±1.0 ±1.5 ±1.6 economy suffers a large negative shock Unemploymentrate1 .... ±0.5 ±0.8 ±1.0 to demands for goods and services. Totalconsumerprices2.. ±0.8 ±1.0 ±1.0 Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for Uncertainty and Risks 1989through2008thatwerereleasedinthespringby various private and government forecasters. As de- A majority of participants continued to scribedinthebox“ForecastUncertainty,”undercertain assumptions,thereisabouta70percentprobabilitythat view the risks to their projections for actualoutcomesforrealGDP,unemployment,andconreal GDP growth as skewed to the sumerpriceswillbeinrangesimpliedbytheaverage downside and saw the associated risks sizeofprojectionerrorsmadeinthepast.Furtherinformation is in David Reifschneider and Peter Tulip to their projections for the unemploy- (2007),“GaugingtheUncertaintyoftheEconomicOutment rate as tilted to the upside, but a look from Historical Forecasting Errors,” Finance and larger number than in January now saw Economics Discussion Series 2007-60 (Washington: Board of Governors of the Federal Reserve System, the risks as broadly balanced. Partici- November). pants shared the judgment that their 1. Fordefinitions,refertogeneralnoteintable1. 2. Measureistheoverallconsumerpriceindex,the projections of future economic activity pricemeasurethathasbeenmostwidelyusedingovand unemployment continued to be ernment and private economic forecasts. Projection is subject to greater-than-average uncer- percent change, fourth quarter of the previous year to thefourthquarteroftheyearindicated. tainty.9 Some participants highlighted the still-considerable uncertainty about the future course of the financial crisis upside. Some participants noted the and the risk that a resurgence of finanrisk that inflation expectations might cial turmoil could adversely impact the become unanchored and drift downreal economy. In addition, some noted ward in response to persistently low inthe difficulty in gauging the macroecoflation outcomes; several pointed to the nomic effects of the credit-easing polipossibility of an upward shift in cies that are now being employed by expected and actual inflation if investhe Federal Reserve and other central tors become concerned that stimulative banks, given limited experience with monetary policy measures and the atsuch tools. tendant expansion of the Federal Re- Most participants judged the risks to serve’s balance sheet might not be unthe inflation outlook as roughly balwound in a timely fashion as the anced; some continued to view these economy recovers. Most participants risks as skewed to the downside, while again saw the uncertainty surrounding one saw inflation risks as tilted to the their inflation projections as exceeding historical norms. 9. Table 2 provides estimates of forecast uncertainty for the change in real GDP, the unemploymentrate,andtotalconsumerpriceinflation Diversity of Views overtheperiodfrom1989to2008.Attheendof this summary, the box “Forecast Uncertainty” Figures 2.A and 2.B provide further discussesthesourcesandinterpretationofuncerdetails on the diversity of participants’ taintyineconomicforecastsandexplainstheapviews regarding likely outcomes for proach used to assess the uncertainty and risks attendingparticipants’projections. real GDP growth and the unemploy-

288 96th Annual Report, 2009 ment rate in 2009, 2010, and 2011. The these distributions did not change apdispersion in participants’ April projec- preciably from January to April. tions reflects, among other factors, the Figures 2.C and 2.D provide corrediversity of their assessments regarding sponding information about the diverthe effects of fiscal stimulus and the sity of participants’ views regarding the likely pace of recovery in the financial inflation outlook. The dispersion in sector. Though the dispersion in projec- participants’ projections for total and tions for each variable was roughly the core PCE inflation during 2009 and the same in April as in January, the down- following two years illustrates their ward shift in the distribution of partici- varying assessments of the inflation pants’ projections of real GDP growth outcomes that will result from persisin 2009, coupled with essentially un- tent economic slack, from expansion changed distributions of projections for and subsequent contraction of the Fedgrowth in 2010 and 2011, resulted in eral Reserve’s balance sheet, and peran upward shift from January to April haps also from changes in the public’s in the distribution of projections for the expectations of future inflation. In conunemployment rate in all three years. trast, the tight distribution of partici- The dispersion in participants’ longer- pants’ projections for longer-run inrun projections reflected differences in flation illustrates their substantial their estimates regarding the sustain- agreement about the measured rate of able rates of output growth and unem- inflation that is most consistent with ployment to which the economy would the Federal Reserve’s dual objectives converge under appropriate policy and of maximum employment and stable in the absence of any further shocks; prices.

Minutes of FOMC Meetings, April 289

290 96th Annual Report, 2009

Minutes of FOMC Meetings, April 291

292 96th Annual Report, 2009

Minutes of FOMC Meetings, April 293 Forecast Uncertainty The economic projections provided by experienced in the past and the risks the members of the Board of Governors around the projections are broadly baland the presidents of the Federal anced, the numbers reported in table 2 Reserve Banks inform discussions of would imply a probability of about 70 monetary policy among policymakers percent that actual GDP would expand and can aid public understanding of the between 2 percent to 4 percent in the basis for policy actions. Considerable current year, 1.5 percent to 4.5 percent uncertainty attends these projections, in the second year, and 1.4 percent to however. The economic and statistical 4.6 percent in the third year. The corremodels and relationships used to help sponding70percentconfidenceintervals produce economic forecasts are neces- for overall inflation would be 1.2 persarily imperfect descriptions of the real cent to 2.8 percent in the current year world. And the future path of the econ- and1.0percentto3.0percentinthesecomy can be affected by myriad unfore- ondandthirdyears. seen developments and events. Thus, in Because current conditions may differ setting the stance of monetary policy, from those that prevailed on average participants consider not only what over history, participants provide judgappears to be the most likely economic ments as to whether the uncertainty atoutcome as embodied in their projec- tached to their projections of each varitions, but also the range of alternative able is greater than, smaller than, or possibilities, the likelihood of their oc- broadly similar to typical levels of forecurring, 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, including those reported in past Mone- downside, or are broadly balanced. That tary Policy Reports and those prepared is, participants judge whether each variby Federal Reserve Board staff in ableismorelikelytobeaboveorbelow advance of meetings of the Federal their projections of the most likely out- OpenMarketCommittee.Theprojection come. These judgments about the uncererror ranges shown in the table illustrate tainty and the risks attending each parthe considerable uncertainty associated ticipant’s projections are distinct from with economic forecasts. For example, thediversityofparticipants’viewsabout suppose a participant projects that real the most likely outcomes. Forecast ungross domestic product (GDP) and total certainty is concerned with the risks asconsumer prices will rise steadily at sociated with a particular projection, annual rates of, respectively, 3 percent rather than with divergences across a and 2 percent. If the uncertainty attend- numberofdifferentprojections. ing those projections is similar to that

294 96th Annual Report, 2009 Meeting Held on Mr.Frierson,10DeputySecretary,Of- June 23–24, 2009 ficeoftheSecretary,Boardof Governors A joint meeting of the Federal Open Mr.Struckmeyer,DeputyStaffDirec- Market Committee and the Board of tor,OfficeoftheStaffDirector Governors of the Federal Reserve Sys- forManagement,BoardofGovtem was held in the offices of the ernors Board of Governors in Washington, Mr.English,DeputyDirector,Division D.C., on Tuesday, June 23, 2009, at ofMonetaryAffairs,Boardof 1:00 p.m. and continued on Wednes- Governors day, June 24, 2009, at 9:00 a.m. Mr.Blanchard,AssistanttotheBoard, OfficeofBoardMembers,Board Present: ofGovernors Mr.Bernanke,Chairman Mr.Dudley,ViceChairman Messrs.Greenlee,Nelson,Reif- Ms.Duke schneider,andWascher,Associate Mr.Evans Directors,DivisionsofBanking Mr.Kohn SupervisionandRegulation, Mr.Lacker MonetaryAffairs,Researchand Mr.Lockhart Statistics,andResearchandSta- Mr.Tarullo tistics,respectively,Boardof Mr.Warsh Governors Ms.Yellen Mr.Gagnon,VisitingAssociateDirec- Messrs.BullardandHoenig,Ms.Pi- tor,DivisionofMonetaryAffairs, analto,andMr.Rosengren,Alter- BoardofGovernors nateMembersoftheFederal OpenMarketCommittee Mr.Oliner,SeniorAdviser,Division ofResearchandStatistics,Board Messrs.Fisher,Plosser,andStern, ofGovernors PresidentsoftheFederalReserve BanksofDallas,Philadelphia, Messrs.CarpenterandPerli,Deputy andMinneapolis,respectively AssociateDirectors,Divisionof MonetaryAffairs,BoardofGov- Mr.Madigan,SecretaryandEconomist ernors Ms.Danker,DeputySecretary Mr.Luecke,AssistantSecretary Mr.Kiley,AssistantDirector,Division Mr.Skidmore,AssistantSecretary ofResearchandStatistics,Board Ms.Smith,AssistantSecretary ofGovernors Mr.Alvarez,10GeneralCounsel Mr.Small,ProjectManager,Division Mr.Baxter,DeputyGeneralCounsel ofMonetaryAffairs,Boardof Mr.Sheets,Economist Governors Mr.Stockton,Economist Ms.Lindner,GroupManager,Division Messrs.Altig,Clouse,Connors,KaofResearchandStatistics,Board min,Slifman,Weinberg,andWilofGovernors cox,AssociateEconomists Mr.Wood,SeniorEconomist,Division Mr.Sack,Manager,SystemOpen ofInternationalFinance,Boardof MarketAccount Governors Ms.Johnson,SecretaryoftheBoard, Messrs.Driscoll,King,10andMcCar- OfficeoftheSecretary,Boardof thy,Economists,Divisionof Governors MonetaryAffairs,BoardofGovernors 10. AttendedTuesday’ssessiononly.

Minutes of FOMC Meetings, June 295 Ms.Beattie,AssistanttotheSecretary, regular overnight securities lending op- OfficeoftheSecretary,Boardof erations, securities held in the SOMA Governors portfolio that are direct obligations of Ms.Low,OpenMarketSecretariat federal agencies. Lending agency secu- Specialist,DivisionofMonetary rities was viewed as a technical modifi- Affairs,BoardofGovernors cation to the existing overnight securities lending program that would Messrs.FuhrerandRosenblum,ExecutiveVicePresidents,Federal support functioning of agency debt ReserveBanksofBostonand markets. The Committee voted unani- Dallas,respectively mously to amend paragraph 3 of the Authorization for Domestic Open Mar- Mr.Judd,AdvisortothePresident, FederalReserveBankofSan ket Operations with the text underlined Francisco below. Messrs.Feldman,Hilton,Krane, “3. In order to ensure the effective con- McAndrews,Mses.Mesterand duct of open market operations, the Federal Mosser,andMessrs.Schweitzer, Open Market Committee authorizes the Sellon,andWaller,SeniorVice Federal Reserve Bank of New York to lend Presidents,FederalReserve on an overnight basis U.S. Government se- BanksofMinneapolis,New curities and securities that are direct obliga- York,Chicago,NewYork,Phila- tions of any agency of the United States, delphia,NewYork,Cleveland, held in the System Open Market Account, KansasCity,andSt.Louis,re- to dealers at rates that shall be determined spectively by competitive bidding. The Federal Reserve Bank of New York shall set a Ms.Logan,VicePresident,Federal minimum lending fee consistent with the ReserveBankofNewYork objectivesoftheprogramandapplyreasonable limitations on the total amount of a specific issue that may be auctioned and on Developments in Financial Markets the amount of securities that each dealer and the Federal Reserve’s Balance may borrow. The Federal Reserve Bank of Sheet New York may reject bids which could facilitate a dealer’s ability to control a single issue as determined solely by the Federal The Manager of the System Open Mar- ReserveBankofNewYork.” ket Account (SOMA) reported on recent developments in domestic and The staff reported on projections of foreign financial markets. The Manager the Federal Reserve’s balance sheet unalso reported on System open market der various assumptions about ecooperations in Treasury securities and in nomic and financial conditions and the agency debt and agency mortgage- associated path of monetary policy. backed securities (MBS) during the Staff projections suggested that the size period since the Committee’s April of the Federal Reserve’s balance sheet 28–29 meeting. By unanimous vote, might peak late this year and decline the Committee ratified those transac- gradually thereafter. The staff also pretions. There were no open market op- sented information on the possible imerations in foreign currencies for the plications of substantial changes in the System’s account over the intermeeting size and composition of the Federal period. Reserve’s balance sheet for the Sys- The Committee reviewed a staff pro- tem’s net income. The analysis indiposal that would authorize the Desk to cated that the Federal Reserve was lend, as part of the Federal Reserve’s likely to earn substantial net interest

296 96th Annual Report, 2009 income over the next few years under limit their lending and acquisition of most interest rate scenarios. The staff securities in order to prevent an excespresented one scenario, however, in sive decline in their capital ratios. The which aggressive increases in short- analysis concluded that, with few exterm interest rates significantly reduced ceptions, banks’ regulatory leverage System net income relative to a base- ratios (defined as tier 1 capital divided line scenario. The analysis also sug- by total average assets) were likely to gested that the market value of the remain comfortably above regulatory Federal Reserve’s securities holdings minimums, even with the substantial could decline appreciably under some growth in reserve balances projected to scenarios. However, while the Federal occur in coming months and even if Reserve would retain the option of sell- there were some erosion in bank capiing securities before they mature or are tal. In part, that result reflected the fact prepaid as a means of tightening policy that many institutions had raised capital when appropriate, it was not expected lately; in addition, the leverage ratios to have to do so. Changes in market for most institutions were well above valuations were thus seen as unlikely to the regulatory minimums at the end of have significant implications for the the first quarter. System’s net income. The staff also reviewed the experi- In a related discussion, the staff ence to date with the Federal Reserve’s briefed the Committee on a number of purchases of Treasury securities, possible tools that the Federal Reserve agency debt securities, and agency might employ to foster effective control MBS. A number of potential modificaof the federal funds rate in the context tions to those programs were presented of a much expanded balance sheet. for the Committee’s consideration, Some of those tools were focused pri- including possible expansions in their marily on shaping or strengthening the size, extensions of the duration of secudemand for reserves, while others were rities purchased, steps to increase the designed to provide greater control flexibility of those purchases both over the supply of reserves. In discuss- within each program and across proing the staff presentation, meeting par- grams in response to short-term market ticipants generally agreed that the Fed- developments, and possible approaches eral Reserve either already had or to winding down purchases as the procould develop tools to remove policy grams near completion. The Federal accommodation when appropriate. En- Reserve was already purchasing a very suring that policy accommodation can large fraction of new current-coupon ultimately be withdrawn smoothly and agency MBS and agency debt, and furat the appropriate time would remain a ther increasing the scale of those protop priority of the Federal Reserve. grams could compromise market func- The staff also provided the Commit- tioning. Some participants thought that tee with an analysis of the potential ad- increases in purchases of Treasury severse effects of very high reserve bal- curities might have little or no effect on ances on bank capital ratios. An long-term interest rates unless the important issue was whether the further increases were very sizable, given the increase in reserve balances that is large amount of current and projected likely to result from the Federal Re- supply of Treasury securities. Others serve’s already-announced program of were concerned that announcements of asset purchases could lead banks to substantial additional purchases could

Minutes of FOMC Meetings, June 297 add to perceptions that the federal debt The staff presented policymakers was being monetized. While most with proposals for extensions, modifimembers did not see large-scale pur- cations, and terminations of various lichases of Treasury securities as likely quidity programs. A number of the to be a source of inflation pressures credit and liquidity facilities that the given the weak economic outlook, pub- Federal Reserve had established in the lic concern about monetization could course of the financial crisis were have adverse implications for inflation scheduled to expire on October 30. Use expectations. The asset purchase pro- of most of the liquidity facilities had grams were intended to support eco- declined in recent months as market nomic activity by improving market conditions had improved. Still, meeting functioning and reducing interest rates participants judged that market condion mortgage loans and other long-term tions remained fragile, and that concredit to households and businesses cerns about counterparty credit risk and relative to what they otherwise would access to liquidity, both of which had have been. But the Committee had not ebbed notably in recent months, could set specific objectives for longer-term increase again. Moreover, participants interest rates, and participants did not viewed the availability of the liquidity consider it appropriate to allow the facilities as a factor that had contrib- Desk discretion to adjust the size and uted to the reduction in financial composition of the Federal Reserve’s strains. If the Federal Reserve’s backup asset purchases in response to short-run liquidity facilities were terminated prefluctuations in market interest rates. maturely, such developments might put Some participants noted that, in prin- renewed pressure on some financial inciple, the Committee could formulate a stitutions and markets and tighten plan for asset purchases that would re- credit conditions for businesses and spond to economic and financial devel- households. The period over year-end opments in a way that might better pro- was seen as posing heightened risks mote monetary policy objectives. Most, given the usual pressures in financial however, thought that formulating and markets at that time. In these circumcommunicating such a plan would be stances, participants agreed that most very difficult, potentially leading to an facilities should be extended into early increase in market uncertainty regard- next year. However, participants also ing Federal Reserve actions and inten- judged that improved market conditions tions. Many participants agreed, how- and declining use of the facilities warever, that it was appropriate for the ranted scaling back, suspending, or Desk to make small adjustments to the tightening access to several programs, size and timing of purchases aimed at including the Term Auction Facility fostering market liquidity and improv- (TAF), the Term Securities Lending Faing market functioning. Participants cility (TSLF), and the Asset-Backed discussed the merits of including secu- Commercial Paper Money Market rities backed by adjustable-rate mort- Mutual Fund Liquidity Facility gages in MBS purchases and of taper- (AMLF). ing off purchases of securities as the Following the presentation and disasset purchase programs were being cussion of the staff proposal, the Board completed, but the Committee did not voted unanimously to extend the reach a decision on those issues at the AMLF, the Commercial Paper Funding meeting. Facility (CPFF), the Primary Dealer

298 96th Annual Report, 2009 Credit Facility (PDCF), and the TSLF to consult with the Chairman and, if posthrough February 1, 2010. The Board sible, the Board and the Federal Open MarketCommittee.” did not extend the Money Market Investor Funding Facility (MMIFF) Board members and FOMC particibeyond October 30. The extension of pants noted their expectation that a the TSLF required the approval of the number of these facilities may not need Federal Open Market Committee to be extended beyond February 1, (FOMC), as that facility was estab- 2010, if the recent improvements in lished under the joint authority of the market conditions continue. However, Board and the FOMC. The Board and if financial stresses do not moderate as the FOMC jointly decided to suspend expected, the Board and the FOMC some TSLF auctions and to reduce the were prepared to extend the terms of size and frequency of others. In addi- some or all of the facilities as needed tion, the FOMC extended the tempo- to promote financial stability and ecorary reciprocal currency arrangements nomic growth. (swap lines) between the Federal Reserve and other central banks to Staff Review of the February 1, 2010. The FOMC unani- Economic Situation mously passed the following resolution to extend the temporary swap arrange- The information reviewed at the June ments and the TSLF: 23–24 meeting suggested that the economy remained very weak, though “The Federal Open Market Committee declines in activity seemed to be lessextends until February 1, 2010, its authoriening. Employment was still falling, zations for the Federal Reserve Bank of and manufacturers had cut production New York to engage in temporary reciprocal currency arrangements (“swap arrange- further in response to excess invenments”) with foreign central banks under tories and soft demand. But the reducthe conditions previously established by the tions in employment and industrial Committee. production had slowed somewhat, con- The Federal Open Market Committee exsumer spending appeared to be holding tends until February 1, 2010, its authorizations for the Federal Reserve Bank of New reasonably steady after shrinking in the York to provide a Term Securities Lending second half of 2008, and sales and con- Facility, subject to the same collateral, struction of single-family homes had interest rate, and other conditions previ- apparently flattened out. In addition, ously established by the Committee. Howthe recent declines in capital spending ever, the Federal Reserve Bank of New were smaller than those recorded ear- York is directed to suspend Schedule 1 TSLF auctions, effective immediately. The lier in the year. Consumer price infla- Federal Reserve Bank of New York is di- tion was fairly quiescent in recent rected to conduct Schedule 2 TSLF auc- months, although the upturn in energy tions initially on a monthly basis in prices appeared likely to boost headline amountsof$75billion;theReserveBankis inflation in June. directed to reduce over time the amounts provided through the TSLF as market con- The demand for labor weakened furditions warrant. The Federal Reserve Bank ther in May, albeit less rapidly than in of New York is directed to suspend opera- earlier months. Nonfarm payrolls contions of the Term Securities Lending Faciltinued to shrink, but the decline was ityOptionsProgram(TOP),effectiveimmethe smallest since September. In addidiately. Should market conditions appear to warranttheresumptionofSchedule1TSLF tion, average weekly hours of producor TOP auctions, the Account Manager is tion and nonsupervisory workers on

Minutes of FOMC Meetings, June 299 private payrolls, which had dropped expenditures on goods other than motor substantially from September to March, vehicles appeared to have risen slightly were essentially unchanged in April in May and to have changed little, on and May. Thus aggregate hours worked net, since the turn of the year. Sales of by this group fell at a slower pace in light motor vehicles in April and May April and May than on average over were slightly higher than the firstthe previous seven months. The unem- quarter average. Real outlays on serployment rate, however, rose further in vices were reported to have picked up May, to 9.4 percent. Despite the high some in April from the average level of joblessness, the labor force monthly gain seen over the first three participation rate moved up for a sec- months of the year. The fundamental ond consecutive month to a level close determinants of consumer demand apto where it was at the beginning of the peared to have improved a bit: Despite recession. The four-week moving aver- the ongoing decline in employment, age of initial claims for unemployment real disposable personal income rose in insurance fell back a little, but the the first quarter and posted another siznumber of individuals receiving unem- able gain in April as various provisions ployment insurance benefits continued of the American Recovery and Reinto increase. vestment Act of 2009 boosted transfer Industrial production decreased in payments and reduced personal taxes. April and May but at a slower pace In addition, equity prices recorded subthan in the first quarter. Manufacturing stantial gains in April and May, reversoutput also fell in those months, and ing a small portion of the prior wealth the factory operating rate dipped fur- declines. Measures of consumer sentither in May. In the high-tech sector, ment, while remaining at levels typicomputer output fell at a pace similar cally seen during recessions, improved to that in the first quarter, but near- markedly from the historical lows reterm indicators of production turned corded around the turn of the year. somewhat less negative and global Single-family housing starts edged semiconductor sales climbed in April up in May, and adjusted permit issufor the second consecutive month. The ance for single-family houses was a production of motor vehicles and parts little above the level of starts, as it had dropped sharply in May, principally be- been since January. In contrast, activity cause of extended plant shutdowns at in the much smaller multifamily sector General Motors and Chrysler. The pro- fell significantly further, reflecting a duction of commercial aircraft moved sharp deterioration in the fundamentals up. Outside the transportation and high- in that sector. The steep decline in the tech sectors, most industries continued demand for new single-family houses to cut production in both April and seemed to have abated. However, the May, though at a slower pace than over pace of new home sales was still very the preceding five months. low in April, and the months’ supply Real personal consumption expendi- of new homes remained quite elevated tures rose somewhat in the first quarter relative to sales despite a decrease in after falling in the second half of 2008, the stock of unsold new single-family and available data suggested that homes to a level roughly one-half of its spending was holding reasonably mid-2006 peak. Sales of existing steady in the second quarter. On the single-family homes had been fairly basis of the latest retail sales data, real steady from late 2008 through May.

300 96th Annual Report, 2009 The relative stability of the resale mar- months’ supply of nonfarm business ket over this period coincided with a inventories remained elevated, large heightened proportion of transactions production cutbacks in recent quarters involving bank-owned and other dis- allowed producers to stem the rise in tressed properties. The apparent stabili- stocks relative to sales. The principal zation in housing demand was likely determinants of investment were still due, in part, to the improvement in weak: Business output dropped further housing affordability that resulted from in the first quarter, the user cost of low mortgage rates and declining house capital was higher than it was a year prices. Rates for conforming 30-year earlier, and credit remained tight. Howfixed-rate mortgages rose on net ever, corporate bond yields eased conbetween late April and late June but siderably in the weeks leading to the remained below the levels seen over June meeting, and monthly surveys of most of 2008. Although the market for business conditions and sentiment were private-label nonprime mortgages re- generally less downbeat than earlier in mained closed, spreads between rates the year. for jumbo and standard conforming The U.S. international trade deficit loans narrowed substantially since widened slightly in April, as a decrease March. Meanwhile, national house in imports was more than offset by a prices continued to decline. drop in exports. Most major categories Real investment in equipment and of exports fell, with exports of machinsoftware (E&S) continued to contract; ery, industrial supplies, and consumer however, the decline in the second goods exhibiting significant declines. quarter appeared likely to be smaller The value of imports of goods and serthan in either of the two preceding vices also edged down after remaining quarters. Outlays on transportation about unchanged in March. Imports of equipment seemed to be firming after machinery and industrial supplies disshrinking for an extended period, and played significant decreases, and imthe incoming data on shipments and or- ports of services fell moderately. Imders of nondefense capital goods ports of consumer goods increased. The pointed to a moderation in the rate of value of oil imports also rose, as higher decrease in other major components of prices outweighed lower volumes. E&S. The contraction in spending on The decline in output in the adcomputing equipment appeared to be vanced foreign economies deepened in leveling off, although businesses con- the first quarter. Domestic demand fell tinued to cut their real outlays on soft- in all major economies, led by doubleware. Real spending on equipment out- digit declines in fixed investment and side of high-tech and transportation sizable negative contributions of invenseemed to have dropped less rapidly in tories to growth. Recent indicators, the second quarter than in the first however, suggested that the pace of quarter. Data suggested a substantial contraction likely moderated in the secincrease in outlays for nonresidential ond quarter. Purchasing managers inconstruction in March and April, con- dexes rebounded from the exceptioncentrated in energy-related sectors. ally low levels reached in the first Outside of the energy-related sectors, quarter, and industrial production stabidemand for nonresidential building lized somewhat. In emerging market remained extremely weak and financ- economies, incoming data showed that ing difficult to obtain. Although the first-quarter real gross domestic prod-

Minutes of FOMC Meetings, June 301 uct (GDP) contracted sharply in Staff Review of the Mexico, Hong Kong, Malaysia, and Financial Situation Singapore, edged up in Korea, and expanded considerably in India and In- The decision by the FOMC at its April donesia. For the second quarter, indica- 28–29 meeting to leave the target range tors suggested a broader stabilization of for the federal funds rate unchanged activity in emerging market economies. and the accompanying statement indi- In China, retail sales and fixed-asset cating that the FOMC would maintain investment rose strongly. Financial con- the size of the large-scale asset purditions continued to improve in most chase program were largely anticipated, emerging market economies. but yields on Treasury securities rose In the United States, headline con- slightly, as a few investors apparently sumer prices were little changed be- had seen some chance that the Comtween March and May, held down by mittee would expand the purchase prodeclines in the prices of food and gram. The release of the April FOMC energy over that period. Core inflation minutes three weeks later prompted a was slightly higher from March to May reversal of this move, as market parthan during the preceding three months, ticipants reportedly focused on the sugalthough core prices posted fairly small gestion that the total size of the purincreases apart from a tax-induced chase program might need to be jump in tobacco prices. Near-term in- increased at some point to spur a more flation expectations in the Reuters/ rapid pace of recovery. The expected University of Michigan Surveys of path of the federal funds rate implied Consumers remained steady in May by futures prices was largely unand then rose somewhat in the prelim- changed by the release of the Commitinary June survey. Survey measures tee’s statement and minutes. However, of long-term inflation expectations in the days following the release of the showed no signs of moving lower de- May employment report, which was spite the considerable margin of labor- read as being significantly less negative and product-market slack present in the than anticipated, market participants economy. At earlier stages of process- marked up their expected path for the ing, the producer price index for core federal funds rate. Yields on nominal intermediate materials continued to de- Treasury coupon securities increased, cline through May, albeit at a slower on net, over the intermeeting period. pace than that seen at the end of 2008. These moves likely reflected a number Spot commodity prices, which had of factors, including investors’ percepmoved higher over the first four months tions of an improvement in the ecoof 2009, rose more rapidly since the nomic outlook, decreased concerns end of April. Nevertheless, these prices about the risk of deflation, a reversal of remained well below their year-earlier flight-to-quality flows, and selling of levels. The incoming data on labor long-duration assets as exposure to costs were mixed. Although the rise in mortgage prepayment risk dropped hourly compensation in the nonfarm with a rise in mortgage rates. In addibusiness sector picked up slightly in tion, inflation compensation rose over the first quarter, the employment cost the intermeeting period as yields on index decelerated further. Increases in inflation-indexed Treasury securities average hourly earnings also slowed increased much less than those on their further in April and May. nominal counterparts. Some of the rise

302 96th Annual Report, 2009 in inflation compensation may have re- economic news and further declines in flected an increase in inflation expecta- risk premiums. The spread between an tions, but an improvement in liquidity estimate of the expected real equity in the market for Treasury inflation- return over the next 10 years for S&P protected securities and mortgage- 500 firms and an estimate of the real related hedging flows may have 10-year Treasury yield—a rough gauge boosted inflation compensation as well. of the equity risk premium—narrowed Pressures in short-term bank funding noticeably but remained high by hismarkets eased further, as evidenced by torical standards. Option-implied voladeclines in London interbank offered tility on the S&P 500 index declined rate (Libor) fixings and in spreads but remained elevated. between one- and three-month Libor Yields on speculative-grade and and comparable-maturity overnight in- investment-grade corporate bonds dex swap (OIS) rates. These spreads dropped, and spreads over yields on narrowed to levels not seen since early comparable-maturity Treasury securi- 2008, transaction volume rose mod- ties narrowed considerably. Estimates estly, and tentative signs of increased of bid-asked spreads in the secondary liquidity reportedly emerged. The mar- market for speculative-grade corporate ket for repurchase agreements saw bonds fell significantly to about their slight improvement, with bid-asked average levels in the few years before spreads for most types of transactions the summer of 2007, while estimates of narrowing a bit and haircuts roughly such spreads for investment-grade corunchanged. Spreads on A2/P2-rated porate bonds remained somewhat elcommercial paper and AA-rated asset- evated. Market sentiment toward the backed commercial paper were little syndicated leveraged loan market also changed, on net, since late April, improved, with the average bid price remaining at the low end of their increasing noticeably and bid-asked ranges over the previous 18 months. spreads narrowing a bit further. The Over the intermeeting period, func- inclusion of commercial mortgagetioning in the market for Treasury se- backed securities (CMBS) in the Term curities generally improved and trading Asset-Backed Securities Loan Facility picked up, but some strains remained. (TALF) program resulted initially in a The on-the-run/off-the-run premium narrowing of commercial mortgage narrowed considerably at the short end credit default swap (CDS) spreads; of the yield curve. Such spreads, how- however, spreads later widened as ratever, remained somewhat wide for ing agencies issued conflicting opinions longer-dated issues, apparently reflect- regarding the credit quality of senior ing concerns about volatility linked to CMBS tranches. mortgage-related hedging flows. Some Market sentiment toward the finanstrains, perhaps associated with these cial sector improved over the interflows, emerged at times in the MBS meeting period, reflecting, in part, the market; market participants reacted to release of the Supervisory Capital Asthe large and rapid changes in MBS sessment Program (SCAP) results for yields by widening bid-asked spreads the nation’s 19 largest bank holding on these securities. companies (BHCs) on May 7. Nearly Broad stock price indexes rose, on all the BHCs evaluated had enough net, over the intermeeting period, re- Tier 1 capital to absorb the higher flecting generally better-than-expected losses envisioned under the hypotheti-

Minutes of FOMC Meetings, June 303 cal more adverse scenario; however, 10 cation of household wealth toward the institutions were required to enhance safety and liquidity of M2 assets evitheir capital structure to put greater em- dently moderated. Retail money market phasis on common equity. Following mutual funds and small time deposits the announcement of the SCAP results, contracted in both months, probably in the 19 evaluated institutions raised, or response to declining interest rates on announced plans to raise, around $70 these assets. The rise in currency dibillion in common equity through pub- minished, likely reflecting primarily a lic offerings, conversion of preferred waning in foreign demand. stock, and asset sales. These offerings Commercial bank credit increased accounted for most of the record-high slightly in May following six consecutotal financial equity issuance in May. tive monthly declines, but the turn- The evaluated BHCs have also issued around reflected a rise in securities additional debt under the Federal De- holdings and in the volatile “other” posit Insurance Corporation’s Tempo- loans category—that is, loans other rary Liquidity Guarantee Program than commercial and industrial (C&I), (TLGP), as well as nonguaranteed debt. real estate, and consumer loans. C&I On June 9, the Treasury announced loans dropped in May, amid subdued that 10 large financial institutions were origination activity and broad-based eligible to repay the $68 billion in paydowns of outstanding loans. Home capital that they had received through equity loans edged down—the first the Troubled Asset Relief Program monthly decline in this category since (TARP). CDS spreads for banking or- October 2006—partly because of ganizations declined considerably over banks’ reductions in existing lines of the intermeeting period, although they credit. Closed-end residential mortremained well above historical norms. gages decreased; originations were Stock price indexes for the banking reportedly strong but were more than sector and the broader financial sectors offset by loan sales to the governmentrose significantly. sponsored enterprises. The amount of The level of private-sector debt was outstanding consumer loans originated estimated to have remained about un- by banks shrank during April and May; changed in the second quarter, as a fur- the quantity of consumer loans on ther modest decline in household debt banks’ balance sheets decreased even about offset a slight increase in nonfi- more because of a number of large nancial business debt. Gross bond issu- credit card securitizations. ance by nonfinancial corporations was The dollar depreciated substantially robust in May. Investment-grade issu- during the intermeeting period against ance rebounded after a lull in April. all other major currencies. This decline Speculative-grade issuance was the appeared to be driven by a renewed highest since June 2007, but issuance sense of optimism about global growth of lower-rated speculative-grade bonds prospects, leading investors to shift remained minimal. Meanwhile, the fed- away from safe-haven assets in the eral government issued large amounts United States to riskier assets elseof debt, and state and local government where. Libor-to-OIS spreads in euros debt was estimated to have expanded and sterling decreased, and several formoderately. eign banks took advantage of improved The expansion of M2 slowed signifi- financial conditions to raise capital and cantly in April and May, as the reallo- increase issuance of debt outside of

304 96th Annual Report, 2009 government guarantee programs. The look for foreign activity was better, and improved access to capital markets and financial stress appeared to have eased better economic outlook buoyed bank somewhat more than had been anticistocks, which helped headline equity pated in the staff forecast prepared for indexes move higher. Most stock mar- the prior FOMC meeting. The prokets in emerging market economies jected boost to aggregate demand from rose considerably, and mutual fund these factors more than offset the negaflows into those markets strengthened. tive effects of higher oil prices and The European Central Bank lowered mortgage rates. The staff projected that its main policy rate 25 basis points to real GDP would decline at a substan- 1 percent and announced that it would tially slower rate in the second quarter purchase up to €60 billion in covered than it had in the first quarter and then bonds. The Bank of England, the Bank increase in the second half of 2009, of Canada, and the Bank of Japan kept though less rapidly than potential outtheir policy rates constant over the in- put. The staff also revised up its protermeeting period, but the Bank of jection for the increase in real GDP in England increased the size of its 2010, to a pace above the growth rate planned asset purchases from £75 bil- of potential GDP. As a consequence, lion to £125 billion. The Bank of Ja- the staff projected that the unemploypan continued purchasing commercial ment rate would rise further in 2009 paper, corporate bonds, equities, and but would edge down in 2010. Meangovernment bonds. Chinese authorities while, the staff forecast for inflation held the renminbi nearly unchanged was marked up. Recent readings on against the dollar, and several central core consumer prices had come in a bit banks intervened to purchase dollars, higher than expected; in addition, the attempting to slow the dollar’s depre- rise in energy prices, less-favorable imciation against their currencies. port prices, and the absence of any downward movement in inflation expectations led the staff to raise its medium-term inflation outlook. None- Staff Economic Outlook theless, the low level of resource utili- In the forecast prepared for the June zation was projected to result in an apmeeting, the staff revised upward its preciable deceleration in core consumer outlook for economic activity during prices through 2010. the remainder of 2009 and for 2010. Looking ahead to 2011 and 2012, Consumer spending appeared to have the staff anticipated that financial marstabilized since the start of the year, kets and institutions would continue to sales and starts of new homes were recuperate, monetary policy would flattening out, and the recent declines remain stimulative, fiscal stimulus in capital spending did not look as se- would be fading, and inflation expectavere as those that had occurred around tions would be relatively well anthe turn of the year. Recent declines in chored. Under such conditions, the staff payroll employment and industrial pro- projected that real GDP would expand duction, while still sizable, were at a rate well above that of its potensmaller than those registered earlier in tial, that the unemployment rate would 2009. Household wealth was higher, decline significantly, and that overall corporate bond rates had fallen, the and core personal consumption expenvalue of the dollar was lower, the out- ditures inflation would stay low.

Minutes of FOMC Meetings, June 305 Participants’ Views and Committee was unlikely to be sufficiently strong to Policy Action provide a substantial boost to U.S. exports. Against this backdrop, partici- In conjunction with this FOMC meet- pants generally judged that, while U.S. ing, all meeting participants—the five output would probably begin to grow members of the Board of Governors again in the second half of the year, the and the presidents of the 12 Federal rate of increase was likely to be rela- Reserve Banks—provided projections tively slow. Most believed that downfor economic growth, the unemploy- side risks to economic growth had diment rate, and consumer price inflation minished somewhat since the April for each year from 2009 through 2011 meeting, but were still significant. and over a longer horizon. Longer-run Developments in financial markets projections represent each participant’s over the intermeeting period were seen assessment of the rate to which each as broadly positive, reflecting, at least variable would be expected to converge in part, a reduction in the perceived over time under appropriate monetary risk of further severely adverse outpolicy and in the absence of further comes. In particular, many participants shocks. Participants’ forecasts through noted that the results of the SCAP 2011 and over the longer run are de- helped bolster confidence in banks and scribed in the Summary of Economic led to large infusions of private capital Projections, which is attached as an ad- in that sector. Corporate credit markets dendum to these minutes. continued to improve, and markets for In their discussion of the economic asset-backed securities also showed an situation and outlook, participants gen- increasing amount of activity, superally agreed that the information re- ported in part by the TALF. Increases ceived since the April meeting indi- in equity prices had favorable effects cated that the economic contraction on household wealth and overall sentiwas slowing and that the decline in ac- ment. Still, participants generally noted tivity could cease before long. Business that the improvement in market condiand household confidence had picked tions was in part due to ongoing supup some, and survey data and anec- port from various government prodotal reports showed improved expec- grams and that underlying financial tations for the future. The inventory conditions remained fragile. Credit was adjustment process was continuing, tight, with some banks quite reluctant housing and consumption demand ap- to lend. Worsening credit quality, espeparently had leveled off, and financial cially for consumer and commercial market strains had eased further. None- real estate loans, was seen as an importheless, most participants saw the econ- tant reason for reduced lending and omy as still quite weak and vulnerable tighter terms, and banks could face to further adverse shocks. Conditions in substantial losses in their loan portthe labor market remained poor, and folios in coming quarters. Many parthe unemployment rate continued to ticipants noted that obtaining financing rise. These factors, along with past for commercial real estate projects declines in wealth, would weigh on remained extremely difficult amid consumer spending. Although financial worsening fundamentals in the sector. market conditions had improved, credit Consumer spending appeared no was still quite tight in many sectors. longer to be declining but nonetheless Economic activity in foreign economies remained weak. The continued slug-

306 96th Annual Report, 2009 gishness in consumer expenditures than expected, job losses remained submainly reflected falling employment, stantial over the intermeeting period sharply lower wealth as a result of ear- and the unemployment rate continued lier steep declines in asset prices, and to rise rapidly. Rising labor force partight credit conditions. Because these ticipation contributed to the increase in factors were not seen as likely to dissi- the unemployment rate. Some participate quickly, most participants judged pants pointed out that households’ that consumer spending would continue financial strains may be encouraging to be subdued for some time. Given the many individuals to enter the labor significant uncertainties in the eco- market despite difficult labor market nomic outlook, a sizable reduction in conditions. Reports from district conthe saving rate seemed unlikely in the tacts suggested that workweeks were near term; some saw the possibility of being trimmed and that total hours further increases in the household sav- worked were falling significantly. The ing rate. Participants also observed that, large number of people working part while personal income had expanded time for economic reasons and the briskly of late, those increases had prevalence of permanent job reductions been boosted by special one-time fac- rather than temporary layoffs suggested tors such as fiscal stimulus and large that labor market conditions were even cost-of-living adjustments for Social more difficult than indicated by the un- Security recipients. Personal income employment rate. With the recovery was likely to contract for a time going projected to be rather sluggish, most forward as the effects of these factors participants anticipated that the emwaned, and there was some risk that ployment situation was likely to be consumer spending might also decline downbeat for some time. as a consequence. Anecdotal reports suggested that the Indicators of single-family starts and weakness in activity was widespread sales suggested that housing activity across many industries and extended to may be leveling out, but most partici- the service sector. However, some pants viewed the sector as still vulner- meeting participants highlighted eviable to further weakness. Some ex- dence from regional surveys that pressed concern that the increases in pointed to a stabilization or even a mortgage rates seen over the intermeet- slight pickup in manufacturing in some ing period had the potential to further areas, and positive signs were apparent depress the demand for housing and in the energy and agriculture sectors. thus impede an economic recovery. Participants noted an improvement in Others noted that foreclosures were business sentiment in many districts, continuing at a very high rate and but contacts remained quite uncertain could push house prices down further about the timing and extent of the and add to inventories of unsold recovery; elevated uncertainty was said homes, holding back housing activity to be inhibiting capital spending in and weighing on household wealth. many cases. Many businesses had been Labor market conditions were of successful in working down inventories particular concern to meeting partici- of unsold goods. Some participants pants. Although some improvements noted that, as this process continues, were evident in new and continuing increases in sales will have to be met unemployment insurance claims and by increases in production, which the May payroll report was less weak would, in turn, support growth in hours

Minutes of FOMC Meetings, June 307 worked and eventually in investment in the future. Participants noted the outlays. considerable uncertainty surrounding Many participants noted that the glo- estimates of the output and unemploybal nature of this recession meant that ment gaps and the extent of their growth abroad was not likely to bolster effects on prices. However, most U.S. exports and so contribute to a agreed that, even taking account of recovery in the United States. In such uncertainty, the economy was al- Europe, for example, unemployment most certainly operating well below its was also rising sharply and financial potential and that significant price presstrains remained significant. Some par- sures were unlikely to materialize in ticipants thought that recovery there the near and medium terms. Still, in was likely to lag behind that of the light of the signs that economic activity United States. In Asia, the outlook was stabilizing, most participants saw appeared more promising, with some less downside risk to their expectations evidence that the rate of decline in ac- for inflation. Moreover, participants tivity was diminishing. Recent informa- pointed out that some measures of intion from China suggested that eco- flation expectations had edged up nomic growth may be picking up there. recently from very low readings, per- Still, some participants mentioned that haps reflecting in part reduced congrowth in that region was likely to cerns about deflation, and were now at remain importantly dependent on ex- levels close to those prevailing prior to ports to major industrial economies that the onset of the crisis. A few particiwere likely to recover slowly. pants were concerned that inflation ex- Although recent increases in oil and pectations could continue to rise, espeother commodity prices were likely to cially in light of the Federal Reserve’s raise headline inflation over the near greatly expanded balance sheet and the term, most participants expected core associated large volume of reserves in inflation to remain subdued for some the banking system, and that as a result time. Several measures of labor com- inflation could temporarily rise above pensation had slowed in recent quarters levels consistent with the Committee’s as unemployment mounted and wages dual objectives of maximum employwere not likely to exert any significant ment and stable prices. Most particiupward pressures on prices, given the pants, however, expected that inflation expectation that labor market condi- would remain subdued for some time. tions were likely to deteriorate further In their discussion of monetary polin coming months and probably would icy for the period ahead, Committee not improve quickly thereafter. In addi- members agreed that the stance of tion, many participants noted that pro- monetary policy should not be changed ductivity growth had been surprisingly at this meeting. Given the prospects for strong in recent quarters. Although the weak economic activity, substantial measured increase in productivity resource slack, and subdued inflation, might reflect cyclical factors rather the Committee agreed that it should than changes in the underlying trend maintain its target range for the federal and was subject to data revisions, funds rate at 0 to 1⁄ 4 percent. The future growth in unit labor costs was expected path of the federal funds rate would to continue to be restrained in coming depend on the Committee’s evolving quarters. Substantial resource slack was expectations for the economy, but for also likely to keep price inflation low now, members thought it most likely

308 96th Annual Report, 2009 that the federal funds rate would need purchases and various liquidity facilities to be maintained at an exceptionally outstanding will cause the size of the Federal Reserve’s balance sheet to expand siglow level for an extended period, given nificantly in coming months. The Desk is their forecasts for only a gradual expected to purchase up to $200 billion in upturn in activity and the lack of infla- housing-related agency debt by the end of tion pressures. The Committee also this year. The Desk is expected to purchase agreed that changes to its program of up to $1.25 trillion of agency MBS by the asset purchases were not warranted at end of the year. The Desk is expected to purchase up to $300 billion of longer-term this time. Although an expansion of Treasury securities by the end of the third such purchases might provide addi- quarter. The System Open Market Account tional support to the economy, the Manager and the Secretary will keep the effects of further asset purchases, espe- Committee informed of ongoing developcially purchases of Treasury securities, ments regarding the System’s balance sheet thatcouldaffecttheattainmentovertimeof on the economy and on inflation exthe Committee’s objectives of maximum pectations were uncertain. Moreover, it employmentandpricestability.” seemed likely that economic activity The vote encompassed approval of was in the process of leveling out, and the statement below to be released at the considerable improvements in 2:15 p.m.: financial markets over recent months were likely to lend further support to “Information received since the Federal aggregate demand. Accordingly, the Open Market Committee met in April sug- Committee agreed that the asset pur- gests that the pace of economic contraction chase programs should proceed for is slowing. Conditions in financial markets have generally improved in recent months. now on the schedule announced at pre- Household spending has shown further vious meetings. signs of stabilizing but remains constrained At the conclusion of the discussion, by ongoing job losses, lower housing the Committee voted to authorize and wealth, and tight credit. Businesses are cutdirect the Federal Reserve Bank of ting back on fixed investment and staffing but appear to be making progress in bring- New York, until it was instructed othering inventory stocks into better alignment wise, to execute transactions in the with sales. Although economic activity is System Account in accordance with the likely to remain weak for a time, the Comfollowing domestic policy directive: mittee continues to anticipate that policy actionstostabilizefinancialmarketsandin- “The Federal Open Market Committee stitutions,fiscalandmonetarystimulus,and seeks monetary and financial conditions market forces will contribute to a gradual that will foster price stability and promote resumption of sustainable economic growth sustainable growth in output. To further its inacontextofpricestability. long-run objectives, the Committee seeks Thepricesofenergyandothercommodiconditions in reserve markets consistent ties have risen of late. However, substantial withfederalfundstradinginarangefrom0 resource slack is likely to dampen cost to 1⁄4 percent. The Committee directs the pressures, and the Committee expects that Desk to purchase agency debt, agency inflation will remain subdued for some MBS, and longer-term Treasury securities time. during the intermeeting period with the aim In these circumstances, the Federal of providing support to private credit mar- Reserve will employ all available tools to kets and economic activity. The timing and promote economic recovery and to preserve pace of these purchases should depend on pricestability.TheCommitteewillmaintain conditionsinthemarketsforsuchsecurities the target range for the federal funds rate at and on a broader assessment of private 0 to 1⁄4 percent and continues to anticipate credit market conditions. The Committee that economic conditions are likely to waranticipates that the combination of outright rant exceptionally low levels of the federal

Minutes of FOMC Meetings, June 309 fundsrateforanextendedperiod.Asprevi- Secretary’s note: Advice subseously announced, to provide support to quently was received that the selection mortgage lending and housing markets and of Mr. Sack as Manager was satisfacto improve overall conditions in private tory to the Board of Directors of the credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of Federal Reserve Bank of New York. agency mortgage-backed securities and up to $200 billion of agency debt by the end Brian F. Madigan oftheyear.Inaddition,theFederalReserve Secretary will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall Addendum: amounts of its purchases of securities in Summary of Economic Projections light of the evolving economic outlook and conditionsinfinancialmarkets.TheFederal In conjunction with the June 23–24, Reserve is monitoring the size and compo- 2009, FOMC meeting, the members of sitionofitsbalancesheetandwillmakeadthe Board of Governors and the presijustments to its credit and liquidity programsaswarranted.” dents of the Federal Reserve Banks, all of whom participate in deliberations of Voting for this action: Messrs. Berthe FOMC, submitted projections for nanke and Dudley, Ms. Duke, Messrs. Evans, Kohn, Lacker, Lockhart, output growth, unemployment, and in- Tarullo,andWarsh,andMs.Yellen. flation in 2009, 2010, 2011, and over Votingagainstthisaction:None. the longer run. Projections were based on information available through the It was agreed that the next meeting end of the meeting and on each particiof the Committee would be held on pant’s assumptions about factors likely Tuesday−Wednesday, August 11–12, to affect economic outcomes, including 2009. The meeting adjourned at 12:40 his or her assessment of appropriate p.m. on June 24, 2009. monetary policy. “Appropriate monetary policy” is defined as the future Notation Vote path of policy that the participant By notation vote completed on May deems most likely to foster outcomes 19, 2009, the Committee unanimously for economic activity and inflation that approved the minutes of the FOMC best satisfy his or her interpretation of meeting held on April 28−29, 2009. the Federal Reserve’s dual objectives of maximum employment and stable Conference Call prices. Longer-run projections represent each participant’s assessment of the On June 3, 2009, the Committee met rate to which each variable would be by conference call in a joint session expected to converge over time under with the Board of Governors to review appropriate monetary policy and in the recent economic and financial develop- absence of further shocks. ments, including changes in the Federal FOMC participants generally ex- Reserve’s balance sheet. In addition, by pected that, after declining over the unanimous vote, Brian Sack was se- first half of this year, output would lected to serve as Manager, System expand sluggishly over the remainder Open Market Account, on the under- of the year. Consequently, as indicated standing that his selection was subject in table 1 and depicted in figure 1, all to being satisfactory to the Federal FOMC participants projected that real Reserve Bank of New York. gross domestic product (GDP) would

310 96th Annual Report, 2009 Table1. EconomicprojectionsofFederalReserveGovernorsandReserveBankpresidents, June2009 Percent Centraltendency1 Range2 Variable Longer Longer 2009 2010 2011 2009 2010 2011 Run Run ChangeinrealGDP.. −1.5to−1.0 2.1to3.3 3.8to4.6 2.5to2.7 −1.6to−0.6 0.8to4.0 2.3to5.0 2.4to2.8 Aprilprojection ... −2.0to−1.3 2.0to3.0 3.5to4.8 2.5to2.7 −2.5to−0.5 1.5to4.0 2.3to5.0 2.4to3.0 Unemploymentrate.. 9.8to10.1 9.5to9.8 8.4to8.8 4.8to5.0 9.7to10.5 8.5to10.6 6.8to9.2 4.5to6.0 Aprilprojection ... 9.2to9.6 9.0to9.5 7.7to8.5 4.8to5.0 9.1to10.0 8.0to9.6 6.5to9.0 4.5to5.3 PCEinflation ....... 1.0to1.4 1.2to1.8 1.1to2.0 1.7to2.0 1.0to1.8 0.9to2.0 0.5to2.5 1.5to2.1 Aprilprojection ... 0.6to0.9 1.0to1.6 1.0to1.9 1.7to2.0 −0.5to1.2 0.7to2.0 0.5to2.5 1.5to2.0 CorePCEinflation3 . 1.3to1.6 1.0to1.5 0.9to1.7 1.2to2.0 0.5to2.0 0.2to2.5 Aprilprojection ... 1.0to1.5 0.7to1.3 0.8to1.6 0.7to1.6 0.5to2.0 0.2to2.5 Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andininflationarefromthefourthquarterof thepreviousyeartothefourthquarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentage ratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures(PCE)andthepriceindexfor PCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemployment rateinthefourthquarteroftheyearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentof appropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’sassessmentoftheratetowhicheach variablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershocksto theeconomy.TheAprilprojectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonApril28–29,2009. 1. Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2. Therangeforavariableinagivenyearincludesallparticipants’projections,fromlowesttohighest,forthat variableinthatyear. 3. Longer-runprojectionsforcorePCEinflationarenotcollected. contract over the entirety of this year for the path of the unemployment rate and that the unemployment rate would from those published in April. Particiincrease in coming quarters. All partici- pants foresaw only a gradual improvepants also expected that overall infla- ment in labor market conditions in tion would be somewhat slower this 2010 and 2011, leaving the unemployyear than in recent years, and most ment rate at the end of 2011 well projected that core inflation would above the level they viewed as its edge down this year. Almost all partici- longer-run sustainable rate. Participants pants viewed the near-term outlook for projected low inflation this year. For domestic output as having improved 2010 and 2011, the central tendencies modestly relative to the projections of the participants’ inflation forecasts they made at the time of the April pointed to fairly stable inflation that FOMC meeting, reflecting both a would be modestly below most particislightly less severe contraction in the pants’ estimates of the rate consistent first half of 2009 and a moderately with the dual objectives; however, the stronger, but still sluggish, recovery in divergence of participants’ views about the second half. With the strong ad- the inflation outlook remained wide. verse forces that have been acting on Most participants indicated that they the economy likely to abate only expected the economy to take five or slowly, participants generally expected six years to converge to a longer-run the recovery to be gradual in 2010. path characterized by a sustainable rate Even though all participants had raised of output growth and by rates of unemtheir near-term outlook for real GDP, in ployment and inflation consistent with light of incoming data on labor mar- the Federal Reserve’s dual objectives, kets, they increased their projections but several said full convergence would

Minutes of FOMC Meetings, June 311

312 96th Annual Report, 2009 take longer. In contrast to recent pro- leveling out of activity in the housing jections, a majority of participants per- sector. In addition, they observed that ceived the risks to growth as roughly aggressive inventory reductions during balanced, although several still viewed the first half of this year appeared to those risks as tilted to the downside. have left firms’ stocks in better balance Most participants saw the risks sur- with sales, suggesting that production rounding their inflation outlook as is likely to increase as sales stabilize roughly balanced, and fewer partici- and then start to turn up later this year. pants than in April characterized those Participants expected, however, that rerisks as skewed to the downside. With coveries in consumer spending and few exceptions, participants judged that residential investment initially would the projections for economic activity be damped by further deterioration in and inflation remained subject to a de- labor markets, the continued repair of gree of uncertainty exceeding historical household balance sheets, persistently norms. tight credit conditions, and still-weak housing demand. They also anticipated that very low capacity utilization, slug- The Outlook gish growth in sales, uncertainty about Participants’ projections for the change the economic environment, and a conin real GDP in 2009 had a central ten- tinued elevated cost and limited availdency of negative 1.5 percent to nega- ability of financing would contribute to tive 1.0 percent, somewhat above the continued weakness in business fixed central tendency of negative 2.0 per- investment this year. Some participants cent to negative 1.3 percent for their noted that weak economic conditions in April projections. Participants noted other countries probably would hold that the data received between the down growth in U.S. exports. A num- April and June FOMC meetings ber of participants also saw recent pointed to a somewhat smaller decline increases in some long-term interest in output during the first half of the rates and in oil prices as factors that year than they had anticipated at the could damp a near-term economic time of the April meeting. Moreover, recovery. participants saw additional indications Looking further ahead, participants’ that the economic downturn in the projections for real GDP growth in United States and worldwide was mod- 2010 and 2011 were not materially diferating in the second quarter, and they ferent from those provided in April. continued to expect that sales and pro- The projections for growth in 2010 had duction would begin to recover gradu- a central tendency of 2.1 to 3.3 perally during the second half of the year, cent, and those for 2011 had a central reflecting the effects of monetary and tendency of 3.8 to 4.6 percent. Particifiscal stimulus, measures to support pants generally expected that household credit markets, and diminishing finan- financial positions would improve only cial stresses. As reasons for marking up gradually and that strains in credit martheir projections for near-term eco- kets and in the banking system would nomic activity, participants pointed to a ebb slowly; hence, the pace of recovery further improvement in financial condi- would continue to be damped in 2010. tions during the intermeeting period, But they anticipated that the upturn signs of stabilization in consumer would strengthen in late 2010 and in spending, and tentative indications of a 2011 to a pace exceeding the growth

Minutes of FOMC Meetings, June 313 rate of potential GDP. Participants put growth next year would not subnoted several factors contributing to stantially exceed its longer-run sustainthis pickup, including accommodative able rate and hence that the monetary policy, fiscal stimulus, and unemployment rate would decline only continued improvement in financial modestly in 2010; some also pointed to conditions and household balance frictions associated with the resheets. Beyond 2011, they expected allocation of labor from shrinking ecothat output growth would remain above nomic sectors to expanding sectors as that of potential GDP for a time, lead- likely to restrain progress in reducing ing to a gradual elimination of slack in unemployment. The central tendency of resource utilization. Over the longer the unemployment rate at the end of run, most participants expected that, 2010 was 9.5 to 9.8 percent. With outwithout further shocks, real GDP put growth and job creation generally growth eventually would converge to a projected to pick up appreciably in rate of 2.5 to 2.7 percent per year, re- 2011, participants anticipated that jobflecting longer-term trends in the lessness would decline more noticeably, growth of productivity and the labor as evident from the central tendency of force. 8.4 to 8.8 percent for their projections Even though participants raised their of the unemployment rate in the fourth output growth forecasts, they also quarter of 2011. They expected that the moved up their unemployment rate unemployment rate would decline conprojections and continued to anticipate siderably further in subsequent years as that labor market conditions would de- it moved back toward its longer-run teriorate further over the remainder of sustainable level, which most particithe year. Their projections for the aver- pants still saw as between 4.8 and 5.0 age unemployment rate during the percent; however, a few participants fourth quarter of 2009 had a central raised their estimates of the longer-run tendency of 9.8 to 10.1 percent, about unemployment rate. 1⁄ 2 percentage point above the central The central tendency of participants’ tendency of their April projections and projections for personal consumption noticeably higher than the actual unem- expenditures (PCE) inflation in 2009 ployment rate of 9.4 percent in May— was 1.0 to 1.4 percent, about 1⁄ 2 perthe latest reading available at the time centage point above the central tenof the June FOMC meeting. All partici- dency of their April projections. pants raised their forecasts of the un- Participants noted that higher-thanemployment rate at the end of this expected inflation data over the interyear, reflecting the sharper-than- meeting period and the anticipated inexpected rise in unemployment that oc- fluence of higher oil and commodity curred over the intermeeting period. prices on consumer prices were factors With little material change in projected contributing to the increase in their inoutput growth in 2010 and 2011, par- flation forecasts. Looking beyond this ticipants still expected unemployment year, participants’ projections for total to decline in those years, but the pro- PCE inflation had central tendencies of jected unemployment rate in each year 1.2 to 1.8 percent for 2010 and 1.1 to was about 1⁄ 2 percentage point above 2.0 percent for 2011, modestly higher the April forecasts, reflecting the than the central tendencies from the higher starting point of the projections. April projections. Reflecting the large Most participants anticipated that out- increases in energy prices over the in-

314 96th Annual Report, 2009 termeeting period, the forecasts for rate was 1.7 to 2.0 percent. Most parcore PCE inflation (which excludes the ticipants judged that a longer-run PCE direct effects of movements in food inflation rate of 2 percent would be and energy prices) in 2009 were raised consistent with the Federal Reserve’s by less than the projections for total dual mandate; others indicated that in- PCE inflation, while the forecasts for flation of 11⁄ 2 percent or 13⁄ 4 percent core and total PCE inflation in 2010 would be appropriate. Modestly posiand 2011 increased by similar amounts. tive longer-run inflation would allow The central tendency of projections for the Committee to stimulate economic core inflation in 2009 was 1.3 to 1.6 activity and support employment by percent; those for 2010 and 2011 were setting the federal funds rate tempo- 1.0 to 1.5 percent and 0.9 to 1.7 per- rarily below the inflation rate when the cent, respectively. Most participants economy suffers a large negative shock expected that sizable economic slack to demands for goods and services. would continue to damp inflation pressures for the next few years and hence Uncertainty and Risks that total PCE inflation in 2011 would still be below their assessments of its In contrast to the participants’ views appropriate longer-run level. Some over the past several quarters, in June a thought that such slack would generate majority of participants saw the risks to a decline in inflation over the next few their projections for real GDP growth years. Most, however, projected that, as and the unemployment rate as broadly the economy recovers, inflation would balanced. In explaining why they perincrease gradually and move closer to ceived a reduction in downside risks to their individual assessments of the the outlook, these participants pointed measured rate of inflation consistent to the tentative signs of economic stawith the Federal Reserve’s dual man- bilization, indications of some effecdate for maximum employment and tiveness of monetary and fiscal policy price stability. Several participants, not- actions, and improvements in financial ing that the public’s longer-run infla- conditions. In contrast, several particition expectations had not changed ap- pants still saw the risks to their GDP preciably, expected that inflation would growth forecasts as skewed to the return more promptly to levels consis- downside and the associated risks to tent with their judgments about longer- unemployment as skewed to the upside. run inflation than these participants had Almost all participants shared the judgprojected in April. A few participants ment that their projections of future also anticipated that projected inflation economic activity and unemployment in 2011 would be modestly above their continued to be subject to greater-thanlonger-run inflation projections because average uncertainty.11 Many particiof the possible effects of very low short-term interest rates and of the 11. Table2providesestimatesofforecastunlarge expansion of the Federal Recertainty for the change in real GDP, the unemserve’s balance sheet on the public’s ploymentrate,andtotalconsumerpriceinflation inflation expectations. Overall, the overtheperiodfrom1989to2008.Attheendof range of participants’ projections of in- this summary, the box titled “Forecast Uncertainty”discussesthesourcesandinterpretationof flation in 2011 remained quite wide. uncertainty in economic forecasts and explains As in April, the central tendency of the approach used to assess the uncertainty and projections of the longer-run inflation risksattendingparticipants’projections.

Minutes of FOMC Meetings, June 315 Table2. Averagehistoricalprojection participants pointed to the possibility of errorranges an upward shift in expected and actual Percentagepoints inflation if the stimulative monetary policy measures and the attendant Variable 2009 2010 2011 expansion of the Federal Reserve’s bal- ChangeinrealGDP1 ... ±1.0 ±1.5 ±1.6 Unemploymentrate1 .... ±0.4 ±0.8 ±1.0 ance sheet were not unwound in a Totalconsumerprices2.. ±0.9 ±1.0 ±1.0 timely fashion as the economy recov- Note: Error ranges shown are measured as plus or ers. Most participants again saw the minus the root mean squared error of projections that uncertainty surrounding their inflation werereleasedinthewinterfrom1989through2008for projections as exceeding historical thecurrentandfollowingtwoyearsbyvariousprivate and government forecasters. As described in the box norms. “ForecastUncertainty,”undercertainassumptions,there is about a 70 percent probability that actual outcomes forrealGDP,unemployment,andconsumerpriceswill Diversity of Views beinrangesimpliedbytheaveragesizeofprojection errorsmadeinthepast.FurtherinformationisinDavid Figures 2.A and 2.B provide further ReifschneiderandPeterTulip(2007),“GaugingtheUncertaintyoftheEconomicOutlookfromHistoricalFore- details on the diversity of participants’ castingErrors,”FinanceandEconomicsDiscussionSe- views regarding likely outcomes for ries 2007-60 (Washington: Board of Governors of the real GDP growth and the unemploy- FederalReserveSystem,November). 1. Fordefinitions,refertogeneralnoteintable1. ment rate in 2009, 2010, 2011, and 2. Measureistheoverallconsumerpriceindex,the over the longer run. The dispersion in pricemeasurethathasbeenmostwidelyusedingovernment and private economic forecasts. Projection is participants’ June projections for the percent change, fourth quarter of the previous year to next three years reflects, among other thefourthquarteroftheyearindicated. factors, the diversity of their assessments regarding the effects of fiscal pants again highlighted the still- stimulus and nontraditional monetary considerable uncertainty about the policy actions as well as the likely pace future course of the financial crisis and of improvement in financial conditions. the risk that a resurgence of financial For real GDP growth, the distribution turmoil could adversely impact the real of projections for 2009 narrowed and economy. In addition, some noted the shifted slightly higher, reflecting the difficulty in gauging the macroeco- somewhat better-than-expected data renomic effects of the credit-easing poli- ceived during the intermeeting period. cies that have been employed by the The distributions for 2010 and 2011 Federal Reserve and other central changed little. For the unemployment banks, given the limited experience rate, the surprisingly large increases in with such tools. unemployment reported during the in- Most participants judged the risks to termeeting period prompted an upward the inflation outlook as roughly bal- shift in the distribution. Because of the anced, with the number doing so higher persistence exhibited in many of the than in April. A few participants con- unemployment forecasts, there were tinued to view these risks as skewed to similar upward shifts in the distributhe downside, and one saw the inflation tions for 2010 and 2011. The disperrisks as tilted to the upside. Some par- sion of these forecasts for all three ticipants noted the risk that inflation years was roughly similar to that of expectations might drift downward in April. The distribution of participants’ response to persistently low inflation projections of longer-run real GDP outcomes and continued significant growth was about unchanged. A few slack in resource utilization. Several participants raised their longer-run pro-

316 96th Annual Report, 2009 jections of the unemployment rate, while distributions for the projections widening the dispersion of these esti- in 2010 and 2011 did not change sigmates, as they incorporated the effects nificantly. The dispersion in particiof unexpectedly high recent unemploy- pants’ projections for total and core ment data and of the reallocation of PCE inflation for 2009, 2010, and 2011 labor from declining sectors to expand- illustrates their varying assessments of ing ones. The dispersion in partici- the effects on inflation and inflation expants’ longer-run projections reflected pectations of persistent economic slack differences in their estimates regarding as well as of the recent expansion of the sustainable rates of output growth the Federal Reserve’s balance sheet. and unemployment to which the econ- These varying assessments are espeomy would converge under appropriate cially evident in the wide dispersion of monetary policy and in the absence of inflation projections for 2011. In conany further shocks. trast, the tight distribution of partic- Figures 2.C and 2.D provide corre- ipants’ projections for longer-run insponding information about the diver- flation illustrates their substantial sity of participants’ views regarding the agreement about the measured rate of inflation outlook. The distribution of inflation that is most consistent with the projections for total and core PCE the Federal Reserve’s dual objectives inflation in 2009 moved upward, re- of maximum employment and stable flecting the higher inflation data re- prices. leased over the intermeeting period,

Minutes of FOMC Meetings, June 317

318 96th Annual Report, 2009

Minutes of FOMC Meetings, June 319

320 96th Annual Report, 2009

Minutes of FOMC Meetings, June 321 Forecast Uncertainty The economic projections provided by experienced in the past and the risks the members of the Board of Governors around the projections are broadly baland the presidents of the Federal anced, the numbers reported in table 2 Reserve Banks inform discussions of would imply a probability of about 70 monetary policy among policymakers percent that actual GDP would expand and can aid public understanding of the within a range of 2.0 to 4.0 percent in basis for policy actions. Considerable thecurrentyear,1.5to4.5percentinthe uncertainty attends these projections, second year, and 1.4 to 4.6 percent in however. The economic and statistical the third year. The corresponding 70 models and relationships used to help percent confidence intervals for overall produce economic forecasts are neces- inflation would be 1.1 to 2.9 percent in sarily imperfect descriptions of the real thecurrentyearand1.0to3.0percentin world. And the future path of the econ- thesecondandthirdyears. omy can be affected by myriad unfore- Because current conditions may differ seen developments and events. Thus, in from those that prevailed, on average, setting the stance of monetary policy, over history, participants provide judgparticipants consider not only what ments as to whether the uncertainty atappears to be the most likely economic tached to their projections of each varioutcome as embodied in their projec- able is greater than, smaller than, or tions, but also the range of alternative broadly similar to typical levels of forepossibilities, the likelihood of their oc- cast uncertainty in the past as shown in curring, and the potential costs to the table 2. Participants also provide judgeconomyshouldtheyoccur. ments as to whether the risks to their Table 2 summarizes the average his- projections are weighted to the upside, torical accuracy of a range of forecasts, are weighted to the downside, or are including those reported in past Mone- broadly balanced. That is, participants tary Policy Reports and those prepared judge whether each variable is more by Federal Reserve Board staff in likely to be above or below their projecadvance of meetings of the Federal tions of the most likely outcome. These OpenMarketCommittee.Theprojection judgments about the uncertainty and the error ranges shown in the table illustrate risks attending each participant’s projecthe considerable uncertainty associated tions are distinct from the diversity of with economic forecasts. For example, participants’ views about the most likely suppose a participant projects that real outcomes. Forecast uncertainty is congross domestic product (GDP) and total cerned with the risks associated with a consumer prices will rise steadily at particular projection rather than with diannual rates of, respectively, 3 percent vergences across a number of different and 2 percent. If the uncertainty attend- projections. ing those projections is similar to that

322 96th Annual Report, 2009 Meeting Held on Ms.George,ActingDirector,Division August 11–12, 2009 ofBankingSupervisionand Regulation,BoardofGovernors A joint meeting of the Federal Open Mr.Frierson,12DeputySecretary,Of- Market Committee and the Board of ficeoftheSecretary,Boardof Governors of the Federal Reserve Sys- Governors tem was held in the offices of the Mr.Struckmeyer,DeputyStaffDirec- Board of Governors in Washington, tor,OfficeoftheStaffDirector D.C., on Tuesday, August 11, 2009, at forManagement,BoardofGov- 2:00 p.m. and continued on Wednes- ernors day, August 12, 2009, at 9:00 a.m. Mr.English,DeputyDirector,Division ofMonetaryAffairs,Boardof Present: Governors Mr.Bernanke,Chairman Mr.Dudley,ViceChairman Ms.Robertson,AssistanttotheBoard, Ms.Duke OfficeofBoardMembers,Board Mr.Evans ofGovernors Mr.Kohn Mr.Lacker Ms.Liang,Messrs.Reifschneiderand Mr.Lockhart Wascher,SeniorAssociateDirec- Mr.Tarullo tors,DivisionofResearchand Mr.Warsh Statistics,BoardofGovernors Ms.Yellen Mr.Meyer,SeniorAdviser,Division Mr.Bullard,Ms.Cumming,Mr.Hoe- ofMonetaryAffairs,Boardof nig,Ms.Pianalto,andMr.Rosen- Governors gren,AlternateMembersofthe Messrs.LeahyandNelson,12Associ- FederalOpenMarketCommittee ateDirectors,DivisionsofInter- Messrs.Fisher,Plosser,andStern, nationalFinanceandMonetary PresidentsoftheFederalReserve Affairs,respectively,Boardof BanksofDallas,Philadelphia, Governors andMinneapolis,respectively Mr.Carpenter,DeputyAssociateDi- Mr.Madigan,SecretaryandEconomist rector,DivisionofMonetary Ms.Danker,DeputySecretary Affairs,BoardofGovernors Mr.Luecke,AssistantSecretary Mr.Small,ProjectManager,Division Mr.Skidmore,AssistantSecretary ofMonetaryAffairs,Boardof Ms.Smith,AssistantSecretary Governors Mr.Alvarez,GeneralCounsel Mr.Baxter,12DeputyGeneralCounsel Ms.Wei,Economist,Divisionof Mr.Sheets,Economist MonetaryAffairs,BoardofGov- Mr.Stockton,Economist ernors Messrs.Altig,Clouse,Connors,Slif- Ms.Beattie,12AssistanttotheSecreman,Sullivan,andWilcox,Asso- tary,OfficeoftheSecretary, ciateEconomists BoardofGovernors Mr.Sack,Manager,SystemOpen Ms.Low,OpenMarketSecretariat MarketAccount Specialist,DivisionofMonetary Affairs,BoardofGovernors Ms.Johnson,SecretaryoftheBoard, OfficeoftheSecretary,Boardof Mr.Lyon,FirstVicePresident,Fed- Governors eralReserveBankofMinneapolis 12. AttendedTuesday’ssessiononly.

Minutes of FOMC Meetings, August 323 Mr.Sniderman,ExecutiveVicePresi- (ARMs) in the Committee’s MBS purdent,FederalReserveBankof chase program: Some thought it would Cleveland be useful to include agency ARM Mr.McAndrews,12Ms.McLaughlin, MBS, noting that doing so could re- Messrs.Rudebusch,Sellon,Too- duce the unusually large spreads tell,andWaller,SeniorVice between ARM rates and yields on Presidents,FederalReserve similar-duration Treasury securities— BanksofNewYork,NewYork, spreads that were far larger than the SanFrancisco,KansasCity,Boston,andSt.Louis,respectively comparable spreads on fixed-rate mortgages; others saw little potential bene- Messrs.Burke,Dotsey,Koenig,and fit, given the small stock and limited Pesenti,VicePresidents,Federal ReserveBanksofNewYork, issuance of ARM MBS, and were hesi- Philadelphia,Dallas,andNew tant to involve the Federal Reserve in York,respectively another market segment. The Commit- Mr.Weber,SeniorResearchOfficer, tee made no decision on purchasing FederalReserveBankofMinne- ARM MBS at this meeting. Particiapolis pants also discussed the merits of progressively reducing the pace at which Mr.Hetzel,SeniorEconomist,Federal ReserveBankofRichmond the Federal Reserve buys Treasury securities, agency debt, and agency MBS Developments in Financial Markets prior to the end of the asset purchase and the Federal Reserve’s Balance programs. They generally were of the Sheet view that gradually slowing the pace of the Committee’s purchases of $300 bil- The Manager of the System Open Mar- lion of Treasury securities and extendket Account reported on recent devel- ing their completion to the end of opments in domestic and foreign finan- October could help promote a smooth cial markets. The Manager also transition in markets. A number of parreported on System open market opera- ticipants noted that a similar tapering tions in Treasury securities, agency of agency debt and MBS purchases debt, and agency mortgage-backed se- could be helpful in the future as those curities (MBS) since the Committee’s programs approach completion. The June 23–24 meeting. By unanimous Committee made no decisions on tapervote, the Committee ratified those ing those purchases at this meeting. transactions. There were no open mar- The staff presented an update on the ket operations in foreign currencies for continuing development of several the System’s account during the inter- tools that could help support a smooth meeting period. The Federal Reserve’s withdrawal of policy accommodation at total assets were about unchanged, the appropriate time. These measures on balance, since the Committee met include executing reverse repurchase in June, remaining at approximately agreements on a large scale, potentially $2 trillion as the System’s purchases of with counterparties other than the prisecurities were essentially matched by mary dealers; implementing a term dea further decline in usage of the Sys- posit facility that would be available to tem’s credit and liquidity facilities. depository institutions in order to re- Meeting participants again discussed duce the supply of excess reserves; and the merits of including agency MBS taking steps to tighten the link between backed by adjustable-rate mortgages the interest rate paid on reserve bal-

324 96th Annual Report, 2009 ances held at the Federal Reserve decline in equipment and software Banks and the federal funds rate. Sev- (E&S) investment seemed to be modereral participants noted the need to con- ating, although the incoming data did tinue refining the Committee’s strategy not point to an imminent recovery. The for an eventual withdrawal of policy sharp cuts in production this year reaccommodation. The staff also updated duced inventory stocks significantly, the Committee on developments in the though they remained high relative to Term Asset-Backed Securities Loan Fa- the level of sales. A jump in gasoline cility (TALF), summarized the pros and prices pushed up overall consumer cons of expanding the range of collat- price inflation in June, but core coneral eligible for TALF loans, and rec- sumer price inflation remained relaommended extending the final date for tively stable in recent months. making new TALF loans into 2010. Job losses continued to abate in July, Participants generally supported the ex- and aggregate hours of production and tension of TALF into 2010 but were nonsupervisory workers were unskeptical about expanding the range of changed. The step-up in motor vehicle assets at this time. assemblies boosted employment in that Secretary’s note: As announced on industry; job losses decreased in a August 17, 2009, the Board of Gover- number of other manufacturing indusnors subsequently approved an exten- tries, and factory workweeks generally sion of the TALF while holding in rose. Employment declines in business abeyance any further expansion in the and financial services in July were also types of collateral eligible for the smaller than those in recent months. TALF. Payrolls in nonbusiness services posted their third monthly gain, supported by the continued uptrend in health and Staff Review of the education and a small gain in the lei- Economic Situation sure and hospitality industry. However, job losses in the construction industry The information reviewed at the continued at about the recent rate. In August 11−12 meeting suggested that the household survey, the unemployoverall economic activity was stabiliz- ment rate edged down in July to 9.4 ing after a contraction in real gross percent, while the labor force participadomestic product (GDP) during 2008 tion rate fell back to its March level. and early 2009 that the Bureau of Eco- Other indicators also suggested a renomic Analysis recently reported to duced pace of deterioration in labor have been greater than it had previ- demand. Both initial claims for unemously estimated. Employment contin- ployment insurance and insured unemued to move lower through July, but ployment moved down since June. the pace of job losses had slowed no- However, with labor markets still quite ticeably in recent months. A sizable slack, year-over-year growth in average pickup in motor vehicle production hourly earnings of production and nonappeared to be under way. Housing ac- supervisory workers slowed further in tivity apparently was beginning to turn July. up. Consumer spending dropped only a The contraction in industrial produclittle further in the first half of this tion slowed markedly in the second year, on balance, after falling sharply in quarter, although the rate of decline the second half of last year. The remained rapid and the factory utiliza-

Minutes of FOMC Meetings, August 325 tion rate recorded a new low in June. second half of 2008 amid tight credit The moderation in the pace of decline conditions and rapidly deteriorating dein industrial production in the second mand fundamentals for apartment quarter was widespread across indus- buildings. The latest sales data sugtries and major market groups. Avail- gested that demand for new houses able indicators suggested that industrial may be strengthening after stabilizing production increased noticeably in July, in the early portion of this year. led by motor vehicle assemblies; manu- Although sales remained quite modest, facturing output excluding motor vehi- they were enough, given the very slow cles likely also rose in July. pace of production, to pare the over- Real personal consumption expendi- hang of unsold new single-family tures (PCE) edged down in June after houses: In June, these inventories stood holding steady in May and declining in at about one-half of their peak in the April. Apart from a jump in motor summer of 2006, and the months’ supvehicle purchases, which were boosted ply of new homes was down considerappreciably by the government’s “cash- ably from its record high in January. for-clunkers” program, indicators of Sales of existing single-family houses, consumer spending in July were mixed. which were fairly flat early in the year, Most determinants of spending re- posted their third consecutive monthly mained weak on balance. In particular, increase in June, and pending home the weak labor market continued to sales agreements through June sugplace significant strains on household gested that resale activity would rise income, and earlier declines in net further in the months ahead. Sales of worth were still holding back spending. existing homes had been supported for However, household net worth received much of the year by heightened vola boost from the rise in equity prices umes of transactions involving banksince their low in March. In addition, owned and other distressed properties; the July Senior Loan Officer Opinion the uptick in May and June, however, Survey on Bank Lending Practices appeared to have been driven by an indicated that the fraction of banks increase in transactions of nontightening standards and terms for con- distressed properties. The apparent stasumer credit had diminished further. bilization in housing demand seen in Moreover, measures of consumer senti- recent months was likely due, in part, ment, though they recently retraced a to improvements in housing affordabilportion of their earlier gains, remained ity stemming from low interest rates well above levels seen at the turn of for conforming mortgages and lower the year. house prices. Data from the housing sector in- Real investment in E&S continued to dicated that construction activity ap- contract in the second quarter; howpeared to be emerging from its ever, the estimated rate of decline was extended decline. Single-family hous- substantially smaller than in the previing starts registered a sizable increase ous two quarters. Business outlays on in June, and the number of starts stood motor vehicles leveled off in the secwell above the record low recorded in ond quarter after an extended period of the first quarter of this year. However, steep declines. Real spending in the in the much smaller multifamily sector, high-tech sector declined, although real starts continued to decline, on net, in outlays for computing equipment 2009 after falling significantly in the posted their first gain in a year. Outside

326 96th Annual Report, 2009 of high-tech and transportation, real industrial supplies, particularly of pespending on equipment dropped again troleum products, and reflected both in the second quarter but at a slower higher prices and greater volumes. The pace than in the previous quarter. value of imports of goods and services Although the fundamental determinants fell at a slower pace than in April. Imof investment in E&S remained weak, ports of petroleum products exhibited conditions appeared less unfavorable, the largest decline, with the fall wholly on balance, than earlier in the year. In reflecting lower volumes, as petroleum particular, the decline in business out- prices rose. Imports of services and auput was less pronounced in the second tomotive products moved down somequarter than in prior quarters, and esti- what, while non-oil industrial supplies mates of the user cost of capital fell were largely unchanged. Overall imback somewhat in the second quarter ports of consumer goods were also after spiking last year. Other forward- about unchanged, as a large decline in looking indicators generally improved, pharmaceuticals offset increases in a but they remained at levels consistent number of other goods. In contrast, imwith a weak outlook for E&S invest- ports of computers moved up strongly ment. Corporate bond spreads over in May. Treasury securities continued to ease, Recent indicators of economic activand monthly surveys of business condi- ity in the advanced foreign economies tions and sentiment generally were less suggested that the pace of contraction downbeat than earlier in the year. In in those countries moderated further. addition, the July Senior Loan Officer Purchasing managers indexes continued Opinion Survey reported that the net to rebound but did not yet point to percentage of banks that had tightened expansion for all countries. Industrial standards and terms on commercial and production, while remaining well below industrial (C&I) loans receded some- pre-crisis levels, moved up strongly in what, although the July National Fed- Japan and edged up in the euro area eration of Independent Business survey and in the United Kingdom. Indicators showed that the share of small busi- of economic sentiment also improved. nesses reporting increased difficulty in However, labor market conditions conobtaining credit remained high. Condi- tinued to deteriorate, and credit stantions in the nonresidential construction dards remained generally tight. In sector generally remained quite poor, emerging market economies, recent with spending in most major categories data showed that economic activity staying on a downward trajectory surged across emerging Asia in the secthrough June. Vacancy rates continued ond quarter. Real GDP rebounded to rise, property prices fell further, and, sharply in China and South Korea, and as indicated by the July Senior Loan the preliminary estimate in Singapore Officer Opinion Survey, financing for indicated a substantial increase. In nonresidential construction projects be- China, policy stimulus lifted activity came even tighter. and thus helped boost China’s im- In May, the U.S. international trade ports, primarily from other countries deficit narrowed to its lowest level in Asia. Indicators for these other since 1999, as exports increased mod- countries also pointed to a strong reerately and imports declined. The bound in the second quarter. Activity increase in exports of goods and ser- remained depressed in Mexico, partly vices was led by a climb in exports of reflecting the adverse effect of a swine

Minutes of FOMC Meetings, August 327 flu outbreak. In contrast, activity in broadly in line with market expecta- Brazil appeared to have begun to tions. However, investors initially recover. marked up their expected path for the In the United States, overall PCE federal funds rate following the release prices rose in June following little of the statement, as they apparently change in each of the previous three interpreted it as suggesting a more favmonths. The increase largely reflected orable assessment of prospects for ecoa sizable increase in gasoline prices, nomic growth than had been anticiwhich appeared to have caught up with pated. Subsequently, investors revised earlier increases in crude oil prices. down the expected policy path after the The latest available survey data showed June employment report and the Chairthat gasoline prices flattened out, on man’s semiannual monetary policy tesnet, in July. Excluding food and timony. These declines were more than energy, PCE prices moved up moder- offset by the favorable economic inforately in June. For the second quarter as mation received toward the end of the a whole, core inflation picked up from intermeeting period, including the the pace in the first quarter, which had stronger-than-expected July employbeen revised down because of smaller ment report. On net, the marketincreases in the imputed prices of non- implied path of the federal funds rate market services. Median year-ahead in- ended the period about the same as at flation expectations in the Reuters/ the time of the June FOMC meeting. University of Michigan Survey of Yields on nominal Treasury securities Consumers held relatively steady in were also little changed, on balance, July, as in recent months. Longer-term over the intermeeting period, though inflation expectations were about the there were sizable intraday movements same as the average over 2008. The in response to macroeconomic data reproducer price index for core interme- leases and Federal Reserve communidiate materials turned up in June fol- cations. Inflation compensation based lowing a string of monthly declines on five-year Treasury inflationthat likely reflected the pass-through of protected securities (TIPS) declined, on the large declines in spot prices of net, over the intermeeting period, while commodities in the second half of last five-year inflation compensation five year. All measures of hourly compensa- years ahead rose somewhat. Liquidity tion and wages suggested that labor in the TIPS market reportedly contincosts decelerated markedly this year in ued to be poor, making unclear the response to the considerable deteriora- extent to which movements in TIPS intion in labor market conditions. flation compensation reflected changes in investors’ expectations of future inflation. Staff Review of the Functioning in short-term funding Financial Situation markets generally showed further im- The decisions by the Federal Open provement over the intermeeting Market Committee (FOMC) at the June period. Consistent with reduced conmeeting to leave the target range for cerns about the financial condition of the federal funds rate unchanged and to large banking institutions, London inmaintain the sizes of its large-scale terbank offered rates (Libor) continued asset purchase programs, along with to edge down. Three- and six-month the accompanying statement, were Libor-OIS (overnight index swap)

328 96th Annual Report, 2009 spreads—while still somewhat elevated intermeeting period, boosted, in part, by historical standards—declined a bit by better-than-expected second-quarter further and stood at levels last recorded earnings results at larger banking instiin early 2008. Bid-asked spreads for tutions. Over the period, bank equity most types of repurchase agreements prices rose, and credit default swap edged down. Since June, spreads on spreads on financial firms declined. A2/P2-rated commercial paper and Nonetheless, some investors com- AA-rated asset-backed commercial mented that the positive upside surpaper were little changed, on net, prises at large financial institutions remaining at the low ends of their were mostly related to investment ranges over the past two years. Indica- banking and trading activities, which tors of Treasury market functioning may not provide a stable source of were little changed over the intermeet- earnings, and to mortgage refinancing ing period, and functioning continued activity, which may recede if longerto be somewhat impaired. Bid-asked term rates rise. Market participants also spreads held roughly steady, and trad- focused on the large consumer loan ing volumes remained low. The on-the- losses reported by many banks. The run liquidity premium for the 10-year financial condition of CIT Group, Inc., Treasury note was little changed at el- one of the largest lenders to middleevated levels, although it was well be- market firms, worsened sharply over low its peak last fall. the period, but broader financial market Broad stock price indexes rose, on conditions appeared to be largely unafnet, over the intermeeting period, as in- fected by this development. vestors responded to strong second- The level of private domestic nonfiquarter earnings reports and indications nancial sector debt apparently declined that the economy may be stabilizing. again in the second quarter, as house- The spread between an estimate of the hold debt was estimated to have expected real equity return over the dropped and nonfinancial business debt next 10 years for S&P 500 firms and appeared to have been essentially unan estimate of the real 10-year Trea- changed. Gross issuance of speculativesury yield—a rough gauge of the and investment-grade bonds by nonfiequity risk premium—narrowed a bit nancial corporations slowed in July more but remained high by recent his- from its outsized second-quarter pace. torical standards. Option-implied vola- Issuance of institutional loans in the tility on the S&P 500 index also syndicated leveraged loan market redropped a bit further. Yields on BBB- portedly remained extremely weak in rated and speculative-grade corporate July, while bank loans and commercial bonds declined over the intermeeting paper continued to run off, leaving net period. As a result, corporate bond debt financing by nonfinancial corporaspreads narrowed further and dropped tions at around zero. In contrast, the below the previous peak levels reached federal government issued debt at a in 2002 following the 2001 recession. rapid clip, and state and local govern- Conditions in the leveraged loan mar- ment debt was estimated to have ket continued to improve as secondary- expanded moderately. market prices rose further and bid- Commercial bank credit contracted asked spreads narrowed. further in June and July. All major loan Investor sentiment toward the finan- categories declined, apparently reflectcial sector improved further over the ing the combined effects of weaker de-

Minutes of FOMC Meetings, August 329 mand for most types of loans, some mildly on a trade-weighted basis since substitution from bank loans to other late June. funding sources, and an ongoing tight- The European Central Bank (ECB), ening of lending standards and terms. the Bank of England, the Bank of Can- Commercial and industrial lending ada, and the Bank of Japan kept their dropped steeply amid subdued origina- respective policy rates constant over tion activity and broad-based paydowns the intermeeting period. However, of outstanding loans. In the July Senior overnight interest rates in the euro area Loan Officer Opinion Survey, respon- declined in the wake of the June 24 indents indicated that the most important jection by the ECB of one-year funds reasons for the decline in C&I loans in at a fixed rate of 1 percent. The ECB 2009 were weaker demand from credit- also began its purchases of covered worthy borrowers and the deterioration bonds, and yields on intermediate-term in credit quality that had reduced the European covered bonds declined since number of firms that respondents the purchases began in early July. After viewed as creditworthy. The contrac- leaving the size of its Asset Purchase tion in commercial real estate (CRE) Facility (APF) unchanged at its July lending accelerated. Large fractions of meeting, the Bank of England, at its respondents to the July survey again August meeting, raised the size of the noted that they had tightened standards APF to £175 billion and widened the and that the demand for CRE loans had set of gilts it would purchase. Benchweakened further. mark gilt yields fell noticeably on the M2 was little changed, on net, in announcement after moving higher in June and July. Retail money market July. mutual funds and small time deposits dropped significantly in June and were Staff Economic Outlook estimated to have contracted again in July, likely reflecting the very low rates In the forecast prepared for the August of interest on these assets and a contin- FOMC meeting, the staff’s outlook for ued reallocation of wealth toward the change in real activity over the next riskier assets. These declines were year and a half was essentially the partly offset by a net increase in liquid same as at the time of the June meetdeposits, also suggesting some portfolio ing. Consumer spending had been on reallocation within M2 assets. Currency the soft side lately. The new estimates expanded weakly, apparently because of real disposable income that were reof soft foreign demand. ported in the comprehensive revision to The tone of financial markets abroad the national income and product improved further during the intermeet- accounts showed a noticeably slower ing period. Stock markets rose globally, increase in 2008 and the first half of as positive U.S. earnings reports and 2009 than previously thought. By news of strong economic rebounds in themselves, the revised income estiemerging Asian economies reportedly mates would imply a lower forecast of lifted investor sentiment. European consumer spending in coming quarters. bank stocks rose especially rapidly, But this negative influence on aggrespurred by reports of better-than- gate demand was roughly offset by expected earnings among some Euro- other factors, including higher housepean banks as well as some U.S. finan- hold net worth as a result of the rise in cial institutions. The dollar depreciated equity prices since March, lower corpo-

330 96th Annual Report, 2009 rate bond rates and spreads, a lower 2009 and to decline only gradually in dollar, and a stronger forecast for for- 2010, the staff still expected core PCE eign economic activity. All told, the inflation to slow substantially over the staff continued to project that real GDP forecast period; the very low readings would start to increase in the second on hourly compensation lately sughalf of 2009 and that output growth gested that such a process might alwould pick up to a pace somewhat ready be in train. above its potential rate in 2010. The projected increase in production in the Participants’ Views on Current second half of 2009 was expected to be Conditions and the Economic the result of a slowing in the pace of Outlook inventory liquidation; final sales were not projected to increase until 2010. In their discussion of the economic The step-up in economic activity in situation and outlook, meeting partici- 2010 was expected to be supported by pants agreed that the incoming data and an ongoing improvement in financial anecdotal evidence had strengthened conditions, which, along with accom- their confidence that the downturn in modative monetary policy, was pro- economic activity was ending and that jected to set the stage for further im- growth was likely to resume in the secprovements in household and business ond half of the year. Many noted that sentiment and an acceleration in aggre- their baseline projections for the secgate demand. ond half of 2009 and for subsequent The staff forecast for inflation was years had not changed appreciably also about unchanged from that at the since the Committee met in June but June meeting. Interpretation of the in- that they now saw smaller downside coming data on core PCE inflation was risks. Consumer spending appeared to complicated by changes in the defini- be in the process of leveling out, and tion of the core measure recently activity in a number of local housing implemented by the Bureau of Eco- markets had stabilized or even innomic Analysis, as well as by unusu- creased somewhat. Reports from busially low readings for some nonmarket ness contacts supported the view that components of the price index.13 After firms were making progress in bringing accounting for these factors, the under- inventories into better alignment with lying pace of core inflation seemed to their reduced sales and that production be running a little higher than the staff was stabilizing in many sectors—albeit had anticipated. Survey measures of in- at low levels—and beginning to rise in flation expectations showed no signifi- some. Nonetheless, most participants cant change. Nonetheless, with the un- saw the economy as likely to recover employment rate anticipated to increase only slowly during the second half of somewhat during the remainder of this year, and all saw it as still vulnerable to adverse shocks. Conditions in the labor market remained poor, and 13. As part of the July 2009 comprehensive revision of the national income and product business contacts generally indicated accounts, the Bureau of Economic Analysis re- that firms would be quite cautious in classified restaurant meals from the food cate- hiring when demand for their products gory to the services category. As a result, the picks up. Moreover, declines in emprice index for PCE excluding food and energy ployment and weakness in growth of (the core PCE price index) now includes prices ofrestaurantmeals. labor compensation meant that income

Minutes of FOMC Meetings, August 331 growth was sluggish. Also, households eral Reserve’s balance sheet and large likely would continue to face unusually continuing federal budget deficits ultitight credit conditions. These factors, mately could lead to higher inflation if along with past declines in wealth that policies were not adjusted in a timely had been only partly offset by recent manner. To address these concerns, it increases in equity prices, would weigh would be important to continue comon consumer spending. The data and municating that the Federal Reserve business contacts indicated very sub- has the tools and willingness to begin stantial excess capacity in many sec- withdrawing monetary policy accomtors; this excess capacity, along with modation at the appropriate time to the tight credit conditions facing many prevent any persistent increase in inflafirms, likely would mean further weak- tion. ness in business fixed investment for a Developments in financial markets time. Even so, less-aggressive inven- during the intermeeting period were tory cutting and continuing monetary again seen as broadly positive; the cuand fiscal policy stimulus could be mulative improvement in market funcexpected to support growth in produc- tioning since the spring was viewed as tion during the second half of 2009 and quite significant. Markets for corporate into 2010. In addition, the outlook for debt continued to improve, and private foreign economies had improved some- credit spreads narrowed further. With what, auguring well for U.S. exports. the TALF continuing to provide impor- Participants expected the pace of recov- tant support, markets for asset-backed ery to pick up in 2010, but they ex- securities also showed improvement, pressed a range of views, and consid- and recent issuance had neared levels erable uncertainty, about the likely observed prior to the second half of strength of the upturn—particularly 2008. Higher equity prices appeared to about the pace of projected gains in result not only from generally betterconsumer spending and the extent to than-expected corporate earnings, which credit conditions would nor- which seemed largely to reflect aggresmalize. sive cost cutting, but also from a re- Most participants anticipated that duction in the perceived risk of substantial slack in resource utilization extremely adverse outcomes and a conwould lead to subdued and potentially sequent increase in investors’ appetite declining wage and price inflation over for riskier assets. However, participants the next few years; a few saw a risk of noted that many markets were still substantial disinflation. However, some strained and that financial risks remain. pointed to the problems in measuring The improvement in financial markets economic slack in real time, and sev- was due, in part, to support from varieral were skeptical that temporarily low ous government programs, and market levels of resource utilization would re- functioning might deteriorate as those duce inflation appreciably, given the programs wind down. While financial loose empirical relationship of eco- markets had improved, credit remained nomic slack to inflation and the fact tight, with many banks—though fewer that the public did not appear to have than in recent quarters—having rereduced its expectations of inflation. ported that they again tightened loan Participants noted concerns among standards and terms. Increases in intersome analysts and business contacts est rates and reductions in lines on that the sizable expansion of the Fed- credit cards were affecting small busi-

332 96th Annual Report, 2009 nesses as well as consumers. All cate- many participants—substantial slack in gories of bank lending had continued labor markets. Several participants to decline. Worsening credit quality noted that the deceleration in labor was still cited by banks as an important costs should eventually support a reason for the tightening of credit con- pickup in hiring. Recently, however, it ditions, though anecdotal evidence sug- contributed to weakness in household gested that the deterioration in the incomes. credit quality of consumer loans might Consumer spending remained weak, be slowing. Nonetheless, several par- but participants saw evidence that it ticipants noted that banks still faced a was stabilizing, even before the boost sizable risk of additional credit losses to auto purchases provided by the cashand that many small and medium-sized for-clunkers program. Real PCE debanks were vulnerable to deteriorating clined little, on balance, during the first performance of commercial real estate half of 2009 after dropping sharply loans. Participants again observed that during the second half of 2008 and was obtaining or renewing financing for essentially constant during May and commercial real estate properties and June. Several participants noted the projects was extremely difficult amid recent rebound in equity prices and worsening fundamentals in that sector, thus household wealth as a factor that though some noted anecdotal evidence was likely to support consumer spendthat the addition of highly rated com- ing. Many noted, however, that housemercial MBS to the list of securities holds still faced considerable headthat can be pledged as collateral for winds, including reduced wealth, tight TALF loans had contributed to an im- credit, high levels of debt, and uncerprovement in liquidity in that market. tain job prospects. With these forces Labor market conditions remained of restraining spending, and with labor particular concern to meeting partici- income likely to remain soft, participants. Though recent data indicated pants generally expected no more than that the pace at which employment was moderate growth in consumer spending declining had slowed appreciably, job going forward. An important source of losses remained sizable. Moreover, uncertainty in the outlook for consumer long-term unemployment and perma- spending was whether households’ pronent separations continued to rise, sug- pensity to save, which had risen in gesting possible problems of skill loss recent quarters, would increase further: and a need for labor reallocation that Analysis based on responses to past could slow recovery in employment as changes in wealth relative to income the economy begins to expand. The suggested that the personal saving rate unusually large fraction of those who could level out near its current value; were working part time for economic however, there was some chance that reasons and the unusually low level of the increased income volatility and rethe average workweek, combined with duced access to credit that had characindications from business contacts that terized recent experience could lead firms would resist hiring as sales and households to save a still-larger fracproduction turn up, also pointed to a tion of their incomes. period of modest job gains and thus a Regional surveys and anecdotal reslow decline in the unemployment rate. ports continued to indicate low levels Wages and benefits continued to decel- of activity across many goodserate, reflecting—in the judgment of producing industries and in the service

Minutes of FOMC Meetings, August 333 sector, but they also pointed to some preventing even larger cuts in state and optimism about the outlook. Firms local government spending. Participants appeared to be making substantial generally anticipated that fiscal stimuprogress in reducing inventories toward lus already in train would contribute to desired levels; indeed, inventories of growth in economic activity during the motor vehicles appeared quite lean fol- second half of 2009 and into 2010, but lowing earlier production shutdowns the stimulative effects of policy would and the recent boost to sales from the fade as 2010 went on and would need cash-for-clunkers program. Accord- to be replaced by private demand and ingly, participants expected firms to income growth. slow the pace of inventory reduction by raising production; this adjustment was Committee Policy Action likely to make an important contribution to economic recovery in the sec- In their discussion of monetary policy ond half of this year. In contrast, busi- for the period ahead, Committee memness contacts generally reported setting bers agreed that the stance of monetary a high bar for increasing capital invest- policy should not be changed at this ment once sales pick up, because their meeting. Given the prospects for an firms now have unusually high levels initially modest economic recovery, of excess capacity. substantial resource slack, and subdued In the residential real estate sector, inflation, the Committee agreed that it home sales, prices, and construction should maintain its target range for the had shown signs of stabilization in federal funds rate at 0 to 1⁄ 4 percent. many areas and were increasing mod- The future path of the federal funds estly in others, but a still-sizable rate would continue to depend on the inventory of unsold existing homes Committee’s evolving outlook, but, for continued to restrain homebuilding. now, given their forecasts for only a Commercial real estate activity, in con- gradual upturn in economic activity trast, was being weighed down by and subdued inflation, members deteriorating fundamentals, including thought it most likely that the federal declining occupancy and rental rates; funds rate would need to be maintained by falling prices; and by difficulty in at an exceptionally low level for an refinancing loans on existing prop- extended period. With the downside erties. risks to the economic outlook now con- Manufacturing firms appeared to siderably reduced but the economic have benefitted recently from an recovery likely to be damped, the earlier- and stronger-than-expected Committee also agreed that neither pickup in foreign economic activity, expansion nor contraction of its proespecially in Asia, and the resulting gram of asset purchases was warranted increase in demand for U.S. exports. at this time. The Committee did, how- Several participants noted that improv- ever, decide to gradually slow the pace ing growth abroad would likely con- of the remainder of its purchases of tribute to greater growth in U.S. exports $300 billion of Treasury securities and going forward. extend their completion to the end of A number of participants noted that October to help promote a smooth tranfiscal policy helped support the stabili- sition in markets. Members noted that, zation in economic activity, in part by with the programs for purchases of buoying household incomes and by agency debt and MBS not due to ex-

334 96th Annual Report, 2009 pire until the end of the year, it was not The vote encompassed approval of necessary to make decisions at this the statement below to be released at meeting about any potential modifi- 2:15 p.m.: cations to those programs. The Com- “Information received since the Federal mittee agreed that it would continue Open Market Committee met in June sugto evaluate the timing and overall gests that economic activity is leveling out. amounts of its purchases of securities Conditions in financial markets have in light of the evolving economic improved further in recent weeks. Houseoutlook and conditions in financial hold spending has continued to show signs of stabilizing but remains constrained by markets. ongoing job losses, sluggish income At the conclusion of the discussion, growth, lower housing wealth, and tight the Committee voted to authorize and credit. Businesses are still cutting back on direct the Federal Reserve Bank of fixed investment and staffing but are mak- New York, until it was instructed other- ing progress in bringing inventory stocks into better alignment with sales. Although wise, to execute transactions in the economic activity is likely to remain weak System Account in accordance with the for a time, the Committee continues to following domestic policy directive: anticipate that policy actions to stabilize financialmarketsandinstitutions,fiscaland “The Federal Open Market Committee monetary stimulus, and market forces will seeks monetary and financial conditions contribute to a gradual resumption of susthat will foster price stability and promote tainable economic growth in a context of sustainable growth in output. To further its pricestability. long-run objectives, the Committee seeks Thepricesofenergyandothercommodiconditions in reserve markets consistent ties have risen of late. However, substantial withfederalfundstradinginarangefrom0 resource slack is likely to dampen cost to 1⁄4 percent. The Committee directs the pressures, and the Committee expects that Desk to purchase agency debt, agency inflation will remain subdued for some MBS, and longer-term Treasury securities time. during the intermeeting period with the aim In these circumstances, the Federal of providing support to private credit mar- Reserve will employ all available tools to kets and economic activity. The timing and promote economic recovery and to preserve pace of these purchases should depend on pricestability.TheCommitteewillmaintain conditionsinthemarketsforsuchsecurities the target range for the federal funds rate at and on a broader assessment of private 0 to 1⁄4 percent and continues to anticipate credit market conditions. The Desk is that economic conditions are likely to warexpected to purchase up to $200 billion in rant exceptionally low levels of the federal housing-related agency debt and up to fundsrateforanextendedperiod.Asprevi- $1.25 trillion of agency MBS by the end of ously announced, to provide support to the year. The Desk is expected to purchase mortgage lending and housing markets and about $300 billion of longer-term Treasury to improve overall conditions in private securities by the end of October, gradually credit markets, the Federal Reserve will slowing the pace of these purchases until purchase a total of up to $1.25 trillion of they are completed. The Committee antici- agency mortgage-backed securities and up pates that outright purchases of securities to $200 billion of agency debt by the end will cause the size of the Federal Reserve’s oftheyear.Inaddition,theFederalReserve balance sheet to expand significantly in is in the process of buying $300 billion of coming months. The System Open Market Treasury securities. To promote a smooth Account Manager and the Secretary will transition in markets as these purchases of keep the Committee informed of ongoing Treasurysecuritiesarecompleted,theComdevelopments regarding the System’s bal- mittee has decided to gradually slow the ance sheet that could affect the attainment pace of these transactions and anticipates over time of the Committee’s objectives of that the full amount will be purchased by maximum employment and price stability.” the end of October. The Committee will

Minutes of FOMC Meetings, September 335 continue to evaluate the timing and overall Mr.Bullard,Ms.Cumming,Mr.Hoeamounts of its purchases of securities in nig,Ms.Pianalto,andMr.Rosenlight of the evolving economic outlook and gren,AlternateMembersofthe conditionsinfinancialmarkets.TheFederal FederalOpenMarketCommittee Reserve is monitoring the size and compo- Messrs.FisherandPlosser,Presidents sitionofitsbalancesheetandwillmakeadoftheFederalReserveBanksof justments to its credit and liquidity pro- DallasandPhiladelphia,respecgramsaswarranted.” tively Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Mr.Lyon,FirstVicePresident,Fed- Evans, Kohn, Lacker, Lockhart, eralReserveBankofMinneapolis Tarullo,andWarsh,andMs.Yellen. Mr.Madigan,SecretaryandEconomist Votingagainstthisaction:None. Mr.Luecke,AssistantSecretary Mr.Skidmore,AssistantSecretary It was agreed that the next meeting Ms.Smith,AssistantSecretary of the Committee would be held on Mr.Alvarez,GeneralCounsel Tuesday−Wednesday, September 22– Mr.Ashton,AssistantGeneralCounsel Mr.Sheets,Economist 23, 2009. The meeting adjourned at Mr.Stockton,Economist 11:40 a.m. on August 12, 2009. Messrs.Altig,Clouse,Connors,Kamin,Slifman,Sullivan,Tracy, Notation Vote Weinberg,andWilcox,Associate Economists By notation vote completed on July 14, 2009, the Committee unanimously ap- Mr.Sack,Manager,SystemOpen proved the minutes of the FOMC meet- MarketAccount ing held on June 23–24, 2009. Ms.Johnson,SecretaryoftheBoard, OfficeoftheSecretary,Boardof Brian F. Madigan Governors Secretary Mr.Struckmeyer,DeputyStaffDirec- Meeting Held on tor,OfficeoftheStaffDirector forManagement,BoardofGov- September 22–23, 2009 ernors A joint meeting of the Federal Open Ms.BargerandMr.English,Deputy Market Committee and the Board of Directors,DivisionsofBanking Governors of the Federal Reserve Sys- SupervisionandRegulationand tem was held in the offices of the MonetaryAffairs,respectively, BoardofGovernors Board of Governors in Washington, D.C., on Tuesday, September 22, 2009, Ms.Robertson,AssistanttotheBoard, at 2:00 p.m. and continued on Wednes- OfficeofBoardMembers,Board day, September 23, 2009, at 9:00 a.m. ofGovernors Ms.Edwards,Messrs.Reifschneider Present: andWascher,SeniorAssociate Mr.Bernanke,Chairman Directors,DivisionsofMonetary Mr.Dudley,ViceChairman Affairs,ResearchandStatistics, Ms.Duke andResearchandStatistics,re- Mr.Evans spectively,BoardofGovernors Mr.Kohn Mr.Lacker Mr.Oliner,SeniorAdviser,Division Mr.Lockhart ofResearchandStatistics,Board Mr.Tarullo ofGovernors Mr.Warsh Ms.Yellen

336 96th Annual Report, 2009 Mr.Small,ProjectManager,Division ket operations in foreign currencies for ofMonetaryAffairs,Boardof the System’s account during the inter- Governors meeting period. Since the Committee Ms.Low,OpenMarketSecretariat met in August, the Federal Reserve’s Specialist,DivisionofMonetary total assets had risen about $125 bil- Affairs,BoardofGovernors lion, on balance, to approximately $2.1 Mr.Williams,RecordsManagement trillion, as the System’s purchases of Analyst,DivisionofMonetary securities exceeded a further decline in Affairs,BoardofGovernors usage of the System’s credit and liquid- Mr.Connolly,14FirstVicePresident, ity facilities. FederalReserveBankofBoston The staff briefed the Committee on the current status of the asset purchase Messrs.FuhrerandRosenblum,Exprograms. Participants noted that the ecutiveVicePresidents,Federal ReserveBanksofBostonand primary influence of the programs is Dallas,respectively likely through the cumulative effect that they generate on the publicly avail- Mr.Hakkio,Ms.Mester,Messrs.Rasche,Rudebusch,andSchweitzer, able stocks of securities. However, they SeniorVicePresidents,Federal also observed that the rate of new pur- ReserveBanksofKansasCity, chases could have an effect on asset Philadelphia,St.Louis,SanFranprices, especially of MBS. Given this cisco,andCleveland,respectively possibility, participants remarked that a Mr.Weber,SeniorResearchOfficer, gradual reduction in the pace at which FederalReserveBankofMinne- the Federal Reserve buys agency debt apolis and agency MBS could help promote a Mr.McCarthyandMs.O’Connor, smooth transition in markets as the AssistantVicePresidents,Federal announced asset purchases are com- ReserveBankofNewYork pleted. Participants observed that such Mr.Chatterjee,SeniorEconomicAd- a strategy would be similar to the apvisor,FederalReserveBankof proach adopted in August for the pur- Philadelphia chases of Treasury securities and generally viewed it as a useful step to Developments in Financial Markets mitigate the risk of a sharp change in and the Federal Reserve’s Balance yields as purchases end. Participants Sheet expressed a range of views about the The Manager of the System Open Mar- rate at which asset purchases should be ket Account reported on recent devel- slowed. Some suggested tapering opments in domestic and foreign finan- quickly and completing the purchases cial markets. The Manager also by year-end, while a few preferred reported on System open market opera- slowing the rate of purchases over a tions in Treasury securities, agency longer period in order to maintain flexdebt, and agency mortgage-backed se- ibility regarding the pace and the cucurities (MBS) since the Committee’s mulative amount purchased and thus August 11–12 meeting. By unanimous potentially better calibrate the programs vote, the Committee ratified those to evolving economic and financial transactions. There were no open mar- market conditions. Most participants supported extending purchases of agency debt and agency MBS through 14. AttendedTuesday’ssessiononly. the first quarter of 2010.

Minutes of FOMC Meetings, September 337 The staff also briefed the Committee event, that the macroeconomic effects on the likely implications of very high of the increase in reserves would probreserve balances for bank balance sheet ably be limited in the current environmanagement and for the economy. The ment. staff’s assessment, based in part on The staff presented an update on the consultations with market participants, continuing development of several was that many banks were currently tools that could help support a smooth comfortable holding high levels of withdrawal of policy accommodation at reserves as a means of managing li- the appropriate time. These measures quidity risks, and these balances or fur- included executing reverse repurchase ther increases along the lines implied agreements on a large scale, potentially by the announced programs were not with counterparties other than the prilikely to crowd out other lending mary dealers; implementing a term dethrough pressures on capital positions. posit facility, available to depository in- As the economy improves, however, stitutions, to reduce the supply of banks could seek to lower their levels reserve balances; and taking steps to of reserve balances by purchasing secu- tighten the link between the interest rities, thereby putting downward pres- rate paid on reserve balances held at sure on market interest rates, or by eas- the Federal Reserve Banks and the feding their credit standards and terms in eral funds rate. Participants expressed order to expand lending. Such effects, confidence that these tools, along with if significant, would provide further the payment of interest on reserves and impetus to economic growth. The staff possible sales of assets from the Sysanalysis indicated that these effects tem’s portfolio, would allow them to would likely emerge only gradually remove policy accommodation at the and that their magnitude could be quite appropriate time and pace. Completing limited. However, some participants development of these tools would thought that declining demand for remain a top priority of the Federal reserves might already be putting Reserve. downward pressure on yields. Partici- The staff presented proposed schedpants expressed a range of views about ules for operations under the Term the likely stimulative effect of a further Auction Facility (TAF) and Term Secuexpansion of reserve balances on eco- rities Lending Facility (TSLF) through nomic activity, as well as the potential January 2010. As conditions in shortimpact of elevated reserves on inflation term funding markets had continued to expectations. Some meeting partici- improve, usage of these facilities had pants noted that the announced de- diminished. The proposed schedules crease in the balance in the Treasury’s were consistent with not only the Fed- Supplementary Financing Account eral Reserve’s previously announced (SFA) would increase reserves in the intention to gradually scale back these banking system unless it were offset by facilities in response to continued im- Federal Reserve actions or by a further provements in financial market condireduction in borrowing from the Fed- tions, but also with a desire to assure eral Reserve’s various credit and li- market participants that the Federal quidity facilities, and that these in- Reserve will provide sufficient liquidity creases could be expansionary. Others over year-end. There was general noted that the decrease in the SFA agreement that the Federal Reserve could well be temporary and, in any should assess over the next several

338 96th Annual Report, 2009 months whether to maintain a TAF on ployment the smallest since that of a permanent basis. August 2008. Although employment Secretary’s note: On September 24, losses continued to be widespread, the 2009, the Federal Reserve announced rate of decline diminished in most schedules for operations under the TAF industries. The length of the average and the TSLF through January 2010 workweek for production and nonsuand indicated that it would seek public pervisory workers remained steady, alcomment on a proposal for a perma- beit at a low level, and the rate of nent TAF. decline in aggregate hours for this group over July and August was the smallest of the past year. In the house- Staff Review of the hold survey, although the unemploy- Economic Situation ment rate rose in August to 9.7 percent, the rise in the unemployment rate The information reviewed at the Sep- slowed, on net, in recent months from tember 22−23 meeting suggested that its pace earlier in the year. The labor overall economic activity was begin- force participation rate in August ning to pick up. Factory output, par- remained at the low level that had preticularly motor vehicle production, rose vailed through much of the year. Conin July and August. Consumer spend- tinuing claims for unemployment insuring on motor vehicles during that ance through regular state programs period was boosted by government re- fell slightly, on balance, from its earlier bates and greater dealer incentives, and peak, but the total including extended household spending outside of motor and emergency benefits stayed near its vehicles appeared to rise in August recent high level. Initial claims for after having been roughly flat from unemployment insurance fluctuated May through July. Although employ- within a narrow range that was consisment continued to contract in August, tent with further declines in employthe pace of job losses slowed notice- ment. With labor markets still weak, ably from that of earlier in the year. the year-over-year increase in average Investment in equipment and software hourly earnings of production and non- (E&S) also seemed to be stabilizing. supervisory workers slowed further in Sales and construction of single-family August, even with the higher federal homes during July and August, while minimum wage that went into effect at still at low levels, were significantly the end of July. above the readings at the beginning of Industrial production rose in July the year. The sharp cuts in production and August, led by a rebound in motor this year reduced inventory stocks sig- vehicle production from the extraordinificantly, though they remained el- narily low assembly rates in the first evated relative to the recent level of half of the year. Manufacturing producsales. Core consumer price inflation tion outside of motor vehicles incontinued to be subdued in July and creased solidly, likely reflecting August, but higher gasoline prices stronger demand for materials from the raised overall consumer price inflation motor vehicle sector and a slower pace in August. of inventory liquidation elsewhere. Firms continued to reduce payrolls, Business survey indicators suggested but job losses abated further in August, further gains in factory output over the with the decline in private payroll em- near term. Nevertheless, the factory uti-

Minutes of FOMC Meetings, September 339 lization rate in August was only mod- family homes. Even though new home estly above its recent historical low. sales remained modest, they had been Real personal consumption expendi- sufficient, given the slow pace of contures increased modestly in July, led by struction, to pare the overhang of una strong advance in motor vehicle sold new single-family houses: In July, purchases, which were boosted appreci- the level of inventories of such homes ably by the government’s “cash-for- was about one-half of its peak in the clunkers” program. This program con- summer of 2006, and the months’ suptributed to a further surge in motor ply had fallen considerably from its vehicle sales in August to their highest record high in January. Sales of existlevel since the first half of 2008. After ing homes in July were at their fastest declining in July, sales at retailers, pace since mid-2007, and pending excluding those at motor vehicle deal- home sales agreements suggested that ers, building materials stores, and gas- resale activity would rise further in fololine stations, rose significantly in lowing months. Although sales of dis- August, suggesting an increase in real tressed properties remained elevated, consumer expenditures on non-motor- the rise in total sales of existing homes vehicle goods for the month. Even so, over the summer appeared to have many determinants of spending contin- been driven by an increase in transacued to be tepid. In particular, the weak tions involving nondistressed properlabor market continued to restrain ties. The apparent modest strengthening growth in household income, and the of housing demand was likely due, in prior declines in household net worth part, to improvements in housing afprobably continued to weigh on spend- fordability stemming from low interest ing. However, an increase in household rates for conforming mortgages, a net worth since March, a rise in nomi- lower level of house prices, and possinal labor compensation in July, and bly the first-time homebuyer tax credit. increases in various measures of con- In addition, demand may have been sumer sentiment indicated some im- buoyed by a sense that house prices provement in the outlook for consumer were beginning to stabilize. Through spending. the end of the second quarter, many Data from the housing sector indi- house price indexes had smaller yearcated that a gradual recovery in activity over-year declines than they had shown was under way. Although single-family earlier this year, and some indexes rehousing starts fell modestly in August, corded positive changes for the second this decrease followed five consecutive quarter. monthly increases, and the number of Real spending on E&S appeared to starts in August was well above the be stabilizing after falling sharply for record low reached in the first quarter more than a year. Business purchases of the year. In contrast, in the much of transportation equipment seemed to smaller multifamily sector, where credit be expanding solidly in the third quarconditions were still particularly tight ter. Nominal shipments and orders for and vacancy rates remained high, starts high-tech equipment in July were sigcontinued to be down, on net, in 2009 nificantly above their second-quarter after a significant fall in the second averages; moreover, a few major prohalf of 2008. The sales data for July ducers of high-tech equipment reported indicated further increases in the de- some signs of improvement in demand. mand for both new and existing single- Business investment in equipment other

340 96th Annual Report, 2009 than high tech and transportation with the rise wholly reflecting higher showed tentative signs of stabilization. prices. Some forward-looking indicators of Real gross domestic product (GDP) investment in E&S improved, suggest- in the advanced foreign economies ing that conditions had become less ad- contracted more moderately in the secverse than earlier in the year. Monthly ond quarter than in the first quarter, surveys of business conditions and sen- with growth resuming in several countiment recently recovered to levels con- tries. In Japan, a trade-related rebound sistent with a modest rise in business in industrial production led to an spending, and corporate bond spreads increase in overall output. Government over Treasury securities narrowed fur- incentives for motor vehicle purchases ther. In contrast, conditions in the non- contributed to a modest expansion of residential construction sector generally the German and French economies, but remained quite poor, and measures the euro-area economy as a whole conof construction spending excluding tracted slightly as inventory drawdowns energy-related projects stayed on a weighed on activity. Output also fell in downward trajectory through July. Va- Canada and the United Kingdom. Purcancy rates continued to rise, property chasing managers indexes (PMIs) rose prices fell further, and financing for further in the major economies during nonresidential construction projects the intermeeting period, and reached remained very tight. The nominal book levels consistent with stabilization or value of businesses inventories contin- moderate expansion of output in the ued to fall in July, which contributed to third quarter. Indicators of consumer further declines in inventory-to-sales sentiment continued to increase, but ratios; however, those ratios stayed el- remained well below pre-recession levevated. els, in part because of concerns about After narrowing to a 10-year low in rising unemployment. In most emerg- May, the U.S. international trade deficit ing market economies, particularly in widened in June and July, as strong Asia, economic activity rebounded in increases in exports were more than the second quarter; however, output offset by sizable rises in imports. The declined again in Mexico. Indicators of July trade data provided additional evi- activity in the third quarter pointed to a dence that the levels of both exports continued expansion of output in most and imports probably reached their emerging market countries, and PMIs trough in the second quarter. About moved into the expansionary range in one-half of the increase in exports of many of them. International trade in goods and services in July was in ex- emerging market economies picked up, ports of automotive products; the other supported by Chinese demand, while gains were widespread across other demand from advanced economies still major categories of exports. As with appeared weak. exports, the largest increase in imports In the United States, core consumer of goods and services in July was in price inflation remained subdued in automotive products, reflecting some July and August, as price increases in recovery in North American motor housing services moderated and duravehicle production. Imports of con- ble goods prices declined. Overall consumer goods, capital goods, and indus- sumer price inflation increased in trial supplies also rose markedly. Im- August, boosted by a sharp upturn in ports of oil increased more moderately, energy prices, particularly those of

Minutes of FOMC Meetings, September 341 gasoline. The latest available survey the federal funds rate implied by data indicated that gasoline prices money market futures prices declined edged up further in the first half of modestly. Subsequently, the expected September. Consumer food prices were policy path shifted down further, on little changed in August. According to net, as investors apparently interpreted the preliminary September release of weak labor market conditions and genthe Reuters/University of Michigan erally quiescent inflation as consistent Surveys of Consumers, median year- with an outlook that would lead the ahead inflation expectations decreased FOMC to maintain low policy rates modestly in the first half of September, over the medium term. In addition, inbut remained somewhat above the low vestors’ uncertainty about the future levels posted at the beginning of the policy rate path appeared to diminish, year. Longer-term inflation expecta- which may have also contributed to the tions from this survey stayed in the lowering of the path implied by futures narrow range that has prevailed over prices by reducing term premiums. recent years. The producer price index Yields on nominal Treasury securities for core intermediate materials rose in also decreased since the Committee August, its third consecutive monthly met in August. A decline in implied increase; over those three months, the volatility on longer-term Treasury index retraced about one-third of the yields suggested that some of the drop decline of the previous eight months. in yields was due to reduced risk pre- All measures of nominal hourly com- miums. Inflation compensation based pensation and wages suggested that on five-year Treasury inflationlabor costs had decelerated markedly protected securities (TIPS) increased a this year amid the considerable weak- little, on balance, over the intermeeting ness in labor markets. period, while five-year inflation compensation five years ahead declined modestly; the decrease in forward in- Staff Review of the flation compensation partially reversed Financial Situation increases in prior intermeeting periods. The decisions by the Federal Open Liquidity in the TIPS market reportedly Market Committee (FOMC) at the continued to be poor, complicating in- August meeting to leave the target ferences about investors’ expectations range for the federal funds rate un- of future inflation. changed and to maintain the maximum Conditions in short-term funding sizes of its large-scale asset purchase markets showed modest further imprograms, along with the accompany- provement over the intermeeting ing statement, were broadly in line period. Spreads between London interwith market expectations. The an- bank offered rates (Libor) and overnouncement in the statement of the de- night index swaps (OIS) at the onecision to slow the pace of Treasury se- and three-month maturities returned to curities purchases so that the full near the levels that prevailed before the amount of $300 billion would be com- onset of the financial crisis in August pleted by the end of October reduced 2007. Longer-term Libor-OIS spreads uncertainty about the timing of the end also narrowed, but they remained high of this program and the ultimate by historical standards. Reports continamount of purchases. After the release ued to suggest that lending institutions of the statement, the expected path for were unusually selective about their

342 96th Annual Report, 2009 counterparties in funding markets. Equity prices for larger banks in- Spreads on A2/P2-rated commercial creased, but stock prices for regional paper and AA-rated asset-backed com- and smaller banks were little changed. mercial paper were little changed, on Market participants reportedly took net, remaining at the low end of their note of the increased number of failranges over the past two years. Indica- ures at regional and smaller banks and tors of Treasury market functioning remained concerned about the credit showed no material change, and func- quality of such banks’ loan portfolios tioning continued to be somewhat im- and their ability to raise capital. Credit paired. Bid-asked spreads held roughly default swap spreads for banking instisteady, and trading volumes remained tutions changed little, on net, over the low. The on-the-run liquidity premium intermeeting period. A number of for the 10-year Treasury note was little financial institutions issued debt that changed at an elevated level, although was not guaranteed by the Federal Deit was well below its peak last fall; the posit Insurance Corporation. premiums on two- and five-year Trea- The level of debt of the private sury securities stayed low. domestic nonfinancial sector declined Amid lower interest rates as well as again in the second quarter, as both further indications that the contraction household and nonfinancial business in economic activity may have ended, debt fell. Consumer credit posted its broad stock price indexes rose, on net, sixth consecutive monthly decline in over the intermeeting period. The July; both revolving and nonrevolving spread between an estimate of the credit showed sizable drops. While isexpected real equity return over the suance of consumer credit asset-backed next 10 years for S&P 500 firms and securities decreased in August, a large an estimate of the real 10-year Trea- volume of securities eligible for the sury yield—a rough gauge of the Term Asset-Backed Securities Loan Faequity risk premium—remained high cility was issued in early September. by historical standards. After having Gross bond issuance by nonfinancial dropped significantly in prior months, corporations rose in August following a option-implied volatility on the S&P lull in July; the rebound was particu- 500 index declined modestly, on bal- larly robust for speculative-grade firms. ance, over the intermeeting period, but However, commercial paper outstandwas still at a level comparable with ing was unchanged and bank loans fell that of previous recessions. Yields on again; as a result, borrowing by the corporate bonds fell a bit more than nonfinancial business sector declined, those on Treasury securities of similar on net, again in August. In contrast, the duration. Indicators suggested that li- federal government continued to issue quidity in the secondary market for debt at a rapid pace, and gross issuance corporate bonds increased a bit further. of state and local government debt was Conditions in the secondary market for robust, supported in part by issuance of leveraged syndicated loans continued to Build America Bonds authorized under improve slowly, as secondary-market the fiscal stimulus program. prices rose slightly and bid-asked Commercial bank credit contracted spreads narrowed. further in August; all major loan cate- Changes in investor sentiment to- gories declined. Commercial and indusward claims on financial firms were trial (C&I) lending again decreased mixed over the intermeeting period. steeply amid reported broad-based pay-

Minutes of FOMC Meetings, September 343 downs of outstanding loans. At the by major central banks of their intensame time, the latest Survey of Terms tion to keep policy interest rates low. of Business Lending showed that C&I On a trade-weighted basis, the dollar loan spreads over comparable-maturity depreciated against major foreign curmarket instruments rose noticeably in rencies, notably against the euro and recent months. The contraction of com- Japanese yen; it was little changed, on mercial real estate loans held by banks average, against the currencies of the also intensified in August. Even though other major trading partners of the originations of residential mortgages United States. apparently increased during August, The European Central Bank, the banks sold an unusually large volume Bank of England, the Bank of Canada, of loans to the government-sponsored and the Bank of Japan kept their reenterprises; consequently, banks’ bal- spective policy rates constant over the ance sheet holdings of residential mort- intermeeting period. On the first day of gages decreased markedly. the FOMC meeting, the Bank of Can- After declining in July, M2 con- ada announced the expiration of two tracted more quickly in August. The re- temporary liquidity facilities at the end duced demand for M2 assets likely re- of October 2009. flected low interest rates on retail deposits and money market mutual Staff Economic Outlook fund shares, as well as a continued reallocation of wealth toward riskier In the forecast prepared for the Sepassets. Small time deposits and retail tember FOMC meeting, the staff raised money market mutual funds fell more its projection for real GDP growth over sharply in August than earlier in the the second half of 2009 and over 2010. year. Liquid deposits increased in The information received during the in- August, but at a slower rate than in termeeting period appeared to indicate July. Currency expanded less rapidly in a more noticeable upturn than antici- July and August than in the first half of pated at the time of the August meetthe year, as demand from abroad evi- ing: Sales and starts of single-family dently was restrained. homes provided evidence of some Global financial markets showed firming in housing activity, capital some further signs of stabilization over spending indicators pointed to an the intermeeting period. Stock indexes earlier-than-anticipated trough for in Europe rose solidly, apparently re- investment in E&S, and some data sugflecting an improved economic outlook, gested a modest recovery in consumer but the Japanese stock market declined spending. These tentative signs of a modestly. In emerging markets, credit recovery of economic activity were default swap spreads on sovereign debt supported by other factors, including declined slightly, and equity prices in recent rises in house and equity prices most countries rose moderately; how- that would support household net ever, stock prices fell notably in China, worth, declines in interest rates on corpartly driven by reports that authorities porate bonds and fixed-rate mortgages, were taking actions to moderate loan and a stronger outlook for activity in growth. Despite fairly positive eco- foreign economies. The staff expected nomic indicators, sovereign yields fell that these positive factors would lead to in major industrial economies, report- a modest increase in final sales in the edly in part because of the reiteration second half of 2009, despite continued

344 96th Annual Report, 2009 weakness in commercial construction flation in the second half of 2009 and and some further deterioration in labor 2010, but it was expected to be near markets. As a result of the expected the core rate in 2011. increase in final sales and an anticipated reduction in inventory liquida- Participants’ Views on Current tion, the staff projected that real GDP Conditions and the Economic would increase in the second half of Outlook 2009 at a rate somewhat above the growth rate of potential output. For In their discussion of the economic 2010, the staff forecast that output situation and outlook, meeting particigrowth would continue to strengthen, pants agreed that the incoming data and supported by an ongoing improvement information received from business in financial conditions, a fading of the contacts suggested that economic activdrag from earlier declines in income ity had picked up following its severe and wealth, accommodative monetary downturn; most thought an economic and fiscal policy, and recovery in the recovery was under way. Many particihousing sector. These factors also con- pants noted that since August, they had tributed to an expected further increase revised up their projections for the secin real GDP growth in 2011, despite an ond half of 2009 and for subsequent anticipated decline in the impetus from years. A number of factors were exfiscal policy. Even though the upward pected to support growth over the next revision to the projection for output few quarters: Activity in the housing was expected to generate larger gains sector was evidently rising, and house in employment than previously fore- prices had apparently stabilized or even cast, the staff still projected only a increased; consumer spending seemed slow improvement in labor markets, to be in the process of leveling out; rewith the unemployment rate moving ports from business contacts and redown to about 91⁄ 4 percent by the end gional surveys were consistent with of 2010 and then falling to about 8 per- firms making progress in bringing cent by the end of 2011. inventories into better alignment with The staff forecast for inflation was sales and with production stabilizing or little changed from that at the August beginning to rise in many sectors; the meeting. The recent data on consumer outlook for growth abroad had also price inflation were a little above staff improved, auguring well for U.S. exexpectations, but still indicated a ports; and financial market conditions slower increase in core prices com- had continued to improve over the past pared with those of earlier in the year. several months. Despite these positive Survey measures of inflation expecta- factors, many participants noted that tions displayed no significant change. the economic recovery was likely to be Nonetheless, with the significant under- quite restrained. Credit from banks utilization of resources expected to per- remained difficult to obtain and costly sist through 2011, the staff forecast for many borrowers; these conditions core inflation to slow somewhat further were expected to improve only graduover the next two years from the pace ally. In light of recent experience, conof the first half of 2009. Because of sumers were likely to be cautious in recent increases in energy prices, over- spending, and business contacts indiall consumer price inflation was pro- cated that their firms would also be jected to be somewhat above core in- cautious in hiring and investing even as

Minutes of FOMC Meetings, September 345 demand for their products picked up. drawing monetary policy accommoda- Some of the recent gains in activity tion at the appropriate time and pace to probably reflected government policy prevent any persistent increase in inflasupport, and participants expressed tion. Overall, many participants viewed considerable uncertainty about the the risks to their inflation outlook over likely strength of the upturn once those the next few quarters as being roughly supports were withdrawn or their balanced. A few continued to see some effects waned. Overall, the economy risk of substantial further disinflation, was projected to expand over the re- but that risk had eased somewhat furmainder of 2009 and during 2010, but ther over the intermeeting period. Over at a pace that was unlikely to reduce a longer horizon, a few felt the risks the unemployment rate appreciably. were tilted to the upside. Subsequently, as the housing market Developments in financial markets picked up further and financial condi- were again regarded as broadly positions improved, economic growth was tive; participants saw the cumulative expected to strengthen, leading to improvement in market functioning and more-substantial increases in resource pricing since the spring as substantial. utilization over time. Over the intermeeting period, the Nonetheless, most participants antici- strengthening in the economic outlook pated that slack in both labor and prod- led to an increase in investors’ appetite uct markets would be substantial over for riskier assets. Markets for corporate the next few years, leading to subdued debt continued to improve, private and potentially declining wage and credit spreads narrowed further, and price inflation. Some participants were equity prices rose. Given the improved skeptical of the usefulness of measures economic prospects, the decline in of resource utilization in gauging infla- longer-term Treasury yields and the aption pressures, partly because of the parent marking down of the implied difficulty of measuring slack, especially path for the policy interest rate were in real time. Also, those participants seen as somewhat puzzling but supnoted that the degree to which slack re- portive of recovery. Some participants duces inflation depends on the stability saw the decline in yields on Treasury of longer-term inflation expectations, securities and other instruments as an which in turn depends on expectations indication that the expansion of excess for monetary policy. In any case, all reserve balances was putting downward participants recognized that inflation pressure on market rates; some others expectations are a key determinant of viewed the configuration of rate moveinflation, and that various measures of ments as consistent with reduced coninflation expectations, although imper- cerns about inflation and with lower fect, needed to be carefully monitored term premiums in a more settled ecoin the current environment. Participants nomic environment. In any event, the discussed the extent to which the size ongoing improvement in broader finanof the Federal Reserve’s balance sheet cial and economic conditions seemed would affect inflation expectations go- to some participants to reflect the onset ing forward. To keep inflation expecta- of a positive feedback loop in which tions well anchored, all agreed on the better financial conditions contribute to importance of the Federal Reserve con- stronger growth in output and employtinuing to communicate that it has the ment, which in turn bolsters expected tools and willingness to begin with- returns and strengthens financial firms,

346 96th Annual Report, 2009 leading to a further easing in financial increase as partly reflecting special facconditions. Others noted, however, that tors like the cash-for-clunkers program. many financial markets and institutions Recent increases in house prices and were still strained and that downside equity prices were positives, but parfinancial risks remained. In particular, ticipants generally expected no more because the improvement in financial than moderate growth in consumer markets was due, in part, to support spending over the near term. Housefrom various government programs, holds still faced considerable headmarket functioning might deteriorate as winds, including tight credit, high levthose programs wind down. Moreover, els of debt, uncertain job prospects, and credit remained quite tight for many wealth levels that remained relatively businesses and households dependent low despite the recent rise in equity on banks, and many regional and small prices and stabilization in house prices. banks were vulnerable to the deteriorat- In that environment, households’ saving performance of commercial real es- ing behavior remained an important tate loans. Participants noted that all source of uncertainty in the outlook. categories of bank lending continued to The household saving rate had risen decline. considerably in recent quarters, and the Participants emphasized that labor most likely outcome was for the saving market conditions remained weak. rate to remain near its higher level; Although recent data indicated that the however, some participants noted that pace at which employment was declin- there was some chance that the sharp ing had slowed, job losses remained drop in household net worth over the sizable and the unemployment rate was past few years, reduced access to high. The unusually large fraction of credit, and high household debt burthose who were working part time for dens could lead households to save a economic reasons, the unusually low substantially larger fraction of their inlevel of the average workweek, and in- comes going forward. dications from business contacts that Firms appeared to be reducing infirms would be slow to hire additional ventories and fixed investment at a staff as sales and production turn up all slower pace than earlier in the year and pointed to a period of modest job had made substantial progress in reducgains, and thus only a slow decline in ing stocks toward desired levels. With the unemployment rate as the economic inventories low, firms were beginning recovery proceeds. Significant cost cut- to raise production to meet at least a ting by firms was thought to have led portion of new demand; this adjustment to a sizable increase in productivity was likely to make an important contrigrowth in the first half of the year; sus- bution to economic recovery in the sectained outsized gains in productivity ond half of this year. Recent data on could further damp hiring. Finally, high new orders and shipments pointed to levels of long-term unemployment and an earlier bottoming out in equipment permanent separations could lead to and investment spending than previlosses of skills and greater needs for ously anticipated. Some participants relabor reallocation that could slow em- ported that while business contacts had ployment growth. expressed relief that the most severe Consumer spending had picked up economic outcomes had been avoided, more than expected over the intermeet- they remained cautious about the reing period, but participants saw that covery. This caution, together with low

Minutes of FOMC Meetings, September 347 utilization rates and substantial excess Committee Policy Action capacity, could hold back the rate of increase of new capital spending. In their discussion of monetary policy In the residential real estate sector, for the period ahead, Committee memhome sales and construction had bers agreed that no significant changes increased from very low levels, and to its policy target rate or large-scale house prices appeared to be stabilizing. asset purchase programs were war- Participants welcomed the cumulating ranted at this meeting. Although the evidence that the housing sector was economic outlook had improved further beginning to recover, and many partici- in recent weeks and the risks to the pants had marked up their forecasts for forecast had become more balanced, housing activity. However, some the level of economic activity was viewed the improvement as quite tenta- likely to be quite weak and resource tive, pointing to the pending termina- utilization low. With substantial tion of the temporary tax credit for resource slack likely to persist and first-time homebuyers and the winding longer-term inflation expectations down of the Federal Reserve’s agency stable, the Committee anticipated that MBS purchase program as potential inflation would remain subdued for risks to the outlook for the sector. Also, some time. Under these circumstances, some participants questioned whether the Committee judged that the costs of the recent stabilization in house prices growth turning out to be weaker than would be sustained as likely further anticipated could be relatively high. increases in foreclosures would prob- Accordingly, the Committee agreed that ably put downward pressure on prices. it was appropriate to maintain its target Still, a better outlook for house prices range for the federal funds rate at 0 to was an important input to the improved 1⁄ 4 percent and to reiterate its view that economic outlook; not only would economic conditions were likely to household wealth benefit from a turn- warrant an exceptionally low level of around in such prices, but the exposure the federal funds rate for an extended of lenders to real estate losses would period. With respect to the large-scale be diminished. In contrast to develop- asset purchase programs, some memments in the residential sector, com- bers thought that an increase in the mercial real estate activity continued maximum amount of the Committee’s to fall markedly in most districts, purchases of agency MBS could help reflecting deteriorating fundamentals, to reduce economic slack more quickly including declining occupancy and than in the baseline outlook. Another rental rates and very tight credit condi- member believed that the recent imtions. provement in the economic outlook Participants marked up their outlook could warrant a reduction in the Comfor foreign economies, mainly reflect- mittee’s maximum purchases. However, ing better-than-expected incoming data all members were able to support an from a range of countries. The pickup indication by the Committee of its inin foreign economic activity, especially tention at this time to purchase the full in Asia, had buoyed U.S. export $1.25 trillion of agency MBS that it growth, and several participants noted had previously established as the maxithat higher growth abroad would sup- mum for this program. With respect to port growth in U.S. exports going for- agency debt, the Committee agreed to ward. reiterate its intention to purchase up to

348 96th Annual Report, 2009 $200 billion of these securities. To pro- Deskisexpectedtograduallyslowthepace mote a smooth transition in markets as of these purchases as they near completion. The Committee anticipates that outright these programs are concluded, mempurchases of securities will cause the size bers decided to gradually slow the pace of the Federal Reserve’s balance sheet to of both its agency MBS and agency expandsignificantlyincomingmonths.The debt purchases and to extend their SystemOpenMarketAccountManagerand completion through the end of the first the Secretary will keep the Committee inquarter of 2010. The Committee agreed formed of ongoing developments regarding the System’s balance sheet that could affect that it would continue to evaluate the the attainment over time of the Committiming and overall amounts of its pur- tee’s objectives of maximum employment chases of securities in light of the andpricestability.” evolving economic outlook and condi- The vote encompassed approval of tions in financial markets. Members the statement below to be released at discussed the importance of maintain- 2:15 p.m.: ing flexibility to expand the asset purchase programs should the economic “Information received since the Federal outlook deteriorate or to scale back the Open Market Committee met in August programs should economic and finan- suggests that economic activity has picked up following its severe downturn. Condicial conditions improve more than antions in financial markets have improved ticipated. further, and activity in the housing sector At the conclusion of the discussion, hasincreased.Householdspendingseemsto the Committee voted to authorize and be stabilizing, but remains constrained by direct the Federal Reserve Bank of ongoing job losses, sluggish income growth, lower housing wealth, and tight New York, until it was instructed othercredit. Businesses are still cutting back on wise, to execute transactions in the fixed investment and staffing, though at a System Account in accordance with the slower pace; they continue to make following domestic policy directive: progress in bringing inventory stocks into better alignment with sales. Although eco- “The Federal Open Market Committee nomic activity is likely to remain weak for seeks monetary and financial conditions a time, the Committee anticipates that polthat will foster price stability and promote icy actions to stabilize financial markets sustainable growth in output. To further its and institutions, fiscal and monetary stimulong-run objectives, the Committee seeks lus, and market forces will support a conditions in reserve markets consistent strengthening of economic growth and a withfederalfundstradinginarangefrom0 gradual return to higher levels of resource to 1⁄4 percent. The Committee directs the utilizationinacontextofpricestability. Desk to purchase agency debt, agency With substantial resource slack likely to MBS, and longer-term Treasury securities continue to dampen cost pressures and with during the intermeeting period with the aim longer-term inflation expectations stable, of providing support to private credit mar- the Committee expects that inflation will kets and economic activity. The timing and remainsubduedforsometime. pace of these purchases should depend on In these circumstances, the Federal conditionsinthemarketsforsuchsecurities Reserve will continue to employ a wide and on a broader assessment of private range of tools to promote economic recovcredit market conditions. The Desk is ery and to preserve price stability. The expected to complete purchases of about Committee will maintain the target range $300billionoflonger-termTreasurysecuri- for the federal funds rate at 0 to 1⁄4 percent ties by the end of October. It is also and continues to anticipate that economic expected to execute purchases of up to conditions are likely to warrant exception- $200 billion in housing-related agency debt ally low levels of the federal funds rate for and about $1.25 trillion of agency MBS by an extended period. To provide support to the end of the first quarter of 2010. The mortgage lending and housing markets and

Minutes of FOMC Meetings, November 349 to improve overall conditions in private Meeting Held on credit markets, the Federal Reserve will November 3–4, 2009 purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 A joint meeting of the Federal Open billion of agency debt. The Committee will gradually slow the pace of these purchases Market Committee and the Board of in order to promote a smooth transition in Governors of the Federal Reserve Sysmarketsandanticipatesthattheywillbeex- tem was held in the offices of the ecuted by the end of the first quarter of Board of Governors in Washington, 2010.Aspreviouslyannounced,theFederal D.C., on Tuesday, November 3, 2009, Reserve’s purchases of $300 billion of Treasury securities will be completed by at 2:00 p.m. and continued on Wednesthe end of October 2009. The Committee day, November 4, 2009, at 9:00 a.m. will continue to evaluate the timing and overall amounts of its purchases of securi- Present: ties in light of the evolving economic out- Mr.Bernanke,Chairman look and conditions in financial markets. Mr.Dudley,ViceChairman The Federal Reserve is monitoring the size Ms.Duke and composition of its balance sheet and Mr.Evans will make adjustments to its credit and li- Mr.Kohn quidityprogramsaswarranted.” Mr.Lacker Mr.Lockhart Voting for this action: Messrs. Ber- Mr.Tarullo nanke and Dudley, Ms. Duke, Messrs. Mr.Warsh Evans, Kohn, Lacker, Lockhart, Ms.Yellen Tarullo,andWarsh,andMs.Yellen. Mr.Bullard,Mr.Hoenig,Ms.Pianalto, Votingagainstthisaction:None. andMr.Rosengren,Alternate It was agreed that the next meeting MembersoftheFederalOpen MarketCommittee of the Committee would be held on Tuesday−Wednesday, November 3–4, Messrs.Fisher,Kocherlakota,and 2009. The meeting adjourned at 12:35 Plosser,PresidentsoftheFederal p.m. on September 23, 2009. ReserveBanksofDallas,Minneapolis,andPhiladelphia,respectively Notation Votes Mr.Madigan,SecretaryandEconomist Mr.Luecke,AssistantSecretary By notation vote completed on August Mr.Skidmore,AssistantSecretary 28, 2009, the Committee unanimously Ms.Smith,AssistantSecretary Mr.Alvarez,GeneralCounsel approved the designation of Matthew Mr.Baxter,DeputyGeneralCounsel M. Luecke as the Committee’s Chief Mr.Sheets,Economist Freedom of Information Act Officer, Mr.Stockton,Economist with authority to subdelegate duties as Messrs.Altig,Clouse,Connors,Kaappropriate. min,Slifman,Sullivan,Wilcox, By notation vote completed on SepandWilliams,AssociateEconotember 1, 2009, the Committee unani- mists mously approved the minutes of the Mr.Sack,Manager,SystemOpen FOMC meeting held on August 11–12, MarketAccount 2009. Ms.Johnson,SecretaryoftheBoard, Brian F. Madigan OfficeoftheSecretary,Boardof Secretary Governors

350 96th Annual Report, 2009 Mr.Frierson,DeputySecretary,Office Messrs.FuhrerandSniderman,ExecuoftheSecretary,BoardofGover- tiveVicePresidents,Federal nors ReserveBanksofBostonand Cleveland,respectively Mr.Struckmeyer,DeputyStaffDirector,OfficeoftheStaffDirector Mr.Barkema,Mses.Mesterand forManagement,BoardofGov- Mosser,andMr.Waller,Senior ernors VicePresidents,FederalReserve BanksofKansasCity,Philadel- Mr.English,DeputyDirector,Division phia,NewYork,andSt.Louis, ofMonetaryAffairs,Boardof respectively Governors Mr.Weber,SeniorResearchOfficer, Ms.Robertson,AssistanttotheBoard, FederalReserveBankofMinne- OfficeofBoardMembers,Board apolis ofGovernors Mr.BurkeandMs.Yucel,VicePresidents,FederalReserveBanksof Ms.Edwards,Messrs.LevinandNel- NewYorkandDallas,respecson,SeniorAssociateDirectors, tively DivisionofMonetaryAffairs, BoardofGovernors;Messrs. Ms.SbordoneandMr.Sill,Assistant ReifschneiderandWascher, VicePresidents,FederalReserve SeniorAssociateDirectors,Divi- BanksofNewYorkandPhiladelsionofResearchandStatistics, phia,respectively BoardofGovernors Mr.Hetzel,SeniorEconomist,Federal Mr.Leahy,15AssociateDirector,Divi- ReserveBankofRichmond sionofInternationalFinance, BoardofGovernors Developments in Financial Markets Mr.Palumbo,DeputyAssociateDirec- and the Federal Reserve’s Balance tor,DivisionofResearchand Sheet Statistics,BoardofGovernors The Manager of the System Open Mar- Mr.Small,ProjectManager,Division ket Account reported on recent develofMonetaryAffairs,Boardof opments in domestic and foreign finan- Governors cial markets. The Manager also Ms.Ihrig,SectionChief,Divisionof reported on System open market opera- MonetaryAffairs,BoardofGov- tions in Treasury securities, agency ernors debt, and agency mortgage-backed securities (MBS) since the Committee’s Ms.Low,OpenMarketSecretariat Specialist,DivisionofMonetary September 22–23 meeting. By unani- Affairs,BoardofGovernors mous vote, the Committee ratified those transactions. There were no open Mr.Williams,RecordsManagement Analyst,DivisionofMonetary market operations in foreign currencies Affairs,BoardofGovernors for the System’s account during the intermeeting period. Since the Committee Ms.Holcomb,FirstVicePresident, met in September, the Federal Re- FederalReserveBankofDallas serve’s total assets were about unchanged, on balance, at approximately $2.2 trillion, as the increase in the System’s holdings of securities roughly 15. Attendedtheportionofthemeetingrelatmatched a further decline in usage of ing to financial developments, open market operations,andSystemfacilities. the System’s credit and liquidity facili-

Minutes of FOMC Meetings, November 351 ties. The Manager noted that, as of would represent another step toward October 30, $300 billion in Treasury normalization of the Federal Reserve’s securities had been purchased, as di- policy-implementation framework and rected by the Committee. Overall, the would align the maximum maturities of Treasury market had recovered sub- the primary credit program with those stantially from the strains during the under the TAF, but no action on this financial crisis, and the Manager re- matter was taken by the Board at this ported that the completion of the Fed- meeting. Regarding the TALF, the staff eral Reserve’s purchase program did indicated that auto and credit card not appear to have led to any signifi- asset-backed security issuance was incant upward pressure on Treasury creasingly being funded by non-TALF yields or to any notable deterioration in sources; however, commercial MBS Treasury market functioning. There remained more dependent on TALF was little evidence, to date, of a financing. buildup in year-end funding pressures, The staff presented another update although demand for Treasury bills on the continuing development of sevwith maturities extending just beyond eral tools that could help support a the year-end seemed to be elevated. smooth withdrawal of policy accommo- The Manager noted that the recent path dation at the appropriate time. These of purchases of agency debt was con- measures include executing reverse sistent with buying a cumulative repurchase agreements (RPs) on a large amount of $175 billion by the end of scale, potentially with counterparties the first quarter of 2010. other than the primary dealers; imple- The staff briefed the Committee on menting a term deposit facility, availrecent developments regarding various able to depository institutions, to re- Federal Reserve liquidity and credit duce the supply of reserve balances; facilities, including the Term Auction and taking steps to tighten the link Facility (TAF), the primary credit pro- between the interest rate paid on regram, the Term Asset-Backed Securi- serve balances held at the Federal ties Loan Facility (TALF), and the Reserve Banks and the federal funds swap lines with foreign central banks. rate. The staff had made considerable Usage of these facilities had been further progress on these tools. Particideclining in recent months as financial pants expressed confidence that the market conditions continued to im- Committee would be in a position to prove. On September 24, the Board of remove policy accommodation when Governors announced a gradual reduc- appropriate by raising the rate of intertion in amounts to be auctioned under est paid on excess reserves and by emthe TAF through January and indicated ploying reserve-management tools such that auctions of credit with maturities as reverse RPs, term deposits, and, if longer than 28 days would be phased desirable, asset sales. Completing the out. The staff reviewed the changes operational work necessary to establish that had been made since the onset of reverse RPs and term deposits as tools the crisis to the terms of the primary that can drain large volumes of credit program, including loan maturi- reserves was viewed as an important ties and interest rates. The staff noted near-term objective. Participants anticithat reducing the maximum maturity of pated that the Federal Reserve would loans available under the primary credit conduct tests of these tools, but they program from 90 days to 28 days stressed that such testing would not im-

352 96th Annual Report, 2009 ply that these tools would be employed Staff Review of the for policy purposes any time soon. Economic Situation Participants expressed a range of views about how the Committee might The information reviewed at the use its various tools in combination to November 3–4 meeting suggested that foster most effectively its dual objec- overall economic activity continued to tives of maximum employment and rise in recent months. Manufacturers price stability. As part of the Commit- increased production in September for tee’s strategy for eventual exit from the the third consecutive month. The period of extraordinary policy accom- gradual recovery in construction of modation, several participants thought single-family homes from its extremely that asset sales could be a useful tool low level earlier in the year continued, to reduce the size of the Federal Re- and home sales increased in the third serve’s balance sheet and lower the quarter. Although consumer spending level of reserve balances, either prior to on motor vehicles declined in Septemor concurrently with increasing the pol- ber after the expiration of government icy rate. In their view, such sales rebates, other household spending rose. would help reinforce the effectiveness Outlays for equipment and software of paying interest on excess reserves as (E&S) appeared to be stabilizing. an instrument for firming policy at the However, the labor market weakened appropriate time and would help further, and business spending on nonquicken the restoration of a balance residential structures continued to desheet composition in which Treasury cline. Meanwhile, consumer price insecurities were the predominant asset. flation remained subdued in recent Other participants had reservations months. about asset sales—especially in ad- The labor market continued to vance of a decision to raise policy weaken in September, but the pace of interest rates—and noted that such deterioration lessened from that seen sales might elicit sharp increases in earlier in the year. Job losses remained longer-term interest rates that could un- widespread across industries. The dermine attainment of the Committee’s length of the average workweek for goals. Furthermore, they believed that production and nonsupervisory workers other reserve management tools such as decreased, and the index of aggregate reverse RPs and term deposits would hours worked for this group fell, albeit likely be sufficient to implement an ap- more slowly than earlier in the year. In propriate exit strategy and that assets the household survey, the unemploycould be allowed to run off over time, ment rate rose in September to 9.8 perreflecting prepayments and the matura- cent, and the labor force participation tion of issues. Participants agreed to rate fell to its lowest level of the year. continue to evaluate various potential Continuing claims for unemployment policy-implementation tools and the insurance through regular state propossible combinations and sequences in grams declined through early October, which they might be used. They also but total claims, including those for agreed that it would be important to extended and emergency benefits, develop communication approaches for remained high. clearly explaining to the public the use Industrial production rose in Septemof these tools and the Committee’s exit ber for the third consecutive month. A strategy more broadly. substantial portion of the third-quarter

Minutes of FOMC Meetings, November 353 gain was directly attributable to a re- over the third quarter as a whole. The bound in motor vehicle assemblies and inventory of unsold new homes derelated parts production, but increases clined further, as sales outpaced conin production were widespread across struction. Sales of existing singlethe industrial sector. Indicators from family homes increased in September business surveys suggested that there and for the quarter as a whole, and would be further gains in factory out- recent resale activity appeared to be put over the near term. Nevertheless, driven primarily by transactions of considerable slack remained in the nondistressed properties. The average manufacturing sector, as the factory uti- interest rate on 30-year conforming lization rate for September was up only fixed-rate mortgages remained very a bit from its historical low earlier this low over the intermeeting period. year. Although some house price indexes For the third quarter as a whole, real had risen in recent months, such inpersonal consumption expenditures dexes remained below year-earlier (PCE) rose at a solid rate, with notice- levels. able increases in motor vehicles, furni- Real spending on E&S appeared to ture, electronics, and other durable have stabilized in the third quarter. goods. However, real outlays declined Real business outlays on high-tech in September after a sharp increase in E&S increased modestly further, out- August. The monthly pattern in expen- lays for aircraft posted another gain, ditures was significantly affected by and business investment in motor vehiswings in motor vehicle sales during cles and other areas was down only and after the government’s “cash-for- slightly. The improvements in a numclunkers” program. Real disposable ber of the fundamental determinants of personal income fell for the fourth con- investment in E&S, including a decline secutive month in September, reflecting in the cost of capital and a rise in busithe weakness in the labor market. Poor ness output, suggested further, albeit labor market conditions and prior sluggish, gains in spending over the declines in household net worth ap- next few quarters. The responses to the peared to have weighed on consumer October SLOOS indicated that banks sentiment, and the October Senior Loan continued to tighten standards on com- Officer Opinion Survey on Bank Lend- mercial and industrial (C&I) loans to ing Practices (SLOOS) suggested that firms. Meanwhile, conditions in the many banking institutions continued to nonresidential construction sector gentighten standards for consumer lending erally remained quite poor. The recent in the third quarter. trend in architectural billings was con- The housing sector continued to sistent with further declines in nonresirecover, on balance. Although single- dential construction, and employment family starts were about flat in Septem- in the sector continued to decline. The ber, the number of starts was well October SLOOS suggested that financabove the record low reached in the ing for new construction projects was first quarter of the year. In the much very difficult for businesses to obtain. smaller multifamily sector, where tight The Bureau of Economic Analysis esticredit conditions persisted and vacan- mated that businesses continued to liqcies remained elevated, starts were uidate inventories in the third quarter, about unchanged. Sales of new homes, but at a slower rate than in the precedalthough down a bit in September, rose ing quarter.

354 96th Annual Report, 2009 In August, the U.S. international were largely offset by declines in food trade deficit narrowed, as exports prices. Core PCE prices also edged up edged up and imports declined, but it during the month. Gasoline prices rose remained wider than it had been at its again in October. Median year-ahead recent low point in May. The increase inflation expectations in the final Octoin exports of goods and services was ber Reuters/University of Michigan held down by a sharp drop in the vola- Surveys of Consumers increased, retile aircraft category. The decline in maining higher than at the turn of the imports of goods and services was led year, but longer-term inflation expectaby a lower volume of imported oil. In tions from this survey were about uncontrast, imports of machinery, auto- changed. Measures of labor compensamotive products, and industrial supplies tion rose moderately in the third increased. quarter after decelerating significantly Indicators of economic activity in in the first half of the year. The emthe advanced foreign economies during ployment cost index for wages and the third quarter were mixed, but con- salaries was boosted by increases in sistent with economic recovery in the several industry categories that might aggregate. In most countries, purchas- have been affected by the rise in the ing managers surveys were at levels minimum wage in July. Output per consistent with expansion, and many hour rose sharply in the second and indicators of consumer and business third quarters, contributing to a sizable confidence continued to show improve- decline in unit labor costs so far this ment. Economic indicators were stron- year. gest in Japan and the euro area, where industrial production rebounded Staff Review of the sharply. In contrast, real gross domestic Financial Situation product (GDP) contracted in the United Kingdom in the third quarter, and real Market participants largely anticipated GDP in Canada edged down in July the decisions by the Federal Open Marand August. In most emerging market ket Committee (FOMC) at the Septemeconomies, recent data showed that ber meeting to leave the target range economic recovery continued in the for the federal funds rate unchanged third quarter. Real GDP increased and to extend the Federal Reserve’s strongly in China, Korea, and Sin- purchases of agency MBS and agency gapore, and the recovery in Brazil con- debt through the end of the first quarter tinued. In Mexico, available data sug- of 2010 to allow for a gradual reducgested that activity had begun to tion in the pace of these purchases. The expand after several quarters of con- announcement of the Committee’s intraction. Across most of the major tent to purchase the full $1.25 trillion foreign economies, price pressures of agency MBS securities reduced remained subdued. Twelve-month in- some uncertainty about the cumulative flation remained elevated but declined amount of these purchases. After the further in Mexico and Brazil. release of the statement, investors In the United States, recent monthly marked down their expected path for data indicated that consumer price in- the federal funds rate slightly; over flation remained subdued. The PCE subsequent weeks, that initial reaction price index moved up only a bit in was largely reversed so that, on bal- September as increases in energy prices ance, the expected path appeared to

Minutes of FOMC Meetings, November 355 change little over the intermeeting 10-year Treasury yield—a rough gauge period. Yields on nominal Treasury se- of the equity risk premium—remained curities were about unchanged on net. elevated. Corporate bond spreads nar- Inflation compensation based on five- rowed further as yields on investmentyear Treasury inflation-protected secu- and speculative-grade corporate bonds rities (TIPS) rose over the intermeeting decreased more than those on period, apparently owing in part to an comparable-maturity Treasury securiincrease in oil and other commodity ties. Bid-asked spreads for corporate prices, while five-year inflation com- bonds—a measure of liquidity in this pensation five years ahead was little market—remained at moderate levels. changed. Conditions in the secondary market for Overall conditions in short-term leveraged syndicated loans continued to funding markets eased a bit further dur- improve, as secondary-market prices ing the intermeeting period. Spreads rose and bid-asked spreads narrowed. between London interbank offered rates Investor sentiment toward the bank- (Libor) and overnight index swap ing sector appeared to deteriorate over (OIS) rates at the one- and three-month the intermeeting period. Bank share maturities were about unchanged and prices fell, with equity prices for large were near their pre-crisis levels. banks declining more than those for re- Spreads at the six-month maturity nar- gional and smaller banks. Credit derowed but remained elevated. Spreads fault swap spreads for large bank holdon A2/P2-rated commercial paper (CP) ing companies were about flat, but they and AA-rated asset-backed CP re- widened for regional and smaller bankmained at the lower ends of their re- ing organizations. Market participants spective ranges over the past two years. reportedly remained concerned about Indicators of Treasury market function- the earnings prospects for banks in an ing, including on-the-run liquidity pre- environment of weak economic activity miums for the 10-year Treasury note and rising loan losses. and trading volumes in both the nomi- Debt of the private domestic nonfinal and TIPS markets, showed some nancial sector appeared to have signs of improvement over the inter- declined again in the third quarter, as meeting period, but trading conditions estimates suggested that household debt remained somewhat impaired. Year-end edged down and nonfinancial business pressures in funding markets generally debt decreased. Consumer credit conappeared modest. However, some evi- tracted for the seventh consecutive dence pointed to increased demand for month in August, reflecting declines in Treasury securities that mature soon both revolving and nonrevolving credit; after the turn of the year. issuance of consumer credit asset- Broad stock price indexes were backed securities also fell. Gross issuabout unchanged, on net, over the in- ance of bonds by investment-grade termeeting period despite initial third- nonfinancial corporations slowed somequarter earnings reports that mostly what in October, even as speculativebeat analysts’ forecasts. Option-implied grade firms continued to issue bonds at volatility on the S&P 500 index moved a robust pace. CP outstanding inup slightly. The spread between an esti- creased, though gains were concenmate of the expected real return on trated at a few large issuers. Bank equity over the next 10 years for S&P loans continued to contract rapidly. In 500 firms and an estimate of the real contrast, the federal government con-

356 96th Annual Report, 2009 tinued to issue debt at a brisk pace, and left their respective policy rates ungross issuance of state and local gov- changed over the intermeeting period. ernment debt remained strong in Octo- The European Central Bank, the Bank ber. of England, and the Bank of Japan Bank credit declined in September continued implementing their special liand in the first half of October, as the quidity and asset purchase programs, contraction in C&I loans contributed although Bank of Japan officials indiimportantly to a further decline in total cated they would let some credit-easing loans over the period. According to the programs expire at the end of the year. SLOOS, bank lending standards and terms tightened further and demand continued to decline, on net, for most Staff Economic Outlook types of loans in the third quarter. Commercial real estate (CRE) loans In the forecast prepared for the Novemalso continued to decrease, reportedly ber FOMC meeting, the staff raised its because of widespread paydowns and projection for real GDP growth over charge-offs. In addition, residential the second half of 2009 but left the mortgage loans on banks’ books fell, forecast for output growth in 2010 and and revolving home equity loans and 2011 roughly unchanged. The spending consumer loans also contracted. The and production data received during the pace of decline in total loans at large intermeeting period suggested that ecobanks continued to exceed that at nomic activity, especially household smaller banks. The allowance for loan spending, was a little stronger in the and lease losses rose further at large summer than previously estimated. banks in September, but it was about Also, industrial production increased unchanged at small banks. more than had been anticipated at the M2 appeared to have expanded at a September meeting. But with labor moderate rate in September and Octo- market conditions somewhat weaker ber. While liquid deposits rose rapidly, than anticipated, earlier declines in small time deposits and retail money wealth still weighing on household balmarket mutual funds continued to con- ance sheets, and measures of consumer tract. Meanwhile, currency increased sentiment relatively low, the staff did amid moderate demand for U.S. cur- not take much signal from the recent rency from abroad. unexpected strength in spending and Stock indexes fell over the inter- output. Indeed, the staff boosted its meeting period in most major industrial projection for the unemployment rate economies, while 10-year sovereign over the next several years. Still, the yields declined in Europe and were staff continued to believe that several little changed in Japan and Canada. factors that were restraining spending Equity prices were mixed in emerging would gradually fade. The staff anticimarkets, and credit spreads on emerg- pated that the strengthening of the ing market sovereign debt edged up. recovery in real output during 2010 and The trade-weighted index of the for- 2011 would be supported by an ongoeign exchange value of the dollar was ing improvement in financial condilittle changed over the intermeeting tions and household balance sheets, period. The Reserve Bank of Australia continued recovery in the housing secand Norges Bank raised their policy tor, improved household and business rates, while most other central banks confidence, and accommodative mone-

Minutes of FOMC Meetings, November 357 tary policy even as the impetus to real of factors were expected to support activity from fiscal policy diminished. near-term growth: Business inventories The staff forecast for inflation was were being brought into better alignlittle changed from the September ment with sales, and the pace of invenmeeting. Although oil prices moved tory runoff was slowing; activity in the higher, likely boosting near-term infla- housing sector appeared to be turning tion, the staff also revised up its esti- up, and house prices seemed to be levmate of the degree of slack in the eling out or beginning to rise by some economy, leaving the forecast for total measures; consumer spending appeared and core PCE inflation over the next to be rising even apart from the effects two years little changed. With signifi- of fiscal incentives to purchase autos; cant underutilization of resources the outlook for growth abroad had expected to persist for several years, improved since earlier in the year, authe staff continued to project that core guring well for U.S. exports; and U.S. inflation would slow somewhat further and global financial market conditions, over the next two years. while roughly unchanged over the intermeeting period, were substantially better than earlier in the year. Above- Participants’ Views on Current trend output growth in the third quarter Conditions and the Economic was a welcome development. More- Outlook over, the upturn in real GDP appeared In conjunction with this FOMC meet- to reflect stronger final demand and not ing, all meeting participants—the five just a slower pace of inventory decumembers of the Board of Governors mulation. While these developments and the presidents of the 12 Federal were positive, participants noted that it Reserve Banks—provided projections was not clear how much of the recent for economic growth, the unemploy- firming in final demand reflected the ment rate, and consumer price inflation effects of temporary fiscal programs to for each year from 2009 through 2012 support the auto and housing sectors, and over a longer horizon. Longer-run and some participants expressed conprojections represent each participant’s cerns about the ability of the economy assessment of the rate to which each to generate a self-sustaining recovery variable would be expected to converge without government support. Nonetheover time under appropriate monetary less, participants expected the recovery policy and in the absence of further to continue in subsequent quarters, shocks. Participants’ forecasts through although at a pace that would be rather 2012 and over the longer run are de- slow relative to historical experience, scribed in the Summary of Economic particularly the robust recoveries that Projections, which is attached as an ad- followed previous steep downturns. dendum to these minutes. Such a modest pace of expansion In the meeting participants’ discus- would imply only slow improvement in sion of the economic situation and out- the labor market next year, with unemlook, they agreed that the incoming ployment remaining high. Indeed, pardata and information received from ticipants noted that business contacts business contacts suggested that eco- continued to report plans to be cautious nomic activity was picking up as an- in hiring and capital spending even as ticipated, with output continuing to demand for their products increased. expand in the fourth quarter. A number Nonetheless, economic growth was ex-

358 96th Annual Report, 2009 pected to strengthen during the next many regional and small banks vulnertwo years as housing construction con- able to the deteriorating performance of tinued to rise and financial conditions CRE loans, banks continued to tighten improved further, leading to more- lending standards for C&I loans and substantial increases in resource utiliza- consumer loans, although the net pertion in product and labor markets. centage of banks reporting further Most participants now viewed the tightening in each category had fallen risks to their growth forecasts as being in recent surveys. Bank loans continued roughly balanced rather than tilted to to contract sharply in all categories. the downside, but uncertainty surround- Participants noted that the dichotomy ing these forecasts was still viewed as between significant easing of condiquite elevated. Downside risks to tions in capital markets and continuing growth included the continued weak- tight conditions in the banking sector ness in the labor market and its impli- implied that financing conditions difcations for income growth and con- fered for large and small firms. Large sumer confidence, as well as the firms with access to debt and equity potential for credit availability to markets for financing had relatively remain relatively tight for consumers little difficulty in obtaining credit and and some businesses. In this regard, in many cases also had high levels of some participants noted the difficulty retained earnings with which to fund that smaller, bank-dependent firms their operations and investment. In conwere having in securing financing. The trast, smaller firms, which tend to be CRE sector was also considered a more dependent on commercial banks downside risk to the forecast and a for financing, reportedly faced substanpossible source of increased pressure tial constraints in their access to credit. on banks. On the other hand, consumer Limited credit availability, along with spending on items other than autos had weak aggregate demand, was viewed as been stronger than expected, which likely to restrain hiring at small busimight be signaling more underlying nesses, which are normally a source of momentum in the recovery and some employment growth in recoveries. chance that the step-up in spending The weakness in labor market condiwould be sustained going forward. In tions remained an important concern to addition, growth abroad had exceeded meeting participants, with unemployexpectations for some time, potentially ment expected to remain elevated for providing more support to U.S. exports some time. Although the pace of job and domestic growth than anticipated. losses was moderating, the unusually Financial market developments over large fraction of those who were workrecent months were generally regarded ing part time for economic reasons and as supportive of continued economic the unusually low level of the average recovery, with equity prices consider- workweek pointed to only a gradual ably higher, private credit spreads sub- decline in the unemployment rate as stantially lower, and financial markets the economic recovery proceeded. In generally performing significantly bet- addition, business contacts reported that ter than earlier in the year. Participants they would be cautious in their hiring noted, however, that bank credit and would continue to aggressively remained tight. With rising levels of seek cost savings in the absence of revnonperforming loans expected to con- enue growth. Indeed, participants tinue to be a source of stress, and with expected that businesses would be able

Minutes of FOMC Meetings, November 359 to meet any increases in demand in the pace than earlier in the year and apparnear term by raising their employees’ ently had made substantial progress in hours and boosting productivity, thus reducing stocks toward desired levels. delaying the need to add to their pay- With inventories lower, firms were berolls; this view was supported by ginning to raise production to meet at aggregate data indicating rapid produc- least a portion of increased demand, tivity growth in recent quarters. More- and this adjustment was expected to over, the need to reallocate labor across make an important contribution to ecosectors as the recovery proceeds, as nomic recovery in the fourth quarter of well as losses of skills caused by high the year and, to a lesser extent, in 2010 levels of long-term unemployment and as well. Investment in E&S appeared to permanent separations, could limit the have stabilized in the third quarter, and pace of gains in employment. Partici- recent data on new orders continued to pants discussed the possibility that this point to a pickup next year. However, recovery could resemble the past two, many participants expressed the view which were characterized by a slow that cautious business sentiment, topace of hiring for a time even after gether with low industrial utilization aggregate demand picked up. rates, was likely to keep new capital The prospect for continued weakness spending subdued until firms became in labor markets remained an important more confident about the durability of factor in the outlook for consumer increases in demand. spending. Although consumer spending In the residential real estate sector, had picked up more than expected in home sales and construction increased recent months, participants saw that over recent months from very low levincrease as partly reflecting special fac- els; moreover, house prices appeared to tors such as the cash-for-clunkers pro- be stabilizing and in some areas had regram. Uncertain job prospects, slow portedly moved higher. Generally, the income growth, and tight credit, as well outlook was for these trends to conas wealth levels that remained rela- tinue. However, some participants still tively low despite the recent rise in viewed the improvements as quite tenequity prices and stabilization in house tative, pointing to potential sources of prices, were seen as weighing on con- softness from the pending termination sumer confidence and the growth of of the temporary tax credit for firstconsumer spending for some time to time homebuyers, the winding down of come. In such an environment, house- the Federal Reserve’s agency MBS holds’ saving behavior was an impor- purchase program, and the downward tant source of uncertainty in the out- pressure that anticipated further look. Participants continued to believe increases in foreclosures would put on that the most likely outcome was for house prices. In contrast to developthe saving rate to remain near its aver- ments in the residential sector, CRE acage level over the past few quarters or tivity continued to fall markedly in to edge up gradually. However, they most Districts as a result of deterioratcould not completely discount the pos- ing fundamentals, including declining sibility of a further substantial rise in occupancy and rental rates and very the saving rate as households took fur- tight credit conditions. ther steps to repair their balance sheets. Stronger foreign economic activity, Participants noted that firms seemed especially in Asia, as well as the partial to be reducing inventories at a slower reversal this year of the dollar’s appre-

360 96th Annual Report, 2009 ciation during the latter part of 2008, result of the public’s concerns about was providing support to U.S. exports. extraordinary monetary policy stimulus Participants noted that the recent fall in and large federal budget deficits. Morethe foreign exchange value of the dol- over, these participants noted that lar had been orderly and appeared to banks might seek to reduce appreciably reflect an unwinding of safe-haven de- their excess reserves as the economy mand in light of the recovery in finan- improves by purchasing securities or cial market conditions this year, but by easing credit standards and expandthat any tendency for dollar deprecia- ing their lending substantially. Such a tion to intensify or to put significant development, if not offset by Federal upward pressure on inflation would Reserve actions, could give additional bear close watching. Further improve- impetus to spending and, potentially, to ments in foreign economies would actual and expected inflation. To keep likely buoy U.S. exports going forward, inflation expectations anchored, all parbut as the recovery took hold in the ticipants agreed that it was important United States, import growth would for policy to be responsive to changes also strengthen. in the economic outlook and for the Participants continued to discuss the Federal Reserve to continue to clearly appropriate weights to place on re- communicate its ability and intent to source slack, inflation expectations, and begin withdrawing monetary policy acother factors in assessing the inflation commodation at the appropriate time outlook. In the near term, most partici- and pace. pants anticipated that substantial slack in both labor and product markets Committee Policy Action would likely keep inflation subdued. Indeed, the considerable decelerations In the members’ discussion of monein wages and unit labor costs this year tary policy for the period ahead, they were cited as factors putting downward agreed that no substantive changes to pressure on inflation. However, some the Committee’s federal funds target participants noted that the recent rise in range or large-scale asset purchase prothe prices of oil and other commod- grams were warranted at this meeting. ities, as well as increases in import On balance, the economic outlook had prices stemming from the decline in the changed little since the September foreign exchange value of the dollar, meeting. The recovery appeared to be could boost inflation pressures. Overall, continuing and was expected to gradumany participants viewed the risks to ally strengthen over time. Still, most their inflation outlooks over the next members projected that over the next few quarters as being roughly balanced. couple of years, the unemployment rate Some saw the risks as tilted to the would remain quite elevated and the downside in the near term, reflecting level of inflation would remain below the quite elevated level of economic rates consistent over the longer run slack and the possibility that inflation with the Federal Reserve’s objectives. expectations could begin to decline in Based on this outlook, members deresponse to the low level of actual in- cided to maintain the federal funds tarflation. But others felt that risks were get range at 0 to 1⁄ 4 percent and to contilted to the upside over a longer hori- tinue to state their expectation that zon, because of the possibility that in- economic conditions were likely to flation expectations could rise as a warrant exceptionally low rates for an

Minutes of FOMC Meetings, November 361 extended period. Low levels of gree of policy accommodation. Memresource utilization, subdued inflation bers also decided to reiterate their trends, and stable inflation expectations intention to gradually slow the pace of were among the important factors the Committee’s agency MBS and underlying their expectation for mone- agency debt purchases to promote a tary policy, and members agreed that smooth transition in markets as the policy communications would be en- announced purchases are completed. hanced by citing these conditions in the The Committee agreed that it would policy statement. Members noted the continue to evaluate the timing and possibility that some negative side overall amounts of its purchases of seeffects might result from the mainte- curities in light of the evolving econance of very low short-term interest nomic outlook and conditions in finanrates for an extended period, including cial markets. the possibility that such a policy stance At the conclusion of the discussion, could lead to excessive risk-taking in the Committee voted to authorize and financial markets or an unanchoring of direct the Federal Reserve Bank of inflation expectations. While members New York, until it was instructed othercurrently saw the likelihood of such wise, to execute transactions in the effects as relatively low, they would System Account in accordance with the remain alert to these risks. All agreed following domestic policy directive: that the path of short-term rates going “The Federal Open Market Committee forward would be dependent on the seeks monetary and financial conditions evolution of the economic outlook. that will foster price stability and promote sustainable growth in output. To further its With respect to the large-scale asset long-run objectives, the Committee seeks purchase programs, all members supconditions in reserve markets consistent ported reiterating the Committee’s in- withfederalfundstradinginarangefrom0 tention to purchase $1.25 trillion of to 1⁄4 percent. The Committee directs the agency MBS by the end of the first Desk to purchase agency debt and agency MBS during the intermeeting period with quarter of 2010. The Committee also the aim of providing support to private agreed to specify that its agency debt credit markets and economic activity. The purchases would cumulate to about timing and pace of these purchases should $175 billion by the end of the first depend on conditions in the markets for quarter, $25 billion less than the previ- such securities and on a broader assessment ously announced maximum for these of private credit market conditions. The Desk is expected to execute purchases of purchases. Owing to the limited availabout $175 billion in housing-related ability of agency debt and concerns agency debt and about $1.25 trillion of that larger purchases could impair mar- agency MBS by the end of the first quarter ket functioning, the Committee’s trans- of 2010. The Desk is expected to gradually actions in these instruments for some slow the pace of these purchases as they nearcompletion.TheCommitteeanticipates time had been on a trajectory that that outright purchases of securities will would leave total purchases somewhat cause the size of the Federal Reserve’s balbelow the previously established maxi- ance sheet to expand significantly in commum. Announcing that purchases ing months. The System Open Market would total about $175 billion was Account Manager and the Secretary will keep the Committee informed of ongoing viewed as providing greater clarity to developments regarding the System’s balthe public regarding the expected ance sheet that could affect the attainment amount of purchases and would not re- over time of the Committee’s objectives of flect a decision to scale back the de- maximum employment and price stability.”

362 96th Annual Report, 2009 The vote encompassed approval of transition in markets, the Committee will the statement below to be released at gradually slow the pace of its purchases of both agency debt and agency mortgage- 2:15 p.m.: backed securities and anticipates that these “Information received since the Federal transactions will be executed by the end of Open Market Committee met in September the first quarter of 2010. The Committee suggests that economic activity has contin- will continue to evaluate the timing and uedtopickup.Conditionsinfinancialmar- overall amounts of its purchases of securikets were roughly unchanged, on balance, ties in light of the evolving economic outovertheintermeetingperiod.Activityinthe look and conditions in financial markets. housing sector has increased over recent The Federal Reserve is monitoring the size months. Household spending appears to be and composition of its balance sheet and expanding but remains constrained by on- will make adjustments to its credit and ligoing job losses, sluggish income growth, quidityprogramsaswarranted.” lower housing wealth, and tight credit. Voting for this action: Messrs. Ber- Businesses are still cutting back on fixed nanke and Dudley, Ms. Duke, Messrs. investment and staffing, though at a slower Evans, Kohn, Lacker, Lockhart, pace; they continue to make progress in Tarullo,andWarsh,andMs.Yellen. bringing inventory stocks into better alignment with sales. Although economic activ- Votingagainstthisaction:None. ity is likely to remain weak for a time, the Committee anticipates that policy actions to It was agreed that the next meeting stabilize financial markets and institutions, of the Committee would be held on fiscal and monetary stimulus, and market Tuesday−Wednesday, December 15–16, forces will support a strengthening of eco- 2009. The meeting adjourned at 12:40 nomic growth and a gradual return to p.m. on November 4, 2009. higher levels of resource utilization in a contextofpricestability. With substantial resource slack likely to Notation Vote continue to dampen cost pressures and with longer-term inflation expectations stable, By notation vote completed on October the Committee expects that inflation will 13, 2009, the Committee unanimously remainsubduedforsometime. In these circumstances, the Federal approved the minutes of the FOMC Reserve will continue to employ a wide meeting held on September 22–23, range of tools to promote economic recov- 2009. ery and to preserve price stability. The Committee will maintain the target range Brian F. Madigan for the federal funds rate at 0 to 1⁄4 percent Secretary and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and Addendum: stable inflation expectations, are likely to Summary of Economic Projections warrant exceptionally low levels of the federal funds rate for an extended period. To In conjunction with the November 3–4, provide support to mortgage lending and 2009, FOMC meeting, the members of housing markets and to improve overall the Board of Governors and the presiconditions in private credit markets, the dents of the Federal Reserve Banks, all Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed of whom participate in deliberations of securities and about $175 billion of agency the FOMC, submitted projections for debt.Theamountofagencydebtpurchases, output growth, unemployment, and inwhile somewhat less than the previously flation for the years 2009 to 2012 and announced maximum of $200 billion, is over the longer run. The projections consistent with the recent path of purchases and reflects the limited availability of were based on information available agency debt. In order to promote a smooth through the end of the meeting and on

Minutes of FOMC Meetings, November 363 Table1. EconomicprojectionsofFederalReserveGovernorsandReserveBankpresidents, November2009 Percent Centraltendency1 Range2 Variable Longer Longer 2009 2010 2011 2012 2009 2010 2011 2012 Run Run ChangeinrealGDP. −0.4to−0.12.5to3.5 3.4to4.5 3.5to4.8 2.5to2.8 −0.5to0.0 2.0to4.0 2.5to4.6 2.8to5.0 2.4to3.0 Juneprojection.... −1.5to−1.02.1to3.3 3.8to4.6 n.a. 2.5to2.7−1.6to−0.60.8to4.0 2.3to5.0 n.a. 2.4to2.8 Unemploymentrate.. 9.9to10.1 9.3to9.7 8.2to8.6 6.8to7.5 5.0to5.2 9.8to10.38.6to10.27.2to8.7 6.1to7.6 4.8to6.3 Juneprojection.... 9.8to10.1 9.5to9.8 8.4to8.8 n.a. 4.8to5.0 9.7to10.58.5to10.66.8to9.2 n.a. 4.5to6.0 PCEinflation....... 1.1to1.2 1.3to1.6 1.0to1.9 1.2to1.9 1.7to2.0 1.0to1.7 1.1to2.0 0.6to2.4 0.2to2.3 1.5to2.0 Juneprojection.... 1.0to1.4 1.2to1.8 1.1to2.0 n.a. 1.7to2.0 1.0to1.8 0.9to2.0 0.5to2.5 n.a. 1.5to2.1 CorePCEinflation3.. 1.4to1.5 1.0to1.5 1.0to1.6 1.0to1.7 1.3to1.6 0.9to2.0 0.5to2.4 0.2to2.3 Juneprojection.... 1.3to1.6 1.0to1.5 0.9to1.7 n.a. 1.2to2.0 0.5to2.0 0.2to2.5 n.a. Note:Projectionsofchangeinrealgrossdomesticproduct(GDP)andininflationarefromthefourthquarterof thepreviousyeartothefourthquarteroftheyearindicated.PCEinflationandcorePCEinflationarethepercentage ratesofchangein,respectively,thepriceindexforpersonalconsumptionexpenditures(PCE)andthepriceindexfor PCEexcludingfoodandenergy.Projectionsfortheunemploymentratearefortheaveragecivilianunemployment rateinthefourthquarteroftheyearindicated.Eachparticipant’sprojectionsarebasedonhisorherassessmentof appropriatemonetarypolicy.Longer-runprojectionsrepresenteachparticipant’sassessmentoftheratetowhicheach variablewouldbeexpectedtoconvergeunderappropriatemonetarypolicyandintheabsenceoffurthershocksto theeconomy.TheJuneprojectionsweremadeinconjunctionwiththemeetingoftheFederalOpenMarketCommitteeonJune23–24,2009. 1. Thecentraltendencyexcludesthethreehighestandthreelowestprojectionsforeachvariableineachyear. 2. Therangeforavariableinagivenyearconsistsofallparticipants’projections,fromlowesttohighest,forthat variableinthatyear. 3. Longer-runprojectionsforcorePCEinflationarenotcollected. each participant’s assumptions about expected that inflation would remain factors likely to affect economic out- subdued over this period. As indicated comes, including his or her assessment in Table 1, participants marked up their of appropriate monetary policy. “Ap- projections for real GDP growth in propriate monetary policy” is defined 2009, reflecting a faster pickup in outas the future path of policy that the put during the second half of the year participant deems most likely to foster than they had anticipated at the time of outcomes for economic activity and in- their previous forecasts, which were flation that best satisfy his or her inter- made in conjunction with the June pretation of the Federal Reserve’s dual FOMC meeting. Looking beyond 2009, objectives of maximum employment the contours of the participants’ outand stable prices. Longer-run projec- look for economic activity and inflation tions represent each participant’s as- were broadly similar to those in their sessment of the rate to which each June projections, with the pace of the variable would be expected to converge economic recovery expected to be reover time under appropriate monetary strained by household and business unpolicy and in the absence of further certainty, weak labor market condishocks. tions, and slow waning of tight credit As depicted in Figure 1, FOMC par- conditions in the banking system. Most ticipants anticipated that economic participants anticipated that about five recovery would be gradual, with real or six years would be needed for the gross domestic product (GDP) growing economy to converge fully to a longerat a moderate pace and the unemploy- run path characterized by a sustainable ment rate declining slowly over the rate of output growth and by rates of next few years. Most participants also unemployment and inflation consistent

364 96th Annual Report, 2009

Minutes of FOMC Meetings, November 365 with their interpretation of the Federal tion, as well as the advance estimate of Reserve’s objectives. However, some third-quarter GDP, suggested that the participants indicated that the conver- economy was growing at a moderate gence process might well require even pace over the second half of the year. longer, while a few expected that Participants took note of the continuing although inflation would settle at its improvement in financial market condilonger-run rate in the next several tions, the progress that businesses years, the convergence process for the appeared to be making in bringing real economy was likely to occur over inventories into line with sales, and the a somewhat longer period. With a fur- signs of stronger growth abroad, espether waning of downside risks to cially in Asia. Participants also indigrowth since June, nearly all partici- cated that GDP growth in the second pants now judged the risks to their half of 2009 had likely been boosted growth outlook as roughly balanced, by transitory factors such as the “cashand most also saw roughly balanced for-clunkers” program and the firstrisks surrounding their inflation projec- time homebuyers’ credit, which had tions. As in June, however, participants brought forward spending that would generally judged that their projections have otherwise occurred in subsequent for economic activity and inflation quarters. were subject to an unusually high de- Looking beyond this year, particigree of uncertainty relative to historical pants’ outlook for real GDP growth norms. was generally similar to that reflected in their June forecasts. The central tendency of their output growth projec- The Outlook tions was 2.5 to 3.5 percent for 2010, Participants’ projections for real GDP 3.4 to 4.5 percent for 2011, and 3.5 to growth in 2009 had a central tendency 4.8 percent for 2012. Participants indiof negative 0.4 percent to negative 0.1 cated that consumer spending would percent, around a percentage point likely be bolstered by the turnaround in above the central tendency of their housing prices, further increases in June projections. The projections for equity values, and gradual improvethe year as a whole were broadly con- ments in credit availability. With an sistent with participants’ previous ex- improved sales outlook, businesses pectations that economic activity would would rebuild their inventory stocks bottom out around midyear. However, and spending on equipment and softthe contraction over the first half was a ware would pick up; in addition, exbit sharper than many participants had ports would likely receive a significant anticipated at the time of the June boost from stronger global growth. FOMC meeting, which took place Monetary and fiscal stimulus would about a month before the Bureau of provide further support to aggregate Economic Analysis (BEA) published demand next year. Nevertheless, the its advance estimate of second-quarter pace of expansion would probably be GDP and its comprehensive revision of damped for some time by elevated unprevious estimates, including a substan- certainty on the part of households and tial downward revision to the estimate businesses and by the slow and lagging of first-quarter GDP growth. Subse- recovery of labor markets, which quent data on consumer spending, would hold down income growth and housing starts, and industrial produc- limit any rebound in household confi-

366 96th Annual Report, 2009 dence. In addition, distress in commer- of unemployment in light of their ascial real estate markets would likely sessments of the extent to which ongoweigh further on the balance sheets of ing structural adjustments would be asbanking institutions, thereby contribut- sociated with somewhat higher labor ing to continued tight credit conditions market frictions. Thus, participants’ for many households and smaller firms. longer-run unemployment rate projec- However, participants anticipated that tions had a central tendency of 5.0 to the recovery would gather steam in 5.2 percent, about a quarter percentage 2011 and 2012 as a consequence of point higher than in June. further improvements in consumer and The central tendency of participants’ business confidence and in the condi- projections for personal consumption tion of financial markets and institu- expenditures (PCE) inflation in 2009 tions. In the absence of any further was 1.1 to 1.2 percent, and the central shocks, participants generally expected tendency of their projections for core that the economy would converge over PCE inflation was 1.4 to 1.5 percent.16 time to a sustainable path with real While actual PCE inflation over the GDP growing at a rate of 2.5 to 2.8 first half of the year turned out to be percent, reflecting longer-term demo- somewhat lower than participants had graphic trends and improvements in anticipated at the time of the June labor productivity. FOMC meeting, recent increases in Participants generally anticipated that energy prices led most of them to make the unemployment rate would rise upward revisions to their second-half somewhat further during the final inflation forecasts; thus, participants’ months of 2009 and then decline PCE inflation projections for the year steadily over the next few years. Their as a whole were broadly similar to projections for the average unemploy- their previous forecasts. Core PCE inment rate in the fourth quarter of 2009 flation was 1.6 percent at an annual had a central tendency of 9.9 to 10.1 rate over the first half of 2009, about a percent, somewhat higher than the ac- quarter point lower than most particitual unemployment rate of 9.8 percent pants had anticipated last June, and in September—the latest reading avail- nearly all participants projected that able at the time of the November core PCE inflation would decline fur- FOMC meeting. Participants noted that, ther to an annual rate of about 11⁄ 4 peras in the early stages of previous re- cent in the second half. coveries the unemployment rate was Looking beyond this year, particicontinuing to rise after output turned pants generally anticipated that inflaup, reflecting firms’ uncertainty about tion would remain subdued. The central the pace of recovery and their efforts to tendency of their projections for PCE raise productivity and hold down costs. inflation was 1.3 to 1.6 percent for Looking further ahead, participants’ un- 2010, 1.0 to 1.9 percent for 2011, and employment rate projections had a cen- 1.2 to 1.9 percent for 2012, and the tral tendency of 9.3 to 9.7 percent for the fourth quarter of 2010, 8.2 to 8.6 16. InJuly2009,theBEAadjustedthedefinipercent for the end of 2011, and 6.8 to tion of core PCE inflation to include prices for 7.5 percent for the final quarter of foodconsumedatrestaurantsandotherestablishmentsawayfromhome.FOMCparticipantsindi- 2012. A number of participants made cated that this definitional adjustment did not modest upward revisions to their esticauseanymaterialchangesintheircoreinflation mates of the longer-run sustainable rate projectionsfor2009orbeyond.

Minutes of FOMC Meetings, November 367 central tendency of their projections for Table2. Averagehistoricalprojection core PCE inflation was 1.0 to 1.5 per- errorranges cent for 2010, 1.0 to 1.6 percent for Percentagepoints 2011, and 1.0 to 1.7 percent for 2012. Variable 2009 2010 2011 2012 Many participants stated that well- ChangeinrealGDP1... ±0.6 ±1.4 ±1.6 ±1.5 anchored inflation expectations would Unemploymentrate1.... ±0.2 ±0.7 ±0.9 ±1.1 play an important role in avoiding fur- Totalconsumerprices2.. ±0.5 ±1.0 ±1.0 ±1.0 ther declines in inflation over the next Note: Error ranges shown are measured as plus or few years despite the persistence of siz- minus the root mean squared error of projections for 1989through2008thatwerereleasedinthefallbyvariable resource slack. Participants also ousprivateandgovernmentforecasters.Asdescribedin pointed out that strong global growth the box “Forecast Uncertainty,” under certain assumpwas likely to place significant upward tions,thereisabouta70percentprobabilitythatactual outcomes for real GDP, unemployment, and consumer pressure on the prices of energy and priceswillbeinrangesimpliedbytheaveragesizeof other commodities; as a consequence, projectionerrorsmadeinthepast.Furtherinformationis inDavidReifschneiderandPeterTulip(2007),“Gaugtheir projections for overall inflation ingtheUncertaintyoftheEconomicOutlookfromHisover the next several years were gener- toricalForecastingErrors,”FinanceandEconomicsDisally a notch higher than their projec- cussion Series 2007-60 (Washington: Board of GovernorsoftheFederalReserveSystem,November). tions for core inflation. As in June, the 1. Fordefinitions,refertogeneralnoteintable1. central tendency of projections for PCE 2. Measureistheoverallconsumerpriceindex,the inflation over the longer run was 1.7 to pricemeasurethathasbeenmostwidelyusedingovernment and private economic forecasts. Projection is 2.0 percent, reflecting participants’ as- percent change, fourth quarter of the previous year to sessments of the measured rate of infla- thefourthquarteroftheyearindicated. tion that would best satisfy the Federal Reserve’s dual mandate of maximum tions as roughly balanced, although a employment and stable prices. Most few indicated that the risks to the participants expected that inflation in unemployment outlook remained 2012 would remain below its longer- weighted to the upside. In explaining run value, but a few expected inflation these judgments, participants highto have converged to its longer-run lighted the intrinsic difficulties in prevalue by that time. dicting the dynamics of the economy following a financial crisis and a severe recession. Participants noted that the Uncertainty and Risks recent pickup in economic growth As in June, nearly all participants might reflect stronger underlying mojudged the degree of uncertainty sur- mentum in economic activity than anrounding their projections of output ticipated and hence point to a faster growth and unemployment as higher pace of recovery going forward. On the than historical norms.17 Participants other hand, participants referred to the generally saw the risks to these projec- possibility that deteriorating performance of commercial real estate and consumer loans could have adverse 17. Table2providesestimatesofforecastuneffects on the financial system that certainty for the change in real GDP, the unemploymentrate,andtotalconsumerpriceinflation would damp the growth of output and overtheperiodfrom1989to2008.Attheendof employment over coming quarters. this summary, the box “Forecast Uncertainty” Most participants continued to see discussesthesourcesandinterpretationofuncerthe uncertainty surrounding their inflataintyineconomicforecastsandexplainstheaption projections as unusually high, proach used to assess the uncertainty and risks attendingparticipants’projections. although a few viewed the extent of

368 96th Annual Report, 2009 such uncertainty as roughly in line with more substantial upward revisions; historical norms. Participants generally hence the lowest points in the distribujudged the risks to the inflation outlook tion increased markedly while the meto be roughly balanced, and many of dian was just a notch higher than in them indicated that these risks were June. The distribution of growth prolinked, at least in part, to the risks as- jections for 2011 was little changed sociated with the economic outlook. from June, while the distribution for Participants cited the risk that longer- 2012 was centered at a slightly higher term inflation expectations might start rate than for 2011 with about the same drifting downward in response to per- degree of dispersion. A few particisistent economic slack and low in- pants made modest upward revisions to flation outcomes; alternatively, those their estimates of the longer-run susexpectations could shift upwards in tainable rate of output growth, producresponse to a sharper recovery, espe- ing a slight widening of the range for cially if extraordinary monetary policy these longer-run projections. Regarding stimulus were not unwound in a timely participants’ unemployment rate projecfashion. Participants also noted the pos- tions, the distribution for 2009 narsibility that an acceleration in global rowed but with roughly the same mode economic activity could induce a surge as in June, while the distributions for in the prices of energy and other com- 2010 and 2011 shifted down a bit and modities that would place upward pres- narrowed somewhat. The distribution sure on headline inflation. of unemployment rate projections for 2012 exhibited noticeably greater dispersion than for 2011. The distribution Diversity of Views of longer-run unemployment rate pro- Figures 2.A and 2.B provide further jections was generally more tightly details on the diversity of participants’ concentrated than in June, reflecting views regarding likely outcomes for modest upward revisions to some parreal GDP growth and the unemploy- ticipants’ estimates of the sustainable ment rate in 2009, 2010, 2011, 2012, rate of unemployment to which the and over the longer run. The dispersion economy would converge under approin these projections reflects, among priate monetary policy and in the abother factors, differences in the partici- sence of further shocks. pants’ assessments regarding the cur- Figures 2.C and 2.D provide correrent degree of underlying momentum sponding information about the diverin economic activity, the evolution of sity of participants’ views regarding the consumer and business sentiment, and inflation outlook. For total PCE inflathe trajectory for private saving, and in tion, the distribution of participants’ their interpretations of the continued projections for 2009 was narrower than weakness in bank credit. The distribu- in June, whereas the distributions of tion of participants’ GDP growth pro- their projections for 2010 and 2011 did jections for 2009 shifted upward about not change significantly, and there was a percentage point and became nar- virtually no change in the distribution rower in response to the economic and of longer-run projections. For core PCE financial information received since the inflation, participants’ projections for June FOMC meeting. Most participants 2009 became more tightly concenonly shaded up their growth projections trated, while their projections for 2010 for 2010, but a few participants made and 2011 were only slightly less dis-

Minutes of FOMC Meetings, November 369 persed than in June. The distributions the extent to which that slack affects of total and core PCE inflation projec- inflation outcomes and expectations. In tions for 2012 exhibited somewhat contrast, the relatively concentrated disgreater dispersion than those for 2011. tribution of longer-run inflation projec- The dispersion in participants’ projec- tions indicates substantial agreement tions for 2010, 2011, and 2012 mainly among participants regarding the meareflected differences in their judgments sured rate of inflation that best satisfies regarding the determinants of inflation, the Federal Reserve’s dual objectives including their estimates of prevailing of maximum employment and stable resource slack and their assessments of prices.

370 96th Annual Report, 2009

Minutes of FOMC Meetings, November 371

372 96th Annual Report, 2009

Minutes of FOMC Meetings, November 373

374 96th Annual Report, 2009 Forecast Uncertainty The economic projections provided by experienced in the past and the risks the members of the Board of Governors around the projections are broadly baland the presidents of the Federal anced, the numbers reported in table 2 Reserve Banks inform discussions of would imply a probability of about 70 monetary policy among policymakers percent that actual GDP would expand and can aid public understanding of the within a range of 2.4 to 3.6 percent in basis for policy actions. Considerable thecurrentyear,1.6to4.4percentinthe uncertainty attends these projections, second year, 1.4 to 4.6 in the third year however. The economic and statistical and1.5to4.5percentinthefourthyear. models and relationships used to help The corresponding 70 percent confiproduce economic forecasts are neces- dence intervals for overall inflation sarily imperfect descriptions of the real would be 1.5 to 2.5 percent in the curworld. And the future path of the econ- rent year and 1.0 to 3.0 percent in the omy can be affected by myriad unfore- second,thirdandfourthyears. seen developments and events. Thus, in Because current conditions may differ setting the stance of monetary policy, from those that prevailed, on average, participants consider not only what over history, participants provide judgappears to be the most likely economic ments as to whether the uncertainty atoutcome as embodied in their projec- tached to their projections of each varitions, but also the range of alternative able is greater than, smaller than, or possibilities, the likelihood of their oc- broadly similar to typical levels of forecurring, 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, including those reported in past Mone- are weighted to the downside, or are tary Policy Reports and those prepared broadly balanced. That is, participants by Federal Reserve Board staff in judge whether each variable is more advance of meetings of the Federal likely to be above or below their projec- OpenMarketCommittee.Theprojection tions of the most likely outcome. These error ranges shown in the table illustrate judgments about the uncertainty and the the considerable uncertainty associated risks attending each participant’s projecwith economic forecasts. For example, tions are distinct from the diversity of suppose a participant projects that real participants’ views about the most likely gross domestic product (GDP) and total outcomes. Forecast uncertainty is conconsumer prices will rise steadily at cerned with the risks associated with a annual rates of, respectively, 3 percent particular projection rather than with diand 2 percent. If the uncertainty attend- vergences across a number of different ing those projections is similar to that projections.

Minutes of FOMC Meetings, December 375 Meeting Held on Mr.Frierson,18DeputySecretary,Of- December 15–16, 2009 ficeoftheSecretary,Boardof Governors A joint meeting of the Federal Open Mr.Struckmeyer,DeputyStaffDirec- Market Committee and the Board of tor,OfficeoftheStaffDirector Governors of the Federal Reserve Sys- forManagement,BoardofGovtem was held in the offices of the ernors Board of Governors in Washington, Mr.English,DeputyDirector,Division D.C., on Tuesday, December 15, 2009, ofMonetaryAffairs,Boardof at 2:00 p.m. and continued on Wednes- Governors day, December 16, 2009, at 9:00 a.m. Ms.Robertson,AssistanttotheBoard, OfficeofBoardMembers,Board Present: ofGovernors Mr.Bernanke,Chairman Mr.Dudley,ViceChairman Ms.Edwards,Messrs.Levin19and Ms.Duke Nelson,18SeniorAssociateDirec- Mr.Evans tors,DivisionofMonetary Mr.Kohn Affairs,BoardofGovernors; Mr.Lacker Messrs.Reifschneiderand Mr.Lockhart Wascher,SeniorAssociateDirec- Mr.Tarullo tors,DivisionofResearchand Mr.Warsh Statistics,BoardofGovernors Ms.Yellen Mr.Meyer,SeniorAdviser,Division Mr.Bullard,Ms.Cumming,Mr.Hoe- ofMonetaryAffairs,Boardof nig,Ms.Pianalto,andMr.Rosen- Governors;Mr.Oliner,Senior gren,AlternateMembersofthe Adviser,DivisionofResearch FederalOpenMarketCommittee andStatistics,BoardofGovernors Messrs.Fisher,Kocherlakota,and Plosser,PresidentsoftheFederal Ms.Zickler,DeputyAssociateDirec- ReserveBanksofDallas,Minne- tor,DivisionofResearchand apolis,andPhiladelphia,respec- Statistics,BoardofGovernors tively Mr.Small,ProjectManager,Division Mr.Madigan,SecretaryandEcono- ofMonetaryAffairs,Boardof mist Governors Mr.Luecke,AssistantSecretary Mr.Skidmore,AssistantSecretary Mr.Bassett,SectionChief,Divisionof Ms.Smith,AssistantSecretary MonetaryAffairs,BoardofGov- Mr.Alvarez,GeneralCounsel ernors;Mr.Roberts,19Section Mr.Baxter,DeputyGeneralCounsel Chief,DivisionofResearchand Mr.Sheets,Economist Statistics,BoardofGovernors Messrs.Altig,Clouse,Connors,Ka- Ms.Beattie,20AssistanttotheSecremin,Slifman,Tracy,andWilcox, tary,OfficeoftheSecretary, AssociateEconomists BoardofGovernors Mr.Sack,Manager,SystemOpen Ms.Low,OpenMarketSecretariat MarketAccount Specialist,DivisionofMonetary Affairs,BoardofGovernors Ms.Johnson,SecretaryoftheBoard, OfficeoftheSecretary,Boardof Governors 18. AttendedTuesday’ssessiononly. Mr.Parkinson,Director,Divisionof 19. Attended the portion of the meeting re- BankSupervisionandRegulation, latedtoinflationdynamics. BoardofGovernors 20. AttendedWednesday’ssessiononly.

376 96th Annual Report, 2009 Mr.Williams,RecordsManagement (MBS) during the intermeeting period. Analyst,DivisionofMonetary The Desk continued to gradually slow Affairs,BoardofGovernors the pace of purchases of these securi- Messrs.FuhrerandRosenblum,Ex- ties in accordance with the program for ecutiveVicePresidents,Federal asset purchases that the Committee ReserveBanksofBostonand announced at the end of its November Dallas,respectively meeting. By unanimous vote, the Com- Mr.Krane,Ms.Mester,Messrs.Sch- mittee ratified those transactions. There weitzerandWaller,SeniorVice were no open market operations in for- Presidents,FederalReserve eign currencies for the System’s BanksofChicago,Philadelphia, account during the intermeeting period. Cleveland,andSt.Louis,respectively Since the Committee met in November, the Federal Reserve’s total assets were Mr.Weber,SeniorResearchOfficer, about unchanged, at nearly $2.2 tril- FederalReserveBankofMinneapolis lion, as the increase in the System’s holdings of securities roughly matched Messrs.Clark,Dotsey,19Fernald, a further decline in usage of the Sys- Hornstein,Olivei,19and Wynne,19VicePresidents,Fed- tem’s credit and liquidity facilities. The eralReserveBanksofKansas Manager noted that the System’s hold- City,Philadelphia,SanFrancisco, ings of securities will tend to decline Richmond,Boston,Dallas,re- gradually after the completion of the spectively asset purchase programs, reflecting ma- Messrs.Friedmanandvander turing issues and prepayments on hold- Klaauw,19AssistantVicePresi- ings of MBS. The Manager noted that dents,FederalReserveBankof the Committee would likely wish to NewYork discuss in detail its policy for reinvest- Mr.Martinez-Garcia,19Research ing the proceeds of maturing issues and Economist,FederalReserveBank prepayments; he proposed, as an inofDallas terim approach, continuing the practice of not reinvesting the proceeds of ma- Developments in Financial Markets turing agency securities or MBS preand the Federal Reserve’s Balance payments. Meeting participants sup- Sheet ported that interim approach pending further discussion at future meetings. The Manager of the System Open Mar- The staff presented another update ket Account reported on developments on the continuing development of sevin domestic and foreign financial mar- eral tools that could be used to support kets since the Committee’s November a smooth withdrawal of policy accom- 3–4 meeting. Financial conditions gen- modation at the appropriate time; these erally had become somewhat more sup- tools include executing reverse repurportive of economic growth. There was chase agreements (RRPs) on a large little evidence of year-end funding scale and implementing a term deposit pressures, although demand for Trea- facility (TDF). To further test its RRP sury bills with maturities extending just capabilities, in early December, the beyond year-end remained elevated. Desk executed a few small RRPs with The Manager also reported on System primary dealers, using both Treasury open market operations in agency debt and agency debt as collateral. These and agency mortgage-backed securities transactions confirmed the operational

Minutes of FOMC Meetings, December 377 capability to execute triparty RRPs on consider further steps the Federal a larger scale if so directed by the Reserve might take to move toward Committee. The Desk was continuing normalization of its lending facilities at to develop the capacity to conduct upcoming meetings, when the Commit- RRPs using agency MBS collateral and tee plans to discuss alternative apanticipated that this work would be proaches to implementing monetary completed by the spring. In addition, policy in the longer-run. the Desk reported that it was exploring the operational issues associated with Staff Review of the expanding potential counterparties for Economic Situation RRPs beyond the primary dealers. Staff also reported significant progress in de- The information reviewed at the veloping and implementing a TDF. The December 15–16 meeting suggested staff noted that it planned to ask the that the recovery in economic activity Board to approve a Federal Register was gaining momentum. The pace of notice requesting public comments on a job losses slowed noticeably in recent TDF and summarized the contents of months, and total hours worked the draft notice. increased in November; however, the The staff also briefed the Committee unemployment rate remained quite elon recent developments regarding vari- evated. Industrial production sustained ous Federal Reserve liquidity and the broad-based expansion that began credit facilities, including the Term in the third quarter, but capacity utiliza- Auction Facility (TAF), the primary tion remained very low. Consumer credit program, and the Term Asset- spending expanded solidly in October, Backed Securities Loan Facility reflecting in part a faster pace of motor (TALF). TAF auctions continued to be vehicle sales. Both light vehicle sales undersubscribed even as the Federal and total retail sales rose again in Reserve progressively reduced the total November. Sales of new homes inamount of funding available from the creased significantly in recent months, TAF. With the exception of the TALF, a development that, given the slow usage of the other facilities declined pace of construction, reduced the infurther as financial market conditions ventory of unsold new homes; sales of continued to improve. The TALF existing homes rose strongly. Spending expanded modestly, supporting issu- on equipment and software continued ance of asset-backed securities collater- to stabilize, but investment in nonresialized by consumer, small business, dential structures declined further as and student loans as well as commer- conditions in nonresidential real estate cial mortgage-backed securities markets remained poor. Both imports (CMBS). Indeed, over the intermeeting and exports continued to recover from period, TALF lending supported the their depressed levels of earlier this first new CMBS issue since June 2008. year, and the U.S. trade deficit in Sep- On November 17, the Board of Gover- tember and October was wider than in nors announced a reduction in the earlier months. Although a jump in maximum maturity of loans available energy prices pushed up headline inflaunder the discount window’s primary tion somewhat, core consumer price incredit program from 90 days to 28 flation remained subdued. days, effective January 14, 2010. Par- Data received over the intermeeting ticipants agreed it would be useful to period suggested that the pace of job

378 96th Annual Report, 2009 loss slowed considerably in recent clunkers” program in August. Sales of months relative to the steep declines new light vehicles increased again in that occurred in the first half of the November. Real disposable personal year. The average decline in private income rose in October, reflecting payrolls in October and November was modest gains in nominal labor income; much smaller than in the third quarter; moreover, the increase in real after-tax that recent improvement was wide- income during the spring and summer spread across industries. The length of was revised up. The latest readings from the average workweek for production indexes of consumer sentiment reand nonsupervisory workers increased mained within the relatively low range in November; moreover, aggregate that prevailed over the previous six hours worked registered the first sub- months, apparently still weighed down stantial increase since the recession by weak labor market conditions and began. The unemployment rate dropped prior declines in household net worth. in November but remained quite high, Housing construction held fairly while the labor force participation rate steady in recent months, while demand continued to decrease. The four-week for housing continued to firm. Singlemoving average of initial claims for family housing starts remained roughly unemployment benefits declined some- flat from June to November at levels what through early December. Continu- only modestly above those reported ing claims for unemployment insurance earlier in the year. In the much smaller through regular state programs also multifamily sector, where tight credit moved down, but the average length of conditions persisted and vacancies spells of unemployment continued to stayed elevated, the average pace of increase. starts in October and November After expanding briskly in the third decreased somewhat from the already quarter, industrial production increased very low rate in the third quarter. In further in October and November. The contrast, sales of existing single-family gains continued to be fairly broad homes increased significantly again in based, and were particularly strong for October. Sales of new homes also rose consumer durables and materials. Busi- in October after two months of little ness surveys suggested that factory out- change. With sales continuing to output would advance further in the com- pace construction, the inventory of uning months. Capacity utilization rose sold new homes declined to its lowest again in November, but remained at a level in three years. The recent invery low level by historical standards. creases in sales likely reflected im- Real personal consumption expendi- proved fundamentals: The average tures increased at a solid pace in Octo- interest rate on 30-year conforming ber, with broad-based advances in both fixed-rate mortgages declined to less goods and services. The data for nomi- than 5 percent, and surveys suggested nal retail sales in November showed that households now expected home continued widespread improvement, prices to be fairly stable over the next particularly at general merchandise year. Although some house price instores, electronics and appliance stores, dexes declined a little in September and nonstore retailers. Outlays for and October, they remained above the motor vehicles bounced back in Octo- troughs reached last spring. ber after a slump in September that Real spending on equipment and followed the end of the “cash-for- software was estimated to have risen

Minutes of FOMC Meetings, December 379 slightly in the third quarter after falling tember, imports flattened out in Octosharply for more than a year. Increased ber, although the slowing almost outlays for transportation equipment entirely reflected reduced oil purand high-tech goods accounted for the chases. Most other categories of imstabilization. Outside of those sectors, ports, including automotive goods, spending declined a bit further in the industrial supplies other than oil and third quarter, although not as steeply as gold, consumer goods, and capital it had earlier in the year. Shipments of goods, posted solid increases in the transportation and high-tech equipment past two months. remained strong in October, but ship- The most recent data from the ments of nondefense capital goods advanced foreign economies suggested excluding those categories declined, that they continue to emerge from their and new orders fell sharply across a deep recessions. Real gross domestic range of products. Business purchases product (GDP) rose in the third quarter of motor vehicles rose significantly in Japan, the euro area, and Canada, again in November. Moreover, monthly and the pace of contraction in the surveys of business conditions, senti- United Kingdom moderated substanment, and capital spending plans tially. The limited data relating to the pointed to a moderate rise in business fourth quarter suggested that economic spending going forward. In contrast, activity advanced in all of those econoconditions in the nonresidential con- mies. Surveys of purchasing managers struction sector generally remained and indicators of business and conquite poor. For instance, real outlays on sumer confidence generally improved structures outside of the drilling and further. Data for October indicated that mining sector plunged in the third trade volumes continued to rise in each quarter. Also in the third quarter, va- of these economies, retail sales cancy rates on nonresidential properties increased in the United Kingdom and rose further, and property prices contin- stopped declining in the euro area, ued to fall amid difficult financing con- housing starts climbed in Canada, and ditions. The book value of manufactur- industrial production increased in Japan ing and trade inventories excluding for the eighth consecutive month. motor vehicles and parts increased in Third-quarter real GDP growth was October for the first time in more than surprisingly strong in several emerging a year, even as the ratio of such inven- market economies, most notably tories to sales declined further. Capital Mexico and India. In emerging Asia markets continued to become some- and in Latin America, indicators sugwhat more supportive of business in- gested that economic activity was vestment over the intermeeting period. expanding somewhat less rapidly, but In contrast, available data indicated that still briskly, in the fourth quarter. Price banks continued to raise spreads on pressures remained subdued in most business loans. of the advanced foreign economies, The U.S. international trade deficit although headline inflation generally was somewhat wider in September and moved up. Headline inflation also October than in previous months. Ex- increased in emerging Asia, generally ports of goods and services increased from low levels, but declined further in sharply, and the gains were broadly Latin America, likely in part because distributed across most major catego- of the recent appreciation of several ries of exports. After surging in Sep- Latin American currencies.

380 96th Annual Report, 2009 In the United States, the latest data following the release, but declined, on indicated that total consumer price in- net, over the intermeeting period. Inflation turned up in recent months, coming economic data, while somewhile core consumer price inflation what better than expected, seemed to remained subdued. The higher readings have little net effect on interest rate exon headline consumer price inflation pectations. Indeed, the expected path of were the result of a rebound in energy the federal funds rate shifted down prices. Core consumer prices increased somewhat over the intermeeting period. modestly in October and were un- Consistent with the decrease in shortchanged in November. Median year- term interest rates, yields on 2-year ahead inflation expectations in the nominal off-the-run Treasury securities Reuters/University of Michigan Survey declined slightly, on net, over the interof Consumers declined in early Decem- meeting period. In contrast, yields on ber, and the same survey’s measure of nominal 10-year Treasury securities longer-term inflation expectations edged higher on balance. Inflation moved down to the lower end of the compensation based on 5-year Treasury narrow range that prevailed over the inflation-protected securities (TIPS) previous few years. Revised data increased, apparently owing in part to showed solid increases in hourly com- an announcement by the Treasury of a pensation in the second and third quar- smaller-than-expected amount of issuters, along with quite rapid productivity ance of TIPS next year. Five-year inflagrowth and a further decline in unit tion compensation five years ahead labor costs. Average hourly earnings of also rose, and was near the upper end production and nonsupervisory workers of its range in recent years. increased modestly, on average, in Conditions in short-term funding October and November. markets were little changed over the intermeeting period. Spreads between London interbank offered rates (Libor) Staff Review of the and overnight index swap (OIS) rates Financial Situation at one- and three-month maturities Market participants largely anticipated were about flat; spreads at the sixthe decisions by the Federal Open Mar- month maturity narrowed somewhat ket Committee (FOMC) at the Novem- further but remained above pre-crisis ber meeting to keep the target range for levels. Spreads on A2/P2-rated comthe federal funds rate unchanged and to mercial paper (CP) and AA-rated assetretain the “extended period” language backed CP remained near their lows of in the accompanying statement. How- the past two years. Indicators of funcever, market participants took note of tioning in the market for nominal Treathe Committee’s explicit enumeration sury securities—including trading volof the factors that were expected to umes and liquidity premiums for the continue to warrant this policy stance, on-the-run 10-year note—were roughly and Eurodollar futures rates fell a bit stable. Liquidity conditions in the TIPS on the release. In contrast, the an- market showed further improvement. nouncement that the Federal Reserve Year-end pressures in short-term fundwould purchase only about $175 billion ing markets, including the CP and bank of agency debt securities had not been funding markets, remained modest. generally anticipated. Spreads on those However, high demand for Treasury securities widened a few basis points bills maturing just past December 31

Minutes of FOMC Meetings, December 381 drove yields on such issues to zero in securities rebounded in November from some recent auctions. its subdued pace in October. Moreover, Over the intermeeting period, broad with support from the TALF, the first stock price indexes increased further. CMBS issue in nearly 18 months came The rise in share prices likely reflected to market. A few other CMBS deals the improvement in the economic out- were subsequently completed without look and strong third-quarter earnings, support from the TALF. Business debt which led analysts to mark up their es- was held down in November by timates of future earnings. The gains another drop in bank loans, as well as were widespread across industry sec- a decrease in CP outstanding, though tors. However, financial stocks signifi- the latter was concentrated among a cantly underperformed the market, as few large firms. In contrast, gross issuinvestors continued to express concerns ance of investment- and speculativeabout the future profitability of the grade bonds was robust in November. banking industry. Option-implied vola- The federal government continued to tility on the S&P 500 index declined. issue debt at a brisk pace, and gross is- The spread between an estimate of the suance of state and local government expected real return on equity over the debt remained strong in November. next 10 years and an estimate of the Commercial bank credit decreased real 10-year Treasury yield—a rough further in November, although the pace gauge of the equity risk premium— of decline slowed relative to recent remained about unchanged at a rela- months. Commercial and industrial tively high level. Yields on investment- (C&I) loans continued to drop, likely and speculative-grade corporate bonds reflecting weak demand and a continfell a little more than those on ued tightening of credit terms by comparable-maturity nominal Treasury banks. The Survey of Terms of Busisecurities, leaving their spreads some- ness Lending conducted in November what narrower. Bid-asked spreads for indicated that the average C&I loan corporate bonds—a measure of the li- rate spread over comparable-maturity quidity of such instruments—were market instruments rose for the fifth about unchanged. Prices and bid-asked consecutive survey. The runoff in comspreads in the secondary market for mercial real estate loans continued, leveraged loans also were stable over consistent with the further weakening the intermeeting period. Spreads on of fundamentals in that sector. Bank credit default swaps (CDS) for large loans to households rose, reflecting a bank holding companies narrowed a slowdown in loan sales to the housingbit. related government-sponsored enter- Debt of the private domestic nonfi- prises that resulted in a modest increase nancial sector appeared to be declining in banks’ on-balance-sheet holdings of again in the fourth quarter, as estimates closed-end residential mortgages in suggested a further drop in household November. However, home equity debt and a tick down in nonfinancial loans and consumer loans fell again. business debt. Consumer credit con- According to third-quarter Call Report tracted for the ninth consecutive month data, unused loan commitments shrank in October, reflecting a steep decline in for the seventh consecutive quarter, revolving credit that offset a small though the rate of decline slowed, increase in nonrevolving credit. Issu- especially for commitments to lend to ance of consumer credit asset-backed businesses. The aggregate profitability

382 96th Annual Report, 2009 of the banking sector turned positive in standstill on debts owed by Dubai the third quarter, but most of the World, a government-owned corporaincrease was due to strong earnings at tion, temporarily roiled some financial a few large institutions. Credit quality markets. However, those pressures appeared to worsen as delinquency and eased as investors concluded that charge-off rates increased further for Dubai World’s difficulties were likely most major loan categories. Banks’ to be isolated. Subsequently, the soverregulatory capital ratios increased again eign debt rating for Greece was lowas banks continued to raise equity and ered amid long-standing concerns over shrink their balance sheets. its public finances and a widening of M2 expanded at a moderate rate in its sovereign CDS spreads. November. As was the case in recent Although the central banks of the months, liquid deposits grew rapidly, major foreign industrial economies kept while small time deposits and retail policy rates on hold, the Bank of money market mutual funds contracted, England expanded its asset purchase albeit at slightly slower paces. Cur- program and the Bank of Japan rency declined somewhat in November announced a new secured lending facilas foreign demand for U.S. banknotes ity. In contrast, the European Central appeared to ebb, consistent with the Bank took some initial steps toward continued stabilization in most global scaling back emergency lending. It financial markets. announced that the one-year refinanc- Broad stock price indexes in major ing operation in December would be its advanced foreign economies rose, last and that the cost of the funds proalthough generally somewhat less than vided would float with interest rates set those in the United States. Stock price in future refinancing operations rather indexes in major emerging markets than being fixed as in previous such increased as well, particularly in Brazil operations. and Mexico, amid generally rising commodity prices and a better-than- Staff Economic Outlook expected Mexican GDP report; Chinese stock prices also increased strongly. In the forecast prepared for the Decem- Long-term government bond yields ber FOMC meeting, the staff raised its declined in most advanced foreign projection for average real GDP growth economies, but increased in the United in the second half of 2009 somewhat, Kingdom. The dollar depreciated over and it also modestly increased its foremuch of the intermeeting period, but cast for economic growth in 2010 and then reversed course following the re- 2011. Better-than-expected data on emlease of better-than-expected U.S. data ployment, consumer spending, home on employment and retail sales for sales, and industrial production re- November. On balance, the dollar ceived during the intermeeting period ended the period up slightly against the pointed to a somewhat stronger major foreign currencies and down a increase in real GDP in the current little relative to the currencies of other quarter than had previously been proimportant trading partners. jected. In addition, the positive signal Concerns about the potential for de- from the incoming data, along with the fault by some sovereign borrowers rose sizable upward revisions to household over the intermeeting period. News that income in earlier quarters and more the Dubai government had requested a supportive financial market conditions,

Minutes of FOMC Meetings, December 383 led to small upward adjustments to rolls at a less rapid pace, and that projected growth in real GDP over the downside risks to the outlook for ecorest of the forecast period. The staff nomic growth had diminished a bit furagain anticipated that the recovery ther. Although some of the recent data would strengthen in 2010 and 2011, had been better than anticipated, most supported by further improvement in participants saw the incoming informafinancial conditions and household bal- tion as broadly in line with the projecance sheets, continued recovery in the tions for moderate growth and subdued housing sector, growing household and inflation in 2010 that they had submitbusiness confidence, and accommoda- ted just before the Committee’s Novtive monetary policy, even as the impe- ember 3–4 meeting; accordingly, their tus to real activity from fiscal policy views on the economic outlook had not diminished. However, the projected changed appreciably. Participants expace of real output growth in 2010 and pected the economic recovery to con- 2011 was expected to exceed that of tinue, but, consistent with experience potential output by only enough to pro- following previous financial crises, duce a very gradual reduction in eco- most anticipated that the pickup in outnomic slack. put and employment growth would be The staff forecast for inflation was rather slow relative to past recoveries nearly unchanged. The staff interpreted from deep recessions. A moderate pace the increases in prices of energy and of expansion would imply slow imnonmarket services that recently provement in the labor market next boosted consumer price inflation as year, with unemployment declining largely transitory. Although the pro- only gradually. Participants agreed that jected degree of slack in resource utili- underlying inflation currently was subzation over the next two years was a dued and was likely to remain so for little lower than shown in the previous some time. Some noted the risk that, staff forecast, it was still quite substan- over the next couple of years, inflation tial. Thus, the staff continued to project could edge further below the rates they that core inflation would slow some- judged most consistent with the Federal what from its current pace over the Reserve’s dual mandate for maximum next two years. Moreover, the staff employment and price stability; others expected that headline consumer price saw inflation risks as tilted toward the inflation would decline to about the upside in the medium term. same rate as core inflation in 2010 and A number of factors were expected 2011. to support near-term expansion in economic activity. Consumer spending appeared to be on a moderately rising Participants’ Views on Current trend, reflecting gains in after-tax Conditions and the Economic income and wealth this year. Recent Outlook upward revisions to official estimates In their discussion of the economic of the level of household income in situation and outlook, meeting partici- recent quarters gave participants somepants agreed that the incoming data and what greater confidence that consumer information received from business spending would continue to expand. contacts suggested that economic The housing sector showed continuing growth was strengthening in the fourth signs of improvement, though housing quarter, that firms were reducing pay- starts had leveled out after increasing

384 96th Annual Report, 2009 earlier in the year and activity re- and financial markets generally continmained quite low. Businesses seemed ued to function significantly better than to be reducing the pace of inventory re- early in the year. Participants noted, ductions. The outlook for growth however, that securitization markets abroad had improved since earlier in were still substantially impaired. In the year, auguring well for U.S. ex- general, U.S. asset values did not seem ports. In addition, financial market con- out of line with improving fundamenditions generally had become more tals. While investors evidently had supportive of economic growth. While become less cautious and more willing these developments were positive, par- to bear risk, they appeared to be disticipants noted several factors that criminating among risky assets. Banks likely would continue to restrain the were raising new capital and in some expansion in economic activity. Busi- cases paying back funds received from ness contacts again emphasized they the Troubled Asset Relief Program. would be cautious in adding to payrolls Bank loans, however, continued to conand capital spending, even as demand tract sharply in all categories, reflecting for their products increases. Conditions lack of demand, deterioration in potenin the commercial real estate (CRE) tial borrowers’ credit quality, uncersector were still deteriorating. Bank tainty about the economic outlook, and credit had contracted further, and with banks’ concerns about their own capital many banks facing continuing loan positions. With rising levels of nonperlosses, tight bank credit could continue forming loans expected to be a conto weigh on the spending of some tinuing source of stress, and with many households and businesses. Some par- regional and small banks vulnerable to ticipants remained concerned about the the deteriorating performance of CRE economy’s ability to generate a self- loans, bank lending terms and stansustaining recovery without govern- dards were seen as likely to remain ment support. In particular, they noted tight. Participants again noted the conthe risk that improvements in the hous- trast between large and small firms’ acing sector might be undercut next year cess to financing. Large firms that can as the Federal Reserve’s purchases of issue debt in the markets appeared to MBS wind down, the homebuyer tax have relatively little difficulty obtaining credits expire, and foreclosures and dis- credit. In contrast, smaller firms, which tress sales continue. Though the near- tend to be more dependent on commerterm outlook remains uncertain, partici- cial banks for financing, reportedly pants generally thought the most likely faced substantial constraints in gaining outcome was that economic growth access to credit. While survey evidence would gradually strengthen over the suggested that small businesses considnext two years as financial conditions ered weak demand to be a larger probimproved further, leading to more- lem than access to credit, participants substantial increases in resource utili- saw limited credit availability as a pozation. tential constraint on future investment Financial market conditions were and hiring by small businesses, which generally regarded as having become normally are a significant source of more supportive of continued economic employment growth in recoveries. recovery during the intermeeting The weakness in labor markets conperiod: Equity prices rose further, pri- tinued to be an important concern to vate credit spreads narrowed somewhat, meeting participants, who generally ex-

Minutes of FOMC Meetings, December 385 pected unemployment to remain el- encouraging. Retail sales increased, evated for quite some time. The unem- spurred by price discounting. The Buployment rate was not the only reau of Economic Analysis revised up indicator pointing to substantial slack its estimates of the level of real disposin labor markets: The employment-to- able income—and thus of the personal population ratio had fallen to a 25-year saving rate—in the second and third low, and aggregate hours of production quarters of this year. Those revisions, workers had dropped more than during along with recent gains in equity the 1981–82 recession. Although the prices, suggested a smaller probability November employment report was con- that households would reduce spending siderably better than anticipated, sev- to rebuild their savings more rapidly. eral participants observed that more However, uncertain job prospects, modthan one good report would be needed est growth in real incomes, tight credit, to provide convincing evidence of and wealth levels that remained relarecovery in the labor market. Partici- tively low despite this year’s rise in pants also noted that the slowing pace equity prices and stabilization in house of employment declines mainly re- prices were seen as likely to weigh on flected a diminished pace of layoffs; consumer confidence and the growth of few firms were hiring. Moreover, the consumer spending for some time to unusually large fraction of those indi- come. Anecdotal evidence on consumer viduals with jobs who were working spending in this year’s holiday season part time for economic reasons, as well was mixed. as the uncommonly low level of the Participants noted that firms had average workweek, pointed to only a made substantial progress in reducing gradual decline in unemployment as inventories toward desired levels and the economic recovery proceeded. were cutting stocks at a slower pace Indeed, many business contacts again than earlier in the year. This adjustment reported that they would be cautious in likely was making an important contritheir hiring, saying they expected to bution to economic growth in the meet any near-term increase in demand fourth quarter, and participants exby raising their existing employees’ pected that it would do so into 2010 as hours and boosting productivity, thus well. The combination of rising condelaying the need to add employees. sumer spending, slower destocking, and The necessity of reallocating labor rising goods production was reflected in across sectors as the recovery proceeds, reports from major transportation comas well as the loss of skills caused by panies that shipping volumes were up. high levels of long-term unemployment Investment in equipment and softand permanent separations, also could ware appeared to have stabilized, and limit the pace of employment gains. recent data on new orders continued to Nonetheless, the reported rise in em- point to some pickup next year. Even ployment of temporary workers in so, many participants expressed the recent months could presage a broader view that cautious business sentiment, increase in job growth and thus was a together with low industrial utilization welcome development. rates, was likely to keep new capital The prognosis for labor markets spending subdued until firms became remained an important factor in the more confident about the durability of outlook for consumer spending. Recent increases in demand. Many also noted data on household expenditures were widespread reports from business con-

386 96th Annual Report, 2009 tacts that uncertainties about health- markets, along with well-anchored incare, tax, and environmental policies flation expectations, would keep inflawere adding to businesses’ reluctance tion subdued in the near term, although to commit to higher capital spending. they had differing views as to the rela- CRE activity continued to fall mark- tive importance of those two factors. edly in most parts of the country as a The decelerations in wages and unit result of deteriorating fundamentals, labor costs this year, and the accompaincluding declining occupancy and nying deceleration in marginal costs, rental rates, and very tight credit condi- were cited as factors putting downward tions. Prospects for nonresidential con- pressure on inflation. Moreover, anecstruction remained weak. dotal evidence suggested that most In the residential real estate sector, firms had little ability to raise their home sales and construction had risen prices in the current economic environrelative to the very low levels reported ment. Some participants noted, howin the spring; moreover, house prices ever, that rising prices of oil and other appeared to be stabilizing and in some commodities, along with increases in areas had reportedly moved higher. import prices, could boost inflation Generally, the outlook was for gains in pressures going forward. Overall, many housing activity to continue. However, participants viewed the risks to their insome participants still viewed the flation outlooks as being roughly balimproved outlook as quite tentative and anced. Some saw inflation risks as again pointed to potential sources of tilted to the downside, reflecting the softness, including the termination next quite elevated level of economic slack year of the temporary tax credits for and the possibility that inflation expechomebuyers and the downward pres- tations could begin to decline in sure that further increases in foreclo- response to the low level of actual insures could put on house prices. More- flation. But others felt that inflation over, mortgage markets could come risks were tilted to the upside, particuunder pressure as the Federal Reserve’s larly in the medium term, because of agency MBS purchases wind down. the possibility that inflation expecta- Stronger foreign economic activity, tions could rise as a result of the pubespecially in the emerging market lic’s concerns about extraordinary economies in Asia, as well as the par- monetary policy stimulus and large tial reversal this year of the dollar’s federal budget deficits. Moreover, a appreciation during the latter part of few participants noted that banks might 2008, was providing further support to seek, as the economy improves, to re- U.S. exports, including agricultural ex- duce their excess reserves quickly and ports. Further improvements in foreign substantially by purchasing securities economies would likely buoy U.S. ex- or by easing credit standards and ports going forward, but import growth expanding their lending. A rapid shift, would also strengthen as the recovery if not offset by Federal Reserve took hold in the United States. Partici- actions, could give excessive impetus pants noted that any tendency for dollar to spending and potentially result in depreciation to put significant upward expected and actual inflation higher pressure on inflation would bear close than would be consistent with price stawatching. bility. To keep inflation expectations Most participants anticipated that anchored, all participants agreed that substantial slack in labor and product monetary policy would need to be re-

Minutes of FOMC Meetings, December 387 sponsive to any significant improve- longer-term assets if the recovery gains ment or worsening in the economic strength over time. The Committee outlook and that the Federal Reserve maintained the federal funds target would need to continue to clearly com- range at 0 to 1⁄ 4 percent and, based on municate its ability and intent to begin the outlook for a slow economic recovwithdrawing monetary policy accom- ery, decided to reiterate its anticipation modation at the appropriate time and that economic conditions, including pace. low levels of resource utilization, sub- In the Committee’s discussion of dued inflation trends, and stable inflamonetary policy for the period ahead, tion expectations, were likely to warall members agreed that no changes to rant exceptionally low rates for an the Committee’s large-scale asset pur- extended period. Although members chase programs, or to its target range generally saw little risk that maintainfor the federal funds rate, were war- ing very low short-term interest rates ranted at this meeting, inasmuch as the could raise inflation expectations or economic outlook had changed little create instability in asset markets, they since the November meeting. Accord- noted that it was important to remain ingly, the Committee affirmed its inten- alert to these risks. All agreed that the tion to purchase $1.25 trillion of path of short-term rates going forward agency MBS and about $175 billion of would depend on the evolution of the agency debt by the end of the first economic outlook. quarter of 2010 and to gradually slow Committee members and Board the pace of these purchases to promote members agreed that there had been a smooth transition in markets. The substantial improvements in the func- Committee emphasized that it would tioning of financial markets; accordcontinue to evaluate the timing and ingly they agreed that the statement to overall amounts of its purchases of se- be released following the meeting curities in light of the evolving eco- should indicate an anticipation that nomic outlook and conditions in finan- most of the Federal Reserve’s special cial markets. A few members noted liquidity facilities will expire on Februthat resource slack was expected to di- ary 1, 2010; these facilities include the minish only slowly and observed that it Asset-Backed Commercial Paper might become desirable at some point Money Market Mutual Fund Liquidity in the future to provide more policy Facility, the Commercial Paper Funding stimulus by expanding the planned Facility, the Primary Dealer Credit Fascale of the Committee’s large-scale cility, and the Term Securities Lending asset purchases and continuing them Facility. Committee members also beyond the first quarter, especially if agreed to announce that the Federal the outlook for economic growth were Reserve will be working with its cento weaken or if mortgage market func- tral bank counterparties to close its tioning were to deteriorate. One mem- temporary liquidity swap arrangements ber thought that the improvement in by February 1. In addition, the statefinancial market conditions and the ment would announce an expectation economic outlook suggested that the that amounts provided under the Term quantity of planned asset purchases Auction Facility will continue to be could be scaled back, and that it might scaled back in early 2010, and that the become appropriate to begin reducing anticipated expiration dates for the the Federal Reserve’s holdings of Term Asset-Backed Securities Loan Fa-

388 96th Annual Report, 2009 cility remained June 30, 2010, for loans ance sheet that could affect the attainment backed by new-issue CMBS, and over time of the Committee’s objectives of maximum employment and price stability.” March 31, 2010, for loans backed by all other types of collateral. Members The vote encompassed approval of emphasized that they were prepared to the statement below to be released at modify these plans if necessary to sup- 2:15 p.m.: port financial stability and economic “Information received since the Federal growth. In that context, several mem- Open Market Committee met in November bers noted that the TALF was still prosuggests that economic activity has continviding important support for securitiza- ued to pick up and that the deterioration in tion markets, particularly the CMBS the labor market is abating. The housing market, and that improvements in the sector has shown some signs of improvementoverrecentmonths.Householdspendfunctioning of securitization markets ing appears to be expanding at a moderate were lagging behind those in other rate, though it remains constrained by a financial markets. weak labor market, modest income growth, At the conclusion of the discussion, lower housing wealth, and tight credit. the Committee voted to authorize and Businesses are still cutting back on fixed direct the Federal Reserve Bank of investment, though at a slower pace, and remain reluctant to add to payrolls; they New York, until it was instructed othercontinue to make progress in bringing wise, to execute transactions in the inventory stocks into better alignment with System Account in accordance with the sales. Financial market conditions have following domestic policy directive: become more supportive of economic growth. Although economic activity is “The Federal Open Market Committee likely to remain weak for a time, the Comseeks monetary and financial conditions mittee anticipates that policy actions to stathat will foster price stability and promote bilizefinancialmarketsandinstitutions,fissustainable growth in output. To further its cal and monetary stimulus, and market long-run objectives, the Committee seeks forces will contribute to a strengthening of conditions in reserve markets consistent economic growth and a gradual return to withfederalfundstradinginarangefrom0 higher levels of resource utilization in a to 1⁄4 percent. The Committee directs the contextofpricestability. Desk to purchase agency debt and agency With substantial resource slack likely to MBS during the intermeeting period with continue to dampen cost pressures and with the aim of providing support to private longer-term inflation expectations stable, credit markets and economic activity. The the Committee expects that inflation will timing and pace of these purchases should remainsubduedforsometime. depend on conditions in the markets for The Committee will maintain the target such securities and on a broader assessment range for the federal funds rate at 0 to 1⁄4 of private credit market conditions. The percentandcontinuestoanticipatethateco- Desk is expected to execute purchases of nomic conditions, including low rates of about $175 billion in housing-related resource utilization, subdued inflation agency debt and about $1.25 trillion of trends, and stable inflation expectations, are agency MBS by the end of the first quarter likelytowarrantexceptionallylowlevelsof of 2010. The Desk is expected to gradually the federal funds rate for an extended slow the pace of these purchases as they period. To provide support to mortgage nearcompletion.TheCommitteeanticipates lending and housing markets and to that outright purchases of securities will improve overall conditions in private credit cause the size of the Federal Reserve’s bal- markets, the Federal Reserve is in the proance sheet to expand significantly in com- cess of purchasing $1.25 trillion of agency ing months. The System Open Market mortgage-backed securities and about $175 Account Manager and the Secretary will billion of agency debt. In order to promote keep the Committee informed of ongoing asmoothtransitioninmarkets,theCommitdevelopments regarding the System’s bal- tee is gradually slowing the pace of these

Minutes of FOMC Meetings, December 389 purchases, and it anticipates that these over, estimates of the magnitude of transactions will be executed by the end of slack and its effect on inflation are senthe first quarter of 2010. The Committee sitive to the details of the analytical will continue to evaluate the timing and framework and the statistical methodoloverall amounts of its purchases of securities in light of the evolving economic out- ogy used in each study. While theory lookandconditionsinfinancialmarkets. suggests that the degree of slack pre- In light of ongoing improvements in the vailing in foreign economies could affunctioning of financial markets, the Com- fect domestic inflation, empirical evimittee and the Board of Governors anticidence on the importance of such an patethatmostoftheFederalReserve’sspeeffect was mixed. Evidence suggested cial liquidity facilities will expire on February 1, 2010, consistent with the Fed- that sizable shifts in the longer-run ineral Reserve’s announcement of June 25, flation expectations of households and 2009. These facilities include the Asset- firms had influenced the evolution of Backed Commercial Paper Money Market inflation over previous decades; in con- Mutual Fund Liquidity Facility, the Comtrast, the anchoring of inflation expecmercial Paper Funding Facility, the Primary DealerCreditFacility,andtheTermSecuri- tations in recent years likely had ties Lending Facility. The Federal Reserve damped somewhat the response of acwill also be working with its central bank tual inflation to the recent economic counterparties to close its temporary liquiddownturn and to fluctuations in the ity swap arrangements by February 1. The prices of energy and other commodi- Federal Reserve expects that amounts provided under the Term Auction Facility will ties. In discussing these issues, particicontinue to be scaled back in early 2010. pants noted that they bear in mind the The anticipated expiration dates for the shocks hitting the economy and regu- TermAsset-BackedSecuritiesLoanFacility larly monitor more than one measure remain set at June 30, 2010, for loans of resource slack as they assess the backed by new-issue commercial mortgagebacked securities and March 31, 2010, for outlook for economic activity and inloans backed by all other types of collat- flation. They also noted the importance eral. The Federal Reserve is prepared to of formulating monetary policy in ways modify these plans if necessary to support that would work well across a range of financialstabilityandeconomicgrowth.” possible economic structures rather Voting for this action: Messrs. Ber- than relying on any one analytical nanke and Dudley, Ms. Duke, Messrs. framework. Finally, they underscored Evans, Kohn, Lacker, Lockhart, the importance of keeping longer-run Tarullo,andWarsh,andMs.Yellen. inflation expectations firmly anchored Votingagainstthisaction:None. to help achieve the Federal Reserve’s dual mandate for maximum employ- Following the Committee’s policy ment and price stability. decision, staff gave several presenta- It was agreed that the next meeting tions on the key determinants of infla- of the Committee would be held on tion dynamics. Theoretical and empiri- Tuesday−Wednesday, January 26–27, cal research indicates that inflation can 2010. The meeting adjourned at 1:00 respond to deviations of economic ac- p.m. on December 16, 2009. tivity from its longer-run sustainable path. However, in some theoretical Notation Votes frameworks, the connection between resource slack and inflation depends on By notation vote completed on Novemthe nature of the shock and its impact ber 23, 2009, the Committee unanion marginal costs and markups. More- mously approved the minutes of the

390 96th Annual Report, 2009 FOMC meeting held on November orfullyguaranteedastoprincipalandinter- 3−4, 2009. est by, any agency of the United States, for the purpose of helping to ensure the readi- By notation vote completed on ness of the Federal Reserve’s tools for ab- November 24, 2009, the Committee sorbing bank reserves. The reverse repo unanimously approved the following transactions authorized in this resolution resolution: shall have terms to maturity of 20 business days or less and the total amount of all “The Federal Open Market Committee transactions outstanding at a given time authorizes the Federal Reserve Bank of shallbe$5billionorless.” New York to conduct reverse repo transactions involving U.S. Government securities, Brian F. Madigan and securities that are direct obligations of, Secretary

391 Litigation During 2009, the Board of Governors a Freedom of Information Act case. was a party in ten lawsuits or appeals The court dismissed the case on the filed that year and in seven other cases parties’ motion on November 30, 2009. pending from previous years, for a total Freedom Watch, Inc., v. Board of of seventeen cases. In 2008, the Board Governors, No. 09-331 (D. District of had been a party in a total of eleven Columbia, filed February 19, 2009), cases. As of December 31, 2009, ten was a Freedom of Information Act cases were pending. case. The district court granted the Gold Anti-Trust Action Committee, Board’s motion to dismiss the action Inc., v. Board of Governors, No. 09- on August 12, 2009. 2436 (D. District of Columbia, filed Barlow v. Federal Reserve System, December 30, 2009), is a Freedom of No. 09-177 (D. District of Columbia, Information Act case. filed February 25, 2009), was an action Judicial Watch, Inc. v. Board of Gov- for writ of mandamus regarding a stuernors, No. 09-2138 (D. District of Co- dent loan. On September 1, 2009, the lumbia, filed November 13, 2009), is a district court dismissed the case. Freedom of Information Act case. Fox News Network v. Board of Gov- Citizens for Responsibility and Eth- ernors, No. 09-272 (S.D. New York, ics in Washington v. Board of Gover- filed January 13, 2009), is a Freedom nors, No. 09-2113 (D. District of Co- of Information Act case. On July 30, lumbia, filed November 10, 2009), is a 2009, the district court granted the Freedom of Information Act case. Board’s motion for summary judgment McKinley v. Board of Governors, (639 F. Supp. 2d 84). The plaintiff’s No. 09-1263 (D. District of Columbia, appeal to the Second Circuit (09-3795, filed July 8, 2009), is a Freedom of In- filed September 11, 2009) is pending. formation Act case. Murray v. Board of Governors, No. Odoski v. Bernanke, No. 09-cv-718 08-cv-15147 (E.D. Michigan, filed (W.D. Pennsylvania, filed June 5, December 15, 2008), is a challenge to 2009), was an employment discrimina- the constitutionality of federal expendition case. On December 29, 2009, the tures relating to American International district court dismissed the action. Group (AIG). Citizens for Responsibility and Eth- Bumgarner v. Paulson, Bernanke, et ics in Washington v. Board of Gover- al., No. 08-cv-5245 (D. New Jersey, nors, No. 09-663 (D. District of Co- amended complaint filed November 21, lumbia, filed April 16, 2009), was a 2008), was a challenge to the imple- Freedom of Information Act case. On mentation of the Economic Emergency November 19, 2009, the district court Stabilization Act of 2008. On August granted the Board’s motion for sum- 10, 2009, the district court dismissed mary judgment. the action. The New York Times Company v. Bloomberg, L.P. v. Board of Gover- Board of Governors, No. 09-2645 (S.D. nors, No. 08-cv-9595 (S.D. New York, New York, filed March 23, 2009), was filed November 7, 2008), is a Freedom

392 96th Annual Report, 2009 of Information Act case. On August 4, court granted the Board’s motion and 2009, the district court granted the dismissed the plaintiff’s claims. On the plaintiff’s motion for summary judg- plaintiff’s appeal (No. 08-5092, filed ment (649 F. Supp. 2d 262). The April 21, 2008), the District of Co- Board’s appeal to the Second Circuit lumbia Circuit affirmed in part and (09-4083, filed October 1, 2009) is reversed in part, and remanded the pending. action to the district court. 557 F.3d Schulz v. United States Federal 670. Reserve System, No. 1:08-cv-991 (N.D. Chandler v. Bernanke, No. 06-2082 New York, filed September 18, 2008), (D. District of Columbia, filed Decemis an action relating to the Federal Re- ber 6, 2006), was an employment disserve’s loan to American International crimination action. On September 21, Group. On September 25, 2008, the 2009, the case was dismissed on the district court denied plaintiff’s request parties’ stipulation. for a temporary restraining order and Artis v. Greenspan, No. 09-5121 preliminary injunction. On September (District of Columbia Circuit, filed 30, 2008, the plaintiff appealed the dis- April 9, 2009), is an appeal from the trict court’s order to the United States district court’s dismissal of the plain- Court of Appeals for the Second Cir- tiffs’ employment discrimination claim cuit (No. 08-4810). (474 F. Supp. 2d 16 (January 31, Jones v. Greenspan, No. 04-1696 (D. 2007)) and subsequent denial of the District of Columbia, filed October 4, plaintiffs’ motion to alter or amend 2004), is an employment discrimination judgment (256 F.R.D. 4 (March 2, case. On March 10, 2008, the district 2009)). Á

Federal Reserve System Organization

Federal Reserve System Organization 395 Board of Governors December31,2009 Members MarkE.VanDerWeide,Assistant Termexpires GeneralCounsel January31, BenS.Bernanke,Chairman1 ..... 2020 CaryK.Williams,AssistantGeneral Counsel DonaldL.Kohn,ViceChairman1 .. 2016 KevinM.Warsh .................. 2018 Office of the Secretary ElizabethA.Duke ............... 2012 DanielK.Tarullo ............... 2022 JenniferJ.Johnson,Secretary RobertdeV.Frierson,DeputySecretary Officers MargaretM.Shanks,Associate Secretary Office of Board Members MichelleA.Smith,Director Division of LindaL.Robertson,Assistanttothe International Finance Board LarickeD.Blanchard,Assistanttothe D.NathanSheets,Director Board ThomasA.Connors,DeputyDirector RosannaPianalto-Cameron,Assistantto StevenB.Kamin,DeputyDirector theBoard JosephE.Gagnon,AssociateDirector DavidW.Skidmore,AssistanttotheBoard MichaelP.Leahy,AssociateDirector BrianJ.Gross,SpecialAssistanttothe RalphW.Tryon,AssociateDirector BoardforCongressionalLiaison TrevorA.Reeve,DeputyAssociate RobertM.Pribble,SpecialAssistantto Director theBoardforCongressionalLiaison JohnH.Rogers,DeputyAssociateDirector LucretiaM.Boyer,SpecialAssistantto ChristopherJ.Erceg,AssistantDirector theBoardforPublicInformation LindaS.Kole,AssistantDirector WinthropP.Hambley,SeniorAdviser MarkS.Carey,Adviser Legal Division JaneHaltmaier,Adviser ScottG.Alvarez,GeneralCounsel Division of RichardM.Ashton,DeputyGeneral Counsel Monetary Affairs KathleenM.O’Day,DeputyGeneral BrianF.Madigan,Director Counsel JamesA.Clouse,DeputyDirector StephanieMartin,AssociateGeneral DeborahJ.Danker,DeputyDirector Counsel WilliamB.English,DeputyDirector AnnMisback,AssociateGeneralCounsel CherylL.Edwards,SeniorAssociate KatherineH.Wheatley,Associate Director GeneralCounsel AndrewT.Levin,SeniorAssociate KieranJ.Fallon,AssociateGeneral Director Counsel WilliamNelson,SeniorAssociateDirector StephenH.Meyer,AssistantGeneral Counsel SethB.Carpenter,AssociateDirector PatriciaA.Robinson,AssistantGeneral RobertoPerli,AssociateDirector Counsel GretchenC.Weinbach,Deputy AssociateDirector EgonZakrajsek,DeputyAssociate 1. The designations as Chairman and Vice Director Chairman expire on January 31, 2010, and MatthewM.Luecke,AssistantDirector June22,2010,respectively,unlesstheserviceof thesemembersoftheBoardterminatessooner. StephenA.Meyer,SeniorAdviser

396 96th Annual Report, 2009 Board of Governors—continued Division of Research BarbaraJ.Bouchard,AssociateDirector and Statistics BetsyCross,AssociateDirector DavidJ.Stockton,Director GeraldA.Edwards,Jr.,Associate DavidW.Wilcox,DeputyDirector Director J.NellieLiang,SeniorAssociateDirector JonD.Greenlee,AssociateDirector DavidL.Reifschneider,SeniorAssociate JackP.JenningsII,AssociateDirector Director DavidS.Jones,AssociateDirector LawrenceSlifman,SeniorAssociate ArthurW.Lindo,AssociateDirector Director WilliamC.Schneider,Jr.,Associate WilliamL.WascherIII,SeniorAssociate Director Director WilliamG.Spaniel,AssociateDirector AlicePatriciaWhite,SeniorAssociate CoryannStefansson,AssociateDirector Director MollyS.Wassom,AssociateDirector MichaelS.Gibson,AssociateDirector KevinM.Bertsch,DeputyAssociate S.WaynePassmore,AssociateDirector Director JaniceShack-Marquez,Associate JamesA.Embersit,DeputyAssociate Director Director DanielE.Sichel,AssociateDirector PhilipAquilino,AssistantDirector DanielM.Covitz,DeputyAssociate RobertT.Ashman,AssistantDirector Director LisaM.DeFerrari,AssistantDirector MichaelS.Cringoli,DeputyAssociate AdrienneT.Haden,AssistantDirector Director RobertT.Maahs,AssistantDirector MatthewJ.Eichner,DeputyAssociate Director RichardA.NaylorII,AssistantDirector DianaHancock,DeputyAssociate NinaA.Nichols,AssistantDirector Director DanaE.Payne,AssistantDirector DavidE.Lebow,DeputyAssociate NancyJ.Perkins,AssistantDirector Director SabethI.Siddique,AssistantDirector MichaelG.Palumbo,DeputyAssociate SarkisYoghourtdjian,AssistantDirector Director TimothyP.Clark,SeniorAdviser JoyceK.Zickler,DeputyAssociate NidaDavis,SeniorAdviser Director MichaelR.Foley,SeniorAdviser SeanD.Campbell,AssistantDirector CharlesH.Holm,SeniorAdviser SandraA.Cannon,AssistantDirector KevinJ.Clarke,Adviser EricM.Engen,AssistantDirector WilliamF.Treacy,Adviser JoshuaGallin,AssistantDirector MichaelT.Kiley,AssistantDirector Division of Consumer AndreasLehnert,AssistantDirector and Community Affairs RobinA.Prager,AssistantDirector MaryM.West,AssistantDirector SandraF.Braunstein,Director GlennB.Canner,SeniorAdviser GlennE.Loney,DeputyDirector StephenD.Oliner,SeniorAdviser AnnaAlvarez-Boyd,AssociateDirector LeonardChanin,AssociateDirector Division of Banking Supervision TondaE.Price,AssociateDirector and Regulation TimothyR.Burniston,AssistantDirector PatrickM.Parkinson,Director JosephFirschein,AssistantDirector NorahM.Barger,DeputyDirector AllenJ.Fishbein,AssistantDirector PeterJ.Purcell,DeputyDirector SuzanneG.Killian,AssistantDirector

Federal Reserve System Organization 397 Board of Governors—continued JamesA.Michaels,AssistantDirector MarieS.Savoy,AssociateDirector MaryannF.Hunter,SeniorAdviser ElaineM.Boutilier,DeputyAssociate Director CharlesF.O’Malley,DeputyAssociate Division of Director Reserve Bank Operations TaraC.Tinsley-Pelitere,Deputy and Payment Systems AssociateDirector LouiseL.Roseman,Director KeithF.Bates,AssistantDirector DonaldV.Hammond,DeputyDirector JeffreyR.Peirce,AssistantDirector JeffreyC.Marquardt,DeputyDirector TheresaA.Trimble,AssistantDirector KennethD.Buckley,AssociateDirector KarenL.Vassallo,AssistantDirector DorothyLaChapelle,AssociateDirector CarolA.Sanders,SpecialAdviser JeffJ.Stehm,AssociateDirector ChristopherJ.Suma,SpecialAdviser GregoryL.Evans,DeputyAssociate Director Division of SusanV.Foley,DeputyAssociate Information Technology Director MaureenT.Hannan,Director LisaK.Hoskins,DeputyAssociate GearyL.Cunningham,DeputyDirector Director WayneA.Edmondson,DeputyDirector MichaelJ.Lambert,AssistantDirector SharonL.Mowry,DeputyDirector MichaelJ.Stan,AssistantDirector PoKyungKim,DeputyAssociateDirector LeonardJ.Tanis,AssistantDirector SusanF.Marycz,DeputyAssociate PaulW.Bettge,SeniorAdviser Director RaymondRomero,DeputyAssociate Office of Staff Director Director for Management LisaM.Bell,AssistantDirector GlennS.Eskow,AssistantDirector StephenR.Malphrus,StaffDirectorfor Management KofiA.Sapong,AssistantDirector CharlesS.Struckmeyer,DeputyStaff RajasekharR.Yelisetty,Assistant Director Director SheilaClark,EqualEmployment TillenaG.Clark,Adviser OpportunityProgramsDirector LynnS.Fox,SeniorAdviser Office of Inspector General AdrienneD.Hurt,Adviser ElizabethA.Coleman,Inspector General Management Division AnthonyJ.Castaldo,AssistantInspector General H.FayPeters,Director LaurenceA.Froehlich,Assistant DonaldA.Spicer,DeputyDirector InspectorGeneral MichellC.Clark,DeputyDirector AndrewPatchan,Jr.,AssistantInspector ToddA.Glissman,SeniorAssociate General Director HarveyWitherspoon,AssistantInspector WilliamL.Mitchell,SeniorAssociate General Director BillyJ.Sauls,SeniorAssociateDirector ChristineM.Fields,AssociateDirector JamesR.Riesz,AssociateDirector

398 96th Annual Report, 2009 Federal Open Market Committee December31,2009 Members Officers BenS.Bernanke,Chairman,Boardof BrianF.Madigan,Secretaryand Governors Economist WilliamC.Dudley,ViceChairman, MatthewM.Luecke,AssistantSecretary President,FederalReserveBankof DavidW.Skidmore,AssistantSecretary NewYork MichelleA.Smith,AssistantSecretary ElizabethA.Duke,BoardofGovernors ScottG.Alvarez,GeneralCounsel CharlesL.Evans,President,Federal ThomasC.Baxter,Jr.,DeputyGeneral ReserveBankofChicago Counsel DonaldL.Kohn,BoardofGovernors RichardM.Ashton,AssistantGeneral JeffreyM.Lacker,President,Federal Counsel ReserveBankofRichmond D.NathanSheets,Economist DennisP.Lockhart,President,Federal DavidJ.Stockton,Economist ReserveBankofAtlanta DavidE.Altig,AssociateEconomist DanielK.Tarullo,BoardofGovernors JamesA.Clouse,AssociateEconomist KevinM.Warsh,BoardofGovernors ThomasA.Connors,AssociateEconomist JanetL.Yellen,President,Federal StevenB.Kamin,AssociateEconomist ReserveBankofSanFrancisco LawrenceSlifman,AssociateEconomist DanielG.Sullivan,AssociateEconomist Alternate Members JosephS.Tracy,AssociateEconomist ChristineM.Cumming,FirstVice JohnA.Weinberg,AssociateEconomist President,FederalReserveBankof DavidW.Wilcox,AssociateEconomist NewYork JohnC.Williams,AssociateEconomist JimBullard,President,FederalReserve BrianSack,Manager,SystemOpen BankofSt.Louis MarketAccount SandraPianalto,President,Federal ReserveBankofCleveland The Federal Open Market Committee is EricS.Rosengren,President,Federal made up of the seven members of the ReserveBankofBoston Board of Governors; the president of the ThomasM.Hoenig,President,Federal Federal Reserve Bank of New York; and ReserveBankofKansasCity four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. During 2009 the Federal Open Market Committee held eight regularly scheduled meetings and three conference calls (see “Minutes of Federal Open Market Committee Meetings” in this volume).

Federal Reserve System Organization 399 Federal Advisory Council December31,2009 Members District 10—Bruce R. Lauritzen, Chairman, First National Bank of Omaha, District 1—Ellen Alemany, Chairman Omaha,NE and Chief Executive Officer, RBS District11—RichardW.Evans,Jr.,Chair- Americas/Citizens Financial Group, man and Chief Executive Officer, Cullen/ Greenwich,Conn. FrostBankersInc.,SanAntonio,TX District 2—Robert P. Kelly, Chairman District 12—Russell Goldsmith, Chairand Chief Executive Officer, The Bank man and Chief Executive Officer, City ofNewYorkMellon,NewYork,N.Y. NationalBank,BeverlyHills,Calif. District3—R.ScottSmith,Jr.Chairman, President, and Chief Executive Officer, Fulton Financial Corporation, Lancaster, Officers PA WilliamA.Downe,President District 4—Henry L. Meyer III, Chair- R.ScottSmith,Jr.,VicePresident man, President, and Chief Executive Officer,KeyCorp,Cleveland,Ohio JamesE.Annable,Secretary District 5—Kenneth D. Lewis, Chief The Federal Advisory Council—a statutory Executive Officer and President, Bank of body established under the Federal Reserve AmericaCorporation,Charlotte,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 A. 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 2009, it met on man and Chief Executive Officer, February 5–6, April 30, May 1, September Cadence Financial Corporation, Stark- 10–11,andDecember3–4.Thecouncilmet ville,Miss. with the Board on February 6, May 1, September11,andDecember4,2009. District 9—Richard K. Davis, Chairman, President, and Chief Executive Officer, U.S.Bancorp,Minneapolis,MN

400 96th Annual Report, 2009 Consumer Advisory Council December31,2009 Members Saurabh Narain, Chief Fund Advisor, Paula Bryant-Ellis, Senior Vice Pres- National Community Investment Fund, ident, Community Development Banking Chicago,Ill. Group, BOK Financial Corporation, Andy Navarrete, Senior Vice President, Tulsa,Okla. Chief Counsel—National Lending, Capital Alan Cameron, President and Chief OneFinancialCorporation,McLean,Va. Executive Officer, Idaho Credit Union Jim Park, President and Chief Executive League,Boise,Idaho Officer, New Vista Asset Management, John P. Carey, Chief Administrative SanDiego,Calif. Officer, Consumer Banking, North Ronald Phillips, President, Coastal En- America,Citigroup,NewYork,N.Y. terprises,Inc.,Wiscasset,Maine Jason Engel, Vice President and Chief Kevin Rhein, Division President, Wells Regulatory Counsel, Experian, Costa FargoCardServices,Minneapolis,Minn. Mesa,Calif. Shanna Smith, President and Chief Kathleen Engel, Professor of Law, Executive Officer, National Fair Housing Suffolk University Law School, Boston, Alliance,Washington,D.C. Mass. H. Cooke Sunoo, Director, Asian Pacific Joseph Falk, Consultant, Akerman Senter- Islander Small Business Program, Los fitt,Miami,Fla. Angeles,Calif. Carolyn “Betsy” Flynn, President and Jennifer Tescher, Director, Center for Fi- Vice Chairman, Community Financial nancialServicesInnovation,Chicago,Ill. ServicesBank,Benton,Ky. Stergios “Terry” Theologides, Exec- Patricia Garcia Duarte, President and utive Vice President, General Counsel, Chief Executive Officer, Neighborhood SaxonMortgage,Irving,Texas Housing Services of Phoenix, Phoenix, MaryTingerthal,President,CapitalMar- Ariz. kets Companies, Housing Partnership Louise Gissendaner, Senior Vice Pres- Network,St.Paul,Minn. ident, Director of Community De- Linda Tinney, Vice President, Community velopment, Fifth Third Bank, Cleveland, Development, West Metro Region Man- Ohio ager,U.S.Bank,Denver,Colo. Ira Goldstein, Director, Policy and In- Luz Urrutia, Chief Executive Officer and formation Services, The Reinvestment President, El Banco de Nuestra Comun- Fund,Philadelphia,Pa. idad,Roswell,Ga. Greta Harris, Vice President—Southeast Region, Local Initiatives Support Cor- Officers poration,Richmond,Va. Edna Sawady, Council Chair, Economic Patricia A. Hasson, President, Consumer InclusionConsultant,NewYork,N.Y. Credit Counseling Service of Delaware Michael Calhoun, Council Vice Chair, Valley,Inc.,Philadelphia,Pa. President, Center for Responsible Thomas P. James, Senior Assistant At- Lending,Durham,N.C. torney General-Consumer Counsel, Of- The Consumer Advisory Council—a statufice of the Illinois Attorney General, tory body established pursuant to the 1976 ConsumerFraudBureau,Chicago,Ill. amendments to the Equal Credit Opportu- Kirsten Keefe, Senior Staff Attorney, nity Act—advises the Board of Governors EmpireJusticeCenter,Albany,N.Y. on consumer financial services. Its mem- Lorenzo Littles, Dallas Director, En- bers, who are appointed by the Board, are terprise Community Partners, Inc., academics, state and local government offi- Dallas,Texas cials, and representatives of the financial Larry B. Litton, Jr., President and Chief servicesindustryandofconsumerandcom- Executive Officer, Litton Loan Servicing munity interests. In 2009, the Council met LP,Houston,Texas with the Board on March 26, June 18, and October22.

Federal Reserve System Organization 401 Thrift Institutions Advisory Council December31,2009 Members Kay M. Hoveland, President and Chief Executive Officer, Kaiser Federal Bank F. Edward Broadwell, Jr., Chairman andK-FedBancorp,Covina,Calif. and Chief Executive Officer, HomeTrust Randy M. Smith, Chief Executive Officer Bank,Asheville,N.C. and President, Randolph−Brooks Federal Barrie G. Christman, Chairman, Prin- CreditUnion,UniversalCity,Texas cipalBank,DesMoines,Iowa William R. White, Chairman and Chief William A. Donius, Board Director, Executive Officer, Dearborn Federal PulaskiFinancialCorp.,St.Louis,Mo. SavingsBank,Dearborn,Mich. Joseph R. Ficalora, Chairman, President, and Chief Executive Officer, New York Officer CommunityBancorp,Westbury,N.Y. Curtis L. Hage, Chairman and Chief Ex- CurtisL.Hage,President ecutive Officer, Home Federal Bank, SiouxFalls,S.D. The Thrift Institutions Advisory Council was established by the Board of Governors Christopher T. Jillson, President and to consult with, and advise, the Board on Chief Executive Officer, Sandia Labissues pertaining to the thrift industry and oratory Federal Credit Union, Albuon other matters within the Board’s jurisquerque,N.M. diction. Its members, who are appointed by Peter L. Judkins, President and Chief Ex- the Board, represent credit unions, savings ecutive Officer, Franklin Savings Bank, andloanassociations,andsavingsbanks.In Farmington,Maine 2009, the council met with the Board on Richard J. Green, Chief Executive Of- February20,June26,andDecember18. ficer,FirstrustBank,Conshohocken,Pa. Richard G. Harwood, President and Chief Executive Officer, Newport Federal Bank,Newport,Tenn.

402 96th Annual Report, 2009 Federal Reserve Banks and Branches December31,2009 Officers Chair1 President Officer BANKorBranch DeputyChair FirstVicePresident inchargeofBranch BOSTON2 .............. LisaM.Lynch EricS.Rosengren HenriA.Termeer PaulM.Connolly NEWYORK2 .......... DenisM.Hughes WilliamC.Dudley LeeC.Bollinger ChristineM. Cumming PHILADELPHIA ....... WilliamF.Hecht CharlesI.Plosser CharlesP.Pizzi WilliamH.Stone,Jr. CLEVELAND .......... TannyB.Crane SandraPianalto AlfredM.Rankin,Jr. Vacant Cincinnati ............... JamesM.Anderson LaVaughnM.Henry Pittsburgh ............... SunilT.Wadhwani RobertB.Schaub RICHMOND ........... LemuelE.Lewis JeffreyM.Lacker MargaretE. SarahG.Green McDermid Baltimore ............... WilliamR.Roberts DavidE.Beck Charlotte ................ ClaudeC.Lilly MatthewA.Martin ATLANTA............... D.ScottDavis DennisP.Lockhart CarolB.Tomé PatrickK.Barron Birmingham............. F.MichaelReilly JuliusWeyman Jacksonville.............. LindaH.Sherrer ChristopherL.Oakley Miami.................... GayRebelThompson JuandelBusto Nashville................. DavidWilliamsII LeeC.Jones NewOrleans............. RobertS.Boh RobertJ.Musso CHICAGO2 ............. JohnA.Canning,Jr. CharlesL.Evans WilliamC.Foote GordonWerkema Detroit................... TimothyM. RobertWiley Manganello ST.LOUIS............... StevenH.Lipstein JamesBullard WardM.Klein DavidA.Sapenaro LittleRock............... SonjaYatesHubbard RobertA.Hopkins Louisville................ GaryA.Ransdell MariaGerwing Hampton Memphis................. CharlesS.Blatteis MarthaPerineBeard MINNEAPOLIS......... JamesJ.Hynes NarayanaR. JohnW.Marvin Kocherlakota JamesM.Lyon Helena................... JosephF.McDonald R.PaulDrake

Federal Reserve System Organization 403 Officers—continued Chair1 President Officer BANKorBranch DeputyChair FirstVicePresident inchargeofBranch KANSASCITY......... LuM.Cordova ThomasM.Hoenig PaulDeBruce EstherL.George Denver................... KristyA.Schloss MarkC.Snead OklahomaCity.......... StevenC.Agee ChadWilkerson Omaha................... CharlesR.Hermes JasonHenderson DALLAS................ JamesT.Hackett RichardW.Fisher HerbKelleher HelenE.Holcomb ElPaso................... D.KirkEdwards RobertW.Gilmer Houston.................. DouglasL.Foshee RobertSmithIII SanAntonio............. StevenR.Vandegrift BlakeHastings SANFRANCISCO2.... T.GaryRogers JanetL.Yellen DouglasW. JohnF.Moore Shorenstein LosAngeles............. AndrewJ.Sale MarkL.Mullinix Portland.................. JamesH.Rudd StevenH.Walker SaltLakeCity........... ClarkD.Ivory RobinA.Rockwood Seattle.................... HelviK.Sandvik MarkA.Gould 1. ThechairofaFederalReserveBankserves,bystatute,asFederalReserveagent. 2. AdditionalofficesoftheseBanksarelocatedatWindsorLocks,Connecticut;EastRutherford,NewJersey; DesMoines,Iowa;MidwayatBedfordPark,Illinois;andPhoenix,Arizona. Conference of Chairs Conference of Presidents The chairs of the Federal Reserve Banks The presidents of the Federal Reserve are organized into the Conference of Banks are organized into the Conference of Chairs, which meets to consider matters of Presidents, which meets periodically to common interest and to consult with and identify, define, and deliberate issues of advise the Board of Governors. Such meet- strategicsignificancetotheFederalReserve ings, also attended by the deputy chairs, System; to consider matters of common were held in Washington, D.C., on May 19 interest; and to consult with and advise the and 20; September 21; and November 17 BoardofGovernors. and18,2009. Jeffrey M. Lacker, president of the Fed- The members of the executive committee eral Reserve Bank of Richmond, served as of the Conference of Chairs during 2009 chair of the conference in 2009, and Richwere Lisa M. Lynch, chair; Lemuel E. ard W. Fisher, president of the Federal Lewis, vice chair; and James J. Hynes, Reserve Bank of Dallas, served as vice member. chair. Sandra Tormoen, Federal Reserve On November 18, the conference elected BankofRichmond,servedassecretary,and its executive committee for 2010, naming Harvey Mitchell, Federal Reserve Bank of Lemuel E. Lewis as chair; Charles P. Pizzi Dallas,servedasassistantsecretary. as vice chair; and Alfred M. Rankin, Jr. as thethirdmember.

404 96th Annual Report, 2009 Conference of ClassAdirectorsrepresentthestockhold- First Vice Presidents ing member banks in each Federal Reserve District. Class B and Class C directors rep- The Conference of First Vice Presidents of resent the public and are chosen with due, the Federal Reserve Banks was organized butnotexclusive,considerationtotheinterin 1969 to meet periodically for the consid- ests of agriculture, commerce, industry, sererationofoperationsandothermatters. vices, labor, and consumers; they may not James M. Lyon, first vice president of be officers, directors, or employees of any the Federal Reserve Bank of Minneapolis, bankorbankholdingcompany.Inaddition, served as chair of the conference in 2009, Class C directors may not be stockholders and Sheryl L. Britsch, Federal Reserve ofanybankorbankholdingcompany. Bank of Minneapolis, served as secretary. For the election of Class A and Class B The conference ratified the appointment of directors, the member banks of each Fed- Sally Green, first vice president of the Fed- eral Reserve District are classified into eral Reserve Bank of Richmond, as vice three groups. Each group, which comprises chair for the remainder of 2009 after the banks with similar capitalization, elects one death of R. Chris Moore, first vice presi- Class A director and one Class B director. dent of the Federal Reserve Bank of Cleve- Annually, the Board of Governors desigland and vice chair of the conference for nates one of the Class C directors as chair 2008-09. Anne C. Gossweiler, Federal of the board and Federal Reserve agent of Reserve Bank of Richmond, was also ap- each District Bank, and it designates pointed to succeed Diana C. Starks, Federal anotherClassCdirectorasdeputychair. Reserve Bank of Cleveland, as assistant Federal Reserve Branches have either secretary for the remainder of 2009. Those five or seven directors, a majority of whom actionswereeffectiveFebruary18,2009. areappointedbytheparentFederalReserve On October 21, 2009, the conference Bank; the others are appointed by the ratified the appointment of Sally Green as Board of Governors. One of the directors chair, Esther L. George, first vice president appointed by the Board is designated annuof the Federal Reserve Bank of Kansas ally as chair of the board of that Branch in City, as vice chair, and Anne C. Gossweiler a manner prescribed by the parent Federal assecretaryfor2010−11. ReserveBank. The chairs and deputy chairs of the Reserve Bank boards of directors, and the Directors chairsoftheBranches,arelistedinthepre- Each Federal Reserve Bank has a nine ceding table, titled “Officers.” The directors member board: three Class A and three of the Banks and Branches are listed in the Class B directors, who are elected by the following table. For each director, the class stockholding member banks, and three of directorship, the director’s principal or- ClassCdirectors,whoareappointedbythe ganizational affiliation, and the date the di- BoardofGovernors. rector’stermexpiresareshown.

Federal Reserve System Organization 405 Directors December31,2009 BankorBranch,Category Termexpires Title Name Dec.31 DISTRICT1—BOSTON ReserveBank ClassA DavidA.Lentini............ Chairman,President,andChiefExecutiveOfficer, 2009 TheConnecticutBankandTrustCompany, Hartford,Connecticut JamesC.Smith............. ChairmanandChiefExecutiveOfficer,WebsterBank, 2010 N.A.,Waterbury,Connecticut KathrynG.Underwood..... PresidentandChiefExecutiveOfficer,Ledyard 2011 NationalBank,Hanover,NewHampshire ClassB StuartH.Reese............. ChairmanandChiefExecutiveOfficer,MassMutual 2009 FinancialGroup,Springfield,Massachusetts RobertK.Kraft............. ChairmanandChiefExecutiveOfficer,TheKraft 2010 Group,Foxborough,Massachusetts MichaelT.Wedge.......... FormerPresidentandChiefExecutiveOfficer, 2011 BJ’sWholesaleClub,Inc.,Natick,Massachusetts ClassC LisaM.Lynch.............. DeanandProfessorofEconomics,TheHellerSchool 2009 forSocialPolicyandManagement,Brandeis University,Waltham,Massachusetts KirkA.Sykes............... President,UrbanStrategyAmericaFund,L.P.,Boston, 2010 Massachusetts HenriA.Termeer........... Chairman,President,andChiefExecutiveOfficer, 2011 GenzymeCorporation,Cambridge,Massachusetts DISTRICT2—NEWYORK ReserveBank ClassA JamesDimon................ ChairmanandChiefExecutiveOfficer,JPMorgan 2009 Chase&Co.,NewYork,NewYork RichardL.Carrión.......... Chairman,PresidentandChiefExecutiveOfficer, 2010 Popular,Inc.,SanJuan,PuertoRico CharlesV.Wait............. President,ChiefExecutiveOfficer,andChairman, 2011 TheAdirondackTrustCompany,SaratogaSprings, NewYork ClassB JeffreyB.Kindler........... ChairmanandChiefExecutiveOfficer,Pfizer,Inc., 2009 NewYork,NewYork JamesS.Tisch.............. PresidentandChiefExecutiveOfficer,Loews 2010 Corporation,NewYork,NewYork JeffreyR.Immelt........... ChairmanandChiefExecutiveOfficer,General 2011 ElectricCompany,Fairfield,Connecticut

406 96th Annual Report, 2009 Directors—continued BankorBranch,Category Termexpires Title Name Dec.31 ClassC LeeC.Bollinger............ President,ColumbiaUniversity,NewYork,NewYork 2009 KathrynS.Wylde........... PresidentandChiefExecutiveOfficer,Partnershipfor 2010 NewYorkCity,NewYork,NewYork DenisM.Hughes........... President,NewYorkStateAFL-CIO,NewYork, 2011 NewYork DISTRICT3—PHILADELPHIA ReserveBank ClassA AaronL.Groff,Jr........... Chairman,President,andChiefExecutiveOfficer, 2009 EphrataNationalBank,Ephrata,Pennsylvania TedT.Cecala............... ChairmanandChiefExecutiveOfficer,Wilmington 2010 TrustCorporation,Wilmington,Delaware FrederickC.Peters.......... ChairmanandChiefExecutiveOfficer,BrynMawr 2011 TrustCompany,BrynMawr,Pennsylvania ClassB GarryL.Maddox........... PresidentandChiefExecutiveOfficer,A.Pomerantz 2009 &Company,Philadelphia,Pennsylvania KeithS.Campbell.......... Chairman,ManningtonMills,Inc.,Salem,NewJersey 2010 MichaelF.Camardo........ RetiredExecutiveVicePresident,LockheedMartin 2011 ITS,CherryHill,NewJersey ClassC WilliamF.Hecht............ RetiredChairman,President,andChiefExecutive 2009 Officer,PPLCorporation,Allentown,Pennsylvania JeremyNowak.............. PresidentandChiefExecutiveOfficer, 2010 TheReinvestmentFund,Philadelphia,Pennsylvania CharlesP.Pizzi............. PresidentandChiefExecutiveOfficer,TastyBaking 2011 Company,Philadelphia,Pennsylvania DISTRICT4—CLEVELAND ReserveBank ClassA C.DanielDeLawder........ ChairmanandChiefExecutiveOfficer,ParkNational 2009 Bank,Newark,Ohio JamesE.Rohr............... ChairmanandChiefExecutiveOfficer,ThePNC 2010 FinancialServicesGroup,Inc.,Pittsburgh, Pennsylvania CharlotteW.Martin......... PresidentandChiefExecutiveOfficer,GreatLakes 2011 BankersBank,Gahanna,Ohio ClassB SusanTomasky............. President,AEPTransmission,Columbus,Ohio 2009 LesC.Vinney............... SeniorAdvisorandImmediatePastPresidentand 2010 ChiefExecutiveOfficer,STERISCorporation, Mentor,Ohio TilmonF.Brown............ PresidentandChiefExecutiveOfficer,NewHorizons 2011 BakingCompany,Norwalk,Ohio

Federal Reserve System Organization 407 BankorBranch,Category Termexpires Title Name Dec.31 ClassC TannyB.Crane............. PresidentandChiefExecutiveOfficer,CraneGroup 2009 Company,Columbus,Ohio RoyW.Haley............... ChairmanandChiefExecutiveOfficer,WESCO 2010 International,Inc.,Pittsburgh,Pennsylvania AlfredM.Rankin,Jr........ Chairman,President,andChiefExecutiveOfficer, 2011 NACCOIndustries,Inc.,Cleveland,Ohio CincinnatiBranch Appointedbythe FederalReserveBank DonaldE.Bloomer......... PresidentandChiefExecutiveOfficer,Citizens 2009 NationalBank,Somerset,Kentucky PaulR.Poston.............. Director,GreatLakesDistrict,NeighborWorks® 2010 America,Cincinnati,Ohio GregoryB.Kenny.......... PresidentandChiefExecutiveOfficer,GeneralCable 2011 Corporation,HighlandHeights,Kentucky JanetB.Reid................ PrincipalPartner,GlobalLeadManagement 2011 Consulting,Cincinnati,Ohio Appointedbythe BoardofGovernors .......... DanielB.Cunningham..... PresidentandChiefExecutiveOfficer,Long-Stanton 2009 ManufacturingCompanies,Cincinnati,Ohio PeterS.Strange............. ChairmanandChiefExecutiveOfficer,Messer 2010 ConstructionCompany,Cincinnati,Ohio JamesM.Anderson......... PresidentandChiefExecutiveOfficer,Cincinnati 2011 Children’sHospitalMedicalCenter,Cincinnati, Ohio PittsburghBranch Appointedbythe FederalReserveBank MargaretIrvineWeir....... President,NexTierBank,Butler,Pennsylvania 2009 ToddD.Brice............... ChiefExecutiveOfficer,S&TBancorp,Inc.,Indiana, 2010 Pennsylvania HowardW.HannaIII....... ChairmanandChiefExecutiveOfficer,HowardHanna 2011 RealEstateServices,Pittsburgh,Pennsylvania PetraMitchell............... President,CatalystConnection,Pittsburgh, 2011 Pennsylvania Appointedbythe BoardofGovernors RobertA.Paul.............. ChairmanandChiefExecutiveOfficer,Ampco− 2009 PittsburghCorporation,Pittsburgh,Pennsylvania GlennR.Mahone........... PartnerandAttorneyatLaw,ReedSmithLLP, 2010 Pittsburgh,Pennsylvania SunilT.Wadhwani.......... Co-Chairman,iGATECorporation,Pittsburgh, 2011 Pennsylvania

408 96th Annual Report, 2009 Directors—continued BankorBranch,Category Termexpires Title Name Dec.31 DISTRICT5—RICHMOND ReserveBank ClassA DwightV.Neese............ Director,President,andChiefExecutiveOfficer, 2009 ProvidentCommunityBankandProvident CommunityBancshares,Inc.,RockHill, SouthCarolina RobertH.Gilliam,Jr........ PresidentandChiefExecutiveOfficer,FirstNational 2010 Bank,Altavista,Virginia KellyS.King............... ChiefExecutiveOfficer,BB&TCorporation, 2011 Winston-Salem,NorthCarolina ClassB KennethR.Sparks.......... PresidentandChiefExecutiveOfficer,KenSparks 2009 AssociatesLLC,WhiteStone,Virginia PatrickC.Graney,III....... President,PetroleumProducts,Inc.,Belle, 2010 WestVirginia DanaS.Boole............... PresidentandChiefExecutiveOfficer,Community 2011 AffordableHousingEquityCorporation,Raleigh, NorthCarolina ClassC LemuelE.Lewis............ President,LocalWeather.com,Suffolk,Virginia 2009 MargaretE.McDermid..... SeniorVicePresidentandChiefInformationOfficer, 2010 DominionResources,Inc.,Richmond,Virginia LindaD.Rabbitt............ ChairmanandChiefExecutiveOfficer,Rand 2011 ConstructionCorporation,Alexandria,Virginia BaltimoreBranch Appointedbythe FederalReserveBank 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 BianaJ.Arentz.............. PresidentandChiefExecutiveOfficer,Hemingway’s 2011 Inc.,Stevensville,Maryland Appointedbythe BoardofGovernors RonaldBlackwell........... ChiefEconomist,AFL-CIO,Washington,D.C. 2009 WilliamR.Roberts......... President−VerizonMaryland/DC,VerizonMaryland 2010 Inc.,Baltimore,Maryland JennyG.Morgan........... President,basys,inc.,Linthicum,Maryland 2011

Federal Reserve System Organization 409 BankorBranch,Category Termexpires Title Name Dec.31 CharlotteBranch Appointedbythe FederalReserveBank JohnS.Kreighbaum........ PresidentandChiefExecutiveOfficer,Carolina 2009 PremierBank,Charlotte,NorthCarolina MichaelC.Miller........... PresidentandChiefExecutiveOfficer,FNBUnited 2009 Corp.andCommunityONEBank,N.A.,Asheboro, NorthCarolina BarryL.Slider.............. PresidentandChiefExecutiveOfficer,FirstSouth 2010 Bancorp,Inc.andFirstSouthBank,Spartanburg, SouthCarolina JamesH.Speed,Jr.......... PresidentandChiefExecutiveOfficer,NorthCarolina 2011 MutualLifeInsuranceCompany,Durham, NorthCarolina Appointedbythe BoardofGovernors DavidJ.Zimmerman....... President,SouthernShows,Inc.,Charlotte, 2009 NorthCarolina ClaudeC.Lilly.............. Dean,ClemsonUniversity,CollegeofBusinessand 2010 BehavioralScience,Clemson,SouthCarolina LindaL.Dolny.............. President,PMLAssociates,Inc.,Greenwood, 2011 SouthCarolina DISTRICT6—ATLANTA ReserveBank ClassA RudyE.Schupp............. PresidentandChiefExecutiveOfficer,1stUnited 2009 Bank,WestPalmBeach,Florida T.AnthonyHumphries..... PresidentandChiefExecutiveOfficer,NobleBankand 2010 Trust,N.A.,Anniston,Alabama JamesM.WellsIII.......... ChairmanandChiefExecutiveOfficer,SunTrust 2011 Banks,Inc.,Atlanta,Georgia ClassB TeriG.Fontenot............ PresidentandChiefExecutiveOfficer,Woman’s 2009 Hospital,BatonRouge,Louisiana LeeM.Thomas............. Chairman,PresidentandChiefExecutiveOfficer, 2010 Rayonier,Jacksonville,Florida RenéeLewisGlover........ PresidentandChiefExecutiveOfficer,Atlanta 2011 HousingAuthority,Atlanta,Georgia ClassC D.ScottDavis.............. ChairmanandChiefExecutiveOfficer,UnitedParcel 2009 Service,Atlanta,Georgia CarolB.Tomé.............. ChiefFinancialOfficerandExecutiveVicePresident, 2010 TheHomeDepot,Atlanta,Georgia ThomasI.Barkin........... Director,McKinsey&Company,Atlanta,Georgia 2011 BirminghamBranch Appointedbythe FederalReserveBank BobbyA.Bradley........... ManagingPartner,LewisProperties,LLCand 2009 AndersonInvestments,LLC,Huntsville,Alabama

410 96th Annual Report, 2009 Directors—continued BankorBranch,Category Termexpires Title Name Dec.31 SamuelF.Dodson.......... Consultant,InternationalUnionofOperating 2009 Engineers−Local312,Birmingham,Alabama C.RichardMoore,Jr........ Chairman,PresidentandChiefExecutiveOfficer, 2010 PeoplesSouthernBank,Clanton,Alabama MackeB.Mauldin.......... President,BankIndependent,Sheffield,Alabama 2011 Appointedbythe BoardofGovernors F.MichaelReilly............ Chairman,PresidentandChiefExecutiveOfficer, 2009 Randall-ReillyPublishingCo.,LLC,Tuscaloosa, Alabama MaryamB.Head............ Chairman,RamToolandSupplyCompany,Inc., 2010 Birmingham,Alabama ThomasR.Stanton.......... ChairmanandChiefExecutiveOfficer,ADTRAN,Inc., 2011 Huntsville,Alabama JacksonvilleBranch Appointedbythe FederalReserveBank WendellA.Sebastian....... PresidentandChiefExecutiveOfficer,GTEFederal 2009 CreditUnion,Tampa,Florida EllenS.Titen............... President,E.T.Consultants,WinterPark,Florida 2009 JackB.Healan,Jr........... President,AmeliaIslandCompany,AmeliaIsland, 2010 Florida HughF.Dailey.............. PresidentandChiefExecutiveOfficer,Community 2011 Bank&TrustofFlorida,Ocala,Florida Appointedbythe BoardofGovernors LindaH.Sherrer............ PresidentandChiefExecutiveOfficer,Prudential 2009 NetworkRealty,Jacksonville,Florida H.BrittLandrum,Jr........ PresidentandChiefExecutiveOfficer,Landrum 2010 HumanResourceCompanies,Inc.,Pensacola, Florida LyndaL.Weatherman...... PresidentandChiefExecutiveOfficer,Economic 2011 DevelopmentCommissionofFlorida’sSpaceCoast, Rockledge,Florida MiamiBranch Appointedbythe FederalReserveBank LeonardL.Abess........... ChiefExecutiveOfficer,CityNationalBankof 2009 Florida,Miami,Florida DennisS.Hudson,III....... ChairmanandChiefExecutiveOfficer,Seacoast 2010 BankingCorporationofFlorida,Stuart,Florida WalterBanks................ President,LagoMarResortandClub, 2011 FortLauderdale,Florida ThomasH.Shea............ ChiefExecutiveOfficer,Florida/CaribbeanRegion, 2011 RightManagement,FortLauderdale,Florida

Federal Reserve System Organization 411 BankorBranch,Category Termexpires Title Name Dec.31 Appointedbythe BoardofGovernors EduardoJ.Padrón.......... President,MiamiDadeCollege,Miami,Florida 2009 GayRebelThompson....... PresidentandChiefExecutiveOfficer,Cement 2010 Industries,Inc.,FortMyers,Florida W.CodyEstes,Sr........... President,EstesCitrus,Inc.,VeroBeach,Florida 2011 NashvilleBranch Appointedbythe FederalReserveBank 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 DanW.Hogan.............. PresidentandChiefExecutiveOfficer,FifthThird 2011 Bank,Tennessee,Nashville,Tennessee Appointedbythe BoardofGovernors DavidWilliamsII........... ViceChancellorandGeneralCounsel,Vanderbilt 2009 University,Nashville,Tennessee DebraK.London........... RetiredPresidentandChiefExecutiveOfficer, 2010 MercyHealthPartners,Knoxville,Tennessee RichardQ.Ford............. President,HylantGroupofNashville,Nashville, 2011 Tennessee NewOrleansBranch Appointedbythe FederalReserveBank 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 R.KingMilling............. Member,BoardofDirectors,WhitneyHolding 2011 CorporationandWhitneyNationalBank, NewOrleans,Louisiana Appointedbythe BoardofGovernors RobertS.Boh............... PresidentandChiefExecutiveOfficer,BohBros. 2009 ConstructionCo.,LLC,NewOrleans,Louisiana ChristelC.Slaughter........ Partner,SSAConsultants,LLC,BatonRouge, 2010 Louisiana JoséS.Suquet............... Chairman,PresidentandChiefExecutiveOfficer, 2011 Pan-AmericanLifeInsuranceGroup,NewOrleans, Louisiana

412 96th Annual Report, 2009 Directors—continued BankorBranch,Category Termexpires Title Name Dec.31 DISTRICT7—CHICAGO ReserveBank ClassA MichaelL.Kubacki......... Chairman,President,andChiefExecutiveOfficer, 2009 LakelandFinancialCorporation,Warsaw,Indiana MarkC.Hewitt............. PresidentandChiefExecutiveOfficer,ClearLake 2010 Bank&TrustCompany,ClearLake,Iowa FrederickH.Waddell....... Chairman,PresidentandChiefExecutiveOfficer, 2011 NorthernTrustCorporationandTheNorthernTrust Company,Chicago,Illinois ClassB MarkT.Gaffney............ President,MichiganAFL-CIO,Lansing,Michigan 2009 AnnD.Murtlow............ PresidentandChiefExecutiveOfficer,Indianapolis 2010 Power&LightCompany,Indianapolis,Indiana AnthonyK.Anderson...... ViceChairandMidwestManagingPartner,Ernst& 2011 YoungLLP,Chicago,Illinois ClassC WilliamC.Foote........... ChairmanandChiefExecutiveOfficer,USG 2009 Corporation,Chicago,Illinois ThomasJ.Wilson........... Chairman,PresidentandChiefExecutiveOfficer, 2010 TheAllstateCorporation,Northbrook,Illinois JohnA.Canning,Jr......... Chairman,MadisonDearbornPartners,LLC,Chicago, 2011 Illinois DetroitBranch Appointedbythe FederalReserveBank WilliamR.Hartman........ RetiredChairman,CitizensRepublicBancorp,Flint, 2009 Michigan MichaelM.Magee,Jr....... PresidentandChiefExecutiveOfficer,Independent 2010 BankCorporation,Ionia,Michigan RogerA.Cregg............. ExecutiveVicePresidentandChiefFinancialOfficer, 2011 PulteHomes,Inc.,BloomfieldHills,Michigan BrianC.Walker............. PresidentandChiefExecutiveOfficer,HermanMiller, 2011 Inc.,Zeeland,Michigan Appointedbythe BoardofGovernors LindaS.Likely............. DirectorofHousingandCommunityDevelopment, 2009 KentCountyCommunityDevelopmentDepartment andHousingCommission,GrandRapids,Michigan CarlT.Camden............. PresidentandChiefExecutiveOfficer,KellyServices, 2010 Inc.,Troy,Michigan TimothyM.Manganello.... ChairmanandChiefExecutiveOfficer,BorgWarner 2011 Inc.,AuburnHills,Michigan

Federal Reserve System Organization 413 BankorBranch,Category Termexpires Title Name Dec.31 DISTRICT8—ST.LOUIS ReserveBank ClassA DavidR.Pirsein............ PresidentandChiefExecutiveOfficer,FirstNational 2009 BankinPinckneyville,Pinckneyville,Illinois RobertG.Jones............. PresidentandChiefExecutiveOfficer,OldNational 2010 Bancorp,Evansville,Indiana J.ThomasMay.............. ChairmanandChiefExecutiveOfficer,SimmonsFirst 2011 NationalCorporation,PineBluff,Arkansas ClassB A.RogersYarnell,II....... ChairmanandChiefExecutiveOfficer,YarnellIce 2009 CreamCo.,Inc.,Searcy,Arkansas PaulT.Combs.............. President,BakerImplementCompany,Kennett, 2010 Missouri GregoryM.Duckett........ SeniorVicePresidentandCorporateCounsel,Baptist 2011 MemorialHealthCareCorporation,Memphis, Tennessee ClassC StevenH.Lipstein.......... PresidentandChiefExecutiveOfficer, 2009 BJCHealthCare,St.Louis,Missouri SharonD.Fiehler........... ExecutiveVicePresidentandChiefAdministrative 2010 Officer,PeabodyEnergy,St.Louis,Missouri WardM.Klein.............. ChiefExecutiveOfficer,EnergizerHoldings,Inc., 2011 St.Louis,Missouri LittleRockBranch Appointedbythe FederalReserveBank WilliamC.Scholl........... PresidentandChiefExecutiveOfficer,FirstSecurity 2009 Bancorp,LittleRock,Arkansas SharonPriest................ ExecutiveDirector,DowntownLittleRock 2010 Partnership,LittleRock,Arkansas PhillipN.Baldwin.......... PresidentandChiefExecutiveOfficer,Southern 2011 Bancorp,Arkadelphia,Arkansas RobertA.Young,III........ Chairman,ArkansasBestCorporation,FortSmith, 2011 Arkansas Appointedbythe BoardofGovernors C.SamWalls............... ChiefExecutiveOfficer,ArkansasCapitalCorporation, 2009 LittleRock,Arkansas SonjaYatesHubbard....... ChiefExecutiveOfficer,E-ZMartStores,Inc., 2010 Texarkana,Texas CalMcCastlain.............. Partner,Pender&McCastlain,P.A.,LittleRock, 2011 Arkansas

414 96th Annual Report, 2009 Directors—continued BankorBranch,Category Termexpires Title Name Dec.31 LouisvilleBranch Appointedbythe FederalReserveBank GordonB.Guess............ GeneralManager,MarionBaseballClub,LLC, 2009 Marion,Kentucky StevenE.Trager............ ChairmanandChiefExecutiveOfficer,RepublicBank 2010 &TrustCompany,Louisville,Kentucky JohnC.Schroeder.......... President,WabashPlastics,Inc.,Evansville,Indiana 2011 L.ClarkTaylor,Jr........... ChiefExecutiveOfficer,EphraimMcDowellHealth, 2011 Danville,Kentucky Appointedbythe BoardofGovernors BarbaraAnnPopp.......... ChiefExecutiveOfficer,SchulerBauerRealEstate 2009 Services,NewAlbany,Indiana GaryA.Ransdell........... President,WesternKentuckyUniversity,Bowling 2010 Green,Kentucky JohnA.Hillerich,IV....... PresidentandChiefExecutiveOfficer,Hillerich& 2011 BradsbyCo.,Inc.,Louisville,Kentucky MemphisBranch Appointedbythe FederalReserveBank DavidP.Rumbarger,Jr..... PresidentandChiefExecutiveOfficer,Community 2009 DevelopmentFoundation,Tupelo,Mississippi ThomasG.Miller........... President,SouthernHardwareCo.,Inc.,WestHelena, 2010 Arkansas ClydeWarrenNunn......... ChairmanandPresident,SecurityBancorpofTN,Inc., 2011 Halls,Tennessee SusanS.Stephenson........ Co-ChairmanandPresident,IndependentBank, 2011 Memphis,Tennessee Appointedbythe BoardofGovernors NickClark................... Partner,Clark&Clark,Memphis,Tennessee 2009 CharlesS.Blatteis.......... Partner,Burch,Porter&JohnsonPLLC,Memphis, 2010 Tennessee LawrenceC.Long.......... Partner,St.RestPlantingCo.,Indianola,Mississippi 2011 DISTRICT9—MINNEAPOLIS ReserveBank ClassA ThomasW.Scott............ ChairmanoftheBoard,FirstInterstateBancSystem, 2009 Inc.,Billings,Montana JamesA.Espeland.......... PresidentandChiefExecutiveOfficer,FirstNational 2010 Bank,Henning,Minnesota MichaelJ.O’Meara......... Chairman,PeoplesBankofWisconsin,EauClaire, 2011 Wisconsin

Federal Reserve System Organization 415 BankorBranch,Category Termexpires Title Name Dec.31 ClassB WilliamJ.Shorma.......... President,Shur-Co.,Yankton,SouthDakota 2009 ToddL.Johnson............ Chairman,President,andChiefExecutiveOfficer, 2010 ReubenJohnson&Son,Inc.&Affiliated Companies,Superior,Wisconsin HowardA.Dahl............ PresidentandChiefExecutiveOfficer,Amity 2011 Technology,LLC,Fargo,NorthDakota ClassC JamesJ.Hynes.............. ExecutiveAdministrator,TwinCityPipeTrades 2009 ServiceAssociation,St.Paul,Minnesota MaryK.Brainerd........... PresidentandChiefExecutiveOfficer,HealthPartners, 2010 Minneapolis,Minnesota JohnW.Marvin............. ChairmanandChiefExecutiveOfficer,Marvin 2011 WindowsandDoors,Warroad,Minnesota HelenaBranch Appointedbythe FederalReserveBank TimothyJ.Bartz............ ChiefExecutiveOfficer,AndersonZurMuehlen& 2009 Company,P.C.,Helena,Montana KayClevidence............. President,FarmersStateBank,Victor,Montana 2010 JohnL.Franklin............ PresidentandChiefExecutiveOfficer,1stBank, 2011 Sidney,Montana Appointedbythe BoardofGovernors JosephF.McDonald........ President,SalishKootenaiCollege,Pablo,Montana 2009 DavidB.Solberg........... Owner,SevenBlackfootRanchCompany,Billings, 2011 Montana DISTRICT10—KANSASCITY ReserveBank ClassA MarkW.Schifferdecker.... PresidentandChiefExecutiveOfficer,GirardNational 2009 Bank,Girard,Kansas RobertC.Fricke............ PresidentandChiefExecutiveOfficer,Farmersand 2010 MerchantsBankofAshland,Ashland,Nebraska JohnA.Ikard............... PresidentandChiefExecutiveOfficer,FirstBank 2011 HoldingCompany,Lakewood,Colorado ClassB Vacancy..................... 2009 MarkGordon................ Owner,MerlinRanch,Buffalo,Wyoming 2010 RichardK.Ratcliffe........ Chairman,Ratcliffe’sInc.,Weatherford,Oklahoma 2011

416 96th Annual Report, 2009 Directors—continued BankorBranch,Category Termexpires Title Name Dec.31 ClassC PaulDeBruce............... ChiefExecutiveOfficerandChairman/Founder, 2009 DeBruceGrain,Inc.,KansasCity,Missouri TerryL.Moore.............. President,OmahaFederationofLabor,Omaha, 2010 Nebraska LuM.Cordova.............. ChiefExecutiveOfficer,CorlundIndustries,LLC; 2011 PresidentandGeneralManager,AlmacenStorage Group,Boulder,Colorado DenverBranch Appointedbythe FederalReserveBank CharlesH.BrownIII....... President,C.H.BrownCo.,Wheatland,Wyoming 2009 JohnD.Pearson............. President,PearsonRealEstateCo.,Inc.,Buffalo, 2009 Wyoming WilliamC.Enloe........... PresidentandChiefExecutiveOfficer,LosAlamos 2010 NationalBank,LosAlamos,NewMexico BruceK.Alexander......... PresidentandChiefExecutiveOfficer,VectraBank 2011 Colorado,Denver,Colorado Appointedbythe BoardofGovernors BarbaraMowry............. PresidentandChiefExecutiveOfficer,SilverCreek 2009 Systems,Westminster,Colorado KristyA.Schloss........... PresidentandChiefExecutiveOfficer,Schloss 2010 EngineeredEquipment,Inc.,Aurora,Colorado LarissaL.Herda............ Chairman,ChiefExecutiveOfficer,andPresident, 2011 twtelecominc.,Littleton,Colorado OklahomaCityBranch Appointedbythe FederalReserveBank FredM.Ramos............. President,RGF,Inc.,OklahomaCity,Oklahoma 2009 JacquelineR.Fiegel........ SeniorExecutiveVicePresidentandChiefOperating 2010 Officer,CoppermarkBank,OklahomaCity, Oklahoma DouglasE.Tippens......... PresidentandChiefExecutiveOfficer,Bankof 2010 Commerce,Yukon,Oklahoma K.Vasudevan................ ChairmanandFounder,Service&Technology 2011 Corporation,Bartlesville,Oklahoma Appointedbythe BoardofGovernors BillAnoatubby.............. Governor,ChickasawNation,Ada,Oklahoma 2009 StevenC.Agee............. President,AgeeEnergy,LLC,OklahomaCity, 2010 Oklahoma JamesD.Dunn.............. ChairmanoftheBoard,MillCreekLumber&Supply 2011 Company,Tulsa,Oklahoma

Federal Reserve System Organization 417 BankorBranch,Category Termexpires Title Name Dec.31 OmahaBranch Appointedbythe FederalReserveBank ToddS.Adams.............. ChairmanandChiefExecutiveOfficer,AdamsBank 2009 &Trust,Ogallala,Nebraska RodrigoLopez.............. PresidentandChiefExecutiveOfficer,AmeriSphere 2009 MultifamilyFinance,L.L.C.,Omaha,Nebraska JoAnnM.Martin........... Chairman,President,andChiefExecutiveOfficer, 2010 AmeritasLifeInsuranceCorp.,Lincoln,Nebraska MarkA.Sutko.............. PresidentandChiefExecutiveOfficer,PlatteValley 2011 StateBank,Kearney,Nebraska Appointedbythe BoardofGovernors CharlesR.Hermes.......... ChiefExecutiveOfficer,Dutton-LainsonCompany, 2009 Hastings,Nebraska LynWallinZiegenbein..... ExecutiveDirector,PeterKiewitFoundation,Omaha, 2010 Nebraska JamesC.Farrell............. PresidentandChiefExecutiveOfficer,Farmers 2011 NationalCompany,Omaha,Nebraska DISTRICT11—DALLAS ReserveBank ClassA PeteCook................... ChiefExecutiveOfficer,FirstNationalBankin 2009 Alamogordo,Alamogordo,NewMexico JoeKimKing............... ChiefExecutiveOfficerandChairmanoftheBoard, 2010 TexasCountryBancshares,Inc.,Brady,Texas GeorgeF.Jones,Jr.......... ChiefExecutiveOfficer,TexasCapitalBank,Dallas, 2011 Texas ClassB MargaretH.Jordan......... PresidentandChiefExecutiveOfficer,DallasMedical 2009 Resource,Dallas,Texas RobertA.Estrada........... Chairman,EstradaHinojosa&Company,Inc.,Dallas, 2010 Texas JamesB.Bexley............ Professor,Finance,SamHoustonStateUniversity, 2011 Huntsville,Texas ClassC MyronE.UllmanIII........ ChiefExecutiveOfficerandChairmanoftheBoard, 2009 J.C.PenneyCompany,Inc.,Plano,Texas HerbKelleher............... FounderandChairmanEmeritus,SouthwestAirlines, 2010 Dallas,Texas JamesT.Hackett............ Chairman,President,andChiefExecutiveOfficer, 2011 AnadarkoPetroleumCorporation,Houston,Texas ElPasoBranch Appointedbythe FederalReserveBank GeraldJ.Rubin............. Chairman,President,andChiefExecutiveOfficer, 2009 HelenofTroyLimited,ElPaso,Texas

418 96th Annual Report, 2009 Directors—continued BankorBranch,Category Termexpires Title Name Dec.31 LarryL.Patton.............. PresidentandChiefExecutiveOfficer,Bankofthe 2010 West,ElPaso,Texas LauraM.Conniff........... QualifyingBroker,MathersRealty,Inc.,LasCruces, 2011 NewMexico MarthaI.Dickason......... President,DMDickasonPersonnelServices,ElPaso, 2011 Texas Appointedbythe BoardofGovernors D.KirkEdwards............ President,MacLondonRoyaltyCompany,Odessa, 2009 Texas CindyJ.Ramos-Davidson . PresidentandChiefExecutiveOfficer,ElPaso 2010 HispanicChamberofCommerce,ElPaso,Texas RobertE.McKnight,Jr..... Owner,McKnightRanchCompany,FortDavis,Texas 2011 HoustonBranch Appointedbythe FederalReserveBank PaulB.Murphy,Jr.......... PresidentandChiefExecutiveOfficer,AmegyBank, 2009 NA,Houston,Texas JodieL.Jiles................ ManagingDirector,RBCCapitalMarkets,Houston, 2010 Texas KirkS.Hachigian........... ChairmanandChiefExecutiveOfficer,Cooper 2011 Industries,Ltd.,Houston,Texas AnnB.Stern................ ExecutiveVicePresident,TexasChildren’sHospital, 2011 Houston,Texas Appointedbythe BoardofGovernors JorgeA.Bermudez......... PresidentandChiefExecutiveOfficer,Byebrook 2009 Group,CollegeStation,Texas DouglasL.Foshee.......... PresidentandChiefExecutiveOfficer,ElPaso 2010 Corporation,Houston,Texas PaulW.Hobby.............. ChairmanandChiefExecutiveOfficer,Alpheus 2011 Communications,Houston,Texas SanAntonioBranch Appointedbythe FederalReserveBank ThomasE.Dobson.......... ChairmanandChiefExecutiveOfficer,Whataburger 2009 Restaurants,LP,SanAntonio,Texas GPSingh.................... ChiefExecutiveOfficer,GurParsaadProperties,Ltd., 2010 SanAntonio,Texas YgnacioD.Garza........... CPA,LongChiltonLLP,Brownsville,Texas 2011 GuillermoF.Trevino....... President,SouthernDistributing,Laredo,Texas 2011 Appointedbythe BoardofGovernors J.DanBates................. President,SouthwestResearchInstitute,SanAntonio, 2009 Texas RicardoRomo............... President,TheUniversityofTexasatSanAntonio, 2010 SanAntonio,Texas StevenR.Vandegrift........ FounderandPresident,SRVHoldings,Austin,Texas 2011

Federal Reserve System Organization 419 BankorBranch,Category Termexpires Title Name Dec.31 DISTRICT12—SANFRANCISCO ReserveBank ClassA KennethP.Wilcox.......... PresidentandChiefExecutiveOfficer,SVBFinancial 2009 Group,SantaClara,California ArnoldT.Grisham.......... PresidentandChiefExecutiveOfficer,AltaAlliance 2010 Bank,Oakland,California DannH.Bowman........... PresidentandChiefExecutiveOfficer,Chino 2011 CommercialBank,N.A.,Chino,California ClassB BlakeW.Nordstrom........ President,Nordstrom,Inc.,Seattle,Washington 2009 WilliamD.Jones........... PresidentandChiefExecutiveOfficer,CityLink 2010 InvestmentCorporation,SanDiego,California KarlaS.Chambers.......... VicePresidentandCo-Owner,StahlbushIslandFarms, 2011 Inc.,Corvallis,Oregon ClassC T.GaryRogers.............. RetiredChairmanoftheBoard,LeviStraussandCo., 2009 SanFrancisco,California PatriciaE.Yarrington....... VicePresidentandChiefFinancialOfficer,Chevron 2010 Corporation,SanRamon,California DouglasW.Shorenstein.... ChairmanandChiefExecutiveOfficer,Shorenstein 2011 PropertiesLLC,SanFrancisco,California LosAngelesBranch Appointedbythe FederalReserveBank EricL.Holoman............ President,MagicJohnsonEnterprises,BeverlyHills, 2009 California JamesL.Sanford........... Consultant,NorthropGrummanCorporation, 2009 LosAngeles,California DominicNg................. ChairmanandChiefExecutiveOfficer,EastWest 2010 Bank,Pasadena,California KeithE.Smith.............. PresidentandChiefExecutiveOfficer,BoydGaming 2011 Corporation,LasVegas,Nevada Appointedbythe BoardofGovernors AndrewJ.Sale.............. Partner,Ernst&YoungLLP,LosAngeles,California 2009 GraceEvansCherashore ... PresidentandChiefExecutiveOfficer,EvansHotels, 2010 SanDiego,California AnnE.Sewill............... President,CommunityFoundationLandTrust, 2011 CaliforniaCommunityFoundation,LosAngeles, California PortlandBranch Appointedbythe FederalReserveBank RobertD.Sznewajs......... PresidentandChiefExecutiveOfficer,WestCoast 2009 Bancorp,LakeOswego,Oregon RogerW.Hinshaw.......... President,OregonandSWWashington,Bankof 2010 AmericaOregon,N.A.,Portland,Oregon

420 96th Annual Report, 2009 Directors—continued BankorBranch,Category Termexpires Title Name Dec.31 PeggyY.Fowler............ RetiredChiefExecutiveOfficerandPresident, 2011 PortlandGeneralElectric,Portland,Oregon JudithA.Johansen.......... President,MarylhurstUniversity,Marylhurst,Oregon 2011 Appointedbythe BoardofGovernors DavidY.Chen.............. ManagingDirector,EquilibriumCapitalGroupLLC, 2009 Portland,Oregon JamesH.Rudd.............. ChiefExecutiveOfficerandPrincipal,Ferguson 2010 WellmanCapitalManagement,Inc.,Portland, Oregon RoderickC.Wendt.......... PresidentandChiefExecutiveOfficer,JELD-WEN, 2011 inc.,KlamathFalls,Oregon SaltLakeCityBranch Appointedbythe FederalReserveBank CarolCarter................. PresidentandChiefExecutiveOfficer,Industrial 2009 CompressorProducts,Inc.,ParkCity,Utah MichaelM.Mooney........ President,IdahoRegion,BankoftheCascades,Boise, 2010 Idaho AnnetteHarder.............. President,HermanConsulting,LLC,ParkCity,Utah 2011 RobertA.Hatch............. RetiredPresidentandChiefExecutiveOfficer, 2011 WellsFargoUtah,SaltLakeCity,Utah Appointedbythe BoardofGovernors EdwinE.Dahlberg.......... PresidentandChiefExecutiveOfficer,St.Luke’s 2009 HealthSystem,Boise,Idaho ScottL.Hymas............. ChiefExecutiveOfficer,RCWilley,SaltLakeCity, 2010 Utah ClarkD.Ivory.............. ChiefExecutiveOfficer,IvoryHomes,Ltd., 2011 SaltLakeCity,Utah SeattleBranch Appointedbythe FederalReserveBank CarolK.Nelson............. PresidentandChiefExecutiveOfficer,Cascade 2009 FinancialCorporation,Everett,Washington RichardGalanti............. ExecutiveVicePresidentandChiefFinancialOfficer, 2010 CostcoWholesaleCorporation,Issaquah, Washington StanW.McNaughton....... Chairman,ChiefExecutiveOfficerandPresident, 2011 PEMCOMutualInsurance,Seattle,Washington PatrickG.Yalung........... RegionalPresident,Washington,WellsFargoBank, 2011 N.A.,Seattle,Washington Appointedbythe BoardofGovernors HelviK.Sandvik........... President,NANADevelopmentCorporation, 2009 Anchorage,Alaska WilliamS.Ayer............. Chairman,President,andChiefExecutiveOfficer, 2010 AlaskaAirGroup,Seattle,Washington AdaM.Healey.............. VicePresident,RealEstate,VulcanInc.,Seattle, 2011 Washington

Federal Reserve System Organization 421 Members of the Board of Governors, 1913–2009 Appointed Members FederalReserve Dateinitiallytook 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. Chas.N.Shepardson Dallas Mar.17,1955 RetiredApr.30,1967.

422 96th Annual Report, 2009 Appointed Members—continued FederalReserve Dateinitiallytook Name Otherdates1 District oathofoffice 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 ServedthroughJan.21,2009. FredericS.Mishkin Boston Sept.5,2006 ResignedAug.31,2008. ElizabethA.Duke Philadelphia Aug.5,2008 DanielK.Tarullo Boston Jan.28,2009

Federal Reserve System Organization 423 Appointed Members—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: UndertheoriginalFederalReserveAct,theFederalReserveBoardwascomposedoffiveappointedmembers,theSecretaryoftheTreasury(exofficiochairmanoftheBoard),andtheComptrolleroftheCurrency.The originaltermofofficewastenyears;thefiveoriginalappointedmembershadtermsoftwo,four,six,eight,andten years.In1922thenumberofappointedmemberswasincreasedtosix,andin1933thetermofofficewasraisedto twelveyears.TheBankingActof1935changedthenametotheBoardofGovernorsoftheFederalReserveSystem andprovidedthattheBoardbecomposedofsevenappointedmembers;thattheSecretaryoftheTreasuryandthe ComptrolleroftheCurrencycontinuetoserveuntilFeb.1,1936;thattheappointedmembersinofficeonAug.23, 1935,continuetoserveuntilFeb.1,1936,oruntiltheirsuccessorswereappointedandhadqualified;andthatthereafterthetermsofmembersbefourteenyearsandthatthedesignationofChairmanandViceChairmanoftheBoard beforfouryears. 1. Datefollowing‘‘Resigned’’and‘‘Retired’’denotesfinaldayofservice. 2. Successortookofficeonthisdate. 3. BeforeAug.23,1935,ChairmenandViceChairmenweredesignatedGovernorandViceGovernor. 4. ServedasChairmanProTemporefromFeb.3,1948,toApr.15,1948. 5. ServedasChairmanProTemporefromMar.3,1996,toJune20,1996.

424 96th Annual Report, 2009 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

426 96th Annual Report, 2009 1. FederalReserveOpenMarketTransactions,2009 Millionsofdollars Typeofsecurityandtransaction Jan. Feb. Mar. Apr. U.S.TreasurySecurities1 Outrighttransactions2 Treasurybills Grosspurchases............................................ 0 0 0 0 Grosssales................................................. 0 0 0 0 Exchanges................................................. 24,708 18,423 23,458 18,423 Fornewbills............................................. 24,708 18,423 23,458 18,423 Redemptions............................................... 0 0 0 0 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 7,541 43,740 Grosssales................................................. 0 0 0 0 Maturityshifts.............................................. 0 0 0 0 Exchanges................................................. 0 0 0 0 5to10years Grosspurchases............................................ 0 0 7,500 8,996 Grosssales................................................. 0 0 0 0 Maturityshifts.............................................. 0 0 0 0 Exchanges................................................. 0 0 0 0 Morethan10years Grosspurchases............................................ 0 0 2,499 3,466 Grosssales................................................. 0 0 0 0 Maturityshifts.............................................. 0 0 0 0 Discountnotes............................................. 0 0 0 0 Allmaturities Grosspurchases............................................ 0 0 17,540 56,202 Grosssales................................................. 0 0 0 0 Redemptions............................................... 0 0 0 0 NetchangeinU.S.Treasurysecurities..................... 0 0 17,540 56,202 Fornotes,refertoendoftable.

Statistical Tables 427 1.—continued May June July Aug. Sept. Oct. Nov. Dec. Total 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 16,005 18,423 24,361 18,423 16,005 18,423 12,138 24,708 233,498 16,005 18,423 24,361 18,423 16,005 18,423 12,138 24,708 233,498 0 0 0 0 0 0 0 0 0 1,380 0 829 0 40 0 0 0 2,249 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 28,185 15,044 21,532 25,784 14,404 1,936 0 0 158,166 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 17,407 28,397 17,088 8,170 5,500 2,949 0 0 96,007 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 9,820 6,749 9,043 7,602 2,049 2,350 0 0 43,578 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 56,792 50,190 48,492 41,556 21,993 7,235 0 0 300,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 56,792 50,190 48,492 41,556 21,993 7,235 0 0 300,000

428 96th Annual Report, 2009 1. FederalReserveOpenMarketTransactions,2009—continued Millionsofdollars Typeofsecurityandtransaction Jan. Feb. Mar. Apr. FederalAgencyObligations Outrighttransactions2 Grosspurchases............................................... 9,600 9,413 13,703 17,765 Grosssales................................................... 0 0 0 0 Redemptions.................................................. 0 0 0 0 Netchangeinfederalagencyobligations.................. 9,600 9,413 13,703 17,765 Mortgage-BackedSecurities3 NetSettlements2 Netchangeinmortgage-backedsecurities................. 7,377 61,470 167,789 129,331 TemporaryTransactions Repurchaseagreements4 Grosspurchases............................................... 0 0 0 0 Grosssales................................................... 80,000 0 0 0 Reverserepurchaseagreements5 Grosspurchases............................................... 1,593,534 1,365,436 1,485,898 1,483,810 Grosssales................................................... 1,581,950 1,362,861 1,482,294 1,481,260 Netchangeintemporarytransactions...................... –68,417 2,575 3,605 2,550 TotalnetchangeinSystemOpenMarketAccount........... –51,440 73,458 202,637 205,848 Note: Sales,redemptions,andnegativefiguresreduceholdingsoftheSystemOpenMarketAccount;allother figuresincreasesuchholdings.Componentsmaynotsumtototalsbecauseofrounding. 1. Transactionsexcludechangesincompensationfortheeffectsofinflationontheprincipalofinflation-indexed securities.Transactionsincludetherolloverofinflationcompensationintonewsecurities. 2. Excludestheeffectoftemporarytransactions—repurchaseagreementsandreverserepurchaseagreements. 3.GuaranteedbyFannieMae,FreddieMac,andGinnieMae.Monthlynetchangeinfacevalueofthesecurities held,whichistheremainingprincipalbalanceoftheunderlyingmortgages. 4. Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities, andmortgage-backedsecurities. 5. Cash value of agreements, which are collateralized by U.S. Treasury securities and federal agency debt securities.

Statistical Tables 429 1.—continued May June July Aug. Sept. Oct. Nov. Dec. Total 11,595 16,873 9,485 13,423 12,589 15,783 8,108 3,141 141,478 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 30 30 11,595 16,873 9,485 13,423 12,589 15,783 8,108 3,111 141,448 61,639 34,819 80,464 82,027 67,448 81,972 77,819 56,216 908,371 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 80,000 1,366,185 1,514,269 1,575,058 1,436,812 1,437,572 1,356,242 1,206,922 1,317,821 17,139,559 1,364,285 1,520,799 1,570,459 1,439,045 1,436,182 1,355,268 1,197,005 1,338,611 17,130,019 1,901 –6,530 4,599 –2,233 1,390 974 9,917 –20,790 –70,459 131,927 95,352 143,040 134,773 103,420 105,964 95,844 38,537 1,279,360

430 96th Annual Report, 2009 2. FederalReserveBankHoldingsofU.S.TreasuryandFederalAgencySecurities, December31,2007–2009 Millionsofdollars December31 Change Description 2008to 2007to 2009 2008 2007 2009 2008 U.S.TreasurySecurities Heldoutright1..................................... 776,588 475,921 740,611 300,667 –264,690 Byremainingmaturity Bills 1–90days....................................... 18,423 18,423 153,829 0 –135,406 91daysto1year................................ 0 0 74,012 0 –74,012 Notesandbonds 1yearorless.................................... 72,818 85,011 101,447 –12,193 –16,436 Morethan1yearthrough5years................. 326,874 173,328 240,562 153,546 –67,234 Morethan5yearsthrough10years............... 213,720 97,325 81,947 116,395 15,378 Morethan10years.............................. 144,753 101,834 88,814 42,919 13,020 Bytype Bills............................................... 18,423 18,423 227,841 0 –209,418 Notes.............................................. 568,323 334,779 401,776 233,544 –66,997 Bonds............................................. 189,843 122,719 110,995 67,124 11,724 FederalAgencySecurities Heldoutright1..................................... 159,879 19,708 0 140,171 19,708 Byremainingmaturity Discountnotes 1–90days....................................... 0 3,731 0 –3,731 3,731 91daysto1year................................ 0 946 0 –946 946 Coupons 1yearorless.................................... 24,642 30 0 24,612 30 Morethan1yearthrough5years................. 99,402 11,361 0 88,041 11,361 Morethan5yearsthough10years............... 33,788 3,640 0 30,148 3,640 Morethan10years.............................. 2,047 0 0 2,047 0 Bytype Discountnotes..................................... 0 4,677 0 –4,677 4,677 Coupons .......................................... 159,879 15,031 0 144,848 15,031 Byissuer FederalHomeLoanMortgageCorporation.......... 61,769 9,556 0 52,213 9,556 FederalNationalMortgageAssociation.............. 63,662 7,091 0 56,571 7,091 FederalHomeLoanBanks.......................... 34,448 3,061 0 31,387 3,061 Mortgage-BackedSecurities2 Heldoutright1..................................... 908,371 0 0 908,371 0 Byremainingmaturity 1yearorless...................................... 0 0 0 0 0 Morethan1yearthrough5years................... 12 0 0 12 0 Morethan5yearsthough10years.................. 20 0 0 20 0 Morethan10years................................. 908,340 0 0 908,340 0 Byissuer FederalHomeLoanMortgageCorporation.......... 304,964 0 0 304,964 0 FederalNationalMortgageAssociation.............. 513,398 0 0 513,398 0 GovernmentNationalMortgageAssociation......... 90,010 0 0 90,010 0 TemporaryTransactions Repurchaseagreements3.......................... 0 80,000 46,500 –80,000 33,500 Reverserepurchaseagreements4.................. 77,732 88,352 43,985 –10,620 44,367 Foreignofficialandinternationalaccounts......... 77,732 88,352 43,985 –10,620 44,367 Dealers.......................................... 0 0 0 0 0 Note: Componentsmaynotsumtototalsbecauseofrounding. 1. Excludestheeffectoftemporarytransactions—repurchaseagreementsandreverserepurchaseagreements. 2. GuaranteedbyFannieMae,FreddieMac,andGinnieMae. 3. Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities, andmortgage-backedsecurities. 4. Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecuritiesandfederalagencydebtsecurities.

Statistical Tables 431 3. FederalReserveBankInterestRatesonLoanstoDepositoryInstitutions Percent A.RatesonSelectedLoansasofDecember31,20091 ReserveBank Primarycredit Secondarycredit Seasonalcredit AllBanks ................................. 0.50 1.00 0.15 1. Fordetailsonratechangesoverthecourseof2009,seethesectionondiscountratesinthechapter“Recordof PolicyActionsoftheBoardofGovernors.”Inordinarycircumstances,primarycreditisavailableforveryshort termsasabackupsourceofliquiditytodepositoryinstitutionsthatareingenerallysoundfinancialconditioninthe judgmentofthelendingFederalReserveBank.OnMarch16,2008,theBoardannouncedatemporarychangetothe ReserveBanks’discountwindowlendingpracticestoallowtheprovisionoftermfinancingforaslongas90days. OnNovember17,2009,theBoardannouncedareductioninthemaximummaturityofsuchfinancingto28dayseffectiveJanuary14,2010.Secondarycreditisavailableinappropriatecircumstancestodepositoryinstitutionsthatdo notqualifyforprimarycredit.Seasonalcreditisavailabletohelprelativelysmalldepositoryinstitutionsmeetregularseasonalneedsforfundsthatarisefromaclearpatternofintra-yearlymovementsintheirdepositsandloans. B.RatesonTermAuctionFacilityLoansOutstandingonDecember31,20092 ReserveBank Auctiondate Rate AllBanks.................................. Nov.2,2009 0.250 Nov.30,2009 0.250 Dec.14,2009 0.250 2. UndertheTermAuctionFacility(TAF),theFederalReserveauctionstermfundstodepositoryinstitutionsthat areingenerallysoundfinancialconditionandareeligibletoborrowundertheprimarycreditprogram.Loansfrom threeauctionswereoutstandingonDecember31,2009.

432 96th Annual Report, 2009 4. ReserveRequirementsofDepositoryInstitutions,December31,2009 Requirements Typeofdeposit Percentageofdeposits Effectivedate Nettransactionaccounts1 $0million–$10.7million2.............................. 0 12-31-09 Morethan$10.7million–$55.2million3 ................ 3 12-31-09 Morethan$55.2million ............................... 10 12-31-09 Nonpersonaltimedeposits ............................. 0 12-27-90 Eurocurrencyliabilities ................................ 0 12-27-90 Note:Requiredreservesmustbeheldintheformofvaultcashand,ifvaultcashisinsufficient,alsointheform ofadepositwithaFederalReserveBank.AninstitutionthatisamemberoftheFederalReserveSystemmusthold thatdepositdirectlywithaReserveBank;aninstitutionthatisnotamemberoftheSystemcanmaintainthatdepositdirectlywithaReserveBankorwithanotherinstitutioninapass-throughrelationship.Reserverequirements areimposedoncommercialbanks,savingsbanks,savingsandloanassociations,creditunions,U.S.branchesand agenciesofforeignbanks,Edgecorporations,andagreementcorporations. 1. Total transaction accounts consist of demand deposits, automatic transfer service (ATS) accounts, NOW accounts, share draft accounts, telephone or preauthorized transfer accounts, ineligible acceptances, and affiliateissuedobligationsmaturinginsevendaysorless.Nettransactionaccountsaretotaltransactionaccountslessamounts duefromotherdepositoryinstitutionsandlesscashitemsintheprocessofcollection. Foramoredetaileddescriptionofthesedeposittypes,seeFormFR2900. 2. Theamountofnettransactionaccountssubjecttoareserverequirementratioof0percent(the“exemption amount”)isadjustedeachyearbystatute.Theexemptionamountisadjustedupwardby80percentoftheprevious year’s(June30toJune30)rateofincreaseintotalreservableliabilitiesatalldepositoryinstitutions.Noadjustment ismadeintheeventofadecreaseinsuchliabilities. 3. Theamountofnettransactionaccountssubjecttoareserverequirementratioof3percentisthe“lowreserve tranche.”Bystatute,theupperlimitofthelowreservetrancheisadjustedeachyearby80percentoftheprevious year’s(June30toJune30)rateofincreaseordecreaseinnettransactionaccountsheldbyalldepositoryinstitutions.

Statistical Tables 433 5. BankingOfficesandBanksAffiliatedwithBankHoldingCompaniesintheUnited States,December31,2008and2009 Commercialbanks1 Statechartered Typeofoffice Total Member Non- savings Total member banks Total National State Allbankingoffices Banks Number,Dec.31,2008......... 7,403 7,050 2,379 1,522 857 4,671 353 Changesduring2009 Newbanks..................... 34 33 12 10 2 21 1 Banksconvertedintobranches.. –149 –145 –52 –37 –15 –93 –4 Ceasedbankingoperations2..... –131 –131 –47 –28 –19 –84 0 Other3......................... 0 1 –4 –19 15 5 –1 Netchange..................... –246 –242 –91 –74 –17 –151 –4 Number,Dec.31,2009......... 7,157 6,808 2,288 1,448 840 4,520 349 Branchesand AdditionalOffices Number,Dec.31,2008......... 83,826 80,744 57,083 42,988 14,095 23,661 3,082 Changesduring2009 Newbranches.................. 1,998 1,943 1,454 1,047 407 489 55 Branchesconvertedfrombanks. 149 145 66 34 32 79 4 Discontinued2.................. –1,613 –1,565 –1,160 –868 –292 –405 –48 Other3......................... 0 9 220 –43 263 –211 –9 Netchange..................... 534 532 580 170 410 –48 2 Number,Dec.31,2009......... 84,360 81,276 57,663 43,158 14,505 23,613 3,084 Banksaffiliatedwithbankholdingcompanies Banks Number,Dec.31,2008......... 5,973 5,847 2,096 1,343 753 3,751 126 Changesduring2009 BHC-affiliatednewbanks....... 73 66 16 10 6 50 7 Banksconvertedintobranches.. –133 –131 –50 –36 –14 –81 –2 Ceasedbankingoperations2..... –128 –127 –47 –28 –19 –80 –1 Other3......................... 0 1 –5 –19 14 6 –1 Netchange..................... –188 –191 –86 –73 –13 –105 3 Number,Dec.31,2009......... 5,785 5,656 2,010 1,270 740 3,646 129 Note:Includesbanks,bankingoffices,andbankholdingcompaniesinU.S.territoriesandpossessions(affiliated insularareas). 1. Forpurposesofthistable,banksareentitiesthataredefinedasbanksintheBankHoldingCompanyAct,as amended, which is implemented by Federal Reserve Regulation Y. Generally, a bank is any institution that acceptsdemanddepositsandisengagedinthebusinessofmakingcommercialloansoranyinstitutionthatisdefined asaninsuredbankinsection3(h)oftheFDICAct. 2. InstitutionsthatnolongermeettheRegulationYdefinitionofabank. 3. Interclasschangesandsalesofbranches.

434 96th Annual Report, 2009 6A. ReservesofDepositoryInstitutions,FederalReserveBankCredit,andRelatedItems, Year-End1984–2009andMonth-End2009 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 1990...... 241,431 18,354 190 2,222 39,897 302,091 11,058 10,018 20,402 1991...... 272,531 15,898 218 731 34,567 323,945 11,059 10,018 21,014 1992...... 300,423 8,094 675 3,253 30,020 342,464 11,056 8,018 21,447 1993...... 336,654 13,212 94 909 33,035 383,904 11,053 8,018 22,095 1994...... 368,156 10,590 223 –716 33,634 411,887 11,051 8,018 22,994 1995...... 380,831 13,862 135 107 33,303 428,239 11,050 10,168 24,003 1996...... 393,132 21,583 85 4,296 32,896 451,992 11,048 9,718 24,966 1997...... 431,420 23,840 2,035 719 31,452 489,466 11,047 9,200 25,543 1998...... 452,478 30,376 17 1,636 36,966 521,475 11,046 9,200 26,270 1999...... 478,144 140,640 233 –237 35,321 654,100 11,048 6,200 28,013 2000...... 511,833 43,375 110 901 36,467 592,686 11,046 2,200 31,643 2001...... 551,685 50,250 34 –23 37,658 639,604 11,045 2,200 33,017 2002...... 629,416 39,500 40 418 39,083 708,457 11,043 2,200 34,597 2003...... 666,665 43,750 62 –319 40,848 751,006 11,043 2,200 35,468 2004...... 717,819 33,000 43 925 42,219 794,007 11,045 2,200 36,434 2005...... 744,215 46,750 72 885 39,611 831,532 11,043 2,200 36,540 2006...... 778,915 40,750 67 –333 39,895 859,294 11,041 2,200 38,206 2007...... 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 2009...... 1,844,838 0 281,095 –2,097 92,444 2,216,280 11,041 5,200 42,698 Fornotes,refertoendoftable.

Statistical Tables 435 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 48,921 855,614 928,256 77,732 239 186,632 5,001 2,411 35,262 3,021 63,219 973,446

436 96th Annual Report, 2009 6A. ReservesofDepositoryInstitutions,FederalReserveBankCredit,andRelatedItems, Year-End1984–2009andMonth-End2009—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 2009 Jan...... 510,788 0 1,292,050 –1,549 44,366 1,845,656 11,041 2,200 42,110 Feb ..... 581,679 0 1,270,642 –2,258 43,590 1,893,654 11,041 2,200 42,178 Mar ..... 779,352 0 1,242,713 –3,075 45,326 2,064,316 11,041 2,200 42,261 Apr ..... 983,179 0 988,424 –2,095 59,728 2,029,236 11,041 2,200 42,319 May..... 1,113,515 0 884,837 –1,450 69,496 2,066,398 11,041 2,200 42,333 Jun...... 1,215,517 0 693,889 –2,831 73,139 1,979,714 11,041 2,200 42,427 Jul...... 1,354,066 0 546,618 –1,535 79,635 1,978,785 11,041 2,200 42,481 Aug..... 1,491,500 0 494,401 –1,440 79,565 2,064,026 11,041 2,200 42,487 Sep ..... 1,592,701 0 448,072 –2,535 85,087 2,123,325 11,041 5,200 42,564 Oct ..... 1,697,804 0 363,321 –1,647 90,348 2,149,825 11,041 5,200 42,607 Nov..... 1,783,761 0 314,311 –1,103 90,250 2,187,221 11,041 5,200 42,663 Dec ..... 1,844,838 0 281,095 –2,097 92,444 2,216,280 11,041 5,200 42,698

Statistical Tables 437 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 887,575 76,769 297 23,548 169,962 134 1,529 4,429 48,905 687,860 897,504 74,194 282 23,502 199,950 1,370 15,193 4,466 51,263 681,350 903,715 70,590 311 67,151 199,934 1,139 21,019 4,428 55,628 795,905 903,300 68,040 311 136,194 199,929 1,782 338 4,343 56,287 714,272 908,505 66,139 301 15,222 199,933 1,932 317 4,224 51,930 873,468 909,725 72,669 318 115,985 199,939 1,749 20,123 4,190 54,362 656,323 909,709 68,070 302 92,971 199,935 3,094 387 5,119 56,903 698,017 910,289 70,303 255 93,333 199,932 2,386 315 4,077 59,600 779,263 913,791 68,913 293 108,324 164,945 1,913 15,902 3,402 59,804 844,842 913,752 67,939 257 19,721 14,999 3,008 10,782 3,233 64,677 1,110,305 923,009 58,021 233 99,236 14,999 2,717 371 3,033 65,853 1,078,653 928,256 77,732 239 186,632 5,001 2,411 35,262 3,021 63,219 973,446 Note:Componentsmaynotsumtototalsbecauseofrounding. 1. IncludesU.S.Treasurysecurities,federalagencydebtsecurities,andmortgage-backedsecurities.U.S.Treasury securitiesandfederalagencydebtsecuritiesincludesecuritieslenttodealers,whicharefullycollateralizedbyU.S. Treasurysecurities,federalagencysecurities,andotherhighlyrateddebtsecurities. 2. Cashvalueofagreements,whicharecollateralizedbyU.S.Treasurysecurities,federalagencydebtsecurities, andmortgage-backedsecurities. 3. Refertotable6Bfordetail. 4. Includescurrencyandcoin(otherthangold)issueddirectlybytheU.S.Treasury.Thelargestcomponentsare fractionalanddollarcoins.Fordetailsreferto“U.S.CurrencyandCoinOutstandingandinCirculation,”Treasury Bulletin. 5. Cash value of agreements, which are collateralized by U.S. Treasury securities and federal agency debt securities. 6. CoinandpapercurrencyheldbytheTreasury,aswellasgoldinexcessofthegoldcertificatesissuedtothe FederalReserveBanks. ... Notapplicable.

438 96th Annual Report, 2009 6B. LoansandOtherCreditExtensions,byType,Year-End1984–2009and Month-End2009 Millionsofdollars Primary, Primary Term Central Period Total secondary, DealerCredit auction bankliquidity AMLF4 TALF5 and cr s e e d a i s t o 1 nal Facility2 credit swaps3 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 37,404 450,219 553,728 23,765 ... 2009....... 281,095 20,700 0 75,918 10,272 0 47,532 Fornotes,refertoendoftable.

Statistical Tables 439 6B.—continued Millionsofdollars Preferred Maiden Maiden Maiden CPFF6 MMIFF7 AIG8 A in IA t L e / r L A e C s L t s s I 9 C in O L L L an C e 10 L L a L n C e 1 I 0 I L L an L e C I 1 I 0 I T L A LC LF 11 ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 334,102 0 38,914 ... 27,023 20,117 26,785 ... 14,064 ... 22,184 25,106 26,701 15,659 22,661 298

440 96th Annual Report, 2009 6B. LoansandOtherCreditExtensions,byType,Year-End1984–2009and Month-End2009—continued Millionsofdollars Primary, Primary Term Central Period Total secondary, DealerCredit auction bankliquidity AMLF4 TALF5 and cr s e e d a i s t o 1 nal Facility2 credit swaps3 2009 Jan ...... 1,292,050 67,485 31,553 412,883 387,448 17,131 ... Feb...... 1,270,642 65,438 23,564 493,145 321,214 10,100 ... Mar...... 1,242,713 69,080 18,116 467,278 309,917 6,745 4,692 Apr...... 988,424 43,361 700 403,573 249,302 3,798 6,379 May ..... 884,837 41,906 0 372,540 177,652 25,696 15,451 Jun ...... 693,889 35,863 0 282,808 114,585 14,911 25,112 Jul....... 546,618 35,663 0 233,673 76,271 756 30,344 Aug...... 494,401 33,393 0 212,110 63,287 79 37,272 Sep...... 448,072 28,800 0 178,379 56,756 79 42,709 Oct ...... 363,321 23,047 0 139,245 31,884 0 43,165 Nov...... 314,311 19,978 0 101,009 23,038 0 44,469 Dec...... 281,095 20,700 0 75,918 10,272 0 47,532

Statistical Tables 441 6B.—continued Millionsofdollars Preferred Maiden Maiden Maiden CPFF6 MMIFF7 AIG8 A in IA t L e / r L A e C s L t s s I 9 C in O L L L an C e 10 L L a L n C e 1 I 0 I L L an L e C I 1 I 0 I T L A LC LF 11 264,316 0 39,041 ... 25,772 18,964 27,456 ... 243,204 0 41,665 ... 25,969 18,647 27,695 ... 248,537 0 45,966 ... 26,288 18,449 27,645 ... 163,539 0 45,493 ... 26,502 18,328 27,449 ... 145,453 0 43,720 ... 25,771 16,262 20,388 ... 115,002 0 43,457 ... 25,921 16,060 20,170 ... 66,122 0 41,607 ... 25,895 15,145 21,142 ... 47,682 0 38,681 ... 26,053 14,946 20,897 ... 41,029 0 38,743 ... 26,261 14,751 20,566 ... 15,899 0 44,617 ... 26,284 16,008 23,172 ... 15,028 ... 45,285 ... 26,425 15,846 22,968 266 14,064 ... 22,184 25,106 26,701 15,659 22,661 298 Note:Componentsmaynotsumtototalsbecauseofrounding. 1.Priorto2003,categorywas“Adjustment,extended,andseasonalcredit.” 2.IncludescreditextendedthroughthePrimaryDealerCreditFacilityandcreditextendedtocertainotherbrokerdealers. 3.Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhenthe foreigncurrencyisreturnedtotheforeigncentralbank.Thisexchangerateequalsthemarketexchangerateused whentheforeigncurrencywasacquiredfromtheforeigncentralbank. 4.Asset-BackedCommercialPaperMoneyMarketMutualFundLiquidityFacility. 5.IncludescreditextendedbytheFederalReserveBankofNewYork(FRBNY)toeligibleborrowersthroughthe TermAsset-BackedSecuritiesLoanFacility(TALF),netofunamortizeddeferredadministrativefees. 6.NetportfolioholdingsofCommercialPaperFundingFacilityLLC. 7. Net portfolio holdings of Money Market Investor Funding Facility LLC. The MMIFF was discontinued in November2009. 8.CreditextendedtoAmericanInternationalGroup,Inc.,includesoutstandingprincipalandcapitalizedinterestnet ofunamortizeddeferredcommitmentfeesandallowanceforloanrestructuring.ExcludescreditextendedtoconsolidatedLLCs. 9.PreferredinterestsinAIAAuroraLLCandALICOHoldingsLLCatbookvalue. 10.Netportfolioholdingsatfairvalue. 11.NetportfolioholdingsofTALFLLC,alimitedliabilitycompanyformedtopurchaseandmanageanyassetbackedsecuritiesthatmightbesurrenderedbyaTALFborrowerorotherwiseclaimedbytheFRBNYinconnection withitsenforcementrightstotheTALFcollateral. ... Notapplicable.

442 96th Annual Report, 2009 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 1919..... 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 1940..... 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 1943..... 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 1945..... 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 1949..... 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 Fornotes,refertoendoftable.

Statistical Tables 443 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

444 96th Annual Report, 2009 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 1961..... 28,722 159 130 2,300 51 0 31,362 16,889 ... 5,585 1962..... 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 1967..... 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 1969..... 57,154 0 183 3,440 64 2,743 63,584 10,367 ... 6,852 1970..... 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 1974..... 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 1982..... 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: For a description of figures and discussion of their significance, see Banking and Monetary Statistics, 1941–1970(BoardofGovernorsoftheFederalReserveSystem,1976),pp.507–23. Componentsmaynotsumtototalsbecauseofrounding. 1. In1969andthereafter,includessecuritiesloaned—fullyguaranteedbyU.S.governmentsecuritiespledgedwith FederalReserveBanks—andexcludessecuritiessoldandscheduledtobeboughtbackundermatchedsale–purchase transactions.OnSeptember29,1971,andthereafter,includesfederalagencyissuesboughtoutright. 2. OnDecember1,1966,andthereafter,includesfederalagencyobligationsheldunderrepurchaseagreements. 3. In1960andthereafter,figuresreflectaminorchangeinconcept;refertoFederalReserveBulletin,vol.47 (February1961),p.164. 4. Principallyacceptancesand,untilAugust21,1959,industrialloans,theauthorityforwhichexpiredonthat date. 5. FortheperiodbeforeApril16,1969,includesthetotalofFederalReservecapitalpaidin,surplus,othercapital accounts,andotherliabilitiesandaccrueddividends,lessthesumofbankpremisesandotherassets,andisreported as“OtherFederalReserveaccounts”;thereafter,“OtherFederalReserveassets”and“OtherFederalReserveliabilitiesandcapital”areshownseparately. 6. BeforeJanuary30,1934,includesgoldheldinFederalReserveBanksandincirculation. 7. Includescurrencyandcoin(otherthangold)issueddirectlybytheTreasury.Thelargestcomponentsarefractionalanddollarcoins.Fordetailsreferto“U.S.CurrencyandCoinOutstandingandinCirculation,”TreasuryBulletin. 8. CoinandpapercurrencyheldbytheTreasury,aswellasanygoldinexcessofthegoldcertificatesissuedto theFederalReserveBanks.

Statistical Tables 445 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 9. InNovember1979andthereafter,includesreservesofmemberbanks,EdgeActcorporations,andU.S.agencies and branches of foreign banks. On November 13, 1980, and thereafter, includes reserves of all depository institutions. 10. BetweenDecember1,1959,andNovember23,1960,partwasallowedasreserves;thereafter,allwasallowed. 11. Estimatedthrough1958.Before1929,datawereavailableonlyoncalldates(in1920and1922thecalldate wasDecember29).SinceSeptember12,1968,theamounthasbeenbasedonclose-of-businessfiguresforthereserveperiodtwoweeksbeforethereportdate. 12. For the week ending November 15, 1972, and thereafter, includes $450 million of reserve deficiencies on whichFederalReserveBanksareallowedtowaivepenaltiesforatransitionperiodinconnectionwithbankadaptationtoRegulationJasamended,effectiveNovember9,1972.Allowabledeficienciesareasfollows(beginningwith firststatementweekofquarter,inmillions): 1973—Q1,$279;Q2,$172;Q3,$112;Q4,$84;1974—Q1,$67;Q2,$58.Thetransitionperiodendedwiththesecondquarterof1974. 13. FortheperiodbeforeJuly1973,includescertaindepositsofdomesticnonmemberbanksandforeign-owned bankinginstitutionsheldwithmemberbanksandredepositedinfullwithFederalReserveBanksinconnectionwith voluntaryparticipationbynonmemberinstitutionsintheFederalReserveSystemprogramofcreditrestraint. AsofDecember12,1974,theamountofvoluntarynonmemberbankandforeign-agencyandbranchdepositsat FederalReserveBanksthatareassociatedwithmarginalreservesisnolongerreported.However,twoamountsare reported:(1)depositsvoluntarilyheldasreservesbyagenciesandbranchesofforeignbanksoperatingintheUnited Statesand(2)Eurodollarliabilities. 14. Adjustedtoincludewaiversofpenaltiesforreservedeficiencies,inaccordancewithchangeinBoardpolicy, effectiveNovember19,1975. ... Notapplicable.

446 96th Annual Report, 2009 7. PrincipalAssetsandLiabilitiesofInsuredCommercialBanks,byClassofBank, June30,2009and2008 Millionsofdollars,exceptasnoted Memberbanks Nonmember Item Total banks Total National State 2009 Assets Loansandinvestments.................... 8,242,525 6,603,156 5,414,831 1,188,324 1,639,369 Loans,gross............................ 6,238,178 4,933,967 4,048,111 885,855 1,304,212 Net.................................. 6,236,251 4,933,145 4,047,608 885,538 1,303,106 Investments............................. 2,004,347 1,669,189 1,366,720 302,469 335,157 U.S.Treasuryandfederalagency ..... securities.......................... 249,742 172,378 123,917 48,461 77,364 Other................................ 1,754,605 1,496,811 1,242,803 254,008 257,793 Cashassets,total.......................... 616,817 486,640 379,577 107,063 130,177 Liabilities Deposits,total............................. 6,548,003 5,080,082 4,138,166 941,915 1,467,923 Interbank............................... 138,690 115,112 98,410 16,702 23,579 Othertransactions....................... 777,883 590,658 468,298 122,360 187,225 Othernontransactions................... 5,631,430 4,374,312 3,571,458 802,853 1,257,119 Equitycapital............................. 1,248,933 1,040,431 861,942 178,490 208,501 Numberofbanks.......................... 6,963 2,346 1,502 844 4,617 2008 Assets Loansandinvestments.................... 7,696,306 6,110,972 4,971,826 1,139,146 1,585,334 Loans,gross............................ 6,065,897 4,785,033 3,904,189 880,844 1,280,864 Net.................................. 6,063,723 4,783,573 3,902,917 880,656 1,280,150 Investments............................. 1,630,409 1,325,939 1,067,637 258,302 304,470 U.S.Treasuryandfederalagency ..... securities.......................... 182,763 98,709 58,602 40,107 84,054 Other................................ 1,447,646 1,227,230 1,009,035 218,195 220,416 Cashassets,total.......................... 299,958 235,950 199,712 36,238 64,007 Liabilities Deposits,total............................. 5,815,619 4,428,353 3,590,979 837,374 1,387,266 Interbank............................... 99,272 81,821 71,891 9,930 17,451 Othertransactions....................... 637,836 461,841 372,625 89,216 175,994 Othernontransactions................... 5,078,511 3,884,690 3,146,463 738,228 1,193,821 Equitycapital............................. 1,146,283 947,154 781,583 165,571 199,128 Numberofbanks.......................... 7,174 2,445 1,582 863 4,729 Note:IncludesU.S.-insuredcommercialbankslocatedintheUnitedStatesbutnotU.S.-insuredcommercialbanks operatinginU.S.territoriesorpossessions.Dataaredomesticassetsandliabilities(exceptforthosecomponentsreportedonaconsolidatedbasisonly).Componentsmaynotsumtototalsbecauseofrounding.Datafor2008have beenrevised.

Statistical Tables 447 8. InitialMarginRequirementsunderRegulationsT,U,andX Percentofmarketvalue Margin Convertible Shortsales, Effectivedate stocks bonds Tonly1 1934,Oct.1............... 25–45 ... ... 1936,Feb.1............... 25–55 ... ... 1936,Apr.1............... 55 ... ... 1937,Nov.1............... 40 ... 50 1945,Feb.5............... 50 ... 50 1945,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 1955,Apr.23.............. 70 ... 70 1958,Jan.16.............. 50 ... 50 1958,Aug.5............... 70 ... 70 1958,Oct.16.............. 90 ... 90 1960,July28.............. 70 ... 70 1962,July10.............. 50 ... 50 1963,Nov.6............... 70 ... 70 1968,Mar.11.............. 70 50 70 1968,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: Theseregulations,adoptedbytheBoardofGovernorspursuanttotheSecuritiesExchangeActof1934, limit the amount of credit that may be extended for the purpose of purchasing or carrying margin securities (as definedintheregulations)whentheloaniscollateralizedbysuchsecurities.Themarginrequirement,expressedasa percentage,isthedifferencebetweenthemarketvalueofthesecuritiesbeingpurchasedorcarried(100percent)and themaximumloanvalueofthecollateralasprescribedbytheBoard.RegulationTwasadoptedeffectiveOctober1, 1934;RegulationU,effectiveMay1,1936;andRegulationX,effectiveNovember1,1971.TheformerRegulation G,whichwasadoptedeffectiveMarch11,1968,wasmergedintoRegulationU,effectiveApril1,1998. 1. FromOctober1,1934,toOctober31,1937,therequirementwasthemargincustomarilyrequiredbythebrokersanddealers. ... Notapplicable.

448 96th Annual Report, 2009 9A. StatementofConditionoftheFederalReserveBanks,byBank, December31,2009and2008 Millionsofdollars Total Boston Item 2009 2008 2009 2008 Assets Goldcertificateaccount................................ 11,037 11,037 412 424 Specialdrawingrightscertificateaccount................ 5,200 2,200 196 115 Coin................................................... 2,053 1,688 64 56 Loansandsecurities Termauctioncredit..................................... 75,918 450,220 4,052 16,150 Primary,secondary,andseasonalloans.................. 20,700 93,790 109 243 PrimaryDealerCreditFacility1......................... ... 37,404 ... ... Asset-BackedCommercialPaperMoneyMarketMutual FundLiquidityFacility............................... ... 23,765 ... 23,765 TermAsset-BackedSecuritiesLoanFacility(TALF)2.... 47,626 ... ... ... CreditextendedtoAmericanInternationalGroup,Inc., net3................................................. 21,250 38,914 ... ... Securitiespurchasedunderagreementstoresell (tri-party)4........................................... ... 80,000 ... 3,356 U.S.Treasurysecurities,boughtoutright5................ 776,588 475,921 14,897 19,962 Government-sponsoredenterprisedebtsecurities, boughtoutright5..................................... 159,879 19,708 3,067 827 Federalagencyandgovernment-sponsoredenterprise mortgage-backedsecurities,boughtoutright........... 908,371 ... 17,425 ... Totalloansandsecurities.......................... 2,010,332 1,219,722 39,550 64,302 Netportfolioholdingsofconsolidatedlimited liabilitycompanies(LLCs):6.......................... 81,380 411,996 ... ... Preferredsecurities7.................................... 25,106 ... ... ... Investmentsdenominatedinforeigncurrencies8.......... 25,272 24,804 1,012 1,411 Centralbankliquidityswaps9........................... 10,272 553,728 411 31,498 Otherassets Itemsinprocessofcollection........................... 611 1,377 19 41 Bankpremises......................................... 2,249 2,194 121 123 Allotherassets10....................................... 65,459 19,789 1,274 842 Interdistrictsettlementaccount.......................... 0 0 25,668 –10,264 Totalassets............................................ 2,238,971 2,248,534 68,728 88,547 Liabilities FederalReservenotesoutstanding(issuedtoBank)...... 1,080,987 1,022,850 35,787 38,282 Less:NotesheldbyFederalReserveBank............ 193,141 169,682 3,618 5,409 FederalReservenotes,net.............................. 887,846 853,168 32,169 32,872 Securitiessoldunderagreementstorepurchase4.......... 77,732 88,352 1,491 3,706 Deposits Depositoryinstitutions.................................. 976,988 860,000 32,934 49,810 U.S.Treasury,generalaccount.......................... 186,632 106,123 ... ... U.S.Treasury,supplementaryfinancingaccount11........ 5,001 259,325 ... ... Foreign,officialaccounts............................... 2,411 1,365 2 2 Other12................................................ 35,627 21,226 18 246 Totaldeposits..................................... 1,206,659 1,248,039 32,954 50,057 Otherliabilities Deferredcredititems................................... 2,206 2,868 56 69 ConsolidatedLLCs13................................... 6,411 5,813 ... ... Allotherliabilities14................................... 6,836 8,143 169 154 Totalliabilities........................................ 2,187,690 2,206,382 66,839 86,859 CapitalAccounts Capitalpaidin......................................... 25,640 21,076 944 844 Surplus(includingaccumulatedothercomprehensive loss)................................................. 25,640 21,076 944 844 Totalliabilitiesandcapitalaccounts................... 2,238,971 2,248,534 68,728 88,547 Fornotesseeendoftable.

Statistical Tables 449 9A.—continued NewYork Philadelphia Cleveland Richmond 2009 2008 2009 2008 2009 2008 2009 2008 3,895 3,935 450 453 467 423 882 891 1,818 874 210 83 237 104 412 147 77 76 165 137 154 136 293 233 58,254 220,434 1,613 38,300 751 15,575 995 75,130 19,504 80,231 122 329 1 48 102 452 ... 37,404 ... ... ... ... ... ... ... ... ... ... ... ... ... ... 47,626 ... ... ... ... ... ... ... 21,250 38,914 ... ... ... ... ... ... ... 28,464 ... 3,493 ... 3,034 ... 7,254 303,549 169,330 12,048 20,779 30,681 18,047 27,986 43,156 62,493 7,012 2,480 860 6,317 747 5,762 1,787 355,060 14,093 ... 35,888 ... 32,735 ... 867,735 581,788 30,356 63,762 73,638 37,450 67,579 127,779 81,380 411,996 ... ... ... ... ... ... 25,106 ... ... ... ... ... ... ... 6,724 6,209 2,776 2,438 1,861 1,736 7,171 6,717 2,733 138,622 1,128 54,424 756 38,749 2,915 149,945 0 0 51 237 182 164 9 41 263 212 71 65 144 147 239 233 25,557 8,791 1,338 812 2,541 693 2,748 1,919 120,324 110,091 35,084 –66,458 –19,789 16,708 111,074 –163,991 1,135,612 1,262,593 71,630 55,952 60,192 96,310 193,321 123,914 398,052 357,738 38,422 41,218 44,922 46,503 82,410 80,772 71,925 46,609 5,591 5,013 7,535 7,240 10,026 11,552 326,127 311,129 32,831 36,205 37,387 39,263 72,384 69,220 30,383 31,435 1,206 3,858 3,071 3,350 2,801 8,012 525,907 509,858 31,597 10,565 15,198 49,963 103,288 34,057 186,632 106,123 ... ... ... ... ... ... 5,001 259,325 ... ... ... ... ... ... 2,382 1,335 4 4 3 3 11 11 34,787 20,536 0 15 24 3 61 82 754,710 897,177 31,602 10,584 15,225 49,969 103,360 34,150 14 0 220 515 422 456 73 172 6,411 5,813 ... ... ... ... ... ... 3,083 5,823 168 160 267 168 423 401 1,120,728 1,251,378 66,026 51,322 56,371 93,206 179,042 111,954 7,442 5,607 2,802 2,315 1,910 1,552 7,140 5,980 7,442 5,607 2,802 2,315 1,910 1,552 7,140 5,980 1,135,612 1,262,593 71,630 55,952 60,192 96,310 193,321 123,914

450 96th Annual Report, 2009 9A. StatementofConditionoftheFederalReserveBanks,byBank, December31,2009and2008—continued Millionsofdollars Atlanta Chicago Item 2009 2008 2009 2008 Assets Goldcertificateaccount................................ 1,356 1,221 911 913 Specialdrawingrightscertificateaccount................ 654 166 424 212 Coin................................................... 220 214 301 194 Loansandsecurities Termauctioncredit..................................... 363 17,222 1,934 5,094 Primary,secondary,andseasonalloans.................. 175 483 459 1,828 PrimaryDealerCreditFacility1......................... ... ... ... ... Asset-BackedCommercialPaperMoneyMarketMutual FundLiquidityFacility............................... ... ... ... ... TermAsset-BackedSecuritiesLoanFacility(TALF)2.... ... ... ... ... CreditextendedtoAmericanInternationalGroup,Inc., net3................................................. ... ... ... ... Securitiespurchasedunderagreementstoresell (tri-party)4........................................... ... 7,960 ... 7,061 U.S.Treasurysecurities,boughtoutright5................ 93,568 47,353 84,035 42,005 Government-sponsoredenterprisedebtsecurities, boughtoutright5..................................... 19,263 1,961 17,301 1,739 Federalagencyandgovernment-sponsoredenterprise mortgage-backedsecurities,boughtoutright........... 109,446 ... 98,296 ... Totalloansandsecurities.......................... 222,815 74,979 202,025 57,726 NetportfolioholdingsofconsolidatedLLCs6 ........... ... ... ... ... Preferredsecurities7.................................... ... ... ... ... Investmentsdenominatedinforeigncurrencies8.......... 1,933 1,910 844 1,100 Centralbankliquidityswaps9........................... 785 42,641 343 24,559 Otherassets Itemsinprocessofcollection........................... 178 325 31 111 Bankpremises......................................... 221 225 207 209 Allotherassets10....................................... 7,719 1,578 6,902 1,316 Interdistrictsettlementaccount.......................... –83,531 20,108 –75,509 34,760 Totalassets............................................ 152,351 143,366 136,478 121,100 Liabilities FederalReservenotesoutstanding(issuedtoBank)...... 136,496 129,432 85,293 83,073 Less:NotesheldbyFederalReserveBank............ 32,645 24,156 12,092 12,938 FederalReservenotes,net.............................. 103,851 105,276 73,201 70,135 Securitiessoldunderagreementstorepurchase4.......... 9,366 8,791 8,411 7,798 Deposits Depositoryinstitutions.................................. 34,951 25,593 52,624 41,013 U.S.Treasury,generalaccount.......................... ... ... ... ... U.S.Treasury,supplementaryfinancingaccount11........ ... ... ... ... Foreign,officialaccounts............................... 3 3 1 2 Other12................................................ 176 13 244 133 Totaldeposits..................................... 35,130 25,610 52,869 41,147 Otherliabilities Deferredcredititems................................... 218 158 178 323 ConsolidatedLLCs13................................... ... ... ... ... Allotherliabilities14................................... 624 307 579 290 Totalliabilities........................................ 149,189 140,143 135,239 119,693 CapitalAccounts Capitalpaidin......................................... 1,581 1,612 619 703 Surplus(includingaccumulatedothercomprehensive loss)................................................. 1,581 1,612 619 703 Totalliabilitiesandcapitalaccounts................... 152,351 143,366 136,478 121,100

Statistical Tables 451 9A.—continued St.Louis Minneapolis KansasCity Dallas SanFrancisco 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 329 344 197 199 335 349 621 636 1,182 1,249 150 71 90 30 153 66 282 98 574 234 32 43 62 54 140 114 214 180 329 252 593 4,698 214 5,737 941 2,740 390 4,335 5,818 44,805 26 454 28 123 7 4,570 2 692 166 4,338 ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 2,765 ... 1,510 ... 2,937 ... 3,318 ... 8,849 30,424 16,446 12,857 8,985 35,055 17,475 37,549 19,742 93,939 52,642 6,263 681 2,647 372 7,217 724 7,730 818 19,339 2,180 35,586 ... 15,038 ... 41,003 ... 43,921 ... 109,880 ... 72,892 25,044 30,784 16,727 84,223 28,446 89,593 28,905 229,142 112,814 ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 251 242 389 477 249 261 325 489 1,737 1,815 102 5,401 158 10,641 101 5,825 132 10,908 706 40,517 19 17 26 76 24 14 33 152 39 199 136 132 111 112 268 273 253 251 214 213 2,523 538 1,084 327 2,896 566 3,121 661 7,756 1,746 –35,273 3,210 –8,558 –9,656 –30,440 5,080 –17,174 11,155 –21,875 49,257 41,162 35,041 24,342 18,987 57,950 40,993 77,399 53,434 219,804 208,296 31,054 29,317 19,330 17,523 28,699 29,868 63,373 55,888 117,148 113,237 4,106 3,405 2,628 2,839 3,022 3,536 13,731 20,767 26,221 26,219 26,948 25,912 16,702 14,684 25,677 26,332 49,642 35,121 90,927 87,018 3,045 3,053 1,287 1,668 3,509 3,244 3,758 3,665 9,403 9,773 10,315 5,446 4,502 1,614 27,940 10,769 22,826 13,533 114,905 107,779 ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 0 0 1 1 0 0 1 1 3 3 61 14 19 38 54 14 54 104 128 29 10,377 5,460 4,522 1,652 27,994 10,784 22,881 13,638 115,036 107,810 67 47 271 235 112 102 109 296 466 495 ... ... ... ... ... ... ... ... ... ... 245 150 137 99 239 116 303 172 599 302 40,682 34,622 22,918 18,338 57,531 40,578 76,694 52,892 216,430 205,398 240 210 712 324 210 208 353 271 1,687 1,449 240 210 712 324 210 208 353 271 1,687 1,449 41,162 35,041 24,342 18,987 57,950 40,993 77,399 53,434 219,804 208,296

452 96th Annual Report, 2009 9A. StatementofConditionoftheFederalReserveBanks,byBank, December31,2009and2008—continued Note:Componentsmaynotsumtototalsbecauseofrounding. 1.IncludescreditextendedtoprimarydealersandcertainLondon-basedprimarydealeraffiliates. 2.Representstheremainingprincipalbalance.AlthoughtheTALFloansarerecordedatfairvalue,theamount necessarytoadjusttheloanstofairvalueatDecember31,isreportedin“Allotherassets.” 3.Includesoutstandingprincipalandcapitalizedinterestnetofunamortizeddeferredcommitmentfeesandallowanceforloanrestructuring.ExcludescreditextendedtoMaidenLaneIILLCandMaidenLaneIIILLC. 4.Contractamountoftheagreements. 5.Includessecuritiesloaned—fullycollateralizedbyU.S.Treasurysecurities,otherinvestment-gradesecurities, andcollateraleligiblefortri-partyrepurchaseagreementspledgedwithFederalReserveBanks—andexcludessecuritiespurchasedunderagreementstoresell. 6.TheFederalReserveBankofNewYorkistheprimarybeneficiaryofCommercialPaperFundingFacilityLLC, TALFLLC,MaidenLaneLLC,MaidenLaneIILLC,andMaidenLaneIIILLCand,asaresult,theaccountsand resultsofoperationsoftheseentitiesareincludedinthecombinedfinancialstatementsoftheFederalReserveBanks. Foradditionaldetails,seethe“KeyFinancialDataforConsolidatedLLCs”tableinthe“FederalReserveBanks” chapterofthisreport. 7.InDecember2009,theFederalReserveBankofNewYorkreceivedpreferredinterestsintwospecialpurpose vehicles,AIAAuroraLLCandALICOHoldingsLLC,inexchangeforthereductionoftheoutstandingbalanceof revolvingcreditprovidedtoAmericanInternationalGroup,Inc.(AIG). 8.Valueddailyatmarketexchangerates. 9.Dollarvalueofforeigncurrencyheldundertheseagreementsvaluedattheexchangeratetobeusedwhenthe foreigncurrencyisreturnedtotheforeigncentralbank.Thisconsistentexchangerateequalsthemarketexchange rateusedwhentheforeigncurrencywasacquiredfromtheforeigncentralbank. 10.Includespremiumsonsecurities,accruedinterest,amountnecessarytoadjustTALFloanstofairvalue,and depositoryinstitutionoverdrafts. 11.RepresentsamountsdepositedbytheU.S.Treasurythatresultfromatemporarysupplementaryprogramthat offsets,inpart,thereserveimpactoftheReserveBanks’lendingandliquidityinitiatives. 12.Includesdepositsofgovernment-sponsoredenterprisesandinternationalorganizations.ThesedepositsareprimarilyheldbytheFederalReserveBankofNewYork. 13.TheotherbeneficialinterestholdersaretheU.S.TreasuryforTALFLLC,JPMorganChaseforMaidenLane LLC,andAIGforMaidenLaneIILLCandMaidenLaneIIILLC. 14.Includesdiscountsonsecuritiesandaccruedbenefitcosts. ... Notapplicable.

Statistical Tables 453 9B. StatementofConditionoftheFederalReserveBanks,December31,2009and2008 SupplementalInformation—CollateralHeldagainstFederalReserveNotes: FederalReserveAgents’Accounts Millionsofdollars Item 2009 2008 FederalReservenotesoutstanding............................................ 1,080,987 1,022,850 Less:NotesheldbyFederalReserveBanksnotsubjecttocollateralization... 193,141 169,682 CollateralizedFederalReservenotes 887,846 853,168 CollateralforFederalReservenotes Goldcertificateaccount..................................................... 11,037 11,037 Specialdrawingrightscertificateaccount..................................... 5,200 2,200 U.S.Treasurysecuritiesandgovernment-sponsoredenterprisedebtsecurities1.. 858,607 496,733 Othereligibleassets......................................................... 13,002 343,198 Totalcollateral............................................................. 887,846 853,168 1. Facevalue.Includescompensationtoadjustfortheeffectofinflationontheoriginalfacevalueofinflationindexedsecurities,cashvalueofrepurchaseagreements,andparvalueofreverserepurchaseagreements.

454 96th Annual Report, 2009 10. IncomeandExpensesoftheFederalReserveBanks,byBank,2009 Thousandsofdollars Item Total Boston NewYork Philadelphia Cleveland CurrentIncome Interestincome Termauctioncredit,primary, secondary,andseasonalloans.. 990,406 34,123 643,900 59,693 18,087 Otherloans,net1................. 4,519,461 72,605 4,446,856 ... ... U.S.Treasurysecurities2......... 22,885,320 546,770 8,779,219 488,305 896,633 Government-sponsored enterprisedebtsecurities....... 2,047,910 44,976 791,706 38,809 80,512 Federalagencyand government-sponsored enterprisemortgage-backed securities...................... 20,406,825 423,278 7,927,495 355,933 804,013 Foreigncurrencies............... 296,223 12,404 78,310 32,169 21,698 Centralbankliquidityswaps3..... 2,167,618 96,278 567,890 231,611 157,573 Otherinvestments4............... 687 16 264 14 27 Othercurrentincome Pricedservices................... 662,730 ... 66,839 ... ... Compensationreceivedfor servicesprovided5............. 339,355 21,171 3,530 25,763 35,235 Securitieslendingfees........... 112,896 4,090 41,162 4,131 4,326 Other ........................... 33,690 14 31,797 386 22 Totalcurrentincome............ 54,463,121 1,255,725 23,378,969 1,236,814 2,018,126 CurrentExpenses Interestexpense Interestexpenseonsecuritiessold underagreements torepurchase.................. 97,605 2,762 36,781 2,614 3,794 Interestonreserves6............. 2,182,763 76,755 1,117,120 46,031 65,240 Personnel Salariesandotherpersonnel expenses...................... 1,610,205 85,331 375,823 74,118 91,600 Retirementandotherbenefits..... 564,097 26,915 112,585 30,526 39,475 Netperiodicpensionexpense7.... 662,672 624 658,655 84 2186 Administrative Fees............................. 218,417 3,230 98,719 4,193 3,457 Travel........................... 69,157 2,531 9,930 2,621 3,974 Postageandothershippingcosts.. 49,953 383 1,027 545 2,341 Communications................. 43,941 1,016 5,406 754 922 Materialsandsupplies............ 64,567 3,453 17,564 5,087 3,795 Building Taxesonrealestate.............. 37,306 5,885 5,461 1,589 1,890 Propertydepreciation............. 112,398 8,833 16,384 4,865 7,771 Utilities......................... 41,535 4,197 7,362 2,601 2,683 Rent............................. 43,284 1,083 18,595 881 53 Otherbuilding................... 46,117 2,711 7,035 2,730 3,327 Equipment/software Purchases........................ 26,593 2,032 4,887 1,230 1,091 Rentals.......................... 3,311 326 1,269 423 247 Depreciation..................... 89,459 5,018 9,331 6,196 4,664 Repairsandmaintenance......... 64,826 3,898 6,215 3,353 3,746 Software........................ 144,874 4,548 25,770 8,073 5,041 Otherexpenses Compensationpaidforservice costsincurred5................ 339,355 ... 33,289 ... ... Earningscreditscosts............ 4,344 204 1,234 96 182 Otherexpenses.................. 74,317 13,177 59,431 8,023 5,346 Recoveries....................... 2126,682 217,227 216,870 24,012 24,285 Expensescapitalized8............ 235,255 23,252 215,578 2725 21,126 Totalcurrentexpenses.......... 6,429,158 234,432 2,597,426 201,895 245,041 Reimbursements............... 2450,363 228,721 2113,405 232,499 248,274 Netexpenses................ 5,978,795 205,712 2,484,021 169,396 196,768 Fornotesseeendoftable.

Statistical Tables 455 10.—continued Richmond Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco 102,155 20,185 18,697 8,051 4,908 5,933 9,669 65,006 ... ... ... ... ... ... ... ... 1,083,414 2,658,000 2,381,981 874,687 389,876 993,153 1,074,010 2,719,272 87,462 241,497 216,618 79,074 34,485 90,335 97,302 245,134 811,771 2,429,407 2,180,354 793,004 341,090 909,376 977,096 2,454,008 83,637 22,669 10,238 2,941 4,681 2,943 4,027 20,504 607,777 166,059 78,511 21,456 35,509 21,751 31,710 151,492 32 80 72 26 12 30 32 82 ... 525,645 70,246 ... ... ... ... ... 32,947 387 34,880 7,249 60,429 52,757 27,910 37,097 8,689 11,828 10,530 4,032 2,065 4,384 4,878 12,781 68 38 87 15 11 251 103 897 2,817,951 6,075,796 5,002,213 1,790,535 873,067 2,080,913 2,226,738 5,706,274 5,652 10,940 9,782 3,643 1,707 4,077 4,451 11,402 406,911 79,294 69,210 17,252 7,576 46,029 35,959 215,388 227,716 136,433 117,285 79,719 79,533 97,361 89,261 156,027 79,388 49,556 44,634 27,492 26,014 29,940 36,990 60,581 523 252 437 653 642 385 318 286 60,600 16,399 8,091 6,981 3,001 5,679 1,687 6,381 10,808 7,680 7,550 3,899 2,804 4,562 4,036 8,761 810 36,630 791 833 695 1,071 1,501 3,327 24,178 1,961 1,769 1,373 1,581 1,251 1,919 1,813 5,714 7,256 5,002 2,253 2,089 3,014 4,007 5,333 2,245 3,343 1,262 563 3,560 3,527 3,814 4,167 13,044 10,907 13,152 6,622 4,061 7,564 9,646 9,549 4,723 4,251 2,238 1,749 1,935 2,194 4,127 3,475 17,109 546 1,173 1,517 265 709 210 1,143 4,212 4,140 5,811 2,558 1,774 1,551 6,987 3,281 5,339 1,261 2,592 1,205 1,446 1,773 1,286 2,451 178 457 280 29 7 8 21 65 32,821 5,118 3,268 2,706 1,489 5,426 6,866 6,555 16,394 9,793 4,996 1,659 1,899 2,507 4,324 6,044 54,537 14,060 3,383 3,391 4,483 5,783 8,850 6,954 ... 295,468 10,599 ... ... ... ... ... 384 253 491 46 117 214 110 1,014 −247,789 56,051 52,339 69,621 20,717 5,666 14,111 17,624 −33,181 211,363 29,786 22,989 21,651 26,296 212,562 26,460 −2,205 21,263 21,191 2489 24,945 2570 2516 23,396 690,113 739,421 355,159 232,283 160,797 223,424 227,401 521,764 −37,642 215,103 24,529 2104,373 227,848 210,564 214,217 213,188 652,471 724,318 350,630 127,910 132,949 212,861 213,184 508,576

456 96th Annual Report, 2009 10. IncomeandExpensesoftheFederalReserveBanks,byBank,2009—continued Thousandsofdollars Item Total Boston NewYork Philadelphia Cleveland ProfitandLoss Currentnetincome.............. 48,484,326 1,050,013 20,894,949 1,067,418 1,821,358 Additionsto(+)anddeductions from(−)currentnetincome Profitonsalesof federalagencyand government-sponsored enterprisemortgage-backed securities..................... 879,305 9,755 354,662 4,845 35,236 Profit(loss)onforeign exchangetransactions......... 172,327 27,113 58,946 28,558 15,744 Dividendsonpreferred securities..................... 106,164 ... 106,164 ... ... Otherloansunrealizedgain...... 557,057 ... 557,057 ... ... Netincomefromconsolidated LLCs9........................ 5,587,900 ... 5,587,900 ... ... Otheradditions10................ 237,630 2 180,573 0 0 Totaladditions............. 7,540,383 2,644 6,845,302 33,403 50,980 Provisionforloanloss........... 0 0 0 0 0 Provisionforloan restructuring11................ −2,620,624 ... −2,620,624 ... ... Otherdeductions12.............. −99,552 21 −76,734 0 215 Totaldeductions............ −2,720,176 21 −2,697,358 0 215 Netadditionto(+)currentnet income....................... 4,820,207 2,643 4,147,944 33,403 50,965 CostofunreimbursedTreasury services...................... 4 0 4 0 0 AssessmentsbyBoard Boardexpenditures13............ 386,400 15,221 106,919 42,109 27,661 Costofcurrency................ 502,044 26,432 109,160 29,791 25,057 Netincomebeforedistributions.. 52,416,086 1,011,004 24,826,810 1,028,920 1,819,604 Changeinfundedstatusof benefitplans.................. 1,006,813 210,172 1,030,918 26,459 23,365 Comprehensiveincomebefore distributions.................. 53,422,899 1,000,832 25,857,728 1,022,461 1,816,239 Dividendspaid.................. 1,428,202 54,936 413,037 150,935 99,813 DistributionstoU.S.Treasury (interestonFederalReserve notes)........................ 47,430,237 845,750 23,610,426 384,631 1,358,118 Transferredto/fromsurplusand changeinaccumulatedother comprehensiveincome........ 4,564,460 100,145 1,834,265 486,895 358,308 Surplus,January1............... 21,075,873 844,272 5,607,427 2,315,058 1,552,095 Surplus,December31........... 25,640,333 944,417 7,441,692 2,801,953 1,910,403 Note: Componentsmaynotsumtototalsbecauseofrounding. 1. RepresentsinterestincomeonAsset-BackedCommercialPaperMoneyMarketMutualFundLiquidityFacility,Primary DealerCreditFacility,TermAsset-BackedSecuritiesLoanFacility,andcreditextendedtoAmericanInternationalGroup,Inc., netofcommitmentfees. 2. Includesinterestincomeonsecuritiespurchasedunderagreementstoresell. 3. Representsinterestincomeonswapagreementswithforeigncentralbanks. 4. Representsinterestincomeonshort-terminvestmentsrelatedtothefederalagencyandgovernment-sponsoredmortgagebackedsecuritiesportfolio. 5. TheFederalReserveBankofAtlantahasoverallresponsibilityformanagingtheReserveBanks’provisionofcheckand ACHservicesandrecognizestotalSystemrevenuefortheseservices.TheFederalReserveBankofNewYorkhasoverallresponsibilityformanagingtheReserveBanks’provisionofFedwirefundstransferandsecuritiestransferservices,andrecognizesthetotalSystemrevenuefortheseservices.TheFederalReserveBankofChicagohasoverallresponsibilityformanagingtheReserveBanks’provisionofelectronicaccessservicestodepositoryinstitutions,andrecognizesthetotalSystem revenuefortheseservices.TheFederalReserveBankofAtlanta,theFederalReserveBankofNewYork,andtheFederal ReserveBankofChicagocompensatetheotherReserveBanksforthecostsincurredinprovidingtheseservices. 6. InOctober2008,theReserveBanksbegantopayinteresttodepositoryinstitutionsonqualifyingbalancesheldatthe FederalReserveBanks. 7. Reflects the effect of the Financial Accounting Standards Board’s Codification Topic (ASC 715) Compensation- RetirementBenefits.TheSystemRetirementPlanforemployeesisrecordedonbehalfoftheSystemonthebooksoftheFed-

Statistical Tables 457 10.—continued Richmond Atlanta Chicago St.Louis Minneapolis KansasCity Dallas SanFrancisco 2,165,480 5,351,478 4,651,583 1,662,625 740,117 1,868,053 2,013,553 5,197,698 14,611 112,503 101,385 35,892 13,831 42,323 44,663 109,599 59,686 12,730 −3,391 1,877 −535 1,156 −3,484 8,155 ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 57,025 3 6 0 0 2 15 2 131,322 125,237 98,000 37,769 13,297 43,480 41,194 117,756 0 0 0 0 0 0 0 0 ... ... ... ... ... ... ... ... -22,802 0 0 0 0 0 0 0 -22,802 0 0 0 0 0 0 0 108,520 125,237 98,000 37,769 13,297 43,480 41,194 117,756 0 0 0 0 0 0 0 0 107,992 28,173 12,791 3,820 7,088 3,661 4,786 26,179 45,300 74,108 46,757 16,892 11,687 18,571 28,090 70,198 2,120,708 5,374,433 4,690,035 1,679,682 734,639 1,889,301 2,021,871 5,219,076 4,508 21,006 27,085 8,953 23,863 23,032 22,981 398 2,125,216 5,373,427 4,682,950 1,688,635 730,776 1,886,270 2,018,890 5,219,475 396,167 94,943 44,013 13,821 34,847 12,555 17,301 95,835 569,531 5,309,090 4,722,903 1,644,220 308,255 1,872,070 1,920,056 4,885,186 1,159,518 230,606 283,965 30,594 387,674 1,645 81,533 238,455 5,980,154 1,611,672 703,459 209,686 324,373 207,922 270,972 1,448,783 7,139,672 1,581,065 619,494 240,281 712,046 209,566 352,505 1,687,238 eralReserveBankofNewYork.NetpensionexpensefortheSystem,whichwas$651,850thousand,isrecordedinthebooks oftheFederalReserveBankofNewYork.TheRetirementBenefitEqualizationPlanandtheSupplementalEmployeeRetirementPlanarerecordedbyeachFederalReserveBank. 8. Includesexpensesforlaborandmaterialscapitalizedanddepreciatedoramortizedaschargestoactivitiesintheperiods benefited. 9. Representstheportionoftheconsolidatedlimitedliabilitycompanies’netincomerecordedbytheFederalReserveBank ofNewYork.Theamountincludesinterestincome,interestexpenses,realizedandunrealizedgainsandlosses,andprofessionalfees. 10. IncludescompensationpaidbyCitigroup,Inc.andBankofAmericaCorporationfortheFederalReserveBankofNew York’sandtheFederalReserveBankofRichmond’scommitmentstoprovidefundingsupport.Costsarereportedin‘‘Other deductions.’’ 11. RepresentstheeconomiceffectoftheinterestratereductionmadepursuanttotheApril17,2009restructuringofthe AIGcreditextension. 12. IncludescostsincurredbytheFederalReserveBankofNewYorkandtheFederalReserveBankofRichmondrelated totheircommitmenttoprovidefundingsupporttoCitigroup,Inc.andBankofAmericaCorporation.Reimbursementofthese costsisreportedin‘‘Otheradditions.’’ 13. Foradditionaldetails,seethe“BoardofGovernorsFinancialStatements”inthe“FederalReserveSystemAudits”sectionofthisreport. ... Notapplicable.

458 96th Annual Report, 2009 11. IncomeandExpensesoftheFederalReserveBanks,1914–2009 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 459 11.—continued DistributionstoU.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

460 96th Annual Report, 2009 11. IncomeandExpensesoftheFederalReserveBanks,1914–2009—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 23,158,808 2009............... 54,463,121 5,978,795 4,820,204 386,400 502,044 1,006,813 Total,1914–2009.. 848,974,370 67,706,631 12,401,045 5,739,616 10,410,734 −1,827,514

Statistical Tables 461 11.—continued DistributionstoU.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 1,428,202 ... 47,430,237 ... 4,564,460 12,348,958 44,113,958 687,645,286 −4 31,582,7224

462 96th Annual Report, 2009 11. IncomeandExpensesoftheFederalReserveBanks,1914–2009—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,1914–2009 Boston.............. 43,062,237 3,992,881 149,103 248,532 604,816 213,242 NewYork........... 304,907,672 12,959,1185 4,788,937 1,437,420 3,124,108 21,873,938 Philadelphia......... 31,233,470 3,241,737 615,539 311,463 466,216 26,258 Cleveland........... 47,993,734 3,851,063 649,458 416,037 587,999 2,889 Richmond........... 65,510,304 5,921,622 1,829,706 948,707 867,797 30,135 Atlanta.............. 54,815,334 9,080,562 885,186 431,119 883,931 7,165 Chicago............. 96,740,142 7,503,350 1,052,372 572,318 1,152,455 3,064 St.Louis............ 28,405,607 2,976,568 183,368 125,518 376,880 9,824 Minneapolis......... 14,741,915 2,970,651 240,066 159,353 195,896 2,961 KansasCity......... 30,064,548 3,994,257 256,754 157,542 386,884 25,346 Dallas............... 37,851,916 4,067,776 516,569 233,913 515,061 10,175 SanFrancisco....... 93,647,491 7,147,046 1,233,988 697,695 1,248,691 5,055 Total ....... ....... 848,974,370 67,706,631 12,401,045 5,739,616 10,410,734 −1,827,514 Note: Componentsmaynotsumtototalsbecauseof 2. Representstransfersmadeasafranchisetaxfrom rounding. 1917through1932;transfersmadeundersection13bof 1. For1987andsubsequentyears,includesthecost theFederalReserveActfrom1935through1947;and ofservicesprovidedtotheTreasurybyFederalReserve transfers made under section 7 of the Federal Reserve Banksforwhichreimbursementwasnotreceived. Actfor1996and1997.

Statistical Tables 463 11.—continued DistributionstoU.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 554,883 2,579,504 34,078,800 135 1,138,546 3,143,937 17,307,161 259,978,960 2433 9,872,400 794,701 1,312,118 22,748,368 291 2,967,857 899,444 2,827,043 37,845,642 210 2,218,863 2,380,997 3,083,928 45,946,850 272 8,220,316 884,651 2,713,230 39,812,462 5 1,901,724 1,079,245 4,593,811 81,856,222 12 1,038,165 243,679 1,833,837 22,678,317 227 364,027 331,057 416,227 10,041,556 65 870,139 283,928 1,249,703 23,911,666 29 331,986 402,176 1,510,802 31,128,376 55 520,501 1,350,260 4,686,594 77,618,065 217 2,138,200 12,348,958 44,113,958 687,645,286 −4 31,582,7224 3. Transfersaremadeundersection13boftheFed- bytransferof$11,131thousandfromreservesforconeralReserveAct. tingencies (1955), leaving a balance of $25,640,333 4. The $31,582,722 thousand transferred to surplus thousandonDecember31,2009. was reduced by direct charges of $500 thousand for 5. This amount is reduced by $3,604,674 thousand charge-offonBankpremises(1927);$139,300thousand forexpensesoftheSystemRetirementPlan.Seenote6, forcontributionstocapitaloftheFederalDepositInsur- table10. anceCorporation(1934);$4thousandnetuponelimina- 6. Transfersaremadeundersection7oftheFederal tion of section 13b surplus (1958); $106,000 thousand Reserve Act. Beginning in 2006, accumulated other (1996),$107,000thousand(1997),and$3,752,000thou- comprehensive income is reported as a component of sand(2000)transferredtotheTreasuryasstatutorilyre- surplus. quired; and $1,848,716 thousand related to the imple- . . . Notapplicable. mentationofSFASNo.158(2006),andwasincreased

464 96th Annual Report, 2009 12. OperationsinPrincipalDepartmentsoftheFederalReserveBanks,2006–2009 Operation 2009 2008 2007 2006 Millionsofpieces Currencyprocessed............................. 31,891 33,256 35,653 37,694 Currencydestroyed............................. 6,049 6,517 6,509 6,766 Coinreceived.................................. 65,349 64,438 63,255 59,705 Checkshandled U.S.governmentchecks1..................... 202 269 214 222 Postalmoneyorders......................... 131 146 164 171 Allother.................................... 8,585 9,545 10,001 11,083 Securitiestransfers2............................ 21 25 24 22 Fundstransfers3................................ 125 131 135 134 Automatedclearinghousetransactions Commercial................................. 9,966 10,040 9,363 8,231 Government................................. 1,195 1,132 1,027 992 Millionsofdollars Currencyprocessed............................. 561,013 604,882 642,168 664,592 Currencydestroyed............................. 92,708 148,460 104,082 84,742 Coinreceived.................................. 6,288 6,286 6,124 5,779 Checkshandled U.S.governmentchecks1..................... 311,667 316,713 256,994 269,073 Postalmoneyorders......................... 23,675 25,544 31,626 28,066 Allother.................................... 13,758,963 15,216,147 14,841,249 16,442,820 Securitiestransfers2............................ 295,741,666 419,347,256 435,577,505 377,258,592 Fundstransfers3................................ 631,127,108 754,974,633 670,665,569 572,645,790 Automatedclearinghousetransactions Commercial................................. 15,418,718 15,662,805 14,547,234 13,124,434 Government................................. 4,297,071 4,008,022 3,716,928 3,474,364 1. Includesgovernmentcheckshandledelectronically(electronicchecks). 2. Dataonsecuritiestransfersdonotincludereversals.In2006,thetitleofthiscategorychangedfromprevious years,butthecompositionofthecategoryremainedthesame.Therefore,thedataarecomparablewithdatareported inpreviousyears. 3. Dataonfundstransfersdonotincludenon-valuetransfers.

Statistical Tables 465 13. NumberandAnnualSalariesofOfficersandEmployeesoftheFederalReserveBanks, December31,2009 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........... 320,900 66 12,856,083 744 39 63,516,351 850 76,693,334 NewYork....... 410,780 368 85,714,443 2,560 43 254,511,210 2,972 340,636,434 Philadelphia...... 344,700 58 10,181,633 800 24 55,718,901 883 66,245,234 Cleveland........ 341,600 57 9,983,500 1,243 22 74,310,639 1,323 84,635,739 Richmond........ 339,600 80 13,563,800 1,369 27 97,233,037 1,477 111,136,437 Atlanta.......... 302,800 82 15,758,280 1,594 23 111,022,816 1,700 127,083,896 Chicago......... 308,400 88 15,923,876 1,167 50 93,685,889 1,306 109,918,165 St.Louis......... 276,800 75 13,394,150 826 35 57,805,258 937 71,476,208 Minneapolis...... 308,400 48 8,421,035 932 53 62,801,655 1,034 71,531,090 KansasCity...... 374,400 71 13,256,500 1,099 15 70,636,359 1,186 84,267,259 Dallas........... 344,700 62 10,568,805 1,067 9 68,950,312 1,139 79,863,817 SanFrancisco.... 410,800 76 16,026,698 1,547 17 127,616,719 1,641 144,054,217 FederalReserve Information Technology.... ... 43 7,580,500 862 1 81,892,180 906 89,472,680 Officeof Employee Benefits....... ... 9 2,140,500 35 0 3,218,346 44 5,358,846 Total............ 4,083,880 1,183 235,369,803 15,845 358 1,222,919,672 17,398 1,462,373,355 Note: Componentsmaynotsumtototalsbecauseofrounding. 1. Under current policies, appointment salaries are normally 85 percent of the salary-range mid-point (an 85 compa-ratio),withtheexceptionoftheNewYorkReserveBankpresident,whoseappointmentsalarynormallyisset ata95compa-ratio.TheBoardhasdiscretiontoapproveahigherstartingsalaryifrequestedbyaReserveBank’s boardofdirectors.OnJanuary1eachyear,allpresidentsreceivesalaryincreasesequaltothepercentageincreasein themid-pointoftheirrespectivesalaryranges.Inaddition,oneverythird-yearanniversaryofhisorherinitialappointment(throughyear9),eachpresidentreceivesasalaryincreasethatresultsinacompa-ratioasfollows:year3: 95(fortheNewYorkBank:105);year6:105(NewYork:115);year9:115(NewYork:125).TherearetieredsalaryrangesforReserveBankofficers,includingpresidents,reflectingdifferencesinthecostsoflaborintheheadofficecities.TheBoardreviewsReserveBankofficersalaryrangesandReserveBankplacementinthesalarytiers annually.In2009,NewYorkandSanFranciscowereintier1,whichhadamid-pointforpresidents’salariesof $432,400.Boston,Philadelphia,Chicago,Minneapolis,andDallaswereintier2,whichhadamid-pointforpresidents’salariesof$362,800.Cleveland,Richmond,Atlanta,St.Louis,andKansasCitywereintier3,whichhada mid-pointforpresidents’salariesof$325,600.SalariesforReserveBankofficers,includingpresidents,arelimitedby compensationcapsestablishedforeachtier.In2009,thecapswere$431,300fortier1;$419,600fortier2;and $400,000fortier3. 2. Annualizedsalaryliability(excludingoutsideagencycosts)basedonsalariesineffectonDecember31,2009. ... Notapplicable.

466 96th Annual Report, 2009 14. AcquisitionCostsandNetBookValueofthePremisesoftheFederalReserveBanks andBranches,December31,2009 Thousandsofdollars Acquisitioncosts FederalReserve Net Other Bankor Buildings Buildingma- book real Branch Land (including chineryand Total2 value estate3 vaults)1 equipment BOSTON.............. 27,293 149,884 30,051 207,228 120,794 ... NEWYORK........... 20,103 334,396 71,231 425,729 263,190 ... PHILADELPHIA...... 7,898 102,293 16,275 126,466 70,929 ... CLEVELAND......... 4,219 123,576 29,548 157,343 104,231 ... Cincinnati.............. 2,909 27,994 15,177 46,080 21,298 ... Pittsburgh.............. 2,751 19,638 15,850 38,240 18,741 ... RICHMOND........... 28,398 149,706 48,653 226,757 159,804 ... Baltimore.............. 7,917 38,175 11,603 57,695 36,382 ... Charlotte............... 7,884 40,487 12,682 61,054 42,815 ... ATLANTA ............ 22,995 150,579 17,473 191,047 156,918 ... Birmingham........... 5,347 12,896 1,465 19,708 11,597 ... Jacksonville............ 1,779 22,673 4,165 28,616 17,187 ... Miami................. 603 6,398 3,542 10,543 4,434 ... Nashville.............. 3,785 10,105 5,174 19,063 9,434 ... NewOrleans........... 4,254 26,599 5,778 36,632 21,689 ... CHICAGO............. 4,512 186,509 23,430 214,451 120,340 ... Detroit................. 12,327 72,447 11,029 95,802 87,018 ... ST.LOUIS............ 9,377 134,796 14,996 159,169 123,416 ... Memphis.............. 2,472 14,339 5,157 21,968 12,404 ... MINNEAPOLIS....... 15,845 107,874 14,854 138,573 101,115 ... Helena................. 2,890 10,387 1,150 14,426 9,528 ... KANSASCITY........ 38,320 198,534 27,470 264,324 253,841 ... Denver................ 3,511 9,238 4,622 17,370 7,348 ... Omaha................. 3,559 7,692 1,933 13,184 6,611 ... DALLAS.............. 36,526 114,965 30,767 182,258 122,991 ... ElPaso................ 262 3,426 1,843 5,531 821 ... Houston............... 25,146 103,875 8,714 137,735 124,143 7,204 SanAntonio........... 826 8,407 2,491 11,724 5,195 ... SANFRANCISCO..... 20,988 102,700 29,504 153,192 86,358 ... LosAngeles........... 6,306 74,272 18,195 98,773 58,752 ... SaltLakeCity......... 1,294 4,788 1,413 7,495 2,690 ... Seattle................. 12,161 52,131 5,498 69,791 66,607 10,089 Total.................. 344,455 2,421,778 491,734 3,257,967 2,248,621 17,294 Note: Componentsmaynotsumtototalsbecauseofrounding. 1. Includesexpendituresforconstructionatsomeoffices,pendingallocationtoappropriateaccounts. 2. Excludescharge-offsof$17,699thousandbefore1952. 3. IncludesrealestateheldforfutureBankuseandBankpremisesformerlyoccupiedandbeingheldpendingsale. ... Notapplicable.

Federal Reserve System Audits

469 Audits of the Federal Reserve System The Board of Governors, the Federal The Reserve Banks’ financial state- Reserve Banks, and the Federal ments are audited annually by an inde- Reserve System as a whole are all sub- pendent outside auditor retained by the ject to several levels of audit and Board of Governors. In addition, the review. The Board’s financial state- ReserveBanksaresubjecttoannualexments, and its compliance with laws amination by the Board. As discussed and regulations affecting those state- in the chapter “Federal Reserve Banks,” ments, are audited annually by an out- the Board’s examination includes a side auditor retained by the Board’s wide range of ongoing oversight activi- Office of Inspector General. The Office ties conducted on site and off site by of Inspector General also conducts au- staff of the Board’s Division of Reserve dits, reviews, and investigations relat- Bank Operations and Payment Systems. ing to the Board’s programs and opera- Federal Reserve operations are also tions as well as to Board functions subject to review by the Government delegated to the Reserve Banks. Accountability Office. Á

471 Board of Governors Financial Statements The financial statements of the Board of Governors for 2009 and 2008 were audited by Deloitte & Touche LLP, independent auditors. March19,2010 MANAGEMENT’SASSERTION TotheCommitteeonBoardAffairs: ThemanagementoftheBoardofGovernorsoftheFederalReserveSystem(“theBoard”)isresponsibleforthepreparationandfairpresentationofthebalancesheetasofDecember31,2009,andfor therelatedstatementofrevenuesandexpensesandchangesincumulativeresultsofoperations,and cashflowsfortheyearthenended(the“FinancialStatements”).TheFinancialStatementshavebeen prepared in conformity with accounting principles generally accepted in the United States of Americaand,assuch,includesomeamountswhicharebasedonmanagementjudgmentsandestimates.Toourknowledge,theFinancialStatementsare,inallmaterialrespects,fairlypresentedin conformitywithgenerallyacceptedaccountingprinciplesandincludealldisclosuresnecessaryfor suchpresentation. Board management is also responsible for establishing and maintaining effective internal control overfinancialreportingasitrelatestotheFinancialStatements.Suchinternalcontrolisdesignedto providereasonableassurancetomanagementandtotheCommitteeonBoardAffairsregardingthe preparationoftheFinancialStatementsinaccordancewithaccountingprinciplesgenerallyaccepted intheUnitedStatesofAmerica.Internalcontrolincludesself-monitoringmechanisms,including, butnotlimitedto,divisionsofresponsibilityandacodeofconduct.Onceidentified,anymaterial deficienciesininternalcontrolarereportedtomanagementandappropriatecorrectivemeasuresare implemented. Eveneffectiveinternalcontrol—nomatterhowwelldesigned—hasinherentlimitations,including the possibility of human error. Internal control, therefore, can provide only reasonable assurance withrespecttothepreparationofreliablefinancialstatements.Also,projectionsofanyevaluationof effectivenesstofutureperiodsaresubjecttotheriskthatspecificcontrolsmaybecomeinadequate becauseofchangesinconditionsorthatthedegreeofcompliancewithpoliciesorproceduresmay deteriorate. BoardmanagementassesseditsinternalcontroloverfinancialreportingreflectedintheFinancial StatementsbaseduponthecriteriaestablishedintheInternalControl—IntegratedFrameworkissued bytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission. Basedonthisassessment,webelievethattheBoardhasmaintainedeffectiveinternalcontrolover financialreportingasitrelatestoitsFinancialStatements. StephenR.Malphrus WilliamL.Mitchell StaffDirectorforManagement ChiefFinancialOfficer

472 96th Annual Report, 2009 INDEPENDENTAUDITORS’REPORT TheBoardofGovernorsoftheFederalReserveSystem: WehaveauditedtheaccompanyingbalancesheetsoftheBoardofGovernorsoftheFederalReserve System(the“Board”)asofDecember31,2009and2008,andtherelatedstatementsofrevenues andexpensesandchangesincumulativeresultsofoperations,andcashflowsfortheyearsthen ended.ThesefinancialstatementsaretheresponsibilityoftheBoard’smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits. Weconductedourauditsinaccordancewithgenerallyacceptedauditingstandardsasestablishedby theAuditingStandardsBoard(UnitedStates),auditingstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),andthestandardsapplicabletofinancialauditscontainedin GovernmentAuditingStandardsissuedbytheComptrollerGeneraloftheUnitedStates.Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthe respectivefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesconsiderationof internalcontroloverfinancialreportingasabasisfordesigningauditproceduresthatareappropriateinthecircumstances.Anauditalsoincludesexamining,onatestbasis,evidencesupportingthe amountsanddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedand significantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion. Inouropinion,suchfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionoftheBoardofGovernorsoftheFederalReserveSystemasofDecember31,2009and2008, and the results of its operations and its cash flows for the years then ended in conformity with accountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica. Wehavealsoaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theBoard’sinternalcontroloverfinancialreportingasofDecember31, 2009,basedonthecriteriaestablishedinInternalControl-IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommissionandourreportdatedMarch19, 2010expressedanunqualifiedopinionontheBoard’sinternalcontroloverfinancialreporting. InaccordancewithGovernmentAuditingStandards,wehavealsoissuedourreportdatedMarch19, 2010,onourtestsoftheBoard’scompliancewithcertainprovisionsoflaws,regulations,contracts, andgrantagreementsandothermatters.Thepurposeofthatreportistodescribethescopeofour testingofcomplianceandtheresultsofthattesting,andnottoprovideanopiniononcompliance. ThatreportisanintegralpartofanauditperformedinaccordancewithGovernmentAuditingStandardsandshouldbeconsideredinassessingtheresultsofouraudit. McLean,VA March19,2010

Board of Governors Financial Statements 473 INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIALREPORTING TotheBoardofGovernorsoftheFederalReserveSystem: WehaveauditedtheinternalcontroloverfinancialreportingoftheBoardofGovernorsoftheFederal ReserveSystem(the“Board”)asofDecember31,2009,basedoncriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadway Commission. The Board’s management is responsible for maintaining effective internal control over financialreportingandforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting, includedintheaccompanyingManagement’sAssertionreport.OurresponsibilityistoexpressanopinionontheBoard’sinternalcontroloverfinancialreportingbasedonouraudit. WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversight Board(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonable assuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterial respects.Ourauditincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,assessingtheriskthatamaterialweaknessexists,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk,andperformingsuchotherproceduresasweconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. TheBoard’sinternalcontroloverfinancialreportingisaprocessdesignedby,orunderthesupervision of,theBoard’sprincipalexecutiveandprincipalfinancialofficers,orpersonsperformingsimilarfunctions,andeffectedbytheBoard’sCommitteeonBoardAffairs,management,andotherpersonneltoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancial statements for external purposes in accordance with accounting principles generally accepted in the UnitedStatesofAmerica.TheBoard’sinternalcontroloverfinancialreportingincludesthosepolicies andproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyand fairlyreflectthetransactionsanddispositionsoftheassetsoftheBoard;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresoftheBoardare beingmadeonlyinaccordancewithauthorizationsofmanagementandgovernorsoftheBoard;and (3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition, use,ordispositionoftheBoard’sassetsthatcouldhaveamaterialeffectonthefinancialstatements. Becauseoftheinherentlimitationsofinternalcontroloverfinancialreporting,includingthepossibility ofcollusionorimpropermanagementoverrideofcontrols,materialmisstatementsduetoerrororfraud maynotbepreventedordetectedonatimelybasis.Also,projectionsofanyevaluationoftheeffectivenessoftheinternalcontroloverfinancialreportingtofutureperiodsaresubjecttotheriskthatthecontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththe policiesorproceduresmaydeteriorate. Inouropinion,theBoardmaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission. Wehavealsoaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversight Board(UnitedStates),generallyacceptedauditingstandardsasestablishedbytheAuditingStandards Board(UnitedStates),andthestandardsapplicabletofinancialauditscontainedinGovernmentAuditingStandardsissuedbytheComptrollerGeneraloftheUnitedStates,theaccompanyingbalancesheet, statementsofrevenuesandexpensesandchangesincumulativeresultsofoperations,andcashflowsas ofandfortheyearendedDecember31,2009oftheBoardandourreportdatedMarch19,2010expressedanunqualifiedopiniononthosefinancialstatements. McLean,VA March19,2010

474 96th Annual Report, 2009 BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM BALANCESHEETS AsofDecember31, 2009 2008 Assets CurrentAssets: Cash ..................................................................... $ 54,792,831 $ 58,255,990 Accountsreceivable ...................................................... 2,948,984 2,975,478 Prepaidexpensesandotherassets ......................................... 3,693,970 4,817,719 Totalcurrentassets ................................................ 61,435,785 66,049,187 NoncurrentAssets: Property,equipment,andsoftware,net(Note4) ............................ 159,267,605 148,875,490 Otherassets .............................................................. 1,837,995 2,187,395 Totalnoncurrentassets ............................................. 161,105,600 151,062,885 Totalassets........................................................ $222,541,385 $217,112,072 LiabilitiesandCumulativeResultsofOperations CurrentLiabilities: Accountspayableandaccruedliabilities ................................... $ 20,765,464 $ 13,312,600 Accruedpayrollandrelatedtaxes.......................................... 10,940,984 9,313,237 Accruedannualleave ..................................................... 24,821,044 22,234,106 Capitalleasepayable(Note4)............................................. 533,110 471,266 Unearnedrevenuesandotherliabilities .................................... 2,982,629 1,843,058 Totalcurrentliabilities ............................................. 60,043,231 47,174,267 Long-termLiabilities: Capitalleasepayable(Note4)............................................. 782,357 1,183,466 Accumulatedretirementbenefitobligation(Note5)......................... 13,021,387 10,866,659 Accumulatedpostretirementbenefitobligation(Note6)..................... 9,304,324 8,527,800 Accumulatedpostemploymentbenefitobligation(Note7)................... 14,463,965 13,900,000 Otherlong-termliabilities ................................................. 415,324 648,534 Totallong-termliabilities .......................................... 37,987,357 35,126,459 Totalliabilities .................................................... 98,030,588 82,300,726 CumulativeResultsofOperations: Fundbalance ............................................................. 133,677,902 144,085,508 Accumulatedothercomprehensiveincome(loss)(Note8) .................. (9,167,105) (9,274,162) Totalcumulativeresultsofoperations............................... 124,510,797 134,811,346 Totalliabilitiesandcumulativeresultsofoperations ................. $222,541,385 $217,112,072 Seeaccompanyingnotestofinancialstatements.

Board of Governors Financial Statements 475 BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM STATEMENTSOFREVENUESANDEXPENSES ANDCHANGESINCUMULATIVERESULTSOFOPERATIONS FortheyearsendedDecember31, 2009 2008 BoardOperatingRevenues: AssessmentsleviedonFederalReserveBanksforBoard operatingexpensesandcapitalexpenditures........................ $386,399,900 $352,290,700 Otherrevenues........................................................ 9,413,565 9,059,232 Totaloperatingrevenues........................................ 395,813,465 361,349,932 BoardOperatingExpenses: Salaries............................................................... 243,664,276 219,752,842 Retirementandinsurance.............................................. 50,458,964 48,394,723 Contractualservicesandprofessionalfees.............................. 40,065,160 29,901,374 Depreciation,amortization,andnetlossesondisposals.................. 13,885,165 13,782,449 Utilities............................................................... 8,676,782 9,977,809 Travel................................................................ 11,346,880 9,414,877 Software.............................................................. 8,699,031 7,277,995 Postageandsupplies................................................... 8,157,780 5,802,368 Repairsandmaintenance............................................... 5,115,155 3,214,203 Printingandbinding................................................... 2,597,982 1,825,119 Otherexpenses........................................................ 13,553,896 10,870,638 Totaloperatingexpenses........................................ 406,221,071 360,214,397 ResultsofOperations ................................................ (10,407,606) 1,135,535 CurrencyCosts: AssessmentsleviedonFederalReserveBanks forcurrencycosts................................................. 502,144,883 500,356,895 Expensesforcostsrelatedtocurrency (Note9) ......................................................... 502,144,883 500,356,895 CurrencyAssessmentsover(under)Expenses........................ 0 0 TotalResultsofOperations ......................................... (10,407,606) 1,135,535 CumulativeResultsofOperations,Beginningofyear ................ 134,811,346 141,463,159 OtherComprehensiveIncome(Note8) Priorservicecredit(cost)arisingduringtheyear ....................... (315,842) (5,059,307) Amortizationofpriorservice(credit)cost.............................. 541,162 73,867 Amortizationofnetactuarial(gain)loss ............................... 353,551 131,578 Netactuarialgain(loss)arisingduringtheyear ........................ (471,814) (3,183,688) Curtailmenteffects-priorservicecredit(cost) ......................... 0 250,202 TotalOtherComprehensiveIncome(Loss) ...................... 107,057 (7,787,348) CumulativeResultsofOperations,Endofyear....................... $124,510,797 $134,811,346 Seeaccompanyingnotestofinancialstatements.

476 96th Annual Report, 2009 BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM STATEMENTSOFCASHFLOWS FortheyearsendedDecember31, 2009 2008 CashFlowsfromOperatingActivities Resultsofoperations..................................................... $(10,407,606) $ 1,135,535 Adjustmentstoreconcileresultsofoperations tonetcashprovidedby(usedin)operatingactivities: Depreciation .......................................................... 13,869,221 13,946,960 Netloss(gain)ondisposalofpropertyandequipment .................. 15,944 (164,511) Decrease(increase)inassets: Accountsreceivable,prepaidexpensesandotherassets.................. 1,499,641 (2,164,471) Increase(decrease)inliabilities: Accountspayableandaccruedliabilities ................................ 1,668,788 (7,087,682) Accruedpayrollandrelatedtaxes ...................................... 1,627,747 3,666,184 Accruedannualleave.................................................. 2,586,938 3,804,505 Unearnedrevenuesandotherliabilities ................................. 1,139,571 1,140,936 Accumulatedretirementbenefitobligation .............................. 2,154,728 8,664,984 Accumulatedpostretirementbenefitobligation .......................... 776,524 555,331 Accumulatedpostemploymentbenefitobligation ........................ 563,965 5,044,387 Otherlong-termliabilities.............................................. (233,210) 648,534 Accumulatedothercomprehensiveincome .............................. 107,057 (7,787,348) Netcashprovidedby(usedin)operatingactivities ................. 15,369,308 21,403,344 CashFlowsfromInvestingActivities Proceedsfromdisposals.................................................. 866 0 Capitalexpenditures ..................................................... (18,346,427) (9,307,059) Netcashprovidedby(usedin)investingactivities ................. (18,345,561) (9,307,059) CashFlowsfromFinancingActivities—Capitalleasepayments .......... (486,906) 1,545,977 Netcashprovidedby(usedin)financingactivities ................. (486,906) 1,545,977 NetIncrease(Decrease)inCash ........................................ (3,463,159) 13,642,262 CashBalance,Beginningofyear ......................................... 58,255,990 44,613,728 CashBalance,Endofyear ............................................... $54,792,831 $58,255,990 Seeaccompanyingnotestofinancialstatements.

Board of Governors Financial Statements 477 BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM NOTESTOFINANCIALSTATEMENTSASOFANDFORTHEYEARSENDED DECEMBER31,2009AND2008 (1)Structure TheFederalReserveSystem(theSystem)wasestablishedbyCongressin1913andconsistsofthe Board of Governors (the Board), the Federal Open Market Committee, the twelve regional Federal ReserveBanks,theFederalAdvisoryCouncil,andtheprivatecommercialbanksthataremembersof theSystem.TheBoard,unliketheReserveBanks,wasestablishedasafederalgovernmentagencyand issupportedbyWashington,D.C.basedstaffnumberingapproximately2,100,asitcarriesoutitsresponsibilitiesinconjunctionwithothercomponentsoftheFederalReserveSystem. TheBoardisrequiredbytheFederalReserveAct(theAct)toreportitsoperationstotheSpeaker oftheHouseofRepresentatives.TheActalsorequirestheBoard,eachyear,toorderafinancialaudit ofeachFederalReserveBankandtopublisheachweekastatementofthefinancialconditionofeach suchReserveBankandaconsolidatedstatementforalloftheReserveBanks.Accordingly,theBoard believesthatthebestfinancialdisclosureconsistentwithlawisachievedbyissuingseparatefinancial statementsfortheBoardandfortheReserveBanks.Therefore,theaccompanyingfinancialstatements includeonlytheresultsofoperationsandactivitiesoftheBoard.Combinedfinancialstatementsfor theFederalReserveBanksareincludedintheBoard’sannualreporttotheSpeakeroftheHouseof Representatives. (2)OperationsandServices The Board’s responsibilities require thorough analysis of domestic and international financial and economicdevelopments.TheBoardcarriesoutthoseresponsibilitiesinconjunctionwithothercomponents of the Federal Reserve System. The Board also supervises and regulates the operations of the FederalReserveBanks,exercisesbroadresponsibilityinthenation’spaymentssystem,andadministersmostofthenation’slawsregardingconsumercreditprotection.PolicyregardingopenmarketoperationsisestablishedbytheFederalOpenMarketCommittee.However,theBoardhassoleauthority overchangesinreserverequirements,anditmustapproveanychangeinthediscountrateinitiatedby aFederalReserveBank. TheBoardalsoplaysamajorroleinthesupervisionandregulationoftheU.S.bankingsystem.It hassupervisoryresponsibilitiesforstate-charteredbanksthataremembersoftheFederalReserveSystem,bankholdingcompanies,foreignactivitiesofmemberbanks,andU.S.activitiesofforeignbanks. (3)SignificantAccountingPolicies BasisofAccounting—TheBoardpreparesitsfinancialstatementsinaccordancewithaccounting principlesgenerallyacceptedintheUnitedStates(GAAP). Revenues—TheFederalReserveActauthorizestheBoardtolevyanassessmentontheReserve Bankstofunditsoperations.TheBoardleviestheassessmentbasedoneachReserveBank’scapital andsurplusbalancesasofDecember31oftheprioryear. CurrencyCosts—TheFederalReserveBoardissuesthenation’scurrency(intheformofFederal Reservenotes),andtheFederalReserveBanksdistributecurrencyandcointhroughdepositoryinstitutions.TheBoardincursexpensesandassessestheReserveBanksfortheexpensesrelatedtoproducing, issuing, and retiring Federal Reserve notes. The assessment is allocated based on each Reserve Bank’sshareofthenumberofnotescomprisingtheFederalReserveBankSystem’snetliabilityfor FederalReservenotesonDecember31oftheprioryear.Theseexpensesandassessmentsarereported separatelyfromtheBoard’soperatingtransactionsintheBoard’sStatementofRevenuesandExpenses andChangesinCumulativeResultsofOperations. AllowanceforDoubtfulAccounts—Accountsreceivableareshownnetoftheallowancefordoubtfulaccounts.Accountsreceivableconsidereduncollectiblearechargedagainsttheallowanceaccount intheyeartheyaredeemeduncollectible.Theallowancefordoubtfulaccountsisadjustedmonthly, baseduponareviewofoutstandingreceivables. Property,Equipment,andSoftware—TheBoard’sproperty,buildings,equipment,andsoftwareare statedatcostlessaccumulateddepreciationandamortization.Depreciationandamortizationarecalculatedonastraight-linebasisovertheestimatedusefullivesoftheassets,whichrangefromthreeto tenyearsforfurnitureandequipment,tentofiftyyearsforbuildingequipmentandstructures,andtwo

478 96th Annual Report, 2009 totenyearsforsoftware.Uponthesaleorotherdispositionofadepreciableasset,thecostandrelated accumulateddepreciationoramortizationareremovedandanygainorlossisrecognized. The Board’s internally developed software projects are each recorded at cost and capitalized and amortizedovertheproject’susefullifeasrequiredbytheInternalUseSoftwareTopicoftheFinancialAccountingStandardsBoard(FASB)AccountingStandardsCodification(ASC). ArtCollections—TheBoardhascollectionsofworksofart,historicaltreasures,andsimilarassets. Thesecollectionsaremaintainedandheldforpublicexhibitioninfurtheranceofpublicservice.Proceedsfromanysalesofcollectionsareusedtoacquireotheritemsforcollections.Aspermittedbythe RevenueRecognitionTopicoftheASC,thecostofcollectionspurchasedbytheBoardischargedto expenseintheyearpurchasedanddonatedcollectionitemsarenotrecorded.ThevalueoftheBoard’s collectionshasnotbeendetermined. DeferredRent—Theleasescontainscheduledrentincreasesoverthetermofthelease.Asrequired bytheLeasesTopicoftheASC,rentabatementsandscheduledrentincreasesmustbeconsideredin determining the annual rent expense to be recognized. The deferred rent represents the difference betweentheactualleasepaymentsandtherentexpenserecognized. Estimates — The preparation of financial statements in conformity with GAAP requires managementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesatthe dateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates. RecentlyIssuedAccountingStandards—TheRetirementBenefitsTopicoftheASCprovidesrules forthedisclosureofinformationaboutassetsheldinadefinedbenefitplaninthefinancialstatements oftheemployersponsoringthatplan,andadditionaldisclosuresaboutassetcategoriesandconcentrationsofrisk.ItiseffectiveforfinancialstatementswithfiscalyearsendingafterDecember15,2009. TheprovisionsoftheASChavebeenreflectedintheaccompanyingfootnotes. TheSubsequentEventsTopicoftheASCestablishesgeneralstandardsofaccountingforanddisclosureofeventsthatoccurthroughthebalancesheetdatebutbeforefinancialstatementsareissuedor areavailabletobeissued.TheASCsetsforth(i)theperiodafterthebalancesheetdateduringwhich managementofareportingentityshouldevaluateeventsortransactionsthatmayoccurforpotential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements;and(iii)thedisclosuresthatanentityshouldmakeabouteventsortransactionsthatoccurred after the balance sheet date, including disclosure of the date through which an entity has evaluated subsequent events and whether that represents the date the financial statements were issued or were availabletobeissued.TheBoardadoptedthestandardfortheperiodendedDecember31,2009. OnJune30,2009,theFASBissuedSFASNo.168,“TheStatementofFinancialAccountingStandardsCodificationandtheHierarchyofGenerallyAcceptedAccountingPrinciples—areplacement of SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles” (SFAS 168). SFAS 168establishestheFASBASCasthesourceofauthoritativeaccountingprinciplesrecognizedbythe FASB to be applied by entities in the preparation of financial statements in conformity with GAAP. TheASCdoesnotchangecurrentGAAP,butitintroducesanewstructurethatorganizestheauthoritativestandardsbytopic.SFAS168iseffectiveforfinancialstatementsissuedforperiodsendingafter September15,2009.Inaccordancewiththerequirementsofthisstandard,theASCisreferencedin theBoard’sfinancialstatementsandfootnotes. (4)Property,Equipment,andSoftware ThefollowingisasummaryofthecomponentsoftheBoard’sproperty,equipment,andsoftware,at cost,netofaccumulateddepreciationandamortizationasofDecember31,2009and2008: AsofDecember31, 2009 2008 Land............................................................. $ 18,640,314 $ 18,640,314 Buildingsandimprovements................................... 155,403,350 150,602,767 Furnitureandequipment........................................ 66,411,669 56,104,247 Softwareinuse.................................................. 16,196,241 14,514,315 Softwareinprocess............................................. 6,276,842 3,832,516 Constructioninprocess......................................... 8,100,559 3,818,295 Total............................................................. 271,028,975 247,512,454 Lessaccumulateddepreciationandamortization.............. (111,761,370) (98,636,964) Property,equipment,andsoftware—net...................... $159,267,605 $148,875,490

Board of Governors Financial Statements 479 Constructioninprocessincludescostsincurredin2009and2008forlong-termprojectsandbuilding enhancements. The Board has accrued liabilities related to property, equipment, and software of $7,131,000asofDecember31,2009. The Board entered into capital leases for printing equipment during 2003 that terminated in May 2008.TheBoardsubsequentlyenteredintonewcapitalleasesin2008and2009.Underthenewcommitments,thecapitalleasetermextendsthrough2012.Furnitureandequipmentincludes$2,086,000 and $1,923,000 in 2009 and 2008, respectively, for capitalized leases. Accumulated depreciation includes$789,000and$280,000forcapitalizedleasesasof2009and2008,respectively.TheBoard paidinterestrelatedtothesecapitalleasesintheamountof$36,000and$26,000asofDecember31, 2009and2008,respectively.TheBoardhasaccruedliabilitiesrelatedtocapitalleasesof$148,000as ofDecember31,2009. TheBoardhasleasedspaceinitsbuildingstoothergovernmentalagencies.Therevenuescollected fromtheseleasesare$2,037,000and$2,034,000in2009and2008,respectively. Thefutureminimumleasepaymentsrequiredunderthecapitalleasesandthepresentvalueofthe netminimumleasepaymentsasofDecember31,2009,areasfollows: YearsEnding December31 Amount 2010.................................................................................... $ 978,315 2011.................................................................................... 978,315 2012.................................................................................... 421,925 Totalminimumleasepayments.................................................... 2,378,555 Lessamountrepresentingmaintenance............................................... (1,026,701) Netminimumleasepayments...................................................... 1,351,854 Lessamountrepresentinginterest.................................................... (36,387) Presentvalueofnetminimumleasepayments.................................... 1,315,467 Lesscurrentmaturitiesofcapitalleasepayments.................................... (533,110) Long-termcapitalleaseobligations................................................... $ 782,357 (5)AccumulatedRetirementBenefits SubstantiallyalloftheBoard’semployeesparticipateintheRetirementPlanforEmployeesofthe FederalReserveSystem(theSystemPlan).TheSystemPlanprovidesretirementbenefitsonlytoemployeesoftheBoard,theFederalReserveBanks,andtheOfficeofEmployeeBenefitsoftheFederal ReserveSystem(OEB).TheFederalReserveBankofNewYork(FRBNY),onbehalfoftheSystem, recognizesthenetassetsandcostsassociatedwiththeSystemPlaninitsfinancialstatements.Costs associatedwiththeSystemPlanarenotredistributedtootherparticipatingemployers. EmployeesoftheBoardwhobecameemployedpriorto1984arecoveredbyacontributorydefined benefitsprogramundertheSystemPlan.EmployeesoftheBoardwhobecameemployedafter1983 arecoveredbyanon-contributorydefinedbenefitsprogramundertheSystemPlan.Contributionsto theSystemPlanareactuariallydeterminedandfundedbyparticipatingemployers.In2009,theSystemmade$500millionincontributionstotheSystemPlan;thecontributionsmaybeadjustedupon completionofthe2010actuarialvaluation.TheBoardwasnotassessedacontributionfor2009. EffectiveJanuary1,1996,BoardemployeescoveredundertheSystemPlanarealsocoveredunder aBenefitsEqualizationPlan(BEP).BenefitspaidundertheBEParelimitedtothosebenefitsthatcannot be paid from the System Plan due to limitations imposed by Sections 401(a)(17), 415(b) and 415(e) of the Internal Revenue Code of 1986. Activity for the BEP as of December 31, 2009 and 2008,issummarizedinthefollowingtables: AsofDecember31, 2009 2008 Changeinprojectedbenefitobligation: Benefitobligation—beginningofyear....................... $4,591,374 $2,201,675 Servicecost..................................................... 712,515 589,094 Interestcost..................................................... 307,501 213,714 Planparticipants’contributions................................. Actuarial(gain)loss............................................ (175,635) 1,137,486 Grossbenefitspaid.............................................. (27,649) (35,016) Planamendments................................................ 492,461 484,421 Benefitobligation—endofyear.............................. $5,900,567 $4,591,374 Accumulatedbenefitobligation—endofyear................ $1,245,465 $1,267,005

480 96th Annual Report, 2009 AsofDecember31, 2009 2008 Weighted-averageassumptionsusedtodetermine benefitobligationasofDecember31: Discountrate.................................................... 6.00% 6.00% Rateofcompensationincrease................................. 5.00% 5.00% Changeinplanassets: Fairvalueofplanassets—beginningofyear................ $ - $ - Employercontributions......................................... 27,649 35,016 Planparticipants’contributions................................. Grossbenefitspaid.............................................. (27,649) (35,016) Fairvalueofplanassets—endofyear....................... $ - $ - Fundedstatus: Reconciliationoffundedstatus—endofyear: Fairvalueofplanassets........................................ $ - $ - Benefitobligations.............................................. 5,900,567 4,591,374 Fundedstatus.................................................... (5,900,567) (4,591,374) Amountrecognized—endofyear............................ $(5,900,567) $(4,591,374) Amountsrecognizedinthestatementsoffinancial positionconsistof: Asset............................................................. $ - $ - Liability......................................................... (5,900,567) (4,591,374) Netamountrecognized......................................... $(5,900,567) $(4,591,374) Amountsrecognizedinaccumulatedother comprehensiveincomeconsistof: Netactuarialloss(gain)........................................ $1,708,854 $2,031,269 Priorservicecost(credit)....................................... 714,123 256,919 $2,422,977 $2,288,188 Expectedcashflow: Expectedemployercontributions—2010..................... $ 111,143 Expectedbenefitpayments:* 2010............................................................. $ 111,143 2011............................................................. 149,745 2012............................................................. 183,388 2013............................................................. 210,792 2014............................................................. 232,368 2015−2019...................................................... 1,421,730 *ExpectedbenefitpaymentstobemadefromSystemassets 2009 2008 Componentsofnetperiodicbenefitcost: Servicecost..................................................... $ 712,515 $ 589,094 Interestcost..................................................... 307,501 213,714 Expectedreturnonplanassets................................. - - Amortization: Actuarial(gain)loss............................................ 146,780 112,474 Priorservice(credit)cost....................................... 35,257 (5,902) Netperiodicbenefitcost(credit)............................... $1,202,053 $ 909,380 Weighted-averageassumptionsusedtodetermine netperiodicbenefitcost: Discountrate.................................................... 6.00% 6.25%** Rateofcompensationincrease................................. 5.00% 5.00% **In 2008, amendments to the System Plan were approved. As a result,theactuariallydeterminednetperiodicbenefitexpensesforthe yearendedDecember31,2008,wereremeasuredwithadiscountrate of7.75%asofNovember1,2008.

Board of Governors Financial Statements 481 AsofDecember31, 2009 2008 Otherchangesinplanassetsandbenefitobligations recognizedinothercomprehensiveincome:*** Currentyearpriorservice(credit)cost......................... $ 492,461 $ 484,421 Currentyearactuarial(gain)loss............................... (175,635) 1,137,486 Amortizationofpriorservicecredit(cost)..................... (35,257) 5,902 Amortizationofactuarialgain(loss)........................... (146,780) (112,474) Totalrecognizedinothercomprehensiveincome............. $ 134,789 $1,515,335 Totalrecognizedinnetperiodicbenefitcostand othercomprehensiveincome................................. $1,336,842 $2,424,715 ***For the Benefit Equalization Plan, other changes to assets and benefitsrecognizedinothercomprehensiveincomewillbereflected innetperiodiccost. Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensiveincomeintonet periodicbenefitcost(credit)in2010areshownbelow: Netactuarial(gain)loss........................................ $114,291 Priorservice(credit)cost....................................... 12,290 Total............................................................. $126,581 OnOctober30,2008,theBoardapprovedanon-qualifiedplanforOfficersoftheBoard.Theretirement benefits covered under the Board Officer Pension Enhancement (BOPE), formerly the Supplemental Employee Retirement Plan (BSERP), increases the pension benefit calculation from 1.8% abovetheSocialSecurityintegrationlevelto2.0%.ActivityfortheBOPEasofDecember31,2009 and2008,issummarizedinthefollowingtables: AsofDecember31, 2009 2008 Changeinprojectedbenefitobligation: Benefitobligation—beginningofyear....................... $6,275,285 $ - Servicecost..................................................... 333,034 37,190 Interestcost..................................................... 402,680 56,010 Planparticipants’contributions................................. Actuarial(gain)loss............................................ 286,440 1,607,199 Grossbenefitspaid.............................................. Planamendments................................................ (176,619) 4,574,886 Benefitobligation—endofyear.............................. $7,120,820 $6,275,285 Accumulatedbenefitobligation—endofyear................ $5,175,331 $4,530,540 Weighted-averageassumptionsusedtodetermine benefitobligationasofDecember31: Discountrate.................................................... 6.00% 6.00% Rateofcompensationincrease................................. 5.00% 5.00% Changeinplanassets: Fairvalueofplanassets—beginningofyear................ $ - $ - Employercontributions......................................... Planparticipants’contributions................................. Grossbenefitspaid.............................................. Fairvalueofplanassets—endofyear....................... $ - $ - Fundedstatus: Reconciliationoffundedstatus—endofyear: Fairvalueofplanassets........................................ $ - $ - Benefitobligations.............................................. 7,120,820 6,275,285 Fundedstatus.................................................... (7,120,820) (6,275,285) Amountrecognized—endofyear............................ $(7,120,820) $(6,275,285)

482 96th Annual Report, 2009 AsofDecember31, 2009 2008 Amountsrecognizedinthestatementsoffinancial positionconsistof: Asset............................................................. $ - $ - Liability......................................................... (7,120,820) (6,275,285) Netamountrecognized......................................... $(7,120,820) $(6,275,285) Amountsrecognizedinaccumulatedother comprehensiveincomeconsistof: Netactuarialloss(gain)........................................ $1,742,746 $1,607,199 Priorservicecost(credit)....................................... 3,774,673 4,482,687 $5,517,419 $6,089,886 Expectedcashflows: Expectedemployercontributions—2010..................... $ 41,829 Expectedbenefitpayments:**** 2010............................................................. $ 41,829 2011............................................................. 75,298 2012............................................................. 115,587 2013............................................................. 161,773 2014............................................................. 215,737 2015−2019...................................................... 1,967,583 ****ExpectedbenefitpaymentstobemadefromSystemassets Componentsofnetperiodicbenefitcost: Servicecost..................................................... $ 333,034 $ 37,190 Interestcost..................................................... 402,680 56,010 Expectedreturnonplanassets................................. Amortization: Actuarial(gain)loss............................................ 150,893 Priorservice(credit)cost....................................... 531,395 92,199 Netperiodicbenefitcost(credit)............................... $1,418,002 $ 185,399 Weighted-averageassumptionsusedtodeterminenet periodicbenefitcost: Discountrate.................................................... 6.00% 7.75% Rateofcompensationincrease................................. 5.00% 5.00% Otherchangesinplanassetsandbenefitobligations recognizedinothercomprehensiveincome:***** Currentyearpriorservice(credit)cost......................... $ (176,619) $4,574,886 Currentyearactuarial(gain)loss............................... 286,440 1,607,199 Amortizationofpriorservicecredit(cost)..................... (531,395) (92,199) Amortizationofactuarialgain(loss)........................... (150,893) Totalrecognizedinothercomprehensiveincome............. $ (572,467) $6,089,886 Totalrecognizedinnetperiodicbenefitcostand othercomprehensiveincome................................. $ 845,535 $6,275,285 *****FortheBoardOfficerPensionEnhancement,otherchangesin assetsandbenefitsrecognizedinothercomprehensiveincomewillbe reflectedinnetperiodiccost. Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensiveincomeintonet periodicbenefitcost(credit)in2010areshownbelow: Netactuarial(gain)loss........................................ $123,908 Priorservice(credit)cost....................................... 531,395 Total............................................................. $655,303

Board of Governors Financial Statements 483 ThetotalaccumulatedretirementbenefitobligationforboththeBenefitsEqualizationPlan(BEP) andBoardOfficerPensionEnhancement(BOPE)asofDecember31,2009and2008,areasfollows: AsofDecember31, 2009 2008 Accumulatedretirementbenefitobligation: Benefitobligation—BEP...................................... $ 5,900,567 $ 4,591,374 Benefitobligation—BOPE.................................... 7,120,820 6,275,285 Totalaccumulatedretirementbenefitobligation............... $13,021,387 $10,866,659 ArelativelysmallnumberofBoardemployeesparticipateintheCivilServiceRetirementSystem (CSRS)oftheFederalEmployees’RetirementSystem(FERS).ThesedefinedbenefitplansareadministeredbytheU.S.OfficeofPersonnelManagement,whichdeterminestherequiredemployercontribution levels. The Board’s contributions to these plans totaled $329,000 and $305,000 in 2009 and 2008,respectively.TheBoardhasnoliabilityforfuturepaymentstoretireesundertheseprogramsand isnotaccountablefortheassetsoftheplans. EmployeesoftheBoardmayalsoparticipateintheFederalReserveSystem’sThriftPlanorRoth 401(k). Board contributions to members’ accounts were $14,342,000 and $11,815,000 in 2009 and 2008,respectively. (6)AccumulatedPostretirementBenefits TheBoardprovidescertainlifeinsuranceprogramsforitsactiveemployeesandretirees.Activityas ofDecember31,2009and2008,issummarizedinthefollowingtables: AsofDecember31, 2009 2008 Changeinprojectedbenefitobligation: Benefitobligation—beginningofyear....................... $8,527,800 $7,972,469 Servicecost..................................................... 169,687 176,450 Interestcost..................................................... 516,194 505,691 Planparticipants’contributions................................. Actuarial(gain)loss............................................ 361,009 439,003 Grossbenefitspaid.............................................. (270,366) (315,611) Curtailments..................................................... (250,202) Benefitobligation—endofyear.............................. $9,304,324 $8,527,800 Weighted-averageassumptionsusedtodeterminebenefit obligationasofDecember31—discountrate............. 5.75% 6.00% Changeinplanassets: Fairvalueofplanassets—beginningofyear................ $ - $ - Employercontributions......................................... 270,366 315,611 Grossbenefitspaid.............................................. (270,366) (315,611) Fairvalueofplanassets—endofyear....................... $ - $ - Fundedstatus: Reconciliationoffundedstatus—endofyear: Fairvalueofplanassets........................................ $ - $ - Benefitobligations.............................................. 9,304,324 8,527,800 Fundedstatus.................................................... (9,304,324) (8,527,800) Amountrecognized—endofyear............................ $(9,304,324) $(8,527,800) Amountsrecognizedinthestatementsoffinancial positionconsistof: Asset............................................................. $ - $ - Liability......................................................... (9,304,324) (8,527,800) Netamountrecognized......................................... $(9,304,324) $(8,527,800) Amountsrecognizedinaccumulatedother comprehensiveincomeconsistof: Netactuarialloss(gain)........................................ $1,528,733 $1,223,601 Priorservicecost(credit)....................................... (302,024) (327,513) $1,226,709 $ 896,088

484 96th Annual Report, 2009 AsofDecember31, 2009 2008 Expectedcashflows: Expectedemployercontributions—2010..................... $ 342,502 $321,938 Expectedbenefitpayments:* 2010............................................................. $ 342,502 2011............................................................. 361,970 2012............................................................. 381,110 2013............................................................. 408,919 2014............................................................. 436,116 2015−2019...................................................... 2,570,408 *ExpectedbenefitpaymentstobemadefromSystemassets Componentsofnetperiodicbenefitcost: Servicecost..................................................... $ 169,687 $176,450 Interestcost..................................................... 516,194 505,691 Expectedreturnonplanassets................................. Amortization: ................................................... Actuarial(gain)loss............................................ 55,878 19,104 Priorservice(credit)cost....................................... (25,490) (12,430) Netperiodicbenefitcost(credit)............................... $ 716,269 $688,815 Weighted-averageassumptionsusedtodetermine netperiodicbenefitcost—discountrate................... 6.00% 6.25%** **In2008,amendmentstothePlanwereapproved.Asaresult,the actuarially determined net periodic benefit expenses for the year endedDecember31,2008,wereremeasuredwithadiscountrateof 7.75%asofNovember1,2008. Otherchangesinplanassetsandbenefitobligations recognizedinothercomprehensiveincome: Currentyearactuarial(gain)loss............................... $ 361,009 $439,003 Amortizationofpriorservicecredit(cost)..................... 25,490 12,430 Amortizationofactuarialgain(loss)........................... (55,878) (19,104) Curtailmenteffects—priorservice(credit)cost.............. (250,202) Totalrecognizedinothercomprehensiveincome............. $ 330,621 $182,127 Totalrecognizedinnetperiodicbenefitcostand othercomprehensiveincome................................. $1,046,890 $870,942 Estimatedamountsthatwillbeamortizedfromaccumulatedothercomprehensiveincomeintonet periodicbenefitcost(credit)in2010areshownbelow: Netactuarial(gain)loss........................................ $76,193 Priorservice(credit)cost....................................... (25,490) Total............................................................. $50,703 (7)AccumulatedPostemploymentBenefits TheBoardprovidescertainpostemploymentbenefitstoeligibleformerorinactiveemployeesand theirdependentsduringtheperiodsubsequenttoemploymentbutpriortoretirement.Postemployment costswereactuariallydeterminedusingaDecember31measurementdateanddiscountratesof4.00% and 2.50% as of December 31, 2009 and 2008, respectively. The accrued postemployment benefit costsrecognizedbytheBoardasofDecember31,2009and2008,were$1,754,000and$5,974,000, respectively.

Board of Governors Financial Statements 485 (8)AccumulatedOtherComprehensiveIncome Areconciliationofbeginningandendingbalancesofaccumulatedothercomprehensiveincomefor theyearsendedDecember31,2009and2008,isasfollows: Amount Amount Total Relatedto Relatedto Accumulated DefinedBenefit Postretirement Other Retirement BenefitsOther Comprehensive Plans ThanPensions Income(Loss) Balance—January1,2008......................... $ 772,853 $ 713,961 $(1,486,814) Changeinfundedstatusofbenefitplans: Priorservice(credit)costarisingduringtheyear.. 5,059,307 (5,059,307) Amortizationofpriorservicecredit(costs)......... (86,297) 12,430 73,867 Amortizationofnetactuarialgain(loss)............ (112,474) (19,104) 131,578 Netactuarial(gain)lossarisingduringtheyear.... 2,744,685 439,003 (3,183,688) Curtailmenteffects—priorservice(credit)cost... (250,202) 250,202 Changeinfundedstatusofbenefitplans— othercomprehensiveincome(loss)............... 7,605,221 182,127 (7,787,348) Balance—December31,2008..................... 8,378,074 896,088 (9,274,162) Changeinfundedstatusofbenefitplans: Priorservice(credit)costarisingduringtheyear.. 315,842 (315,842) Amortizationofpriorservicecredit(costs)......... (566,652) 25,490 541,162 Amortizationofnetactuarialgain(loss)............ (297,673) (55,878) 353,551 Netactuarial(gain)lossarisingduringtheyear.... 110,805 361,009 (471,814) Changeinfundedstatusofbenefitplans— othercomprehensiveincome(loss)............... (437,678) 330,621 107,057 Balance—December31,2009..................... $7,940,396 $1,226,709 $(9,167,105) Additional detail regarding the classification of accumulated other comprehensive income is includedinNotes5and6. (9)FederalReserveBanks TheBoardperformscertainfunctionsfortheReserveBanksinconjunctionwithitsresponsibilities fortheSystem,andtheReserveBanksprovidecertainadministrativefunctionsfortheBoard.ActivityrelatedtotheBoardandReserveBanksasofDecember31,2009and2008,issummarizedinthe followingtable: AsofDecember31, 2009 2008 ReserveBankexpenseschargedtotheBoard: Dataprocessingandcommunication........................... $ 776,835 $ 2,368,144 Contingencysite................................................ 1,171,808 1,265,618 TotalReserveBankexpenseschargedtotheBoard........... $ 1,948,643 $ 3,633,762 BoardexpenseschargedtotheReserveBanks: Assessmentsforcurrencycosts: Printing.......................................................... $479,255,288 $477,927,083 Shipping......................................................... 15,367,546 14,984,564 Retirement....................................................... 3,608,937 3,722,146 Researchanddevelopment..................................... 3,913,112 3,723,101 AssessmentsforoperatingexpensesoftheBoard............. 386,399,900 352,290,700 Dataprocessing................................................. 635,235 601,957 TotalBoardexpenseschargedtotheReserveBanks.......... $889,180,018 $853,249,551 AccountsreceivableduefromtheReserveBanks............. $ 1,071,932 $ 1,016,688 AccountspayableduetotheReserveBanks.................. 295,848 The Board contracted for audit services on behalf of entities that are included in the combined financialstatementsoftheFederalReserveBanks.TheentitiesreimbursetheBoardforthecostofthe

486 96th Annual Report, 2009 auditservices.TheBoardaccruedliabilitiesof$138,000and$313,000inauditservicesandrecorded receivablesof$138,000and$313,000fromtheentitiesasofDecember31,2009and2008,respectively. (10)FederalFinancialInstitutionsExaminationCouncil The Board is one of the five member agencies of the Federal Financial Institutions Examination Council(theCouncil),andcurrentlyperformscertainmanagementfunctionsfortheCouncil.Thefive agencies that are represented on the Council are the Board, Federal Deposit Insurance Corporation, NationalCreditUnionAdministration,OfficeoftheComptrolleroftheCurrency,andOfficeofThrift Supervision.TheBoard’sfinancialstatementsdonotincludefinancialdatafortheCouncil.Activity relatedtotheBoardandCouncil,asofDecember31,2009and2008,issummarizedinthefollowing table: AsofDecember31, 2009 2008 CouncilexpenseschargedtotheBoard: Assessmentsforoperatingexpenses............................ $ 67,998 $ 164,889 CentralDataRepository........................................ 1,522,597 1,352,390 UniformBankPerformanceReport............................ 210,293 185,833 TotalCouncilexpenseschargedtotheBoard................. $1,800,888 $1,703,112 BoardexpenseschargedtotheCouncil: Dataprocessingrelatedservices................................ $4,884,868 $4,683,363 Administrativeservices......................................... 245,000 190,400 TotalBoardexpenseschargedtotheCouncil................. $5,129,868 $4,873,763 AccountsreceivableduefromtheCouncil.................... $ 618,861 $ 650,672 AccountspayableduetotheCouncil.......................... 209,922 373,466 (11)TheOfficeofEmployeeBenefitsoftheFederalReserveSystem TheOfficeofEmployeeBenefitsoftheFederalReserveSystem(OEB)administerscertainSystem benefitprogramsonbehalfoftheBoardandtheReserveBanks,andcostsassociatedwiththeOEB’s activities are assessed to the Board and Reserve Banks. The Board was assessed $2,166,000 and $2,867,000asofDecember31,2009and2008,respectively. (12)BureauofEngravingandPrinting TheBureauofEngravingandPrinting(BEP)istheprincipalsupplierforcurrencyprintingandretirementservices.ThecurrencycostsincurredasofDecember31,2009and2008,arereflectedinthe followingtable: AsofDecember31, 2009 2008 CurrencyexpenseschargedtotheBoard: Printing.......................................................... $479,255,288 $477,927,083 Retirement....................................................... 3,608,937 3,722,146 TotalcurrencyexpenseschargedtotheBoard................. $482,864,225 $481,649,229 (13)CommitmentsandContingencies Leases—TheBoardhasenteredintoseveraloperatingleasestosecureoffice,trainingandwarehousespace.TheBoardhassubleasedspacetoothergovernmentalagencies.Thesubleaseagreements areannualandtherevenuecollectedwas$467,000and$468,000for2009and2008,respectively. Minimumannualpaymentsundertheoperatingleaseshavinganinitialorremainingnon-cancelable leaseterminexcessofoneyearatDecember31,2009,areasfollows: YearsEnding December31 2010............................................................. $ 6,297,594 2011............................................................. 6,335,714 2012............................................................. 6,414,807 2013............................................................. 6,608,976 After2013....................................................... 42,414,511 $68,071,602

Board of Governors Financial Statements 487 Rental expenses under the operating leases were $3,947,000 and $2,207,000 for the years ended December31,2009and2008,respectively. DeferredLeases—Thechangeindeferredrentwas$1,666,000and$537,000fortheyearsended December31,2009and2008,respectively. Commitments—TheBoardhasenteredintoanagreementwiththeFederalDepositInsuranceCorporationandtheOfficeoftheComptrolleroftheCurrency,throughtheCouncil,tofundaportionof the enhancements and maintenance fees for a central data repository project through 2010 with an optiontoextendmaintenancethrough2013.TheestimatedBoardexpensetosupportthiseffortis$7.9 millionforthebaseperiodand$2.6millionfortheoptionperiod. In2007,theCouncilbeganarewriteoftheHomeMortgageDisclosureActprocessingsystem,for whichtheBoardprovidesdataprocessingservices.TheestimatedtotalexpensetotheCouncilofthe rewriteis$3.2millionthrough2010.TheestimatedtotalBoardexpensetosupportthiseffortwiththe maintenanceextensionoptionis$533,000. Accruedliabilitiesincludeafederaltaxliabilityestimatedat$494,000fortheBoardanditsemployees.TheBoardexpectstopaytheliabilityduring2010. Litigation and Contingent Liabilities — The Board is subject to contingent liabilities which arise from litigation cases and various business contracts. These contingent liabilities arise in the normal courseofoperationsandtheirultimatedispositionisunknown.Basedoninformationcurrentlyavailabletomanagement,itismanagement’sopinionthattheexpectedoutcomeofthesematters,individuallyorintheaggregate,willnothaveamateriallyadverseeffectonthefinancialstatements. One case alleges employment discrimination under Title VII of the Civil Rights Act of 1964, as amended,andtheAgeDiscriminationinEmploymentAct,andispendingintheUnitedStatesDistrict CourtfortheDistrictofColumbia.Thesecondcaseisanactionallegingdiscriminationonbehalfofa classofAfricanAmericansecretariesattheBoard.ThecasewasdismissedbytheUnitedStatesDistrict Court for the District of Columbia on January 31, 2007, and the plaintiffs’ motion to alter or amend judgment was denied by that court on March 2, 2009. The plaintiffs have appealed the dismissaltotheUnitedStatesCourtofAppealsfortheDistrictofColumbiacircuit.TheBoardhassubstantial defenses for both cases and intends to defend the matters vigorously. Management believes thatthelikelihoodofanadversejudgmentforbothcasesissmall. Theestimatedcontingentliabilitiesrelatedtobusinesscontractswere$0and$69,720asofDecember31,2009and2008,respectively. (14)SubsequentEvents There were no subsequent events that require adjustments to or disclosures in the financial statementsasofDecember31,2009.SubsequenteventswereevaluatedthroughMarch19,2010,whichis thedatetheBoardissuedthefinancialstatements.

488 96th Annual Report, 2009 INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIALREPORTINGAND ON COMPLIANCEAND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCEWITHGOVERNMENTAUDITINGSTANDARDS TotheBoardofGovernorsoftheFederalReserveSystem: WehaveauditedthefinancialstatementsoftheBoardofGovernorsoftheFederalReserveSystem (the“Board”)asofandfortheyearendedDecember31,2009,andhaveissuedourreportthereon datedMarch19,2010.Weconductedourauditinaccordancegenerallyacceptedauditingstandards as established by the Auditing Standards Board (United States), auditing standards of the Public CompanyAccountingOversightBoard(UnitedStates),andthestandardsapplicabletofinancialauditscontainedinGovernmentAuditingStandards,issuedbytheComptrollerGeneraloftheUnited States. InternalControloverFinancialReporting InaccordancewithstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates) andGovernmentAuditingStandards,wehavealsoissuedourreportdatedMarch19,2010,onour testsoftheBoard’sinternalcontroloverfinancialreporting.Thepurposeofthatreportistodescribe thescopeandtheresultsofthattesting.ThatreportisanintegralpartofanauditperformedinaccordancewithstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates)and GovernmentAuditingStandardsandshouldbeconsideredinassessingtheresultsofouraudit. ComplianceandOtherMatters AspartofobtainingreasonableassuranceaboutwhethertheBoard’sfinancialstatementsarefreeof materialmisstatement,weperformedtestsofitscompliancewithcertainprovisionsoflaws,regulations,contracts,andgrantagreements,noncompliancewithwhichcouldhaveadirectandmaterial effectonthedeterminationoffinancialstatementamounts.However,providinganopiniononcompliancewiththoseprovisionswasnotanobjectiveofouraudit,andaccordingly,wedonotexpress suchanopinion.Theresultsofourtestsdisclosednoinstancesofnoncomplianceorothermatters thatarerequiredtobereportedunderGovernmentAuditingStandards. Distribution ThisreportisintendedsolelyfortheinformationanduseoftheBoard,management,andothers withintheorganization,OfficeofInspectorGeneral,theUnitedStatesCongress,andisnotintended tobeandshouldnotbeusedbyanyoneotherthanthesespecifiedparties. McLean,VA March19,2010

489 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, 2009 and 2008. INDEPENDENTAUDITORS’REPORT TotheBoardofGovernorsoftheFederalReserveSystem andtheBoardofDirectorsoftheFederalReserveBanks: We have audited the accompanying combined statements of condition of the Federal ReserveBanks(the“ReserveBanks”)asofDecember31,2009and2008,andtherelated combinedstatementsofincomeandcomprehensiveincomeandchangesincapitalforthe yearsthenended,whichhavebeenpreparedinconformitywithaccountingprinciplesestablishedbytheBoardofGovernorsoftheFederalReserveSystem.Thesecombinedfinancial statementsaretheresponsibilityoftheDivisionofReserveBankOperationsandPayment System’smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits. WeconductedourauditsinaccordancewithgenerallyacceptedauditingstandardsasestablishedbytheAuditingStandardsBoard(UnitedStates)andinaccordancewiththeauditing standardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whetherthefinancialstatementsarefreeofmaterialmisstatement.TheReserveBanksare notrequiredtohave,norwereweengagedtoperform,anauditoftheirinternalcontrolover financialreporting.Ourauditsincludedconsiderationofinternalcontroloverfinancialreportingasabasisfordesigningauditproceduresthatareappropriateinthecircumstances, butnotforthepurposeofexpressinganopinionontheeffectivenessoftheReserveBank’s internalcontroloverfinancialreporting.Accordingly,weexpressnosuchopinion.Anaudit alsoincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresin thefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimates madebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.We believethatourauditsprovideareasonablebasisforouropinion. 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 andaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericaarealsodescribedinNote4. Inouropinion,suchcombinedfinancialstatementspresentfairly,inallmaterialrespects, thecombinedfinancialpositionoftheReserveBanksasofDecember31,2009and2008, and the combined results of their operations for the years then ended, on the basis of accountingdescribedinNote4. April21,2010

490 96th Annual Report, 2009 FEDERALRESERVEBANKS COMBINEDSTATEMENTSOFCONDITION (inmillions) AsofDecember31, 2009 2008 Assets Goldcertificates......................................................... $ 11,037 $ 11,037 Specialdrawingrightscertificates....................................... 5,200 2,200 Coin..................................................................... 2,053 1,688 Itemsinprocessofcollection............................................ 507 979 PrepaidinterestonFederalReservenotes............................... - 2,425 Loanstodepositoryinstitutions ......................................... 96,618 544,010 Otherloans,net(ofwhich$48,183millionismeasuredatfairvalue asofDecember31,2009)............................................. 69,433 100,082 SystemOpenMarketAccount: Securitiespurchasedunderagreementstoresell....................... - 80,000 Treasurysecurities,net................................................ 805,972 481,449 Government-sponsoredenterprisedebtsecurities,net................. 167,362 20,740 Federalagencyandgovernment-sponsoredenterprise mortgage-backedsecurities,net..................................... 918,927 - Investmentsdenominatedinforeigncurrencies........................ 25,272 24,804 Centralbankliquidityswaps.......................................... 10,272 553,728 Otherinvestments..................................................... 5 - Consolidatedvariableinterestentities: Investmentsheldbyconsolidatedvariableinterestentities (ofwhich$71,648millionand$74,570millionismeasuredat fairvalueasofDecember31,2009and2008,respectively)........ 81,380 411,996 Preferredsecurities...................................................... 25,106 - Accruedinterestreceivable.............................................. 12,641 7,389 Bankpremisesandequipment,net....................................... 2,624 2,572 Otherassets.............................................................. 638 629 Totalassets............................................................ $2,235,047 $2,245,728 LiabilitiesandCapital FederalReservenotesoutstanding,net.................................. $ 887,846 $ 853,168 SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase....................... 77,732 88,352 Otherliabilities........................................................ 601 - Consolidatedvariableinterestentities: Beneficialinterestinconsolidatedvariableinterestentities............ 5,095 2,824 Otherliabilities(ofwhich$143millionismeasuredatfairvalue .... asofDecember31,2009).......................................... 1,316 5,813 Deposits: Depositoryinstitutions................................................ 976,988 860,000 Treasury,generalaccount............................................. 186,632 106,123 Treasury,supplementaryfinancingaccount............................ 5,001 259,325 Otherdeposits......................................................... 36,228 21,671 Deferredcredititems.................................................... 2,103 2,471 AccruedinterestonFederalReservenotes .............................. 1,191 - Interestduetodepositoryinstitutions.................................... 113 88 Accruedbenefitcosts.................................................... 2,631 3,374 Otherliabilities.......................................................... 290 367 Totalliabilities........................................................ 2,183,767 2,203,576 Capitalpaid-in........................................................... 25,640 21,076 Surplus(includingaccumulatedothercomprehensiveloss of$3,676millionand$4,683millionatDecember31,2009 and2008,respectively)................................................ 25,640 21,076 Totalcapital........................................................... 51,280 42,152 Totalliabilitiesandcapital.......................................... $2,235,047 $2,245,728 Theaccompanyingnotesareanintegralpartofthesecombinedfinancialstatements.

Federal Reserve Banks Combined Financial Statements 491 FEDERALRESERVEBANKS COMBINEDSTATEMENTSOFINCOMEANDCOMPREHENSIVEINCOME (inmillions) Fortheyearsended December31, 2009 2008 Interestincome: Loanstodepositoryinstitutions.......................................... $ 990 $ 3,817 Otherloans,net.......................................................... 4,519 3,348 SystemOpenMarketAccount: Securitiespurchasedunderagreementstoresell....................... 13 1,891 Treasurysecurities.................................................... 22,873 25,532 Government-sponsoredenterprisedebtsecurities...................... 2,048 99 Federalagencyandgovernment-sponsoredenterprise mortgage-backedsecurities......................................... 20,407 - Investmentsdenominatedinforeigncurrencies........................ 296 623 Centralbankliquidityswaps ......................................... 2,168 3,606 Otherinvestments..................................................... 1 - Investmentsheldbyconsolidatedvariableinterestentities .............. 9,820 4,087 Totalinterestincome.................................................. 63,135 43,003 Interestexpense: SystemOpenMarketAccount: Securitiessoldunderagreementstorepurchase....................... 98 737 Depositoryinstitutiondeposits........................................... 2,183 817 Beneficialinterestinconsolidatedvariableinterestentities.............. 267 463 Totalinterestexpense................................................. 2,548 2,017 Provisionforloanrestructuring.......................................... (2,621) - Netinterestincome,afterprovisionforloanrestructuring............. 57,966 40,986 Non-interestincome(loss): Otherloansunrealizedgains............................................. 557 - SystemOpenMarketAccount: Treasurysecuritiesgains.............................................. - 3,769 Federalagencyandgovernment-sponsoredenterprise mortgage-backedsecuritiesgains,net............................... 879 - Foreigncurrencygains,net........................................... 172 1,266 Consolidatedvariableinterestentities: Investmentsheldbyconsolidatedvariableinterestentitieslosses,net (1,937) (9,626) Beneficialinterestinconsolidatedvariableinterestentities(losses) gains,net........................................................... (1,903) 4,389 Dividendsonpreferredsecurities........................................ 106 - Incomefromservices.................................................... 663 773 Reimbursableservicestogovernmentagencies.......................... 450 461 Otherincome............................................................ 443 899 Totalnon-interest(loss)income....................................... (570) 1,931 Operatingexpenses: Salariesandotherbenefits............................................... 2,802 2,184 Occupancyexpense...................................................... 280 275 Equipmentexpense...................................................... 183 200 AssessmentsbytheBoardofGovernors................................. 888 853 Professionalfeesrelatedtoconsolidatedvariableinterestentities........ 125 80 Otherexpenses ......................................................... 702 662 Totaloperatingexpenses.............................................. 4,980 4,254 Netincomepriortodistribution......................................... 52,416 38,663 Changeinfundedstatusofbenefitplans................................ 1,007 (3,159) Comprehensiveincomepriortodistribution........................... $53,423 $35,504 Distributionofcomprehensiveincome: Dividendspaidtomemberbanks........................................ $ 1,428 $ 1,189 Transferredtosurplusandchangeinaccumulatedothercomprehensive income(loss).......................................................... 4,564 2,626 PaymentstoTreasuryasinterestonFederalReservenotes.............. 47,431 31,689 Totaldistribution...................................................... $53,423 $35,504 Theaccompanyingnotesareanintegralpartofthesecombinedfinancialstatements.

492 96th Annual Report, 2009 FEDERALRESERVEBANKS COMBINEDSTATEMENTSOFCHANGESINCAPITAL fortheyearsendedDecember31,2009andDecember31,2008 (inmillions,exceptsharedata) Surplus Accumulated Net Other Capital Income Comprehensive Total Total Paid-In Retained (Loss)Income Surplus Capital BalanceatJanuary1,2008 (368,996,413shares)............. $18,450 $19,974 $(1,524) $18,450 $36,900 Netchangeincapitalstockissued (52,521,054shares)............... 2,626 - - - 2,626 Transferredtosurplusand changeinaccumulatedother comprehensiveincome(loss)....... - 5,785 (3,159) 2,626 2,626 BalanceatDecember31,2008 (421,517,467shares)............. $21,076 $25,759 $(4,683) $21,076 $42,152 Netchangeincapitalstockissued (91,289,192shares)............... 4,564 - - - 4,564 Transferredto(from)surplusand changeinaccumulatedother comprehensiveincome.............. - 3,557 1,007 4,564 4,564 BalanceatDecember31,2009 (512,806,659shares)............. $25,640 $29,316 $(3,676) $25,640 $51,280 Theaccompanyingnotesareanintegralpartofthesecombinedfinancialstatements. NotestotheCombinedFinancialStatementsoftheFederalReserveBanks (1) Structure The 12 Federal Reserve Banks (“Reserve Banks”) are part of the Federal Reserve System (“System”)createdbyCongressundertheFederalReserveActof1913(“FederalReserveAct”),whichestablishedthecentralbankoftheUnitedStates.TheReserveBanksarecharteredbythefederalgovernmentandpossessauniquesetofgovernmental,corporate,andcentralbankcharacteristics. InaccordancewiththeFederalReserveAct,supervisionandcontrolofeachReserveBankisexercisedbyaboardofdirectors.TheFederalReserveActspecifiesthecompositionoftheboardofdirectors for each of the Reserve Banks. Each board is composed of nine members serving three-year terms:threedirectors,includingthosedesignatedaschairmananddeputychairman,areappointedby theBoardofGovernorsoftheFederalReserveSystem(“BoardofGovernors”)torepresentthepublic,andsixdirectorsareelectedbymemberbanks.BanksthataremembersoftheSystemincludeall national banks and any state-chartered banks that apply and are approved for membership. Member banksaredividedintothreeclassesaccordingtosize.Memberbanksineachclasselectonedirector representingmemberbanksandonerepresentingthepublic.Inanyelectionofdirectors,eachmember bankreceivesonevote,regardlessofthenumberofsharesofReserveBankstockitholds. Inadditiontothe12ReserveBanks,theSystemalsoconsists,inpart,oftheBoardofGovernors andtheFederalOpenMarketCommittee(“FOMC”).TheBoardofGovernors,anindependentfederal agency,ischargedbytheFederalReserveActwithanumberofspecificduties,includinggeneralsupervisionovertheReserveBanks.TheFOMCiscomposedofmembersoftheBoardofGovernors, the president of the Federal Reserve Bank of New York (“FRBNY”), and, on a rotating basis, four otherReserveBankpresidents.

Federal Reserve Banks Combined Financial Statements 493 (2) OperationsandServices TheReserveBanksperformavarietyofservicesandoperations.Thesefunctionsincludeparticipating in formulating and conducting monetary policy; participating in the payments system, including large-dollartransfersoffunds,automatedclearinghouse(“ACH”)operations,andcheckcollection;distributingcoinandcurrency;performingfiscalagencyfunctionsfortheU.S.DepartmentoftheTreasury (“Treasury”), certain federal agencies, and other entities; serving as the federal government’s bank;providingshort-termloanstodepositoryinstitutions;providingloanstoindividuals,partnerships, andcorporationsinunusualandexigentcircumstances;servingconsumersandcommunitiesbyprovidingeducationalmaterialsandinformationregardingfinancialconsumerprotectionrightsandlawsand informationoncommunitydevelopmentprogramsandactivities;andsupervisingbankholdingcompanies,statememberbanks,andU.S.officesofforeignbankingorganizations.Certainservicesareprovidedtoforeignandinternationalmonetaryauthorities,primarilybytheFRBNY. TheFOMC,inconductingmonetarypolicy,establishespolicyregardingdomesticopenmarketoperations,overseestheseoperations,andannuallyissuesauthorizationsanddirectivestotheFRBNYto executetransactions.TheFOMCauthorizesanddirectstheFRBNYtoconductoperationsindomestic markets,includingthedirectpurchaseandsaleofTreasurysecurities,federalagencyandgovernmentsponsored enterprise (“GSE”) debt securities, federal agency and GSE mortgage-backed securities (“MBS”),thepurchaseofthesesecuritiesunderagreementstoresell,andthesaleofthesesecurities underagreementstorepurchase.TheFRBNYexecutesthesetransactionsatthedirectionoftheFOMC and holds the resulting securities and agreements in a portfolio known as the System Open Market Account(“SOMA”).TheFRBNYisauthorizedtolendtheTreasurysecuritiesandfederalagencyand GSEdebtsecuritiesthatareheldintheSOMA. In addition to authorizing and directing operations in the domestic securities market, the FOMC authorizestheFRBNYtoexecuteoperationsinforeignmarketsinordertocounterdisorderlyconditions in exchange markets or to meet other needs specified by the FOMC to carry out the System’s centralbankresponsibilities.Specifically,theFOMCauthorizesanddirectstheFRBNYtoholdbalances of, and to execute spot and forward foreign exchange and securities contracts for, 14 foreign currencies and to invest such foreign currency holdings, while maintaining adequate liquidity. The FRBNYisauthorizedanddirectedbytheFOMCtomaintainreciprocalcurrencyarrangementswith twocentralbanksandto“warehouse”foreigncurrenciesfortheTreasuryandtheExchangeStabilizationFund(“ESF”).TheFRBNYisalsoauthorizedanddirectedbytheFOMCtomaintainU.S.dollar currency liquidity swap arrangements with 14 central banks. The FOMC has also authorized the FRBNYtomaintainforeigncurrencyliquidityswaparrangementswithfourforeigncentralbanks. Although the Reserve Banks are separate legal entities, they collaborate in the delivery of certain servicestoachievegreaterefficiencyandeffectiveness.ThiscollaborationtakestheformofcentralizedoperationsandproductorfunctionofficesthathaveresponsibilityforthedeliveryofcertainservicesonbehalfoftheReserveBanks.Variousoperationalandmanagementmodelsareusedandare supported by service agreements between the Reserve Banks. In some cases, costs incurred by a ReserveBankforservicesprovidedtootherReserveBanksarenotshared;inothercases,theReserve BanksarereimbursedforcostsincurredinprovidingservicestootherReserveBanks. (3) FinancialStabilityActivities TheReserveBankshaveimplementedthefollowingprogramsthatsupporttheliquidityoffinancial institutionsandfosterimprovedconditionsinfinancialmarkets. ExpandedOpenMarketOperationsandSupportforMortgageRelated-Securities TheSingle-TrancheOpenMarketOperationProgramallowsprimarydealerstoinitiateaseriesof 28-daytermrepurchasetransactionswhilepledgingTreasurysecurities,federalagencyandGSEdebt securities,andfederalagencyandGSEMBSascollateral. TheFederalAgencyandGSEDebtSecuritiesandMBSPurchaseProgramprovidessupporttothe mortgageandhousingmarketsandfostersimprovedconditionsinfinancialmarkets.Underthisprogram,theFRBNYpurchaseshousing-relatedGSEdebtsecuritiesandfederalagencyandGSEMBS. Purchasesofhousing-relatedGSEdebtsecuritiesbeganinNovember2008andpurchasesoffederal agencyandGSEMBSbeganinJanuary2009.TheFRBNYisauthorizedtopurchaseupto$200billioninfixedrate,non-callableGSEdebtsecuritiesandupto$1.25trillioninfixedratefederalagency andGSEMBS.TheactivitiesofbothoftheseprogramsareallocatedtotheotherReserveBanks.

494 96th Annual Report, 2009 CentralBankLiquiditySwaps The FOMC authorized and directed the FRBNY to establish central bank liquidity swap arrangements, which may be structured as either U.S. dollar liquidity or foreign currency liquidity swap arrangements. U.S.dollarliquidityswaparrangementswereauthorizedwith14foreigncentralbankstoprovideliquidityinU.S.dollarstooverseasmarkets.Sucharrangementswereauthorizedwiththefollowingcentralbanks:theReserveBankofAustralia,theBancoCentraldoBrasil,theBankofCanada,Danmarks Nationalbank,theBankofEngland,theEuropeanCentralBank,theBankofJapan,theBankofKorea,theBancodeMexico,theReserveBankofNewZealand,NorgesBank,theMonetaryAuthority ofSingapore,theSverigesRiksbank,andtheSwissNationalBank.Themaximumamountthatcould bedrawnundertheseswaparrangementsvariedbycentralbank.TheauthorizationfortheseswaparrangementsexpiredonFebruary1,2010. ForeigncurrencyliquidityswaparrangementsprovidedtheReserveBankswiththecapacitytooffer foreigncurrencyliquiditytoU.S.depositoryinstitutions.Sucharrangementswereauthorizedwiththe BankofEngland,theEuropeanCentralBank,theBankofJapan,andtheSwissNationalBank.The maximum amount that could be drawn under the swap arrangements varied by central bank. The authorizationfortheseswaparrangementsexpiredonFebruary1,2010. LendingtoDepositoryInstitutions TheTermAuctionFacility(“TAF”)promotestheefficientdisseminationofliquiditybyproviding termfundstodepositoryinstitutions.UndertheTAF,ReserveBanksauctiontermfundstodepository institutionsagainstanycollateraleligibletosecureprimary,secondary,andseasonalcreditlessamargin,whichisareductionintheassignedcollateralvaluethatisintendedtoprovidetheReserveBanks additional credit protection. All depository institutions that are considered to be in generally sound financialconditionbytheirReserveBankandthatareeligibletoborrowundertheprimarycreditprogramareeligibletoparticipateinTAFauctions.Allloansmustbecollateralizedtothesatisfactionof theReserveBanks. LendingtoPrimaryDealers The Term Securities Lending Facility (“TSLF”) promoted liquidity in the financing markets for Treasurysecurities.UndertheTSLF,theFRBNYcouldlenduptoanaggregateamountof$200billionofTreasurysecuritiesheldintheSOMAtoprimarydealerssecuredforatermof28days.Securitieswerelenttoprimarydealersthroughacompetitivesingle-priceauctionandwerecollateralized, lessamargin,byapledgeofothersecurities,includingTreasurysecurities,municipalsecurities,federal agency and GSE MBS, non-agency AAA/Aaa-rated private-label residential MBS, and assetbackedsecurities(“ABS”).TheauthorizationfortheTSLFexpiredonFebruary1,2010. TheTermSecuritiesLendingFacilityOptionsProgram(“TOP”)offeredprimarydealers,througha competitivesingle-priceauction,topurchaseanoptiontodrawuponshort-term,fixed-rateTSLFloans inexchangeforeligiblecollateral.TheprogramenhancedtheeffectivenessoftheTSLFbyensuring additionalliquidityduringperiodsofheightenedcollateralmarketpressures,suchasaroundquarterenddates.TheprogramwassuspendedeffectivewiththematurityoftheJune2009TOPoptionsand theprogramauthorizationexpiredonFebruary1,2010. ThePrimaryDealerCreditFacility(“PDCF”)wasdesignedtoimprovetheabilityofprimarydealerstoprovidefinancingtoparticipantsinthesecuritizationmarkets.PrimarydealerscouldobtainsecuredovernightfinancingunderthePDCFintheformofrepurchasetransactions.Eligiblecollateral wasthatwhichcouldbepledgedintri-partyarrangements,whichprimarilyincludesTreasurysecurities,federalagencyandGSEMBS,otherMBS,municipalsecurities,ABS,andmoneymarketequities. The interest rate charged on the secured financing was the Reserve Banks’ primary credit rate. Participantspaidafrequency-basedfeeiftheyaccessedtheprogramonmorethan45businessdays duringthetermoftheprogram.SecuredfinancingmadeunderthePDCFwasmadewithrecourseto theprimarydealer.TheauthorizationforthePDCFexpiredonFebruary1,2010. TheTransitionalCreditExtension(“TCE”)programprovidedliquiditysupporttobroker-dealersthat wereintheprocessoftransitioningtothebankholdingcompanystructure.Loanswerecollateralized similar to loans made under either the Reserve Banks’ primary credit programs or the PDCF. The authorizationfortheTCEprogramexpiredonFebruary1,2010.

Federal Reserve Banks Combined Financial Statements 495 OtherLendingFacilities TheAsset-BackedCommercialPaperMoneyMarketMutualFundLiquidityFacility(“AMLF”)provided funding to depository institutions and bank holding companies to finance the purchase of eligible high-quality asset-backed commercial paper (“ABCP”) from money market mutual funds. The programassistedmoneymarketmutualfundsthatholdsuchpapertomeetthedemandsforinvestor redemptionsandtofosterliquidityintheABCPmarketandmoneymarketsmoregenerally.TheFederalReserveBankofBoston(“FRBB”)administeredtheAMLFandwasauthorizedtoextendthese loanstoeligibleborrowersonbehalfoftheotherReserveBanks.AllloansextendedundertheAMLF were non-recourse and were recorded as assets by the FRBB, and loans extended to borrowers that settle to depository accounts in other Districts were processed through the interdistrict settlement account. The credit risk related to the AMLF was assumed by the FRBB. The authorization for the AMLFexpiredonFebruary1,2010. TheCommercialPaperFundingFacility(“CPFFprogram”)enhancedtheliquidityofthecommercialpapermarketintheU.S.byincreasingtheavailabilityoftermcommercialpaperfundingtoissuersandbyprovidinggreaterassurancetobothissuersandinvestorsthatissuerswouldbeabletoroll over their maturing commercial paper. The authorization to purchase high-quality commercial paper throughtheCPFFprogramexpiredonFebruary1,2010.TheCommercialPaperFundingFacilityLLC (“CPFF”)isaDelawarelimitedliabilitycompanyformedonOctober14,2008,inconnectionwiththe implementationoftheCPFFprogram,topurchaseeligiblethree-monthunsecuredcommercialpaper and ABCP directly from eligible issuers using the proceeds of loans made to CPFF by the FRBNY. CPFFisasingle-memberlimitedliabilitycompany,withtheFRBNYasthesoleandmanagingmember.TheFRBNYisthecontrollingpartyofCPFFandwillremainasthecontrollingpartyaslongas itretainsaneconomicinterest. AlllendingtoCPFFwasmadewithrecoursetotheassetsofCPFF.Theinterestrateoneachloan toCPFFwasthetargetfederalfundsrateandwasfixedthroughthetermoftheloan.Ifthetargetfederalfundsratewasarange,theinterestratewassetatthemaximumratewithintherange.Principal andaccruedinterestarepayabletotheFRBNY,infull,atthematuritydateofthecommercialpaper. TheFRBNY’sloanstoCPFFeliminateinconsolidation. TobeeligibleforpurchasebyCPFF,commercialpaperwasrequiredtobe(1)issuedbyaU.S.issuer(whichincludesU.S.issuerswithaforeignparentcompanyandU.S.branchesofforeignbanks) and(2)ratedatleastA-1/P-1/F1byanationallyrecognizedstatisticalratingorganization(“NRSRO”) or,ifratedbymultipleNRSROs,wasratedatleastA-1/P-1/F1bytwoormore.Thecommercialpaper wasalsorequiredtobeU.S.dollar-denominatedandhaveathree-monthmaturity.Commercialpaper purchased by CPFF was discounted when purchased and carried at amortized cost. The maximum amountofasingleissuer’scommercialpaperthatCPFFcouldownatanytime(“maximumfacevalue limit”)wasthegreatestamountofU.S.dollar-denominatedcommercialpapertheissuerhadoutstandingonanydaybetweenJanuary1andAugust31,2008.TheCPFFdidnotpurchaseadditionalcommercial paper from an issuer whose total commercial paper outstanding to all investors (including CPFF)equaledorexceededtheissuer’smaximumfacevaluelimit. Eachissuerwasrequiredtopayanon-refundablefacilityfeeuponregistrationwithCPFFequalto 10basispointsoftheissuer’smaximumfacevaluelimit(“registrationfee”).TheCPFFprogramparticipants that issued unsecured commercial paper to CPFF were required to pay a surcharge of 100 basispointsperannumofthefacevalue(“creditenhancementfee”).TheCPFFwasauthorizedtoreinvestcashinshort-termandhighly-liquidassets,whichincludedTreasurysecurities,federalagency debtsecurities(excludingMBS),moneymarketfunds,repurchaseagreementscollateralizedbyTreasurysecuritiesandfederalagencysecurities,andU.S.dollar-denominatedovernightdeposits.ABCP issuersthatwereinactivepriortothecreationoftheCPFFprogramwereineligibleforparticipation. AnissuerwasconsideredinactiveifitdidnotissueABCPtoinstitutionsotherthanthesponsoringinstitutionforanyconsecutiveperiodofthreemonthsorlongerbetweenJanuary1andAugust31,2008. The Money Market Investor Funding Facility (“MMIFF”) supported a private-sector initiative designedtoprovideliquiditytoU.S.moneymarketinvestors.UndertheMMIFF,theFRBNYcouldprovideseniorsecuredfundingtoaseriesofspecialpurposevehicles(“SPV”)tofacilitateanindustrysupportedprivate-sectorinitiativetofinancethepurchaseofeligibleassetsfromeligibleinvestors.No activitywasrecordedfortheMMIFFin2008or2009.TheauthorizationfortheMMIFFexpiredon October30,2009. TheTermAsset-BackedSecuritiesLoanFacility(“TALF”)assistsfinancialmarketsinaccommodatingthecreditneedsofconsumersandbusinessesofallsizesbyfacilitatingtheissuanceofABScollateralizedbyavarietyofconsumerandbusinessloans;itisalsointendedtoimprovethemarketcon-

496 96th Annual Report, 2009 ditionsforABS.TheBoardofGovernorshasauthorizedtheofferingofTALFloanscollateralizedby newlyissuedABSandlegacycommercialmortgage-backedsecurities(“CMBS”)untilMarch31,2010 andTALFloanscollateralizedbynewlyissuedCMBSuntilJune30,2010. UndertheTALF,theFRBNYisauthorizedtolendupto$200billiontoeligibleborrowers.Upto $100billionofthetotalauthorizedTALFloanscanhavematuritiesoffiveyearstofinancepurchases ofCMBS,ABSbackedbystudentloans,andABSbackedbyloansguaranteedbytheSmallBusiness Administration (“SBA”). Interest proceeds paid on collateral supporting a five-year TALF loan or a three-yearloancollateralizedbyCMBSmaybeusedtowardanacceleratedrepaymentoftheprincipal amountoftheloan. EachTALFloanissecuredbyeligiblecollateral,withtheFRBNYlendinganamountequaltothe valueofthecollateral,asdeterminedbytheFRBNY,lessamargin.Loanproceedsaredisbursedto theborrowercontingentonreceiptbytheFRBNY’scustodianoftheeligiblecollateral,anadministrativefee,and,ifapplicable,amargin. EligiblecollateralincludesU.S.dollar-denominatedABSthatare(1)backedbystudentloans,auto loans,creditcardloans,loansguaranteedbytheSBA,loansorleasesrelatedtobusinessequipment, leasesofvehiclefleets,floorplanloans,mortgageservicingadvances,andinsurancepremiumfinance loansthathaveacreditratinginthehighestinvestment-graderatingcategoryfromtwoormoreapprovedratingagenciesanddonothaveacreditratingbelowthehighestinvestment-graderatingcategoryfromamajorratingagency,or(2)arenewlyissuedCMBSorcertainhigh-qualityCMBSissued beforeJanuary1,2009(“legacyCMBS”).High-qualitynewlyissuedandlegacyCMBSmusthaveat least two AAA ratings from the approved ratings agencies and must not have a rating below AAA fromanyoftheseratingagencies.AsofDecember31,2009,approvedcreditratingagenciesforABS includedFitch,Moody’sInvestorsService,andStandard&Poor’s.ThecreditratingagenciesforABS wereexpandedinFebruary2010toincludeDBRSandRealpoint.AsofDecember31,2009,approved credit rating agencies for CMBS included Fitch, Moody’s Investors Service, Standard & Poor’s, DBRS,andRealpoint.PriortoitsacceptancebytheFRBNY,pledgedcollateralmustalsohavemet otherriskassessmentcriteriaasstipulatedintheTALFprogram’stermsandconditions. TheTALFloansareextendedonanon-recoursebasis.Iftheborrowerdoesnotrepaytheloan,the FRBNYwillenforceitsrightsinthecollateralandmaysellthecollateraltoTALFLLC,aDelaware limitedliabilitycompany,establishedforthepurposeofpurchasingsuchassets.AsofDecember31, 2009,theFRBNYhadnotenforceditsrightstoanyofthecollateraland,asaresult,TALFLLCdid notpurchasesuchassets. PursuanttoaputagreementwiththeFRBNY,TALFLLChascommittedtopurchaseassetsthatsecuredaTALFloanatapriceequaltotheprincipalamountoutstandingplusaccruedbutunpaidinterest,regardlessoffairvalueofthecollateral.TALFLLC’spurchasesofthesesecuritiesarefundedfirst through the fees received by TALF LLC from the FRBNY for this commitment and any interest earnedonitsinvestments.ThefeerepresentsthespreadontheTALFloans,whichistheTALFloan interest rate paid by the TALF borrower less the overnight indexed swap (“OIS”) rate plus 25 basis points.IntheeventthatsuchfundingprovesinsufficientfortheassetpurchasesthatTALFLLChas committedtomakeundertheputagreement,theTreasury,asasubordinatedlender,hascommittedto lendupto$20billiontoTALFLLCatarateoftheone-monthLondonInterbankOfferedRate(“LI- BOR”)plus300basispoints.TheFRBNYhasagreedtolendupto$180billiontoTALFLLCinthe form of senior debt at a rate of the one-month LIBOR plus 100 basis points. Both the senior, when funded,andsubordinatedloanstoTALFLLCaresecuredbyalloftheassetsofTALFLLCthrougha pledgetoBankofNewYorkMellonasthecollateralagent.TheFRBNYisthemanagingmemberand the controlling party of TALF LLC and will remain as the controlling party as long as it retains an interest. After TALF LLC has paid all operating expenses and principal due to the FRBNY, the remainingproceedsoftheportfolioholdingswillbedistributedinthefollowingorder,principaldueto Treasury, interest due to the FRBNY, and interest due to Treasury. Any residual cash flows will be shared between the FRBNY, which will receive 10 percent, and the Treasury, which will receive 90 percentascontingentinterest. SupportforSpecificInstitutions BearStearnsCompanies,Inc. In connection with and to facilitate the merger of The Bear Stearns Companies, Inc. (“Bear Stearns”) and JPMorgan Chase & Co. (“JPMC”), the FRBNY extended credit to Maiden Lane LLC (“ML”)inJune2008.MLisaDelawarelimitedliabilitycompanyformedbytheFRBNYtoacquire certainassetsofBearStearnsandtomanagethoseassetsovertime,inordertomaximizethepoten-

Federal Reserve Banks Combined Financial Statements 497 tialfortherepaymentofthecreditextendedtoMLandtominimizedisruptiontothefinancialmarkets.TheassetsacquiredbyMLwerevaluedat$29.9billionasofMarch14,2008,thedatethatthe FRBNY committed to the transaction, and largely consisted of federal agency and GSE MBS, nonagency residential mortgage-backed securities (“non-agency RMBS”), commercial and residential mortgageloans,andderivatives.TheFRBNYextendedaseniorloanofapproximately$28.8billion and JPMC extended a subordinated loan of $1.15 billion to finance the acquisition of the assets throughapledgetoStateStreetasthecollateralagent.Theinterestrateontheseniorloanistheprimarycreditrateineffectfromtimetotime.JPMCbearsthefirst$1.15billionofanylossesassociated with the portfolio through its subordinated loan. Residual gains, if any, will be allocated to the FRBNY. The interest rate on the JPMC subordinated loan is the primary credit rate plus 450 basis points.TheloansarecollateralizedbyalloftheassetsofML.TheFRBNYisthesoleandmanaging member and the controlling party of ML and will remain as such as long as the FRBNY retains an economicinterestinML. AmericanInternationalGroup,Inc. In September 2008, the Board of Governors authorized the FRBNY to lend to American InternationalGroup,Inc.,(“AIG”).Initially,theFRBNYprovidedAIGwithalineofcreditcollateralizedby the pledge of a substantial portion of the assets of AIG. Under the provisions of the original agreement,theFRBNYwasauthorizedtolendupto$85billiontoAIGfortwoyearsatthethree-month LIBOR,withafloorof350basispoints,plus850basispoints.Inaddition,theFRBNYassessedAIG a one-time commitment fee of 200 basis points on the full amount of the commitment and a fee of 850basispointsperannumontheundrawncreditline.Aconditionofthecreditagreementwasthat AIGwouldissuetoatrust,forthesolebenefitofthefiscaltreasury,preferredsharesconvertibleto approximately78percentoftheissuedandoutstandingsharesofthecommonstockofAIG.TheAIG CreditFacilityTrust(“Trust”)wasformedJanuary16,2009,andthepreferredshareswereissuedto theTrustonMarch4,2009.TheTrusthasthreeindependenttrusteeswhocontroltheTrust’svoting and consent rights. The FRBNY cannot exercise voting or consent rights. On October 8, 2008, the FRBNY began providing cash collateral to certain AIG insurance subsidiaries in connection with AIG’sdomesticsecuritieslendingprogram. TheFRBNYandtheTreasuryannouncedarestructuringofthegovernment’sfinancialsupportto AIG in November 2008. As part of the restructuring, the Treasury purchased $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program (“TARP”). The TARP funds were used to pay down AIG’s debt to the FRBNY. In addition, the terms of the original agreement were modified to reduce the line of credit to $60 billion; reduce the interest rate to the three-month LIBORwithafloorof350basispoints,plus300basispoints;reducethefeeonundrawnfundsto75 basispoints;andextendthetermoftheagreementtofiveyears.Theothermaterialtermsofthefunding were unchanged. These revised terms were more consistent with terms granted to other entities withsimilarcreditrisk. ConcurrentwiththeNovember2008restructuringofitsfinancialsupporttoAIG,theFRBNYestablished two limited liability companies (“LLCs”). The FRBNY extended credit to Maiden Lane II LLC(“MLII”),aDelawarelimitedliabilitycompanyformedtopurchasenon-agencyRMBSfromthe reinvestmentpoolofthesecuritieslendingportfolioofseveralregulatedU.S.insurancesubsidiariesof AIG.MLIIborrowed$19.5billionfromtheFRBNYandusedtheproceedstopurchasenon-agency RMBSthathadanapproximatefairvalueof$20.8billionasofOctober31,2008fromAIG’sdomesticinsurancesubsidiaries.TheFRBNYisthesoleandmanagingmemberandthecontrollingpartyof MLIIandwillremainasthecontrollingpartyaslongastheFRBNYretainsaneconomicinterestin MLII.NetproceedsreceivedbyMLIIwillbeappliedtopaytheFRBNY’sseniorloanplusinterest at one-month LIBOR plus 100 basis points. As part of the agreement, the AIG subsidiaries also received from ML II a fixed deferred purchase price of up to $1.0 billion, plus interest on any such fixeddeferredpurchasepriceoutstandingatone-monthLIBORplus300basispoints,payablefromthe net proceeds received by ML II and only to the extent that the FRBNY’s senior loan, including accrued and unpaid interest, has been paid in full. After ML II has paid the FRBNY’s senior loan, includingaccruedandunpaidinterest,andthefixeddeferredpurchasepriceinfull,includingaccrued andunpaidinterest,theFRBNYwillbeentitledtoreceivefive-sixthsofanyadditionalnetproceeds receivedbyMLIIascontingentinterestontheseniorloanandtheAIGsubsidiarieswillbeentitledto receive one-sixth of any net proceeds received by ML II as variable deferred purchase price. The FRBNY’sloanandthefixeddeferredpurchasepriceoftheAIGsubsidiariesarecollateralizedbyall of the assets of ML II through a pledge to Bank of New York Mellon as the collateral agent. As a

498 96th Annual Report, 2009 resultoftheformationandcommencementofoperationsofMLII,theFRBNY’slendinginconnectionwithAIG’ssecuritieslendingprogramwasterminated. TheFRBNYalsoextendedcredittoMaidenLaneIIILLC(“MLIII”),aDelawarelimitedliability companyformedtopurchaseABScollateralizeddebtobligations(“ABSCDOs”)fromcertainthirdpartycounterpartiesofAIGFinancialProductsCorp.(“AIGFP”).Inconnectionwiththeacquisitions, thethird-partycounterpartiesagreedtoterminatetheirrelatedcreditdefaultswap(“CDS”)contracts with AIGFP. ML III borrowed approximately $24.3 billion from the FRBNY and AIG provided an equity contribution of $5 billion to ML III. The proceeds were used to purchase ABS CDOs with a fairvalueof$29.6billion.Thecounterpartiesreceived$26.8billionnetofprincipal,interestreceived, and finance charges paid. ML III also made a payment to AIGFP of $2.5 billion, representing the return of excess collateral previously posted by AIGFP with the counterparties. The FRBNY is the managingmemberandthecontrollingpartyofMLIIIandwillremainasthecontrollingpartyaslong astheFRBNYretainsaneconomicinterestinMLIII.NetproceedsreceivedbyMLIIIwillbeappliedtorepaytheFRBNY’sseniorloanplusinterestatone-monthLIBORplus100basispoints.The FRBNY’sseniorloaniscollateralizedbyalloftheassetsofMLIIIthroughapledgetoBankofNew YorkMellonasthecollateralagent.Afterpaymentofprincipalandaccruedandunpaidinterestonthe FRBNY’sseniorloaninfull,AIG,oritsassignee,isentitledtoreceivefromMLIIIrepaymentofits equitycontribution,includingaccruedandunpaidinterestatone-monthLIBORplus300basispoints, payablefromnetproceedsreceivedbyMLIIIasadditionalinterest.AfterMLIIIhaspaidtheFRB- NY’s senior loan and AIG’s equity contribution in full, the FRBNY will be entitled to receive twothirdsofanyadditionalnetproceedsreceivedbyMLIIIontheseniorloanandAIG,oritsassignee, willbeentitledtoreceiveone-thirdofanynetproceedsreceivedbyMLIIIascontingentdistributions onitsequityinterest. OnApril17,2009,theFRBNY,aspartoftheU.S.government’scommitmenttotheorderlyrestructuring of AIG over time, in the face of continuing market dislocations, additionally restructured the AIGloanbyloweringtheinterestrate.EffectiveApril17,2009,the350basis-pointflooronLIBOR usedtocalculatetheinterestrateontheloanwaseliminated.Theinterestrateonthemodifiedloanis thethree-monthLIBORplus300basispoints. OnDecember1,2009,theFRBNY’scommitmenttolendtoAIGwasreducedto$35billionand theoutstandingbalanceoftheFRBNY’sloantoAIGwasreducedby$25billioninexchangefora liquidation preference of nonvoting perpetual preferred interests in two limited liability companies. AIGcreatedtheselimitedliabilitycompaniestohold,directlyorindirectly,alloftheoutstandingcommon stock of American Life Insurance Company (“ALICO”) and American International Assurance CompanyLtd.(“AIA”),twolifeinsuranceholdingcompanysubsidiariesofAIG.TheFRBNYwillbe paida5percentcumulativedividendonitsnonvotingpreferredintereststhroughSeptember22,2013 anda9percentcumulativedividendthereafter.AlthoughtheFRBNYhascertaingovernancerightsto protectitsinterests,AIGretainscontrolofthelimitedliabilitycompaniesandtheunderlyingoperatingcompanies.TheinitialvalueoftheFRBNY’spreferredinterests,whichrepresentsapercentageof thefairmarketvalueofALICOandAIAatDecember1,2009,was$16billionfortheAIAAurora LLC(“AIALLC”)and$9billionfortheALICOHoldingsLLC(“ALICOLLC”). In addition, the FRBNY was authorized to make loans of up to $8.5 billion to other SPVs establishedbyAIGoritssubsidiaries.LoansextendedbytheFRBNYtotheseSPVswouldhavebeenrepaid from net cash flows of designated blocks of existing life insurance policies issued by certain domesticinsurancesubsidiariesofAIG.Noloansweremadeunderthisauthorizationduringtheyear endedDecember31,2009.OnFebruary26,2010,AIGstatedinits2009annualreportfiledwiththe SecuritiesandExchangeCommissionthatitwasnolongerpursuingthistransaction. Citigroup,Inc. The Board of Governors, the Treasury, and the FDIC (“parties”) jointly announced on November 23, 2008, that they would provide financial support to Citigroup, Inc. (“Citigroup”). The agreement provided funding support for possible future principal losses on up to $301 billion of Citigroup’s assets.Thefundingsupportwasforaperiodoftenyearsforresidentialassetsandfiveyearsfornonresidentialassets.Undertheagreement,alossonaportfolioassetwouldhaveincludedacharge-offor realized loss upon collection, through a permitted disposition or exchange, or upon a foreclosure or short-saleloss,butnotthroughachangeinCitigroup’smark-to-marketaccountingfortheassetorthe creationorincreaseofarelatedlossreserve.TheFRBNY’scommitmenttolendundertheagreement wouldhavebeentriggeredatthetimethatqualifyinglossesof$56.2billionwererecognizedinthe coveredassetspool.Atthatpoint,ifCitigroupmadeaproperelection,theFRBNYwouldhavemade

Federal Reserve Banks Combined Financial Statements 499 asinglenon-recourseloantoCitigroupinanamountequaltotheaggregateadjustedbaselinevalueof the remaining covered assets, as defined in the relevant agreements. Under this agreement, no loans weremadeduringtheyearsendedDecember31,2009and2008.OnDecember23,2009,theparties terminated the arrangement and, as consideration for terminating the agreement, Citigroup paid the FRBNYa$50millionterminationfeeandagreedtoreimbursetheFRBNYforitsout-of-pocketexpenses. BankofAmericaCorporation The parties jointly announced on January 15, 2009, that they would provide financial support to Bank of America Corporation (“Bank of America”). Under this arrangement, the Federal Reserve BankofRichmond(“FRBR”)wouldhaveprovidedfundingsupportforpossiblefutureprincipallosses relatingtoadesignatedpoolofupto$118billionoffinancialinstruments.TheFRBR’scommitment underthearrangementwastoprovidenon-recourseloanstoBankofAmericaif,andwhen,qualifying losses of $18 billion were recorded in the pool. On September 21, 2009, however, the parties announcedthattheyhadreachedanagreementwithBankofAmericatoterminatetheagreement.As partoftheterminationoftheagreement,BankofAmericapaid$57millionincompensationforoutof-pocketexpensesincurredbytheFRBRandanamountequaltothecommitmentfeesrequiredby theagreement. (4) SignificantAccountingPolicies Accountingprinciplesforentitieswiththeuniquepowersandresponsibilitiesofanation’scentral bankhavenotbeenformulatedbyaccountingstandard-settingbodies.TheBoardofGovernorshasdevelopedspecializedaccountingprinciplesandpracticesthatitconsiderstobeappropriateforthenatureandfunctionofacentralbank.Theseaccountingprinciplesandpracticesaredocumentedinthe FinancialAccountingManualforFederalReserveBanks(“FinancialAccountingManual”or“FAM”), which is issued by the Board of Governors. The Reserve Banks are required to adopt and apply accountingpoliciesandpracticesthatareconsistentwiththeFAMandthecombinedfinancialstatementshavebeenpreparedinaccordancewiththeFAM. LimiteddifferencesexistbetweentheaccountingprinciplesandpracticesintheFAMandgenerally acceptedaccountingprinciplesintheUnitedStates(“GAAP”),primarilyduetotheuniquenatureof theReserveBanks’powersandresponsibilitiesasthenation’scentralbank.Theprimarydifferenceis thepresentationofallSOMAsecuritiesholdingsatamortizedcostratherthanthefairvaluepresentationrequiredbyGAAP.Treasurysecurities,GSEdebtsecurities,federalagencyandGSEMBS,and investments denominated in foreign currencies comprising the SOMA are recorded at cost on a settlement-datebasisratherthanthetrade-datebasisrequiredbyGAAP.ThecostbasisofTreasurysecurities,GSEdebtsecurities,andforeigngovernmentdebtinstrumentsisadjustedforamortizationof premiumsoraccretionofdiscountsonastraight-linebasis.Amortizedcostmoreappropriatelyreflects theReserveBanks’securitiesholdingsgiventheSystem’suniqueresponsibilitytoconductmonetary policy.Accountingforthesesecuritiesonasettlement-datebasismoreappropriatelyreflectsthetimingofthetransaction’seffectonthequantityofreservesinthebankingsystem.Althoughtheapplicationoffair-valuemeasurementstothesecuritiesholdingsmayresultinvaluessubstantiallyaboveor belowtheircarryingvalues,theseunrealizedchangesinvaluehavenodirecteffectonthequantityof reservesavailabletothebankingsystemorontheprospectsforfutureReserveBankearningsorcapital.BoththedomesticandforeigncomponentsoftheSOMAportfoliomayinvolvetransactionsthat resultingainsorlosseswhenholdingsaresoldpriortomaturity.Decisionsregardingsecuritiesand foreigncurrencytransactions,includingtheirpurchaseandsale,aremotivatedbymonetarypolicyobjectives rather than profit. Accordingly, fair values, earnings, and gains or losses resulting from the saleofsuchsecuritiesandcurrenciesareincidentaltotheopenmarketoperationsanddonotmotivate decisionsrelatedtopolicyoropenmarketactivities. Inaddition,theReserveBankshaveelectednottopresentaCombinedStatementofCashFlowsbecause the liquidity and cash position of the Reserve Banks are not a primary concern given the ReserveBanks’uniquepowersandresponsibilities.OtherinformationregardingtheReserveBanks’ activitiesisprovidedin,ormaybederivedfrom,theCombinedStatementsofCondition,Incomeand ComprehensiveIncome,andChangesinCapital.Therearenoothersignificantdifferencesbetweenthe policiesoutlinedintheFAMandGAAP. PreparingthecombinedfinancialstatementsinconformitywiththeFAMrequiresmanagementto makecertainestimatesandassumptionsthataffectthereportedamountsofassetsandliabilities,the disclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatements,andthereported

500 96th Annual Report, 2009 amountsofincomeandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates. Certain amounts relating to the prior year have been reclassified to conform to the currentyearpresentation.Theclassificationofcertainvariableinterestentities(“VIE”)assetshavebeenreclassifiedasfollows:RMBSandnonagencyCMOshavebeenreclassifiedasNon-agencyRMBSand agency CMOs and TBA commitments have been reclassified as federal agency and GSE MBS. Uniqueaccountsandsignificantaccountingpoliciesareexplainedbelow. (a) Consolidation The combined financial statements include the accounts and results of operations of the Reserve BanksaswellasseveralVIEs,whichincludeML,MLII,MLIII,CPFF,andTALFLLC.Theconsolidation of the VIEs was assessed in accordance with Financial Accounting Standards Board (“FASB”)AccountingStandardsCodification(ASC)Topic810(ASC810),Consolidation(previously FIN46R),whichrequiresavariableinterestentitytobeconsolidatedbyitscontrollingfinancialinterestholder.Intercompanybalancesandtransactionshavebeeneliminatedinconsolidation. AReserveBankconsolidatesaVIEifithasacontrollingfinancialinterestbecauseitwillabsorba majorityoftheentity’sexpectedlosses,receiveamajorityoftheentity’sexpectedresidualreturns,or itismostcloselyassociatedwiththeVIE.Todeterminewhetheritisthecontrollingfinancialinterest holderofaVIE,theReserveBankevaluatestheVIE’sdesign,capitalstructure,andrelationshipswith thevariableinterestholders.TheReserveBankreconsiderswhetheritisthecontrollingfinancialinterestholderofaVIE,asrequiredbyASC810,whencertaineventsoccur. (b) GoldandSpecialDrawingRightsCertificates TheSecretaryoftheTreasuryisauthorizedtoissuegoldandspecialdrawingrights(“SDR”)certificatestotheReserveBanks. PaymentforthegoldcertificatesbytheReserveBanksismadebycreditingequivalentamountsin dollarsintotheaccountestablishedfortheTreasury.ThegoldcertificatesheldbytheReserveBanks arerequiredtobebackedbythegoldoftheTreasury.TheTreasurymayreacquirethegoldcertificates at any time and the Reserve Banks must deliver them to the Treasury. At such time, the Treasury’s accountischarged,andtheReserveBanks’goldcertificateaccountsarereduced.Thevalueofgold forpurposesofbackingthegoldcertificatesissetbylawat$422⁄9perfinetroyounce.TheBoardof GovernorsallocatesthegoldcertificatesamongtheReserveBanksonceayearbasedontheaverage FederalReservenotesoutstandingineachReserveBank. SDRcertificatesareissuedbytheInternationalMonetaryFund(the“Fund”)toitsmembersinproportion to each member’s quota in the Fund at the time of issuance. SDR certificates serve as a supplement to international monetary reserves and may be transferred from one national monetary authoritytoanother.UnderthelawprovidingforU.S.participationintheSDRsystem,theSecretary oftheTreasuryisauthorizedtoissueSDRcertificatestotheReserveBanks.WhenSDRcertificates areissuedtotheReserveBanks,equivalentamountsinU.S.dollarsarecreditedtotheaccountestablishedfortheTreasuryandtheReserveBanks’SDRcertificateaccountsareincreased.TheReserve BanksarerequiredtopurchaseSDRcertificates,atthedirectionoftheTreasury,forthepurposeof financingSDRacquisitionsorforfinancingexchangestabilizationoperations.AtthetimeSDRtransactionsoccur,theBoardofGovernorsallocatesSDRcertificatetransactionsamongtheReserveBanks baseduponeachReserveBank’sFederalReservenotesoutstandingattheendoftheprecedingyear. TherewerenoSDRtransactionsin2008,andin2009theTreasuryissued$3billioninSDRcertificatestotheReserveBanks. (c) LoanstoDepositoryInstitutionsandOtherLoans Loans,exceptforloansextendedunderTALF,arereportedattheiroutstandingprincipalbalances netofunamortizedadministrativeorcommitmentfees,andinterestincomeisrecognizedonanaccrual basis.Loanadministrativeandcommitmentfeesaregenerallydeferredandamortizedonastraight-line basisoverthetermoftheloanorcommitmentperiod.Thismethodresultsinaninterestamountthat issubstantiallysimilartotheinterestmethod. Loansareimpairedwhen,basedoncurrentinformationandevents,itisprobablethattheReserve Bankswillnotreceivetheprincipalorinterestthatisdueinaccordancewiththecontractualtermsof theloanagreement.Loansareevaluatedtodeterminewhetheranallowanceforloanlossisrequired. TheReserveBankshavedevelopedproceduresforassessingtheadequacyofanyallowanceforloan lossesusingallavailableinformationtoreflecttheassessmentofcreditrisk.Thisassessmentincludes monitoringinformationobtainedfrombankingsupervisors,borrowers,andothersourcestoassessthe

Federal Reserve Banks Combined Financial Statements 501 credit condition of the borrowers and, as appropriate, evaluating collateral values for each program. Generally,theReserveBanksdiscontinuerecognizinginterestincomeonimpairedloansuntiltheborrower’s repayment performance demonstrates principal and interest will be received in accordance withthetermoftheloanagreement.IfaReserveBankdiscontinuesrecordinginterestonanimpaired loan,cashpaymentsarefirstappliedtoprincipaluntiltheloanbalanceisreducedtozero;subsequent payments are applied as recoveries of amounts previously deemed uncollectible, if any, and then as interestincome. Impairedloansincludeloansthathavebeenmodifiedindebtrestructuringsinvolvingborrowersexperiencingfinancialdifficulties.Theallowanceforloanrestructuringisdeterminedbydiscountingthe restructuredcashflowsusingtheoriginaleffectiveratefortheloan.Similartootherimpairedloans, theReserveBanksdiscontinuerecognizinginterestincomeuntiltheborrowerdemonstratesthatitcan meettherestructuredterms.Performancepriortotherestructuring,orsignificanteventsthatcoincide withtherestructuring,areconsideredinassessingwhethertheborrowercanmeetthenewtermsand, ifso,theReserveBanksmayresumerecordinginterestincome. The FRBNY has elected to record the TALF loans at fair value in accordance with FASB ASC Topic825(ASC825),FairValueOption(previouslySFAS159).Unrealizedgains(losses)onTALF loansthatarerecordedatfairvaluearereportedas“Non-interestincome(loss):Otherloansunrealizedgains”intheCombinedStatementsofIncomeandComprehensiveIncome.Theinterestincome onTALFloansisrecognizedbasedonthecontractedrateandisreportedasacomponentof“Interest Income:Otherloans”intheCombinedStatementsofIncomeandComprehensiveIncome.Administrativefeespaidbyborrowersattheinitiationofeachloanarerecognizedasincurredandnotdeferred, are reported as a component of “Non-interest income (loss): Other income” in the Combined StatementsofIncomeandComprehensiveIncome. (d) SecuritiesPurchasedUnderAgreementstoResell,SecuritiesSoldUnderAgreementsto Repurchase,andSecuritiesLending TheFRBNYmayengageinpurchasesofsecuritieswithprimarydealersunderagreementstoresell (“repurchasetransactions”).Theserepurchasetransactionsaretypicallyexecutedthroughatri-partyarrangement(“tri-partytransactions”).Tri-partytransactionsareconductedwithtwocommercialcustodialbanksthatmanagetheclearing,settlement,andpledgingofcollateral.Thecollateralpledgedmust exceedtheprincipalamountofthetransaction.Acceptablecollateralundertri-partyrepurchasetransactionsprimarilyincludesTreasurysecurities;pass-throughmortgagesecuritiesofFannieMae,Freddie Mac, and Ginnie Mae; STRIP Treasury securities; and “stripped” securities of federal agencies. The tri-party transactions are accounted for as financing transactions with the associated interest incomeaccruedoverthelifeofthetransaction.Repurchasetransactionsarereportedattheircontractualamountas“SystemOpenMarketAccount:Securitiespurchasedunderagreementstoresell”inthe CombinedStatementsofConditionandtherelatedaccruedinterestreceivableisreportedasacomponentof“Accruedinterestreceivable.” TheFRBNYmayengageinsalesofsecuritieswithprimarydealersunderagreementstorepurchase (“reverserepurchasetransactions”).Thesereverserepurchasetransactionsmaybeexecutedthrougha tri-partyarrangement,similartorepurchasetransactions.Reverserepurchasetransactionsmayalsobe executed with foreign official and international accounts. Reverse repurchase transactions are accountedforasfinancingtransactions,andtheassociatedinterestexpenseisrecognizedoverthelifeof the transaction. These transactions are reported at their contractual amounts in the Combined Statements of Condition and the related accrued interest payable is reported as a component of “Other liabilities.” TreasurysecuritiesandGSEdebtsecuritiesheldintheSOMAarelenttoprimarydealerstofacilitatetheeffectivefunctioningofthedomesticsecuritiesmarket.Overnightsecuritieslendingtransactions are fully collateralized by other Treasury securities. TSLF transactions are fully collateralized withinvestment-gradedebtsecurities,collateraleligiblefortri-partyrepurchaseagreementsarranged bytheFRBNY,orboth.Thecollateraltakeninbothovernightandtermsecuritieslendingtransactions isinexcessofthefairvalueofthesecuritieslent.TheFRBNYchargestheprimarydealerafeefor borrowingsecurities,andthesefeesarereportedasacomponentof“Otherincome.”Inaddition,TOP feesarereportedasacomponentof“Otherincome.” Activityrelatedtosecuritiespurchasedunderagreementstoresell,securitiessoldunderagreements torepurchase,andsecuritieslendingisallocatedtoeachoftheReserveBanksonapercentagebasis derivedfromanannualsettlementoftheinterdistrictsettlementaccountthatoccursinAprileachyear.

502 96th Annual Report, 2009 The settlement also equalizes Reserve Bank gold certificate holdings to Federal Reserve notes outstandingineachDistrict. (e) TreasurySecurities;Government-SponsoredEnterpriseDebtSecurities;FederalAgencyand Government-SponsoredEnterpriseMortgage-BackedSecurities;InvestmentsDenominatedin ForeignCurrencies;andWarehousingAgreements InterestincomeonTreasurysecurities,GSEdebtsecurities,andinvestmentsdenominatedinforeign currenciescomprisingtheSOMAisaccruedonastraight-linebasis.Interestincomeonfederalagency andGSEMBSisaccruedusingtheinterestmethodandincludesamortizationofpremiums,accretion of discounts, and paydown gains or losses. Paydown gains or losses result from scheduled payment andprepaymentofprincipalandrepresentthedifferencebetweentheprincipalamountandthecarryingvalueoftherelatedsecurity.Gainsandlossesresultingfromsalesofsecuritiesaredeterminedby specificissuebasedonaveragecost. InadditiontooutrightpurchasesoffederalagencyandGSEMBSthatareheldintheSOMA,the FRBNYentersintodollarrolltransactions(“dollarrolls”),whichprimarilyinvolveaninitialtransactiontopurchaseorsell“tobeannounced”(“TBA”)MBScombinedwithanagreementtosellorpurchaseTBAMBSonaspecifiedfuturedate.TheFRBNY’sparticipationinthedollarrollmarketfurtherstheMBSPurchaseProgramgoalofprovidingsupporttothemortgageandhousingmarketsand fostering improved conditions in financial markets. The FRBNY accounts for outstanding commitments to sell or purchase TBA MBS on a settlement-date basis. Based on the terms of the FRBNY dollarrolltransactions,transfersofMBSuponsettlementoftheinitialTBAMBStransactionsareaccounted for as purchases or sales in accordance with FASB ASC Topic 860 (ASC 860), Accounting forTransfersofFinancialAssetsandRepurchaseFinancingTransactions,(previouslySFAS140),and therelatedoutstandingcommitmentsareaccountedforassalesorpurchasesuponsettlement. Activity related to Treasury securities, GSE debt securities, and federal agency and GSE MBS, includingthepremiums,discounts,andrealizedgainsandlosses,isallocatedtoeachReserveBankon apercentagebasisderivedfromanannualsettlementoftheinterdistrictsettlementaccountthatoccurs inAprilofeachyear.ThesettlementalsoequalizesReserveBankgoldcertificateholdingstoFederal ReservenotesoutstandingineachDistrict.Activityrelatedtoinvestmentsdenominatedinforeigncurrencies,includingthepremiums,discounts,andrealizedandunrealizedgainsandlosses,isallocated toeachReserveBankbasedontheratioofeachReserveBank’scapitalandsurplustoaggregatecapitalandsurplusattheprecedingDecember31. Foreign-currency-denominatedassetsarerevalueddailyatcurrentforeigncurrencymarketexchange ratesinordertoreporttheseassetsinU.S.dollars.Realizedandunrealizedgainsandlossesoninvestments denominated in foreign currencies are reported as “Foreign currency gains or losses” in the CombinedStatementsofIncomeandComprehensiveIncome. Warehousing is an arrangement under which the FOMC agrees to exchange, at the request of the Treasury,U.S.dollarsforforeigncurrenciesheldbytheTreasuryorESFoveralimitedperiodoftime. ThepurposeofthewarehousingfacilityistosupplementtheU.S.dollarresourcesoftheTreasuryand ESFforfinancingpurchasesofforeigncurrenciesandrelatedinternationaloperations. Warehousingagreementsaredesignatedasheld-for-tradingpurposesandarevalueddailyatcurrent marketexchangerates.ActivityrelatedtotheseagreementsisallocatedtoeachReserveBankbased ontheratioofeachReserveBank’scapitalandsurplustoaggregatecapitalandsurplusattheprecedingDecember31. (f) CentralBankLiquiditySwaps Centralbankliquidityswaps,whicharetransactedbetweentheFRBNYandaforeigncentralbank, maybestructuredaseitherU.S.dollarliquidityorforeigncurrencyliquidityswaparrangements. ActivityrelatedtoU.S.dollarandforeigncurrencyswaptransactions,includingtherelatedincome andexpense,isallocatedtoeachReserveBankbasedontheratioofeachReserveBank’scapitaland surplustoaggregatecapitalandsurplusattheprecedingDecember31.Similartoinvestmentsdenominatedinforeigncurrencies,theforeigncurrencyamountsassociatedwiththesecentralbankliquidity swaparrangementsarerevaluedatcurrentforeigncurrencymarketexchangerates. U.S.dollarliquidityswaps AttheinitiationofeachU.S.dollarliquidityswaptransaction,theforeigncentralbanktransfersa specifiedamountofitscurrencytoarestrictedaccountfortheFRBNYinexchangeforU.S.dollarsat theprevailingmarketexchangerate.Concurrentwiththistransaction,theFRBNYandtheforeigncen-

Federal Reserve Banks Combined Financial Statements 503 tralbankagreetoasecondtransactionthatobligatestheforeigncentralbanktoreturntheU.S.dollars andtheFRBNYtoreturntheforeigncurrencyonaspecifiedfuturedateatthesameexchangerateas theinitialtransaction.TheforeigncurrencythattheFRBNYacquiresisreportedas“Centralbankliquidityswaps”ontheCombinedStatementsofCondition.BecausetheswaptransactionwillbeunwoundatthesameU.S.dollaramountandexchangeratethatwasusedintheinitialtransaction,the recordedvalueoftheforeigncurrencyamountsisnotaffectedbychangesinthemarketexchangerate. TheforeigncentralbankcompensatestheFRBNYbasedontheforeigncurrencyamountsheldfor theFRBNY.TheFRBNYrecognizescompensationduringthetermoftheswaptransactionandreports itas“Interestincome:Centralbankliquidityswaps”intheCombinedStatementsofIncomeandComprehensiveIncome. Foreigncurrencyliquidityswaps Attheinitiationofeachforeigncurrencyliquidityswaptransaction,theFRBNYwilltransfer,atthe prevailingmarketexchangerate,aspecifiedamountofU.S.dollarstoanaccountfortheforeigncentralbankinexchangeforitscurrency.Theforeigncurrencyamountreceivedwouldbereportedasa liabilitybytheReserveBanks.Concurrentwiththistransaction,theFRBNYandtheforeigncentral bank agree to a second transaction that obligates the FRBNY to return the foreign currency and the foreigncentralbanktoreturntheU.S.dollarsonaspecifiedfuturedate.TheFRBNYcompensatesthe foreign central bank based on the foreign currency transferred to the FRBNY. For each foreign currencyswaptransactionwithaforeigncentralbankitisanticipatedthattheFRBNYwillenterintoa correspondingtransactionwithaU.S.depositoryinstitutioninordertoprovideforeigncurrencyliquiditytothatinstitution.Noforeigncurrencyliquidityswaptransactionsoccurredin2008or2009. (g) InvestmentsHeldbyConsolidatedVariableInterestEntities Investments of the consolidated VIEs include commercial paper, federal agency and GSE MBS, commercialandresidentialrealestatemortgageloans,non-agencyRMBS,CDOs,otherinvestmentsecurities,otherrealestateowned,andderivatives.Theseinvestmentsareaccountedforandclassifiedas follows: • CommercialpaperheldbytheCPFFisdesignatedasheld-to-maturityunderFASBASCTopic320 (ASC 320), Investments — Debt and Equity Securities (previously SFAS 115) according to the termsoftheCPFFprogram.TheFRBNYhasthepositiveintentandtheabilitytoholdthesecurities to maturity and, therefore, the commercial paper is recorded at amortized cost. The amortizationofpremiumsandaccretionofdiscountsisrecordedonastraight-linebasisthatisnotmaterially different from the interest method. Interest income on the commercial paper is reported as “Interestincome:Investmentsheldbyconsolidatedvariableinterestentities”intheCombinedStatementsofIncomeandComprehensiveIncome.Allotherinvestments,consistingofshort-termhighly liquidassets,heldbytheCPFFareclassifiedastradingsecuritiesunderASC320andarerecorded atfairvalue. TheFRBNYevaluatescommercialpaperforimpairmentonaquarterlybasis.Aninvestmentis impaired if its fair value falls below its recorded value and the decline is considered other-thantemporary.Another-than-temporary-impairmentistriggeredif(1)theFRBNYhastheintenttosell thesecurity,(2)itismorelikelythannotthattheFRBNYwillberequiredtosellthesecuritybefore recovery of its recorded investment, or (3) the FRBNY does not expect to recover the entire amortizedcostbasisofthesecurityevenifitdoesnotintendtosellthesecurity. • MLfollowstheguidanceinASC320whenaccountingforinvestmentsindebtsecurities.MLclassifies its debt securities as available for sale and has elected the fair-value option for all eligible assetsandliabilitiesinaccordancewithASC825.Otherfinancialinstruments,includingderivatives contractsinML,arerecordedatfairvalueinaccordancewithFASBASCTopic815(ASC815), DerivativesandHedging(previouslySFAS133). • ML II and ML III qualify as non-registered investment companies under the provisions of the American Institute of Certified Public Accountants’ Audit and Accounting Guide for Investment Companiesand,therefore,allinvestmentsarerecordedatfairvalueinaccordancewithFASBASC Topic946(ASC946),FinancialServices-InvestmentCompanies(previouslytheAmericanInstitute ofCertifiedPublicAccountantsAuditandAccountingGuideforInvestmentCompanies). • TALFLLCfollowstheguidanceinASC320whenaccountingforABSinvestmentsonceobtained. All other investments held by the TALF LLC are classified as available for sale securities under

504 96th Annual Report, 2009 ASC320andTALFLLChaselectedthefairvalueoptionforalleligibleassetsinaccordancewith ASC825.Theseassetsarerecordedas“Investmentsheldbyconsolidatedvariableinterestentities” intheCombinedStatementsofCondition. • Interest income, accretion of discounts, amortization of premiums on investments, and paydown gainsandlossesonfederalagencyandGSEMBS,non-agencyRMBS,andCMOsheldbyconsolidatedVIEsarereportedin“Interestincome:Investmentsheldbyconsolidatedvariableinterestentities”intheCombinedStatementsofIncomeandComprehensiveIncome.Realizedandunrealized gains (losses) on investments in consolidated VIEs that are recorded at fair value are reported as “Non-interestincome(loss):Investmentsheldbyconsolidatedvariableinterestentitieslosses,net” intheCombinedStatementsofIncomeandComprehensiveIncome. (h) PreferredSecurities As part of the restructuring of the AIG loan, the FRBNY was issued preferred securities in AIA LLCandALICOLLC,whichwerecreatedtoholdalloftheoutstandingcommonstockofAIAand ALICO,respectively.ThepreferredsecuritiesarepresentedatcostconsistentwithASC320andare reportedontheCombinedStatementsofConditionas“Preferredsecurities.”The5percentcumulative dividendaccruedonthepreferredsecuritiesisreportedas“Dividendsonpreferredsecurities”onthe CombinedStatementsofIncomeandComprehensiveIncome.Onaquarterlybasis,theaccrueddividendsarecapitalizedandincreasetherecordedcostoftheFRBNY’spreferredinterestinAIALLC andALICOLLC.Apreferredsecurityisimpairedifitsfairvaluefallsbelowitsrecordedvalueand thedeclineisconsideredother-than-temporary.Another-than-temporaryimpairmentistriggeredif(1) theFRBNYhastheintenttosellthesecurity,(2)itismorelikelythannotthattheFRBNYwillberequired to sell the security before recovery of its recorded investment, or (3) the FRBNY does not expecttorecovertheentireamortizedcostbasisofthesecurityevenifitdoesnotintendtosellthe security.Dividendsareaccruedunlesstheimpairmentanalysisindicatesthatthedividendswillnotbe collected. (i) BankPremises,Equipment,andSoftware Bankpremisesandequipmentarestatedatcostlessaccumulateddepreciation.Depreciationiscalculatedonastraight-linebasisovertheestimatedusefullivesoftheassets,whichrangefromtwoto 50years.Majoralterations,renovations,andimprovementsarecapitalizedatcostasadditionstothe assetaccountsandaredepreciatedovertheremainingusefullifeoftheassetor,ifappropriate,over theuniqueusefullifeofthealteration,renovation,orimprovement.Maintenance,repairs,andminor replacementsarechargedtooperatingexpenseintheyearincurred. Costsincurredforsoftwareduringtheapplicationdevelopmentstage,whetherdevelopedinternally oracquiredforinternaluse,arecapitalizedbasedonthepurchasecostandthecostofdirectservices andmaterialsassociatedwithdesigning,coding,installing,andtestingthesoftware.Capitalizedsoftwarecostsareamortizedonastraight-linebasisovertheestimatedusefullivesofthesoftwareapplications,whichrangefromtwotofiveyears.Maintenancecostsrelatedtosoftwarearechargedtoexpenseintheyearincurred. Capitalizedassets,includingsoftware,buildings,leaseholdimprovements,furniture,andequipment, areimpairedandanadjustmentisrecordedwheneventsorchangesincircumstancesindicatethatthe carryingamountofassetsorassetgroupsisnotrecoverableandsignificantlyexceedstheassets’fair value. (j) FederalReserveNotes FederalReservenotesarethecirculatingcurrencyoftheUnitedStates.Thesenotes,whichareidentifiedasissuedtoaspecificReserveBank,mustbefullycollateralized.Assetseligibletobepledged ascollateralsecurityincludealloftheReserveBanks’assets.Thecollateralvalueisequaltothebook valueofthecollateraltenderedwiththeexceptionofsecurities,forwhichthecollateralvalueisequal totheparvalueofthesecuritiestendered.Theparvalueofsecuritiespledgedforsecuritiessoldunderagreementstorepurchaseisdeducted. TheBoardofGovernorsmay,atanytime,calluponaReserveBankforadditionalsecuritytoadequatelycollateralizetheoutstandingFederalReservenotes.TosatisfytheobligationtoprovidesufficientcollateralforoutstandingFederalReservenotes,theReserveBankshaveenteredintoanagreementthatprovidesforcertainassetsoftheReserveBankstobejointlypledgedascollateralforthe FederalReservenotesissuedtoallReserveBanks.Intheeventthatthiscollateralisinsufficient,the FederalReserveActprovidesthatFederalReservenotesbecomeafirstandparamountlienonallthe

Federal Reserve Banks Combined Financial Statements 505 assetsoftheReserveBanks.Finally,FederalReservenotesareobligationsoftheUnitedStatesgovernment.AtDecember31,2009and2008,allFederalReservenotesissuedtotheReserveBankswere fullycollateralized. “Federal Reserve notes outstanding, net” in the Combined Statements of Condition represents the FederalReservenotesoutstanding,reducedbytheReserveBanks’currencyholdingsof$193,141millionand$169,681millionatDecember31,2009and2008,respectively. AtDecember31,2009,allFederalReservenoteswerefullycollateralized.Allgoldcertificates,all special drawing rights certificates, and $871,609 million of domestic securities and securities purchasedunderagreementstoresellwerepledgedascollateral.AtDecember31,2009,noinvestments denominatedinforeigncurrencieswerepledgedascollateral. (k) BeneficialInterestinConsolidatedVariableInterestEntities ML,MLII,MLIII,andTALFLLChaveoutstandingseniorandsubordinatedfinancialinterests,inclusiveofafixeddeferredpurchasepriceinMLIIandanequitycontributioninMLIII.Uponissuance of the senior and subordinated financial interests, ML, ML II, ML III, and TALF LLC each electedtomeasuretheseobligationsatfairvalueinaccordancewithASC825.Principal,interest,and changesinfairvalueontheseniorfinancialinterest,whichwereextendedbytheFRBNY,areeliminatedinconsolidation.Thesubordinatedfinancialinterestisrecordedatfairvalueas“Beneficialinterest in consolidated variable interest entities” in the Combined Statements of Condition. Interest expenseandchangesinfairvalueofthesubordinatedfinancialinterestarerecordedin“Interestexpense: Beneficialinterestinconsolidatedvariableinterestentities”and“Non-interestincome(loss):Beneficialinterestinconsolidatedvariableinterestentitieslosses,net,”respectively,intheCombinedStatementsofIncomeandComprehensiveIncome. (l) TreasurySupplementalFinancingAccountandOtherDeposits TheTreasury’stemporarysupplementaryprogramconsistsofaseriesofTreasurybillauctions,in additiontoTreasury’sstandardborrowingprogram.Theproceedsofthisdebtareheldinanaccountat theFRBNYthatisseparatefromtheTreasury’sgeneralaccount,andwhichisreportedas“Treasury, supplementaryfinancingaccount”intheCombinedStatementsofCondition.Thepurposeofplacing fundsinthisaccountistodrainreservesfromthebankingsystemandpartiallyoffsetthereserveimpactoftheReserveBank’slendingandliquidityinitiatives. OtherdepositsrepresentamountsheldinaccountsattheReserveBanksbyGSEsandforeigncentralbanksandgovernments. (m) ItemsinProcessofCollectionandDeferredCreditItems “Items in process of collection” in the Combined Statements of Condition primarily represents amountsattributabletochecksthathavebeendepositedforcollectionandthat,asofthebalancesheet date,havenotyetbeenpresentedtothepayingbank.“Deferredcredititems”arethecounterpartliabilitytoitemsinprocessofcollection.Theamountsinthisaccountarisefromdeferringcreditfordepositeditemsuntiltheamountsarecollected.Thebalancesinbothaccountscanvarysignificantly. (n) CapitalPaid-in The Federal Reserve Act requires that each member bank subscribe to the capital stock of the ReserveBankinanamountequaltosixpercentofthecapitalandsurplusofthememberbank.These sharesarenonvotingwithaparvalueof$100andmaynotbetransferredorhypothecated.Asamember bank’s capital and surplus changes, its holdings of Reserve Bank stock must be adjusted. Currently,onlyone-halfofthesubscriptionispaid-inandtheremainderissubjecttocall.Amemberbank isliableforReserveBankliabilitiesuptotwicetheparvalueofstocksubscribedbyit. Bylaw,eachReserveBankisrequiredtopayeachmemberbankanannualdividendofsixpercent on the paid-in capital stock. This cumulative dividend is paid semiannually. To reflect the Federal ReserveActrequirementthatannualdividendsbedeductedfromnetearnings,dividendsarepresented asadistributionofcomprehensiveincomeintheCombinedStatementsofIncomeandComprehensive Income. (o) Surplus TheBoardofGovernorsrequirestheReserveBankstomaintainasurplusequaltotheamountof capitalpaid-inasofDecember31ofeachyear.Accumulatedothercomprehensiveincomeisreported asacomponentofsurplusintheCombinedStatementsofConditionandtheCombinedStatementsof

506 96th Annual Report, 2009 Changes in Capital. The balance of accumulated other comprehensive income is comprised of expenses,gains,andlossesrelatedtotheSystemretirementplanandotherpostretirementbenefitplans that,underGAAP,areincludedinothercomprehensiveincome,butexcludedfromnetincome.Additional information regarding the classifications of accumulated other comprehensive income is providedinNote15. (p) InterestonFederalReserveNotes TheBoardofGovernorsrequirestheReserveBankstotransferexcessearningstotheTreasuryas interestonFederalReservenotesafterprovidingforthecostsofoperations,paymentofdividends,and reservationofanamountnecessarytoequatesurpluswithcapitalpaid-in.Thisamountisreportedas “Payments to U.S. Treasury as interest on Federal Reserve notes” in the Combined Statements of IncomeandComprehensiveIncome.TheamountduetotheTreasuryisreportedas“Accruedinterest onFederalReservenotes”intheCombinedStatementsofCondition.Ifoverpaidduringtheyear,the amountisreportedas“PrepaidinterestonFederalReservenotes”intheCombinedStatementsofCondition.PaymentsaremadeweeklytotheTreasury. Intheeventoflossesoranincreaseincapitalpaid-inataReserveBank,paymentstotheTreasury aresuspendedandearningsareretaineduntilthesurplusisequaltothecapitalpaid-in. Intheeventofadecreaseincapitalpaid-in,theexcesssurplus,afterequatingcapitalpaid-inand surplusatDecember31,isdistributedtotheTreasuryinthefollowingyear. (q) InterestonDepositoryInstitutionDeposits OnOctober9,2008,theReserveBanksbeganpayinginteresttodepositoryinstitutionsonqualifying balances held at the Reserve Banks. The interest rates paid on required reserve balances and excess balances are determined by the Board of Governors, based on an FOMC-established target rangefortheeffectivefederalfundsrate. (r) IncomeandCostsRelatedtoTreasuryServices TheReserveBanksarerequiredbytheFederalReserveActtoserveasfiscalagentanddepositary oftheUnitedStatesGovernment.Bystatute,theDepartmentoftheTreasuryhasappropriationstopay fortheseservices.DuringtheyearsendedDecember31,2009and2008,theReserveBankswerereimbursedforallmaterialservicesprovidedtotheDepartmentoftheTreasuryasitsfiscalagent. (s) AssessmentsbytheBoardofGovernors TheBoardofGovernorsassessestheReserveBankstofunditsoperationsbasedoneachReserve Bank’scapitalandsurplusbalancesasofDecember31oftheprioryear.TheBoardofGovernorsalso assesseseachReserveBankfortheexpensesincurredbytheTreasurytoproduceandretireFederal ReservenotesbasedoneachReserveBank’sshareofthenumberofnotescomprisingtheSystem’s netliabilityforFederalReservenotesonDecember31oftheprioryear. (t) Taxes TheReserveBanksareexemptfromfederal,state,andlocaltaxes,exceptfortaxesonrealproperty. The Reserve Banks’ real property taxes were $37 million and $38 million for the years ended December31,2009and2008,respectively,andarereportedasacomponentof“Occupancyexpense.” (u) RestructuringCharges TheReserveBanksrecognizerestructuringchargesforexitordisposalcostsincurredaspartofthe closureofbusinessactivitiesinaparticularlocation,therelocationofbusinessactivitiesfromonelocationtoanother,orafundamentalreorganizationthataffectsthenatureofoperations.Restructuring chargesmayincludecostsassociatedwithemployeeseparations,contractterminations,andassetimpairments.ExpensesarerecognizedintheperiodinwhichtheReserveBankscommittoaformalized restructuringplanorexecutethespecificactionscontemplatedintheplanandallcriteriaforfinancial statementrecognitionhavebeenmet. Note 16 describes the Reserve Banks’ restructuring initiatives and provides information about the costsandliabilitiesassociatedwithemployeeseparationsandcontractterminations.ThecostsassociatedwiththeimpairmentofcertainoftheReserveBanks’assetsarediscussedinNote11.Costsand liabilitiesassociatedwithenhancedpensionbenefitsinconnectionwiththerestructuringactivitiesfor all of the Reserve Banks are recorded on the books of the FRBNY. Costs and liabilities associated withenhancedpostretirementbenefitsarediscussedinNote14.

Federal Reserve Banks Combined Financial Statements 507 In2009,theReserveBankscontinuedtheircheckrestructuringinitiativestoaligncheckprocessing infrastructureandoperationswithdecliningcheckprocessingvolumes.Additionalannouncementsin 2009includedrestructuringplansassociatedwithdiscontinuingcheckprintsites. (v) RecentlyIssuedAccountingStandards InDecember2008,theFASBissuedFASBStaffPosition(FSP)132(R)-1,EmployersDisclosures aboutPostretirementBenefitPlanAssets,(codifiedinFASBASCTopic715(ASC715)Compensation — Retirement Benefits). ASC 715 provides rules for the disclosure of information about assets held in a defined benefit plan in the financial statements of the employer sponsoring that plan, and additional disclosures about asset categories and concentrations of risk. It is effective for financial statements with fiscal years ending after December 15, 2009. The disclosures required by ASC 715 havebeenreflected,asappropriate,intheaccompanyingfootnotes. InMarch2008,FASBissuedStatementofFinancialAccountingStandards(SFAS)161,Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133, (codified in FASB ASC Topic 815 (ASC 815), Derivatives and Hedging), which requires expanded qualitative,quantitative,andcredit-riskdisclosuresaboutderivativesandhedgingactivitiesandtheir effectsonacompany’sfinancialposition,financialperformance,andcashflows.Theseprovisionsof ASC815areeffectivefortheReserveBanks’combinedfinancialstatementsfortheyearbeginningon January1,2009andhavenothadamaterialeffectontheReserveBanks’combinedfinancialstatements.Thedisclosurerequirementshavebeenreflected,asappropriate,inNote9. InFebruary2008,FASBissuedFSPSFAS140-3,AccountingforTransfersofFinancialAssetsand RepurchaseFinancingTransactions,(codifiedinFASBASCTopic860(ASC860),TransfersandServicing).ASC860requiresthataninitialtransferofafinancialassetandarepurchasefinancingthat wasenteredintocontemporaneouslywith,orincontemplationof,theinitialtransferbeevaluatedtogetherasalinkedtransactionunlesscertaincriteriaaremet.TheseprovisionsofASC860areeffectivefortheReserveBanks’combinedfinancialstatementsfortheyearbeginningonJanuary1,2009 andhavenothadamaterialeffectontheReserveBanks’combinedfinancialstatements.Therequirementsofthisstandardhavebeenreflectedintheaccompanyingfootnotes. InJune2009,FASBissuedSFAS166,AccountingforTransfersofFinancialAssets—anamendment toFASBStatementNo.140,(codifiedinFASBASC860).ThenewguidancemodifiesexistingguidancetoeliminatethescopeexceptionforqualifyingSPVsandclarifiesthatthetransferormustconsiderallarrangementsofthetransferoffinancialassetswhendeterminingifthetransferorhassurrenderedcontrol.TheseprovisionsofASC860areeffectivefortheReserveBanks’combinedfinancial statementsfortheyearbeginningonJanuary1,2010,andearlieradoptionisprohibited.Theadoption of this standard is not expected to have a material effect on the Reserve Banks’ combined financial statements. In April 2009, FASB issued FSP SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary-Impairments,(codifiedinFASBASCTopic320(ASC320)Investment-Debt andEquitySecurities),whichamendstheother-than-temporaryimpairmentguidancefordebtsecurities and the financial statement presentation and disclosure requirements. These provisions of ASC 320, which are effective for the Reserve Banks’ combined financial statements ended December 31, 2009,havenothadamaterialeffectontheReserveBanks’combinedfinancialstatements. InApril2009,FASBissuedFSP157-4,DeterminingFairValueWhentheVolumeandLevelofActivity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, (codified in FASB ASC Topic 820 (ASC 820), Fair Value Measurements and Disclosures)whichprovidesadditionalguidanceforestimatingfairvaluewhenthevalueandlevelofmarketactivityforanassetorliabilityhavesignificantlydecreased.Thestandardalsoprovidesguidance on identifying circumstances that indicate a transaction is not orderly. The provisions of the FSP, whichareeffectivefortheReserveBanks’combinedfinancialstatementsfortheyearendingDecember31,2009,wereconsideredindeterminingthevaluationofassetsandliabilitiesthataremeasured atfairvalue.TheadoptionofthisprovisiondidnothaveamaterialeffectontheReserveBanks’combinedfinancialstatements. InMay2009,FASBissuedSFASNo.165,SubsequentEvents,(codifiedinFASBASCTopic855 (ASC855),SubsequentEvents),whichestablishesgeneralstandardsofaccountingforanddisclosing eventsthatoccurafterthebalancesheetdatebutbeforefinancialstatementsareissuedorareavailabletobeissued.ASC855setsforth(i)theperiodafterthebalancesheetdateduringwhichmanagementofareportingentityshouldevaluateeventsortransactionsthatmayoccurforpotentialrecognition or disclosure in the financial statements; (ii) the circumstances under which an entity should

508 96th Annual Report, 2009 recognizeeventsortransactionsoccurringafterthebalancesheetdateinitsfinancialstatements;and (iii)thedisclosuresthatanentityshouldmakeabouteventsortransactionsthatoccurredafterthebalance sheet date, including disclosure of the date through which an entity has evaluated subsequent eventsandwhetherthatrepresentsthedatethefinancialstatementswereissuedorwereavailabletobe issued. The Reserve Banks adopted ASC 855 for the period ended December 31, 2009 and the requireddisclosuresarereflectedinNote17. InJune2009,FASBissuedSFASNo.167,AmendmentstoFASBInterpretationNo.46(R),(codified in FASB ASC 810), which expands the scope of Interpretation 46R, Consolidation of Variable InterestEntitiesandchangestheapproachfordeterminingwhetheranentityhasacontrollinginterest in a VIE by making a qualitative assessment of its financial interests. Additional disclosures are required for a variable interest in a VIE. These provisions of ASC 810 are effective for the Reserve Banks’combinedfinancialstatementsfortheyearbeginningonJanuary1,2010,andearlieradoption isprohibited.TheadoptionofthisstandardisnotexpectedtohaveamaterialeffectontheReserve Banks’combinedfinancialstatements. In June 2009, the FASB issued SFAS No. 168, The Statement of FinancialAccounting Standards CodificationandtheHierarchyofGenerallyAcceptedAccountingPrinciples,areplacementofSFAS No.162,TheHierarchyofGenerallyAcceptedAccountingPrinciples(SFAS168).SFAS168establishestheFASBASCasthesourceofauthoritativeaccountingprinciplesrecognizedbytheFASBto beappliedbynongovernmentalentitiesinthepreparationoffinancialstatementsinconformitywith GAAP.TheASCdoesnotchangecurrentGAAP,butitintroducesanewstructurethatorganizesthe authoritativestandardsbytopic.SFAS168iseffectiveforfinancialstatementsissuedforperiodsendingafterSeptember15,2009.Asaresult,boththeASCandthelegacystandardarereferencedinthe ReserveBanks’combinedfinancialstatementsandfootnotes. InJanuary2010,theFASBissuedAccountingStandardsUpdate2010-06,(codifiedinFASBASC Topic 820 (ASC 820), Fair Value Measurements and Disclosures) which requires additional disclosures related to fair value measurements. This update is effective for the Reserve Banks’ combined financialstatementsfortheyearbeginningonJanuary1,2010andearlyadoptionisprohibited.The adoption of this update is not expected to have a material effect on the Reserve Banks’ combined financialstatements. (5) Loans TheloanamountsoutstandingatDecember31wereasfollows(inmillions): 2009 2008 Primary,secondary,andseasonalcredit........................ $20,700 $ 93,790 TAF.............................................................. 75,918 450,220 Loanstodepositoryinstitutions................................ $96,618 $544,010 AMLF........................................................... $ - $ 23,765 PDCF............................................................ - 37,404 TALFloans,fairvalue ......................................... 48,183 - AIG ............................................................. 22,738 38,913 Otherloans...................................................... 70,921 100,082 Allowanceforloanrestructuring(AIG)........................ (1,488) - Otherloans,net................................................. $69,433 $100,082 Theremainingmaturitydistributions,netofallowance,ofloansoutstandingatDecember31were asfollows(inmillions): 2009 Primary, secondary, andseasonal TALFloans, credit TAF fairvalue AIG,net Within15days.................... $16,304 $75,918 $ - $ - 16to90days...................... 4,396 - - - Over1yearto5years............ - - 48,183 21,250 Totalloans......................... $20,700 $75,918 $48,183 $21,250

Federal Reserve Banks Combined Financial Statements 509 2008 Primary, secondary, andseasonal credit TAF AMLF PDCF AIG Within15days............... $85,846 $235,424 $ 9,682 $37,404 $ - 16to90days................ 7,944 214,796 14,083 - - Over1yearto5years....... - - - - 38,913 Totalloans................... $93,790 $450,220 $23,765 $37,404 $38,913 Loanstodepositoryinstitutions The Reserve Banks offer primary, secondary, and seasonal credit to eligible borrowers. Each programhasitsowninterestrate.Interestisaccruedusingtheapplicableinterestrateestablishedatleast every14daysbytheReserveBanks’boardsofdirectors,subjecttoreviewanddeterminationbythe BoardofGovernors.Primaryandsecondarycreditareextendedonashort-termbasis,typicallyovernight,whereasseasonalcreditmaybeextendedforaperiodofuptoninemonths. Primary, secondary, and seasonal credit lending is collateralized to the satisfaction of the Reserve Bankstoreducecreditrisk.Assetseligibletocollateralizetheseloansincludeconsumer,business,and real estate loans; Treasury securities; GSE debt securities; foreign sovereign debt; municipal, corporate,andstateandlocalgovernmentobligations;ABS;corporatebonds;commercialpaper;andbankissued assets, such as certificates of deposit, bank notes, and deposit notes. Collateral is assigned a lendingvaluethatisdeemedappropriatebytheReserveBanks,whichistypicallyfairvalueorface valuereducedbyamargin. DepositoryinstitutionsthatareeligibletoborrowundertheReserveBanks’primarycreditprogram arealsoeligibletoparticipateintheTAFprogram.UndertheTAFprogram,theReserveBanksconduct auctions for a fixed amount of funds, with the interest rate determined by the auction process, subjecttoaminimumbidrate.TAFloansareextendedonashort-termbasis,withtermsrangingfrom 28to84days.AlladvancesundertheTAFprogrammustbecollateralizedtothesatisfactionofthe Reserve Banks. Assets eligible to collateralize TAF loans include the complete list noted above for loanstodepositoryinstitutions.Similartotheprocessusedforprimary,secondary,andseasonalcredit, alendingvalueisassignedtoeachassetthatisacceptedascollateralforTAFloansreducedbyamargin. Loanstodepositoryinstitutionsaremonitoredonadailybasistoensurethatborrowerscontinueto meeteligibilityrequirementsfortheseprograms.Thefinancialconditionofborrowersismonitoredby theReserveBanksand,ifaborrowernolongerqualifiesfortheseprograms,theReserveBankswill generallyrequestfullrepaymentoftheoutstandingloanor,forprimaryandseasonalcreditlending, mayconverttheloantoasecondarycreditloan.Collaterallevelsarerevieweddailyagainstoutstandingobligationsandborrowersthatnolongerhavesufficientcollateraltosupportoutstandingloansare requiredtoprovideadditionalcollateralortomakepartialorfullrepayment. AtDecember31,2009and2008,theFRBNYdidnothaveanyimpairedloanstodepositoryinstitutionsandnoallowanceforloanlosseswasrequired. Otherloans AMLF The FRBB administered the AMLF and was authorized to extend loans to eligible borrowers on behalfoftheotherReserveBanks.AllloansextendedundertheAMLFwererecordedasassetsbythe FRBBand,iftheborrowinginstitutionsettledtoadepositoryaccountinanotherReserveBankDistrict,thefundswerecreditedtotheinstitution’sdepositoryaccountbytheappropriateReserveBank andsettledbetweentheBanksthroughtheinterdistrictsettlementaccount.Theloansextendedunder theAMLFwerenonrecourse,sothattheFRBBhadrecourseonlytothecollateralpledgedbytheborrowers.ThecreditriskrelatedtotheAMLFwasassumedbytheFRBB.Nolosseswereincurredon loansextendedduringtheyearsendedDecember31,2009and2008.EligiblecollateralundertheprogramwaslimitedtoU.S.dollar-denominatedABCPthatwasnotratedlowerthanA-1/P-1/F1andwas required to be purchased from an eligible money market mutual fund. The terms of loans under the AMLFwerelimitedto120daysiftheborrowerwasabankor270daysfornonbankborrowers.The interestrateforadvancesmadeundertheAMLFwasequaltotheFRBB’sprimarycreditrateoffered todepositoryinstitutionsatthetimetheadvancewasmade.

510 96th Annual Report, 2009 At December 31, 2009, the FRBB did not have any AMLF loans outstanding. At December 31, 2008,noAMLFloanswereimpairedandnoallowanceforloanlosseswasrequired. PDCF The PDCF provided secured overnight financing to primary dealers in exchange for a specified rangeofcollateral,includingTreasurysecurities;federalagencyandGSEMBS;otherMBS;municipalsecurities;ABS;andmoneymarketequities,forwhichpriceswereavailable.InterestonPDCFsecuredfinancingwasaccruedusingtheprimarycreditrateofferedbytheReserveBankstodepository institutions.Thesecuredfinancingisreportedasacomponentof“Otherloans”intheCombinedStatementsofCondition.Thefrequency-basedfeesarereportedas“Otherincome”intheCombinedStatementsofIncomeandComprehensiveIncome. AtDecember31,2009,theReserveBanksdidnothaveanyPDCFloansoutstanding.AtDecember 31,2008,noPDCFloanswereimpairedandnoallowanceforloanlosseswasrequired. TALF CreditextensionsunderTALFarenonrecourseloanssecuredbyeligiblecollateral.EachTALFloan hasathree-yearmaturity,exceptforloanssecuredbySBAPoolCertificates,loanssecuredbySBA Development Company Participation Certificates, or ABS backed by student loans or commercial mortgageloans,whichhaveafive-yearmaturityiftheborrowersoelects. The FRBNY has elected the fair value option for all TALF loans under ASC 825. Recording all TALFloansatfairvalue,ratherthanattheremainingprincipalamountoutstanding,resultsinconsistentaccountingtreatmentamongallTALF-relatedtransactionsandprovidesthemostappropriatepresentation of the TALF program on the financial statements by matching the change in fair value of TALF loans, the related put agreement with the consolidated TALF LLC, and the valuation of the otherbeneficialinterestsinTALFLLC.AdditionalinformationregardingtheTALFLLCassetsandliabilitiesispresentedinNote9. In certain cases where there is limited activity around inputs to the valuation, loans are classified within Level 3 of the valuation hierarchy. Because external price information was not available, market-basedmodelswereusedtodeterminethefairvalueoftheTALFloans.Thefairvalueofthe TALFloanswasdeterminedbyvaluingthefuturecashflowsfromloaninterestincomeandtheestimatedfairvaluelossesassociatedwithcollateralthatmaybeputtotheFRBNY.Thevaluationmodel takesintoaccountarangeofoutcomesonTALFloanrepayments,marketpricesofthecollateral,risk premiumsestimatedusingmarketprices,andthevolatilitiesofmarketriskfactors.Othermethodologies employed or assumptions made in determining fair value could result in an amount that differs significantlyfromtheamountreported. ThefollowingtablepresentstheTALFloansatfairvalueasofDecember31,2009,byASC820 hierarchy(inmillions): Fairvaluehierarchy Total Level1 Level2 Level3 fairvalue TALFloans........................ $ - $ - $48,183 $48,183 ThetablebelowpresentsareconciliationoftheTALFloans,whicharemeasuredatfairvalueusing significant unobservable inputs (Level 3) during the period February 4, 2009 to December 31, 2009(inmillions): FairValueat FairValueat February4, Loans Unrealized Transfers December31, 2009 originated1 gains out2 2009 TALFloans.................. $ - $61,626 $557 $(14,000) $48,183 1.Loansoriginatedincludes$52millioninaccruedinterestreceivable. 2.Nettransfersoutrepresentprincipalprepayments. ThefairvalueofTALFloansreportedintheCombinedStatementsofConditionatDecember31, 2009 includes $557 million in unrealized gains. FRBNY attributes substantially all changes in fair valueofnonrecourseloanstochangesininstrumentspecificcreditspreads.

Federal Reserve Banks Combined Financial Statements 511 ThetablebelowpresentsprincipalandaccruedinterestbyconcentrationfortheTALFloansasof December31,2009(inmillions): ConcentrationofUnpaidPrincipalBalanceandAccruedInterest YearstoMaturity Percent CollateralTypeandCreditRating 1–3 4–5 Total ofTotal Auto(AAA).......................... $ 5,851 $ - $ 5,851 12% CMBS(AA)......................... - 25 25 0% CMBS(AAA)........................ 3,572 4,941 8,513 18% CreditCard(AAA).................. 20,297 - 20,297 43% Floorplan(AAA)..................... 2,427 - 2,427 5% SBAs(AAA)......................... 915 357 1,272 3% StudentLoan(AAA)................ 2,236 4,168 6,404 13% Other(AAA)1........................ 2,837 - 2,837 6% Total.................................. $38,135 $9,491 $47,626 100% 1.Includesequipment,servicingadvances,andpremiumfinanceABS. The aggregate remaining principal amount outstanding on TALF loans as of December 31, 2009 was$47,574million. AtDecember31,2009,noTALFloanswereover90dayspastdueorinnonaccrualstatus.Because theTALFloansaremeasuredatfairvalue,anallowanceforloanlosseswasnotrequired. AIG The$21,250millionextendedtoAIGundertherevolvinglineofcreditisnetofunamortizeddeferredcommitmentfeesandallowanceforrestructuringandincludesunpaidcommitmentsfeesandaccruedinterest.TheAIGloanisreportedasacomponentof“Otherloans”intheCombinedStatements ofCondition. The table below represents the components of the loan amounts outstanding to AIG at December 31. AIGLoanComponents 2009 2008 Lineofcreditdrawn............................................ $17,900 $36,800 Accruedinterest................................................. 3,835 1,931 Unpaidcommitmentfees....................................... 1,700 1,700 Unamortizeddeferredcommitmentfees....................... (697) (1,518) Allowanceforloanrestructuring,net.......................... (1,488) - LoantoAIG,net................................................ $21,250 $38,913 ThefairvalueoftheAIGlineofcreditprovidedbytheFRBNY,basedonestimateddrawsandrepayments,wasnotmateriallydifferentfromthenetamountreportedasacomponentof“Otherloans” intheCombinedStatementsofConditionasofDecember,31,2009. TheactivityrelatedtotheallowanceforloanrestructuringfortheyearendedDecember31,2009 wasasfollows(inmillions): Allowance Allowance forLoan forLoan Restructuring Provisionfor Restructuring January1,2009 LoanRestructuring Recoveries December31,2009 AIGloan......................... $ - $(2,621) $1,133 $(1,488) Theallowanceforloanrestructuringrepresentstheeconomiceffectofthereductionoftheinterest rateonloanstheFRBNYmadetoAIGpriortoApril17,2009,aspartoftheloanrestructuringthat occurredonthatdate.Therestructuringchargeswillberecoveredovertheremainingtermoftherelatedloan.Theallowanceoutstanding,netofamortizedrecoveries,isdeductedfrom“Otherloans”in the Combined Statements of Condition and recoveries are reported as a component of “Interest income:Otherloans”ontheCombinedStatementsofIncomeandComprehensiveIncome.TheaveragebalanceofthecreditextensionstoAIGundertherevolvinglineofcredit,netoftheallowancefor restructuring,duringtheyearendedDecember31,2009was$39,099million.InterestincomerecognizedoncreditextensionstoAIGduringtheyearendedDecember31,2009was$3,996million.No interestincomewasforegoneaftertherecordedrestructuring.

512 96th Annual Report, 2009 (6) TreasurySecurities;Government-SponsoredEnterpriseDebtSecurities;Federal AgencyandGovernment-SponsoredEnterpriseMortgage-BackedSecurities;SecuritiesPurchasedUnderAgreementsToResell;SecuritiesSoldUnderAgreementsto Repurchase;andSecuritiesLending TheFRBNY,onbehalfoftheReserveBanks,holdssecuritiesboughtoutrightintheSOMA. ThetotaloftheTreasurysecurities,GSEdebtsecurities,andfederalagencyandGSEMBS,net, excludingaccruedinterest,heldintheSOMAatDecember31wasasfollows(inmillions): 2009 Treasurysecurities Total Federal Treasury GSEdebt agencyand Bills Notes Bonds securities securities GSEMBS Par........................ $18,423 $568,323 $189,843 $776,588 $159,879 $908,371 Unamortizedpremiums.... - 6,545 24,460 31,005 7,509 12,110 Unaccreteddiscounts...... - (991) (630) (1,621) (26) (1,554) Totalamortizedcost....... $18,423 $573,877 $213,673 $805,972 $167,362 $918,927 FairValue................. $18,422 $583,040 $230,717 $832,180 $167,444 $914,290 2008 Treasurysecurities Total Treasury GSEdebt Bills Notes Bonds securities securities Par............................ $18,423 $334,779 $122,719 $475,921 $19,708 Unamortizedpremiums........ - 274 6,711 6,985 1,064 Unaccreteddiscounts.......... - (837) (620) (1,457) (32) Totalamortizedcost........... $18,423 $334,216 $128,810 $481,449 $20,740 FairValue..................... $18,423 $357,709 $169,433 $545,564 $20,863 The fair value amounts in the above tables are presented solely for informational purposes. Althoughthefairvalueofsecurityholdingscanbesubstantiallygreaterthanorlessthantherecorded valueatanypointintime,theseunrealizedgainsorlosseshavenoeffectontheabilityoftheReserve Banks, as the central bank, to meet their financial obligations and responsibilities. Fair value was determinedbyreferencetoquotedmarketvaluesforidenticalsecurities,exceptforfederalagencyand GSEMBSforwhichfairvaluesweredeterminedusingamodel-basedapproachbasedonobservable inputsforsimilarsecurities. The fair value of the fixed-rate Treasury securities, GSE debt securities, and federal agency and GSEMBSintheSOMA’sholdingsissubjecttomarketrisk,arisingfrommovementsinmarketvariables,suchasinterestratesandsecuritiesprices.ThefairvalueoffederalagencyandGSEMBSis alsoaffectedbytherateofprepaymentsofmortgageloansunderlyingthesecurities. The following table provides additional information on the amortized cost and fair values of the federalagencyandGSEMBSportfolioatDecember31,2009(inmillions): DistributionofMBSholdingsbycouponrate Amortizedcost Fairvalue 4.0%............................................................. $170,119 $165,740 4.5%............................................................. 434,352 431,646 5.0%............................................................. 195,418 196,411 5.5%............................................................. 103,379 104,583 6.0%............................................................. 12,710 12,901 Other1............................................................ 2,949 3,009 Total............................................................. $918,927 $914,290 1.Representslessthanonepercentofthetotalportfolio

Federal Reserve Banks Combined Financial Statements 513 Financialinformationrelatedtosecuritiespurchasedunderagreementstoresellandsecuritiessold underagreementstorepurchasefortheyearsendedDecember31,2009and2008,wasasfollows(in millions): Securitiespurchasedunder Securitiessoldunder agreementstoresell agreementstorepurchase 2009 2008 2009 2008 Contractamountoutstanding,endofyear.. $ - $ 80,000 $77,732 $88,352 Averagedailyamountoutstanding, duringtheyear............................ 3,616 86,227 67,837 55,169 Maximummonth-endbalanceoutstanding, duringtheyear............................ - 119,000 77,732 98,559 Securitiespledged,endofyear.............. - - 77,860 78,896 TheReserveBanksrevisedthedisclosureofsecuritiespurchasedunderagreementstoresellandsecuritiessoldunderagreementstorepurchasefromaweightedaveragecalculation,disclosedin2008, tothesimpledailyaveragecalculation,disclosedabove.ThepreviouslyreportedReserveBanktotal 2008 weighted average amount outstanding for securities purchased under agreements to resell was $97,037million.ThepreviouslyreportedReserveBanktotal2008weightedaverageamountoutstandingforsecuritiessoldunderagreementstorepurchasewas$65,461million. Thecontractamountsforsecuritiespurchasedunderagreementstoresellandsecuritiessoldunder agreementstorepurchaseapproximatefairvalue. TheremainingmaturitydistributionofTreasurysecurities,GSEdebtsecurities,federalagencyand GSEMBSboughtoutright,securitiespurchasedunderagreementstoresell,andsecuritiessoldunder agreementstorepurchaseatDecember31,2009wasasfollows(inmillions): Securities Securities purchased soldunder Federal underagree- agreementsto Treasury GSEdebt agencyand mentstoresell repurchase securities securities GSEMBS (Contract (Contract (Parvalue) (Parvalue) (Parvalue) amount) amount) Within15days................ $ 11,617 $ 68 $ - $- $77,732 16daysto90days............ 28,853 3,046 - - - 91daysto1year.............. 50,771 21,528 - - - Over1yearto5years........ 326,874 99,402 12 - - Over5yearsto10years...... 213,720 33,788 20 - - Over10years................. 144,753 2,047 908,339 - - Total ......................... $776,588 $159,879 $908,371 $- $77,732 Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weightedaveragelifeofthesesecuritiesatDecember31,2009,whichdiffersfromthestatedmaturity primarilybecauseitfactorsinprepaymentassumptions,isapproximately6.4years. At December 31, 2009 and 2008, Treasury securities and GSE debt securities with par values of $21,610millionand$180,765million,respectively,wereloanedfromtheSOMA. AtDecember31,2009,thetotalofotherinvestmentswas$5million.Otherinvestmentsconsistof cashandshort-terminvestmentsrelatedtothefederalagencyandGSEMBSportfolio. AtDecember31,2009,thetotalofotherliabilitieswas$601million.Theseotherliabilities,which arerelatedtopurchasesoffederalagencyandGSEMBS,arisefromthefailureofasellertodeliver securitiestotheFRBNYonthesettlementdate.AlthoughtheFRBNYhasownershipofandrecords itsinvestmentsintheMBSasofthecontractualsettlementdate,itisnotobligatedtomakepayment until the securities are delivered, and the amount reported as other liabilities represents the Reserve Banks’obligationtopayforthesecuritieswhendelivered. TheFRBNYentersintocommitmentstobuyfederalagencyandGSEMBSandrecordstherelated MBS on a settlement-date basis. As of December 31, 2009, the total purchase price of the federal agencyandGSEMBSunderoutstandingcommitmentswas$160,099million,ofwhich$32,838millionwasrelatedtodollarrolls.Thesecommitments,whichhadcontractualsettlementdatesextending throughMarch2010,areprimarilyforthepurchaseofTBAMBSforwhichthenumberandidentity of the pools that will be delivered to fulfill the commitment are unknown at the time of the trade. These commitments are subject to market and counterparty risks that result from their future settle-

514 96th Annual Report, 2009 ment. As of December 31, 2009, the fair value of federal agency and GSE MBS under outstanding commitmentswas$158,868million.DuringtheyearendedDecember31,2009,theReserveBanksrecordednetgainsfromdollarrollrelatedsalesof$879million.Thesenetgainsarereportedas“Non- InterestIncome(Loss):Federalagencyandgovernment-sponsoredenterprisemortgage-backedsecuritiesgains,net”intheCombinedStatementsofIncomeandComprehensiveIncome. (7) InvestmentsDenominatedInForeignCurrencies TheFRBNY,onbehalfoftheReserveBanks,holdsforeigncurrencydepositswithforeigncentral banksandwiththeBankforInternationalSettlementsandinvestsinforeigngovernmentdebtinstruments. These investments are guaranteed as to principal and interest by the issuing foreign governments. In addition, the FRBNY enters into transactions to purchase foreign-currency-denominated government-debtsecuritiesunderagreementstoresellforwhichtheacceptedcollateralisthedebtinstrumentsissuedbythegovernmentsofBelgium,France,Germany,Italy,theNetherlands,andSpain. TheReserveBanks’investmentsdenominatedinforeigncurrencies,includingaccruedinterest,valuedatamortizedcostandforeigncurrencymarketexchangeratesatDecember31,wasasfollows(in millions): 2009 2008 Euro: Foreigncurrencydeposits...................................... $ 7,396 $ 5,563 Securitiespurchasedunderagreementstoresell............... 2,591 4,076 Governmentdebtinstruments.................................. 4,936 4,609 Japaneseyen: Foreigncurrencydeposits...................................... 3,403 3,483 Governmentdebtinstruments.................................. 6,946 7,073 Total ............................................................ $25,272 $24,804 AtDecember31,2009and2008,thefairvalueofinvestmentsdenominatedinforeigncurrencies, including accrued interest, was $25,480 million and $25,021 million, respectively. The fair value of governmentdebtinstrumentswasdeterminedbyreferencetoquotedpricesforidenticalsecurities.The costbasisofforeigncurrencydepositsandsecuritiespurchasedunderagreementstoresell,adjusted foraccruedinterest,approximatesfairvalue.SimilartotheTreasurysecurities,GSEdebtsecurities, andfederalagencyandGSEMBSdiscussedinNote6,unrealizedgainsorlosseshavenoeffecton theabilityoftheReserveBanks,asthecentralbank,tomeetitsfinancialobligationsandresponsibilities.Thefairvalueispresentedsolelyforinformationalpurposes. TheremainingmaturitydistributionofinvestmentsdenominatedinforeigncurrenciesatDecember 31,2009wasasfollows(inmillions): Euro Japaneseyen Total Within15days........................... $ 6,067 $ 3,623 $ 9,690 16daysto90days....................... 2,505 463 2,968 91daysto1year......................... 2,408 2,368 4,776 Over1yearto5years................... 3,943 3,895 7,838 Total ...................................... $14,923 $10,349 $25,272 AtDecember31,2009and2008,theauthorizedwarehousingfacilitywas$5billion,withnobalanceoutstanding. Inconnectionwithitsforeigncurrencyactivities,theFRBNYmayenterintotransactionsthatcontainvaryingdegreesofoff-balance-sheetmarketriskthatresultfromtheirfuturesettlementandcounterpartycreditrisk.TheFRBNYcontrolstheserisksbyobtainingcreditapprovals,establishingtransactionlimits,receivingcollateralinsomecases,andperformingdailymonitoringprocedures. (8) CentralBankLiquiditySwaps U.S.DollarLiquiditySwaps At December 31, 2009 and 2008, the total Reserve Bank amount of foreign currency held under U.S.dollarliquidityswapswas$10,272millionand$553,728million,respectively.

Federal Reserve Banks Combined Financial Statements 515 TheremainingmaturitydistributionofU.S.dollarliquidityswapsatDecember31wasasfollows (inmillions): 2009 2008 Within 16days Within 16days 15days to90days Total 15days to90days Total Australiandollar.. $ - $- $ - $ 10,000 $ 12,830 $ 22,830 Danishkrone...... - - - - 15,000 15,000 Euro............... 6,506 - 6,506 150,969 140,383 291,352 Japaneseyen...... 545 - 545 47,893 74,823 122,716 Koreanwon....... - - - - 10,350 10,350 Mexicanpeso..... 3,221 - 3,221 - - - Norwegiankrone.. - - - 2,200 6,025 8,225 Swedishkrona.... - - - 10,000 15,000 25,000 Swissfranc........ - - - 19,221 5,954 25,175 U.K.pound........ - - - 120 32,960 33,080 Total.............. $10,272 $- $10,272 $240,403 $313,325 $553,728 ForeignCurrencyLiquiditySwaps There were no transactions related to the foreign currency liquidity swaps during the years ended December31,2008and2009. (9) InvestmentsHeldByConsolidatedVariableInterestEntities ThecombinedfinancialstatementsincludetheaccountsandresultsofoperationsofseveralVIEs, specificallyML,MLII,MLIII,CPFFandTALFLLC.TheconsolidationoftheVIEswasassessedin accordancewithASC810,whichrequiresavariableinterestentitytobeconsolidatedbyitscontrollingfinancialinterestholder. (a) SummaryInformationforConsolidatedVariableInterestEntities The total assets of consolidated VIEs, including cash, cash equivalents, and accrued interest, at December31wereasfollows(inmillions): 2009 2008 CPFF............................................................ $14,233 $334,910 ML .............................................................. 28,140 30,635 MLII............................................................ 15,912 19,195 MLIII........................................................... 22,797 27,256 TALFLLC...................................................... 298 - Total ............................................................ $81,380 $411,996 TheFRBNY’smaximumexposuretolossatDecember31,2009and2008was$73,879millionand $405,377million,respectively.TheseestimatesincorporatepotentiallossesassociatedwithassetsrecordedontheFRBNY’sbalancesheet,netofthefairvalueofsubordinatedinterests(beneficialinterestinconsolidatedVIEs).

516 96th Annual Report, 2009 TheclassificationofsignificantassetsandliabilitiesoftheconsolidatedVIEsatDecember31was asfollows(inmillions): 2009 2008 Assets: Commercialpaper................................................... $ 9,421 $333,631 CDOs................................................................. 22,650 26,957 Non-agencyRMBS.................................................. 17,552 20,675 FederalagencyandGSEMBS...................................... 18,149 15,654 Commercialmortgageloans......................................... 4,025 5,553 Residentialmortgageloans.......................................... 583 937 Swapcontracts....................................................... 1,127 2,454 Otherinvestments.................................................... 5,467 2,340 Subtotal............................................................... $78,974 $408,201 Cash,cashequivalents,andaccruedinterestreceivable............ 2,406 3,795 Totalinvestmentsheldbyconsolidatedvariableinterestentities.. $81,380 $411,996 Liabilities: Beneficialinterestinconsolidatedvariableinterestentities........ $ 5,095 $ 2,824 Otherliabilities1...................................................... $ 1,316 $ 5,813 1.Theamountsreportedas“Consolidatedvariableinterestentities:Otherliabilities”intheCombinedStatements ofConditionatDecember31,2009included$980millionrelatedtocashcollateralreceivedonswapcontractsand atDecember31,2008included$2,572millionrelatedtocashcollateralreceivedonswapcontractsand$2,369millionpayableforinvestmentspurchasedbyVIEs.Theamountalsoincludedaccruedinterest,unearnedregistration fees,andaccruedotherexpenses. Total realized gains (losses) and unrealized gains (losses) for the 12 months ended December 31, 2009,wereasfollows(inmillions): Totalportfolio Totalportfolio Fairvaluechanges holdingsrealized/ holdingsrealized unrealizedgains unrealizedgains gains(losses) (losses) (losses) CDOs...................................... $ (3) $(1,211) $(1,214) Non-agencyRMBS....................... 217 (991) (774) FederalagencyandGSEMBS........... 322 521 843 Commercialmortgageloans.............. (47) (1,177) (1,224) Residentialmortgageloans............... (48) (219) (267) Swapcontracts............................ (119) 212 93 Otherinvestments......................... 12 712 724 Otherassets............................... (182) 64 (118) Total ...................................... $152 $(2,089) $(1,937) Total realized gains (losses) and unrealized gains (losses) for the 12 months ended December 31, 2008,wereasfollows(inmillions): Totalportfolio Totalportfolio Fairvaluechanges holdingsrealized/ holdingsrealized unrealizedgains unrealizedgains gains(losses) (losses) (losses) CDOs...................................... $ - $(3,281) $(3,281) Non-agencyRMBS....................... (4) (3,001) (3,005) FederalagencyandGSEMBS........... (166) 50 (116) Commercialmortgageloans.............. 42 (2,130) (2,088) Residentialmortgageloans............... (3) (563) (566) Swapcontracts............................ (70) 155 85 Otherinvestments......................... 237 (892) (655) Total ...................................... $ 36 $(9,662) $(9,626)

Federal Reserve Banks Combined Financial Statements 517 The net income (loss) attributable to ML, ML II, ML III and CPFF for the 12 months ended December31,2009andforTALFLLCfortheperiodfrominceptiontoDecember31,2009wasas follows(inmillions): TALF ML MLII MLIII CPFF LLC Total Interestincome: Portfoliointerestincome............... $1,476 $1,088 $3,032 $4,224 $ - $9,820 Less:Interestexpense ................. 61 33 171 - 2 267 Netinterestincome.................... 1,415 1,055 2,861 4,224 (2) 9,553 Non-interestincome: Portfolioholdingsgains(losses)........ (102) (604) (1,239) 8 - (1,937) Less:Unrealizedgains(losses)on beneficialinterestinconsolidated VIEs................................. 61 34 (1,299) - (699)1 (1,903) Netnon-interestincome(loss)......... (41) (570) (2,538) 8 (699) (3,840) Totalnetinterestincomeand non-interestincome.................. 1,374 485 323 4,232 (701) 5,713 Less:Professionalfees ................ 55 12 27 30 1 125 Netincome(loss)attributableto consolidatedVIEs................... $1,319 $ 473 $ 296 $4,202 $(702)2 $5,588 1.TheTALFLLCreportednetoperatingincomeof$776millionfortheperiodfrominceptiontoDecember31, 2009includesgainsof$557millionontheputoptionbetweenFRBNYandTALFLLCthatareeliminatedinconsolidation.TheunrealizedlossonbeneficialinterestinconsolidatedVIEsrepresentTreasury’s90percentfinancial interestintheTALFLLC’snetoperatingincomebeforeconsolidation. 2.TheFRBNYearned$1,025milliononTALFloansduringtheyearendedDecember31,2009whichoffsets thenetlossattributabletoTALFLLC.EarningsonTALFloansthatarereportedontheCombinedStatementsof Incomeincludeinterestincomeof$414millionreportedasacomponentof“Interestincome:Otherloans,net,” gainsonthevaluationofloansof$557reportedas“Non-InterestIncome(Loss):Otherloansunrealizedgains,”and administrativefeesof$54millionreportedasacomponentof“Non-InterestIncome(Loss):Otherincome.” Thenetincome(loss)attributabletoconsolidatedVIEsfrominceptionthroughDecember31,2008 wasasfollows(inmillions): ML MLII MLIII CPFF Total Interestincome: Portfoliointerestincome.............. $1,561 $ 302 $ 517 $1,707 $4,087 Less:Interestexpense................. 332 103 28 - 463 Netinterestincome.................... 1,229 199 489 1,707 3,624 Non-interestincome: Portfolioholdings(losses)gains ..... (5,497) (1,499) (2,633) 3 (9,626) Less:Unrealizedgainsonbeneficial interestinconsolidatedVIEs....... 1,188 1,003 2,198 - 4,389 Netnon-interest(loss)income........ (4,309) (496) (435) 3 (5,237) Totalnetinterestincomeand non-interestincome................. (3,080) (297) 54 1,710 (1,613) Less:Professionalfees ................ 54 5 9 12 80 Netincome(loss)attributableto consolidatedVIEs................... $(3,134) $ (302) $ 45 $1,698 $(1,693)

518 96th Annual Report, 2009 ThesubordinatedfinancialinterestoftheconsolidatedVIEsfrominceptionthroughDecember31, 2009isasfollows(inmillions): MLII ML deferred MLIII TALF subordinated purchase equity Treasury loan price contribution contribution Total Beginningprincipalin2008............. $1,150 $1,000 $5,000 $ - $7,150 Interestaccruedandcapitalized......... 38 3 22 - 63 Endingprincipalbalance................ 1,188 1,003 5,022 - 7,213 Unrealized(gain)........................ (1,188) (1,003) (2,198) - (4,389) BalanceatDecember31,2008 ......... $ - $ - $2,824 $ - $2,824 Treasuryloan........................... $ - $ - $ - $100 $ 100 Interestaccruedandcapitalized......... 61 34 171 2 268 Endingprincipalbalance................ 61 34 2,995 102 3,192 Unrealized(gain)/loss.................. (61) (34) 1,299 699 1,903 BalanceatDecember31,2009 ......... $ - $ - $4,294 $801 $5,095 (b) CommercialPaperFundingFacilityLLC TheCPFFProgramchargedalendingrateforunsecuredcommercialpaperequaltoathree-month OISrateplus100basispointsperannum,withanadditionalsurchargeof100basispointsperannum foranunsecuredcreditenhancementfee.TheinterestrateforABCPisthethree-monthOISrateplus 300basispoints. UnsecuredcommercialpaperissuerscoveredbytheFDICTemporaryLiquidityGuaranteeProgram areviewedashavingasatisfactoryguaranteeandthecreditenhancementfeeforthoseparticipantsis waived.Thecreditenhancementfeeisamortizedonastraight-linebasisoverthetermofthecommercialpaper,whichisnotmateriallydifferentfromtheinterestmethod.Theregistrationfeesareamortizedonastraight-linebasisoverthelifeoftheprogram,whichisnotmateriallydifferentfromthe interestmethod. The FRBNY conducts a periodic review of the CPFF’s commercial paper to determine if impairmentisotherthantemporarysuchthatalossshouldberecognized.AtDecember31,2009therewere no commercial paper securities for which management considered impairments to be other than temporary. The remaining maturity distribution of the commercial paper and trading securities held by the CPFFatDecember31,2009wasasfollows(inmillions): Commericalpaper Asset Non-asset Trading backed backed securities Total Within15days.................... $ - $ - $ 1 $ 1 16daysto60days................ 7,422 1,999 30 9,451 61daysto92days................ - - 2,364 2,364 93daysto124days............... - - 2,392 2,392 Total............................... $7,422 $1,999 $4,787 $14,208

Federal Reserve Banks Combined Financial Statements 519 Top-tiercommercialpaperhasreceivedthehighestratings(A-1,P-1,F1)fromallratingagencies thatprovidearatingforthepaper.Split-ratedcommercialpaperhasreceivedatoptierratingfromtwo ratingagenciesandsecondtierrating(A-2,P-2,F2)fromathirdratingagency.Allofthecommercial paperheldbytheCPFFatDecember31,2009wastop-tier.ThecreditratingsprofileofthecommercialpaperheldbytheCPFFbyassettype,issuertype,andindustrysector,atDecember31,2009was asfollows(inmillions): Commerical paper Assetbacked Multi-seller ..................................................... $3,583 Securitiesarbitrage ............................................. 2,741 Structuredinvestmentvehicle ................................. 1,088 Investmentcompany ........................................... 10 7,422 Non-assetbacked Insurance ....................................................... 1,999 1,999 Total ............................................................ $9,421 The largest issuer, an asset-backed commercial paper conduit of a diversified financial company, represents29percentofthetotalcommercialpaperportfolioholdingsatDecember31,2009.Thisentityandaffiliatesofthisentity,together,represent62percentofthetotalcommercialpaperportfolio heldatDecember31,2009. (c) MaidenLaneLLC ML’sinvestmentportfolioconsistsprimarilyoffederalagencyandGSEMBS,non-agencyRMBS, commercialandresidentialmortgageloans,andderivatives.Adescriptionofthesignificantholdings atDecember31,2009andtheassociatedcreditriskforeachholdingfollows. i. DebtSecurities MLhasinvestmentsinfederalagencyandGSEMBS,whichrepresentfractionalownershipinterestsinRMBSissuedbyfederalagenciesandGSEs.Theyieldcharacteristicsofthesesecuritiesmay differfromtraditionaldebtsecurities.Onesuchmajordifferenceisthatalloraprincipalpartofthe obligationsmaybeprepaidatanytimebecausetheunderlyingmortgagesmaybeprepaidatanytime. AportionofML’sinvestmentsincludeinterestonly(“IO”)orprincipalonly(“PO”)securityclasses. TheIOclassreceivestheinterestcashflowsfromtheunderlyingmortgages,whilethePOclassreceivestheprincipalcashflows.Theyieldtomaturityonthesesecuritiesissensitivetotherateofprincipal repayments (including prepayments) on the related underlying mortgage assets. The principal prepaymentsmayhaveamaterialeffectonyieldtomaturity.Iftheunderlyingmortgageassetsexperiencegreater-than-anticipatedprepaymentsofprincipal,MLmaynotfullyrecoupitsinitialinvestment inIOclasses. TheyieldtomaturityonthePOclassesmaybeimpactedbydelinquenciesordefaultsontheunderlying mortgage assets. The rate of delinquencies and defaults on residential mortgage loans and the aggregateamountoftheresultinglossescanbeaffectedbyanumberoffactors,includinggeneraleconomicconditions,particularlythoseintheareawheretherelatedmortgagedpropertyislocated,the leveloftheborrower’sequityinthemortgagedpropertyandtheindividualfinancialcircumstancesof theborrower.Changesineconomicconditions,includingdelinquenciesanddefaultsontheunderlying mortgages,canaffectthevalue,income,andliquidityofML’spositions. ML’snon-agencyRMBSinvestmentsexposeMLtovaryinglevelsofcredit,interestrate,general market,andconcentrationrisk.Credit-relatedriskonnon-agencyRMBSarisesfromlossesduetodelinquenciesanddefaultsbyborrowersontheunderlyingmortgageloansandbreachesbyoriginators and servicers of their obligations under the underlying documentation pursuant to which the nonagencyRMBSareissued.Therateofdelinquenciesanddefaultsonresidentialmortgageloansandthe aggregateamountoftheresultinglossescanbeaffectedbyanumberoffactors,includinggeneraleconomicconditions,particularlythoseintheareawheretherelatedmortgagedpropertyislocated;the leveloftheborrower’sequityinthemortgagedproperty;andtheindividualfinancialcircumstancesof theborrower.

520 96th Annual Report, 2009 Therateofinterestpayableoncertainnon-agencyRMBSmaybesetoreffectivelycappedatthe weighted average net coupon of the underlying mortgage loans themselves, often referred to as an “availablefundscap.”Asaresultofthisavailablefundscap,thereturntoMLonsuchnon-agency RMBS is dependent on the relative timing and rate of delinquencies and prepayments of mortgage loansbearingahigherinterestrate. AsofDecember31,2009,approximately51percentofthepropertiescollateralizingthenon-agency RMBS held by ML were located in California and Florida, based on the geographic location data availablefortheunderlyingloansbyaggregateunpaidprincipalbalance. OtherinvestmentsareprimarilycomprisedofCMBSandCDOs. AtDecember31,2009,theratingsbreakdownofthe$20,965millionofdebtsecurities,whichare recordedatfairvalueintheMLportfolio,asapercentageofaggregatefairvalueofallsecuritiesin theportfoliowasasfollows: Ratings1 Govern- AA+to BBB+to BB+and ment/ AAA AA- A+toA- BBB- Lower Agency Total SecurityType:2 Federalagencyand GSEMBS........... 0.0% 0.0% 0.0% 0.0% 0.0% 86.6% 86.6% Non-agencyRMBS.... 0.5% 0.5% 0.8% 0.3% 7.0% 0.0% 9.1% Other3.................. 1.2% 0.6% 0.5% 0.7% 1.2% 0.1% 4.3% Total .................. 1.7% 1.1% 1.3% 1.0% 8.2% 86.7% 100.0% 1.Lowestofallratingsisusedforthepurposesofthistableforsecuritiesratedbytwoormorenationallyrecognizedstatisticalratingorganizations. 2.ThistabledoesnotincludeML’scommercialandresidentialmortgageloans,swaps,andotherderivativecontracts. 3.Includesallassetsectorsthat,individually,representlessthanfivepercentofaggregatefairvalueofdebtsecurities. ii. CommercialandResidentialMortgageLoans Commercialandresidentialmortgageloansaresubjecttoahighdegreeofcreditriskbecauseofexposuretolossfromloandefaults.Defaultratesaresubjecttoawidevarietyoffactors,including,but notlimitedto,propertyperformance,propertymanagement,supplyanddemand,constructiontrends, consumerbehavior,regionaleconomicconditions,interestrates,andothers. TheperformanceprofileforthecommercialandresidentialmortgageloansatDecember31,2009 wasasfollows(inmillions): Remaining Fairvalueas principalamount apercentageof outstanding Fairvalue remainingprincipal Performingloans: Commercial............................... $7,037 $3,879 55.1% Residential................................ 747 378 50.6% Subtotal................................... 7,784 4,257 54.7% Non-performingloans(pastduemore than90days)1 Commercial............................... 1,081 146 13.5% Residential................................ 739 205 27.7% Subtotal................................... 1,820 351 19.3% Total Commercial............................... 8,118 4,025 49.6% Residential................................ 1,486 583 39.2% Totalloans................................ $9,604 $4,608 48.0% 1.In2009MLchangeditsclassificationofnon-performing/nonaccrualloanstoincludeloanswithpaymentspast duegreaterthan90daysorwhenMLhasdoubtsaboutthefutureperformanceoftheloanassets.Theprioryear classificationincludedallloansgreaterthan60dayspastdue.Thischangeinpresentationwasmadetoconformto industrystandardsanddidnothaveamaterialeffectonML’sconsolidatedfinancialstatements.

Federal Reserve Banks Combined Financial Statements 521 Thefollowingtablesummarizesthestateinwhichresidentialmortgageloansarecollateralizedand thepropertytypesofthecommercialmortgageloansheldintheMLportfolioatDecember31,2009: Concentrationofunpaidprincipalbalances Residential Commercial2 ByState: California............................................. 36.4% Florida................................................ 9.1% Other1................................................ 54.5% 100.0% ByProperty: Hospitality............................................ 82.8% Office................................................. 9.1% Other1................................................ 8.1% 100.0% 1.Nootherindividualstateorpropertytypecomprisesmorethanfivepercentofthetotal. 2.Oneborrowerrepresentsapproximately50percentoftotalunpaidprincipalbalanceofthecommercialmortgageloanportfolio. iii. DerivativeInstruments Derivative contracts are instruments, such as futures or swap contracts, which derive their value fromunderlyingassets,indices,referencerates,oracombinationofthesefactors.TheMLportfolio includesvariousderivativefinancialinstruments,primarilyconsistingofatotalreturnswapagreement (“TRS”) with JPMC. ML and JPMC entered into the TRS with reference obligations representing single-named credit default swaps (“CDS”) primarily on ABS and interest rate swaps (“IRS”) with variousmarketparticipants,includingJPMC.ML,throughitsInvestmentManager,currentlymanages theCDScontractswithintheTRSasarunoffportfolioandmayunwind,amend,ornovatereference obligationsonanongoingbasis. Onanongoingbasis,perthetermsoftheTRS,MLpledgescollateralforcreditorliquidityrelated shortfalls based on 20 percent of the notional amount of sold CDS protection and 10 percent of the presentvalueoffuturepremiumsonpurchasedCDSprotection.Separately,MLandJPMCengagein bilateralpostingofcollateraltocoverthenetmark-to-market(“MTM”)variationsintheswapportfolio.MLonlynetsthecollateralreceivedfromJPMCfromthebilateralMTMpostingforthereference obligations where JPMC is the counterparty. The values of ML’s cash equivalents and investments,purchasedbythere-hypothecationofcashcollateralassociatedwiththeTRS,were$0.8billion and$0.5billion,respectively,asofDecember31,2009and$2.1billionand$0.5billion,respectively, asofDecember31,2008.Inaddition,MLhaspledged$1.5billionand$3.0billionoffederalagency andGSEMBStoJPMCasofDecember31,2009and2008,respectively. MLentersintoadditionalderivativecontractsconsistingoffuturesandinterestrateswapstoeconomicallyhedgeitsexposuretointerestrates.Allderivativesarerecordedatfairvalueinaccordance withASC815.NoneofthederivativesheldinMLaredesignatedashedginginstrumentsforaccountingpurposes. The following risks are associated with the derivative instruments within ML as part of the TRS agreementwithJPMCaswellasanyderivativesoutsideoftheTRS: MarketRisk IRSobligatetwopartiestoexchangeoneormorepaymentstypicallycalculatedwithreferenceto fixedorperiodicallyresetratesofinterestappliedtoaspecifiednotionalprincipalamount.Notional principal is the amount to which interest rates are applied to determine the payment streams under IRS.Suchnotionalprincipalamountsoftenareusedtoexpressthevolumeofthesetransactionsbut arenotactuallyexchangedbetweenthecounterparties. Futures contracts are agreements to buy and sell financial instruments for a set price on a future date.Initialmargindepositsaremadeuponenteringintofuturescontractsintheformofcashorsecurities. During the period that a futures contract is open, changes in the value of the contract are recordedasunrealizedgainsorlossesbyrevaluingthecontractsonadailybasistoreflectthemarket valueofthecontractattheendofeachday’strading.Variationmarginpaymentsarepaidorreceived, dependinguponwhetherunrealizedgainsorlossesresult.Whenthecontractisclosed,MLwillrecord

522 96th Annual Report, 2009 arealizedgainorlossequaltothedifferencebetweentheproceedsfrom(orcostof)theclosingtransactionandML’scostbasisinthecontract.Theuseoffuturestransactionsinvolvestheriskofimperfectcorrelationinmovementsinthepriceoffuturescontracts,interestratesandtheunderlyinghedged assets.MLisalsoatriskofnotbeingabletoenterintoaclosingtransactionforthefuturescontract becauseofanilliquidsecondarymarket.MLhadpledgedcollateralrelatedtofuturecontractsof$40 millionand$69millionasofDecember31,2009and2008,respectively. CDSareagreementsthatprovideprotectionforthebuyeragainstthelossofprincipalonabondor loan in case of a default by the issuer. The nature of a credit event is established by the protection buyerandprotectionsellerattheinceptionofatransaction,andsucheventsincludebankruptcy,insolvency or failure to meet payment obligations when due. The buyer of the CDS pays a premium in returnforpaymentprotectionupontheoccurrence,ifany,ofacreditevent.Upontheoccurrenceofa triggeringcreditevent,themaximumpotentialamountoffuturepaymentsthesellercouldberequired tomakeunderaCDSisequaltothenotionalamountofthecontract.Suchfuturepaymentscouldbe reducedoroffsetbyamountsrecoveredunderrecourseorbycollateralprovisionsoutlinedinthecontract,includingseizureandliquidationofcollateralpledgedbythebuyer.ML’sderivativesportfolio consistsofpurchasedcreditprotectionwithunderlyingreferencednamesnotcorrelatedtooffsetitsexposuretosoldcreditprotection. CreditRisk CreditriskistheriskoffinanciallossresultingfromfailurebyacounterpartytomeetitscontractualobligationstoML.Thiscanbecausedbyfactorsdirectlyrelatedtothecounterparty,suchasbusiness or management. Taking collateral is the most common way to mitigate credit risk. ML takes financialcollateralintheformofcashandmarketablesecuritiesaspartoftheTRSagreementwith JPMCaswellastheover-the-counterderivativesactivitiesoutsideoftheTRS. ThefollowingtablesummarizesthenotionalamountsofderivativeinstrumentsbycontracttypeoutstandingasofDecember31,2009and2008(inmillions): NotionalAmounts1,2 2009 2008 Interestratecontracts: IRS.............................................................. $ 3,185 $11,188 Futuresandoptionsonfutures3................................ 70 45 Creditderivatives: CDS............................................................. 7,323 11,791 Total ............................................................ $10,578 $23,024 1.Representsthesumofgrosslongandgrossshortnotionalderivativecontracts. 2.Therewere1,764and3,606CDSandIRScontractsoutstandingasofDecember31,2009and2008,respectively. 3.Futuresandoptionsonfuturesrelatedtocontractobligationsandnotgrossnotionalamounts. Thefollowingtablesummarizesthefairvalueofderivativeinstrumentsbycontracttypeonagross basisasofDecember31,2009(inmillions): Derivativesusedintradingactivities Grossderivative Grossderivative assets liabilities Interestratecontracts: Swaps............................................................ $ 5 $ 195 Futures........................................................... 20 - Creditderivatives: CDS............................................................. 3,271 1,816 Counterpartynetting............................................ (1,868) (1,868) Cashcollateral.................................................. (281) - Total............................................................. $1,147 $ 143

Federal Reserve Banks Combined Financial Statements 523 The table below summarizes certain information regarding protection sold through CDS as of December31,2009(inmillions): MaximumPotentialPayout/Notional Fair YearstoMaturity Value Upto CreditRatingsoftheReferenceObligation 1year 1–3 3–5 Over5 Total Liability Investmentgrade(AAAtoBBB-)................ $40 $140 $ 5 $ 165 $ 350 $ 154 Non-investmentgrade............................ 5 20 120 1,954 2,099 1,640 Totalcreditdefaultswapssold................... $45 $160 $125 $2,119 $2,449 $1,794 (d) MaidenLaneIILLC MLII’sinvestmentsinnon-agencyRMBSexposeMLIItovaryinglevelsofcredit,interestrate, general market, and concentration risk. Credit-related risk on non-agency RMBS arises from losses due to delinquencies and defaults by borrowers on the underlying mortgage loans and breaches by originatorsandservicersoftheirobligationsundertheunderlyingdocumentationpursuanttowhichthe non-agency RMBS are issued. The rate of delinquencies and defaults on residential mortgage loans and the aggregate amount of the resulting losses can be affected by a number of factors, including generaleconomicconditions,particularlythoseintheareawheretherelatedmortgagedpropertyislocated;theleveloftheborrower’sequityinthemortgagedproperty;andtheindividualfinancialcircumstancesoftheborrower. Therateofinterestpayableoncertainnon-agencyRMBSmaybesetoreffectivelycappedatthe weightedaveragenetcouponoftheunderlyingmortgageloans,oftenreferredtoasanavailablefunds cap.Asaresultofthisavailablefundscap,thereturntotheholderofsuchnon-agencyRMBSisdependentontherelativetimingandrateofdelinquenciesandprepaymentsofmortgageloansbearinga higherrateofinterest. At December 31, 2009, the type/sector and rating composition of ML II’s $15,643 million nonagency RMBS portfolio, recorded at fair value, as a percentage of aggregate fair value, was as follows: Rating1,3 BBB+to BB+and AAA AA+toAA- A+toA- BBB- lower Total AssetType: Alt-AARM .............. 0.9% 3.1% 2.2% 1.9% 23.3% 31.3% Subprime.................. 7.7% 2.8% 3.0% 1.9% 39.4% 54.8% OptionARM ............. 0.0% 0.0% 0.0% 0.1% 6.0% 6.1% Other2..................... 0.1% 0.6% 0.0% 0.0% 7.2% 7.8% Total...................... 8.7% 6.4% 5.2% 3.8% 75.9% 100.0% 1.Lowestofallratingsisusedforthepurposesofthistableifratedbytwoormorenationallyrecognizedstatisticalratingorganizations. 2.Includesallassettypesthat,individually,representlessthanfivepercentofaggregateoutstandingfairvalueof debtsecurities. 3.Rowsandcolumnsmaynottotalduetorounding. At December 31, 2009, approximately 44 percent of the properties collateralizing the non-agency RMBS held by ML II were located in California and Florida based on the geographic location data availablefortheunderlyingloansbyaggregateunpaidprincipalbalance. (e) MaidenLaneIIILLC TheprimaryholdingswithinMLIIIareABSCDOs.AnABSCDOisasecurityissuedbyabankruptcyremoteentitythatisbackedbyadiversifiedpoolofdebtsecurities,whichinthecaseofMLIII areprimarilyRMBSandCMBS.ThecashflowsofABSCDOscanbesplitintomultiplesegments, called“tranches,”whichvaryinriskprofileandyield.Thejuniortranchesbeartheinitialriskofloss, followedbythemoreseniortranches.TheABSCDOsintheMLIIIportfoliolargelyrepresentsenior tranches.Becausetheyareshieldedfromdefaultsbythesubordinatedtranches,seniortranchestypicallyhavehighercreditratingsandloweryieldsthantheunderlyingsecurities,andwilloftenreceive investment-grade ratings from one or more of the nationally recognized rating agencies. Despite the protectionaffordedbythesubordinatedtranches,seniortranchescanexperiencesubstantiallossesfrom actualdefaultsontheunderlyingnon-agencyRMBSorCMBS.

524 96th Annual Report, 2009 ABSCDOsecuritiesarelimitedrecourseobligationsoftheissuerthereofpayablesolelyfromthe underlyingsecuritiesownedbytheissuerorproceedsthereof.Consequently,holdersofABSCDOsecuritiesmustrelysolelyondistributionsonthecollateralunderlyingsuchABSCDOsecuritiesorthe proceedsthereofforpayment.Suchcollateralmayconsistofinvestment-gradedebtsecurities,highyield debt securities, loans, structured finance securities, synthetic securities and other debt instruments. Investments in assets through the purchase of synthetic securities present risks in addition to thoseresultingfromdirectpurchasesofthoseassetsbecausethebuyerofsuchsyntheticsecurityusuallywillhaveacontractualrelationshiponlywiththesyntheticsecuritycounterpartyandnottheobligoronthereferenceobligationofsuchsyntheticsecurity.Thebuyerofasyntheticsecuritywillnot benefitfromanycollateralsupportingthereferenceobligationofsuchsyntheticsecurity,willnothave anyremediesthatwouldnormallybeavailabletotheholderofsuchreferenceobligation,andwillbe subjecttothecreditriskofthesyntheticsecuritycounterpartyaswellastheobligoronsuchreference obligation.Overthelastseveralyears,therehasbeenasignificantincreaseinthedefaultratesof,delinquencieson,andratingdowngradesreportedonRMBSandCMBS.Asaresultofincreasesinthe defaultratesanddelinquencies,therehasbeenadecreaseintheamountofcreditsupportavailablefor theABSCDOsecuritiesbackedbysuchRMBSandCMBSsincetheissuedatethereof.Diminished creditsupportasaresultofincreasesinthedefaultratesof,delinquencieson,andratingdowngrades reportedonRMBSandCMBScouldincreasethelikelihoodthatpaymentsmaynotbemadetoholdersofABSCDOsecurities. CertainABSCDOissuerscanissueshort-termeligibleinvestmentsunderRule2a-7oftheInvestment Company Act of 1940 if the ABS CDO contains arrangements to remarket the securities at definedperiods.Theinvestmentsmustcontainputoptions(“2a-7Puts”)whichallowthepurchasersto selltheABSCDOatpartoathird-party(“PutProvider”),ifascheduledremarketingisunsuccessful duetoreasonsotherthanacreditorbankruptcyevent.AsofDecember31,2009,thetotalnotional valueofABSCDOsheldbyMLIIIwithembedded2a-7Puts,forwhichAIGFPwas,directlyorindirectly, the Put Provider, was $1.6 billion. ML III has entered into an agreement not to exercise the 2a-7Puts,ortoonlyexercisethe2a-7PutsifitsimultaneouslyrepurchasestheABSCDOsatpar.In return,MLIIIwillreceivetheputpremiumsandAIGFPwilltakethenecessarystepstoattemptconversion of the ABS CDOs to long-term notes. The termination dates of this agreement range from December31,2010toApril30,2011dependingontherespectiveABSCDOs. CMBSandRMBSexposeMLIIItovaryinglevelsofcredit,interestrate,liquidity,andconcentrationrisk.Credit-relatedriskarisesfromlossesduetodelinquenciesanddefaultsbyborrowersonthe underlying mortgage loans and breaches by originators and servicers of their obligations under the underlyingdocumentationpursuanttowhichthesecuritiesareissued.Therateofdelinquenciesand defaults on residential and commercial mortgage loans and the aggregate amount of the resulting losses can be affected by a number of factors, including general economic conditions, particularly thoseintheareawheretherelatedmortgagedpropertyislocated;theleveloftheborrower’sequityin themortgagedproperty;andtheindividualfinancialcircumstancesoftheborrower.

Federal Reserve Banks Combined Financial Statements 525 At December 31, 2009, the investment type/vintage and rating composition of ML III’s $22,339 millionportfolio,recordedatfairvalue,asapercentageofaggregatefairvalueofallsecuritiesinthe portfoliowasasfollows: Rating1,2,3 AA+to BBB+to BB+and Not AAA AA- A+toA- BBB- Lower Rated Total ABSCDOs: High-GradeABSCDOs........ 0.0% 0.0% 0.0% 0.0% 68.9% 0.0% 68.9% Pre-2005........................ 0.0% 0.0% 0.0% 0.0% 24.3% 0.0% 24.3% 2005............................ 0.0% 0.0% 0.0% 0.0% 30.6% 0.0% 30.6% 2006............................ 0.0% 0.0% 0.0% 0.0% 7.3% 0.0% 7.3% 2007............................ 0.0% 0.0% 0.0% 0.0% 6.7% 0.0% 6.7% MezzanineABSCDOs......... 0.0% 0.2% 0.0% 0.5% 8.0% 0.3% 8.9% Pre-2005........................ 0.0% 0.2% 0.0% 0.5% 4.4% 0.3% 5.4% 2005............................ 0.0% 0.0% 0.0% 0.0% 2.8% 0.0% 2.8% 2006............................ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2007............................ 0.0% 0.0% 0.0% 0.0% 0.7% 0.0% 0.7% CommercialReal-EstateCDOs. 1.5% 0.5% 18.9% 0.0% 0.0% 0.0% 21.0% Pre-2005........................ 1.5% 0.5% 3.1% 0.0% 0.0% 0.0% 5.2% 2005............................ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2006............................ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2007............................ 0.0% 0.0% 15.8% 0.0% 0.0% 0.0% 15.8% RMBS,CMBS,&Other:........ 0.2% 0.2% 0.1% 0.1% 0.6% 0.0% 1.2% Pre-2005........................ 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.2% 2005............................ 0.1% 0.1% 0.1% 0.1% 0.4% 0.0% 0.9% 2006............................ 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.1% 2007............................ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% TotalInvestments............... 1.7% 0.8% 19.1% 0.6% 77.5% 0.3% 100.0% 1.Lowestofallratingsisusedforthepurposesofthistableifratedbytwoormorenationallyrecognizedstatisticalratingorganizations. 2.Theyearofissuancewiththehighestconcentrationofunderlyingassetsasmeasuredbyoutstandingprincipal balancedeterminesthevintageoftheCDO. 3.Rowsandcolumnsmaynottotalduetorounding (f) TALFLLC TALFloansareextendedonanon-recoursebasisbytheFRBNY.Iftheborrowerdoesnotrepaythe loan,theFRBNYwillenforceitsrightsinthecollateralandmaysellthecollateral,pursuanttoaput agreement,toTALFLLC,establishedforthepurposeofpurchasingsuchassets.AsofDecember31, 2009theFRBNYdidnotenforceitsrightstotheTALFloancollateralorexercisetheputoption.As aresult,TALFLLCdidnotpurchaseanyassetsfromtheFRBNY. CashreceiptsresultingfromtheputoptionfeespaidtotheTALFLLCandproceedsfromtheTreasury’s subordinated loan are invested in the following types of U.S. dollar-denominated short-term investmentsandcashequivalentseligibleforpurchasebytheTALFLLC:(1)Treasurysecurities,(2) federalagencysecuritiesthataresenior,negotiabledebtobligationsoftheFederalNationalMortgage Association(“FNMA”),FederalHomeLoanMortgageCorporation(“FHLMC”),FederalHomeLoan Banks (“FHLB”), and Federal Farm Credit Banks (“FFCB”) which have a fixed rate of interest, (3) repurchaseagreementsthatarecollateralizedbyTreasuryandfederalagencysecuritiesandfixed-rate agencyMBS,and(4)moneymarketmutualfundsregisteredwiththeSecuritiesandExchangeCommissionandregulatedunderRule2a-7oftheInvestmentCompanyActthatinvestexclusivelyinTreasuryandfederalagencysecurities. (g) Fair-ValueMeasurement TheconsolidatedVIEshaveadoptedASC820andASC825andhaveelectedthefairvalueoption forallsecuritiesandcommercialandresidentialmortgagesheldbyMLandTALFLLC.MLIIand ML III qualify as nonregistered investment companies under the provisions of ASC 946 and, therefore,allinvestmentsarerecordedatfairvalueinaccordancewithASC820.Inaddition,theFRBNY haselectedtorecordthebeneficialinterestsinML,MLII,MLIII,andtheTALFLLCatfairvalue.

526 96th Annual Report, 2009 TheaccountingandclassificationoftheseinvestmentsappropriatelyreflectstheVIEs’andtheFRB- NY’sintentwithrespecttothepurposeoftheinvestmentsandmostcloselyreflectstheamountofthe assetsavailabletoliquidatetheentities’obligations. i. FairValueHierarchy ASC820establishesathree-levelfairvaluehierarchythatdistinguishesbetweenmarketparticipant assumptionsdevelopedusingmarketdataobtainedfromindependentsources(observableinputs)and theconsolidatedVIEsassumptionsaboutmarketparticipantassumptionsdevelopedusingthebestinformationavailableinthecircumstances(unobservableinputs). ThethreelevelsestablishedbyASC820aredescribedbelow: • Level1 —Valuationisbasedonquotedpricesforidenticalinstrumentstradedinactivemarkets. • Level 2 — Valuation is based on quoted prices for similar instruments in active markets, quoted pricesforidenticalorsimilarinstrumentsinmarketsthatarenotactive,andmodel-basedvaluation techniquesforwhichallsignificantassumptionsareobservableinthemarket. • Level3—Valuationisbasedoninputsfrommodel-basedtechniquesthatusesignificantassumptionsnotobservableinthemarket.TheseunobservableassumptionsreflecttheconsolidatedVIE’s estimatesofassumptionsthatmarketparticipantswoulduseinpricingtheassetandliability.Valuationtechniquesincludetheuseofoptionpricingmodels,discountedcashflowmodels,andsimilar techniques. Theinputsormethodologyusedforvaluingsecuritiesarenotnecessarilyanindicationoftherisk associatedwithinvestinginthosesecurities. ii. DeterminationofFairValue TheconsolidatedVIEsvaluetheirinvestmentsonthebasisofthelastavailablebidpricesorcurrentmarketquotationsprovidedbydealers,orpricingservicesselectedbytheirdesignatedinvestment managers.Todeterminethevalueofaparticularinvestment,pricingservicesmayuseinformationon transactionsinsuchinvestments;quotationsfromdealers;pricingmetrics;markettransactionsincomparable investments; relationships observed in the market between investments; and calculated yield measuresbasedonvaluationmethodologiescommonlyemployedinthemarketforsuchinvestments. Marketquotationsmaynotrepresentfairvalueincircumstancesinwhichtheinvestmentmanager believesthatfactsandcircumstancesapplicabletoanissuer,aseller,apurchaser,orthemarketfora particularsecurityresultinthecurrentmarketquotationsreflectinganinaccuratefairvalueofthesecurity.Todeterminefairvalue,theinvestmentmanagerappliesproprietaryvaluationmodelsthatuse collateralperformancescenariosandpricingmetricsderivedfromthereportedperformanceoftheuniverseofbondswithsimilarcharacteristicsaswellastheobservablemarket. Becauseoftheinherentuncertaintyofdeterminingthefairvalueofinvestmentsthatdonothavea readilyavailablefairvalue,thefairvalueoftheseinvestmentsmaydiffersignificantlyfromthevaluesthatwouldhavebeenreportedifareadilyavailablefairvaluehadexistedfortheseinvestments andmaydiffermateriallyfromthevaluesthatmayultimatelyberealized. The fair value of the liability for the beneficial interests of consolidated VIEs is estimated based uponthefairvalueoftheunderlyingassetsheldbytheVIEs.Theholdersofthesebeneficialinterests donothaverecoursetothegeneralcreditoftheFRBNY. iii. ValuationMethodologiesforLevel3AssetsandLiabilities Incertaincaseswherethereislimitedactivityaroundinputstothevaluation,securitiesareclassified within level 3 of the valuation hierarchy. For example, in valuing CDOs, certain collateralized mortgageobligations,andcommercialandresidentialmortgageloans,thedeterminationoffairvalue isbasedoncollateralperformancescenarios.Thesevaluationsalsoincorporatepricingmetricsderived fromthereportedperformanceoftheuniverseofbondsaswellasobservationsandestimatesofmarketdata.Becauseexternalpriceinformationisnotavailable,market-basedmodelsareusedtovalue thesesecurities.Keyinputstothemodelaremarketspreads,dataforeachcreditrating,collateraltype, and other relevant contractual features. Because there is lack of observable pricing, securities and investmentloansthatarecarriedatfairvalueareclassifiedwithinlevel3.

Federal Reserve Banks Combined Financial Statements 527 ThefollowingtablespresentthefinancialinstrumentsrecordedinVIEsatfairvalueasofDecember31byASC820hierarchy(inmillions): 2009 Totalfair Level1 Level2 Level3 Netting1 value Assets: Cashequivalents............................. $1,933 $ 142 $ - $ - $ 2,075 CDOs......................................... - 241 22,409 - 22,650 Non-agencyRMBS.......................... - 9,461 8,091 - 17,552 FederalagencyandGSEMBS.............. - 18,125 24 - 18,149 Commercialmortgageloans................. - - 4,025 - 4,025 Residentialmortgageloans.................. - - 583 - 583 Swapcontracts .............................. - 5 3,272 (2,150) 1,127 Otherinvestments............................ 31 5,413 23 - 5,467 Otherassets.................................. 20 - - - 20 Totalassets................................... $1,984 $33,387 $38,427 $(2,150) $71,648 Liabilities: BeneficialinterestinconsolidatedVIEs.... $ - $ - $ 5,095 $ - $ 5,095 Swapcontracts .............................. - 195 1,816 (1,868) 143 Totalliabilities............................... $ - $ 195 $ 6,911 $(1,868) $ 5,238 1.Derivativereceivablesandpayablesandtherelatedcashcollateralreceivedandpaidareshownnettedwhena masternettingagreementexists. 2008 Level1 Level2 Level3 Totalfairvalue Assets: CDOs................................. $- $ 155 $26,802 $26,957 Non-agencyRMBS.................. - 8,165 12,510 20,675 FederalagencyandGSEMBS...... - 14,759 895 15,654 Commercialmortgageloans......... - - 5,553 5,553 Residentialmortgageloans.......... - - 937 937 Swapcontracts ...................... - - 2,454 2,454 Otherinvestments.................... - 1,992 348 2,340 Totalassets........................... $- $25,071 $49,499 $74,570 Liabilities: Beneficialinterestinconsolidated variableinterestentities........... $- $ - $ 2,824 $ 2,824

528 96th Annual Report, 2009 Thetablesbelowpresentareconciliationofallassetsandliabilitiesmeasuredatfairvalueonarecurringbasisusingsignificantunobservableinputs(level3)atDecember31,2009and2008.UnrealizedgainsandlossesrelatedtothoseassetsstillheldatDecember31,2009and2008arereportedas a component of “Consolidated variable interest entities: Investments held by consolidated variable interestentities,net”intheCombinedStatementsofCondition. 2009 Changein unrealized gains/(losses) Net relatedto pur- Total financial chases, realized/ instruments sales,and unrealized Net heldat Fairvalue settle- gains transfers Fairvalue December31, January1 ments (losses) inorout December31 2009 Assets: CDOs......................... $26,802 $(3,123) $(1,267) $ (3) $22,409 $(1,265) Non-agencyRMBS.......... 12,510 (1,481) (499) (2,439) 8,091 (533) FederalagencyandGSE MBS....................... 895 (248) - (623) 24 - Commercialmortgageloans. 5,553 (305) (1,223) - 4,025 (1,177) Residentialmortgageloans.. 937 (86) (268) - 583 (219) Otherinvestments............ 348 (263) 30 (92) 23 29 Totalassets................... $47,045 $(5,506) $(3,327) $(3,157) $35,155 $(3,165) Netswapcontracts2.......... 2,454 (906) 94 (186) 1,456 212 Liabilities: Beneficialinterestin consolidatedvariable interestentities............ $(2,824) $ (368)1 $(1,903) $ - $(5,095) $(1,903) 1.Includes$268millionincapitalizedinterest. 2.Level3derivativeassetsandliabilitiesarepresentednetforthepurposesofthistable. 2008 Changein unrealized gains/(losses) Net relatedto pur- Total financial chases, realized/ instruments sales,and unrealized Net heldat Fairvalue settle- gains transfers Fairvalue December31, January1 ments (losses) inorout December31 2008 Assets: CDOs......................... $- $29,740 $(2,938) $- $26,802 $(2,938) Non-agencyRMBS.......... - 14,668 (2,158) - 12,510 (2,159) FederalagencyandGSE MBS....................... - 891 4 - 895 4 Commercialmortgageloans. - 7,683 (2,130) - 5,553 (2,130) Residentialmortgageloans.. - 1,500 (563) - 937 (563) Swapcontracts............... - 2,369 85 - 2,454 155 Otherinvestments............ - 625 (277) - 348 (278) Totalassets................... $- $57,476 $(7,977) $- $49,499 $(7,909) Liabilities: Beneficialinterestin consolidatedvariable interestentities............ $- $(7,213)1 $4,389 $- $(2,824) $4,389 1.Includes$63millionincapitalizedinterest.

Federal Reserve Banks Combined Financial Statements 529 (h) ProfessionalFees TheconsolidatedVIEshaverecordedcostsforprofessionalservicesprovidedbyseveralnationally recognizedinstitutionstoserveasinvestmentmanagers,administrators,andcustodiansfortheVIEs’ assets.Thefeeschargedbytheinvestmentmanagers,custodians,andadministrators,aswellastheauditors,attorneys,andotherserviceproviders,arerecordedin“Professionalfeesrelatedtoconsolidated variableinterestentities”intheCombinedStatementsofIncomeandComprehensiveIncome. (10) Non-ConsolidatedVariableInterestEntities In December 2009, the FRBNY obtained preferred securities in two VIEs. The FRBNY does not consolidatetheseVIEsbecauseitdoesnothaveacontrollingfinancialinterest.TheFRBNY’smaximumexposuretoanypotentiallossesoftheVIEs,shouldtheyoccur,islimitedtotherecordedvalue oftheFRBNY’sinvestmentinthepreferredsecuritiesanddividendsreceivablefromtheVIE.Thefollowing table shows the financial information related to nonconsolidated VIEs for the year ended December31,2009(inmillions): TotalNon- AIALLC ALICOLLC ConsolidatedVIEs Totalassets................................ $89,100 $114,800 $203,900 Totalliabilities............................ 73,600 100,800 174,400 Maximumexposuretoloss............... 16,068 9,038 25,106 The recorded value of the FRBNY’s investment in the preferred securities, including capitalized dividends, was $16,068 million for AIA LLC and $9,038 million for ALICO LLC at December 31, 2009.TheFRBNY’sinvestmentinpreferredsecuritiesandcapitalizeddividendsisreportedas“Preferredsecurities”anddividendsreceivablearereportedasacomponentof“Otherassets”intheCombinedStatementsofCondition. ThefairvalueoftheFRBNY’spreferredinterestsinAIALLCandALICOLLCwasnotmateriallydifferentfromtheamountreportedas“Preferredsecurities”intheCombinedStatementsofConditionasofDecember,31,2009. (11) BankPremises,Equipment,AndSoftware BankpremisesandequipmentatDecember31wereasfollows(inmillions): 2009 2008 Bankpremisesandequipment: Land............................................................. $ 344 $ 334 Buildings........................................................ 2,378 2,161 Buildingmachineryandequipment............................ 492 463 Constructioninprogress........................................ 43 160 Furnitureandequipment........................................ 1,010 1,037 Subtotal.......................................................... 4,267 4,155 Accumulateddepreciation...................................... (1,643) (1,583) Bankpremisesandequipment,net............................. $2,624 $2,572 Depreciationexpense,fortheyearsendedDecember31..... $ 202 $ 199 BankpremisesandequipmentatDecember31includedthefollowingamountsforcapitalizedleases (inmillions): 2009 2008 Leasedpremisesandequipmentundercapitalleases.......... $10 $21 Accumulateddepreciation...................................... (6) (13) Leasedpremisesandequipmentundercapitalleases,net..... $ 4 $ 8 Depreciationexpenserelatedtoleasedpremisesand equipmentundercapitalleases.............................. $ 2 $ 4

530 96th Annual Report, 2009 TheReserveBanksleasespacetooutsidetenantswithremainingleasetermsrangingfromoneto fifteen years. Rental income from such leases was $32 million and $30 million for the years ended December31,2009and2008,respectively,andisreportedasacomponentof“Otherincome”inthe CombinedStatementsofIncomeandComprehensiveIncome.Futureminimumleasepaymentsthatthe ReserveBankswillreceiveundernoncancelableleaseagreementsinexistenceatDecember31,2009 wereasfollows(inmillions): 2010............................................................. $ 28 2011............................................................. 24 2012............................................................. 21 2013............................................................. 20 2014............................................................. 19 Thereafter........................................................ 54 Total............................................................. $166 TheReserveBankshadcapitalizedsoftwareassets,netofamortization,of$134millionand$129 millionatDecember31,2009and2008,respectively.Amortizationexpensewas$52millionand$67 millionfortheyearsendedDecember31,2009and2008,respectively.Capitalizedsoftwareassetsare reportedasacomponentof“Otherassets”intheCombinedStatementsofConditionandtherelated amortizationisreportedasacomponentof“Otherexpenses”intheCombinedStatementsofIncome andComprehensiveIncome. Assets impaired as a result of the Reserve Banks’ restructuring plans, as discussed in Note 16, includecheckequipment,leaseholdimprovements,andfurnitureassets.Assetimpairmentlossesof$2 millionfortheyearendedDecember31,2008weredeterminedusingfairvaluesbasedonquotedfair valuesorothervaluationtechniquesandarereportedasacomponentof“Operatingexpenses:Other expenses” in the Combined Statements of Income and Comprehensive Income. There were no asset impairmentsfortheyearendedDecember31,2009. (12) CommitmentsAndContingencies InthenormalcourseofoperationstheReserveBanksenterintocontractualcommitments,normally withfixedexpirationdatesorterminationprovisions,atspecificratesandforspecificpurposes. AtDecember31,2009,theReserveBankswereobligatedundernoncancelableleasesforpremises andequipmentwithremainingtermsrangingfromonetoapproximately14years.Theseleasesprovide for increased rental payments based upon increases in real estate taxes, operating costs, or selectedpriceindices. Rentalexpenseunderoperatingleasesforcertainoperatingfacilities,warehouses,anddataprocessingandofficeequipment(includingtaxes,insurance,andmaintenancewhenincludedinrent),netof subleaserentals,was$27millionforeachoftheyearsendedDecember31,2009and2008. Futureminimumrentalpaymentsundernoncancelableoperatingleases,netofsubleaserentals,with remainingtermsofoneyearormore,atDecember31,2009areasfollows(inmillions): Operating leases 2010............................................................. $ 11 2011............................................................. 12 2012............................................................. 12 2013............................................................. 11 2014............................................................. 11 Thereafter........................................................ 95 Futureminimumrentalpayments.............................. $ 152

Federal Reserve Banks Combined Financial Statements 531 At December 31, 2009, the Reserve Banks had unrecorded unconditional purchase commitments and long-term obligations extending through the year 2017 with a remaining fixed commitment of $206million.Purchasesof$28millionand$33millionweremadeagainstthesecommitmentsduring 2009 and 2008, respectively. These commitments represent maintenance of currency processing machines and have variable and/or fixed components. The variable portion of the commitments is for additionalservicesabovefixedcontractualservicelimits.Thefixedpaymentsforthenextfiveyears underthesecommitmentsareasfollows(inmillions): 2010............................................................. $32 2011............................................................. 23 2012............................................................. 23 2013............................................................. 24 2014............................................................. 25 TheReserveBanksareinvolvedincertainlegalactionsandclaimsarisingintheordinarycourseof business. Although it is difficult to predict the ultimate outcome of these actions, in management’s opinion,basedondiscussionswithcounsel,theaforementionedlitigationandclaimswillberesolved withoutmaterialadverseeffectonthefinancialpositionorresultsofoperationsoftheReserveBanks. OtherCommitments In support of financial market stability activities, the Reserve Banks entered into commitments to providefinancialassistanceandbackstopsupporttofinancialinstitutions.Thecontractualamountrepresents the Reserve Banks’ maximum exposure to loss in the event that the commitments are fully fundedandthereisadefaultbytheborrowerortotallossinvalueofpledgedcollateral.TotalcommitmentsatDecember31,2009and2008wereasfollows(inmillions): 2009 2008 Contractual Unfunded Contractual Unfunded amount amount amount amount Loancommitment(Citigroup)........... $ - $ - $244,800 $244,800 Securedlineofcredit(AIG)............ 35,000 17,100 60,000 23,200 Commercialloancommitments(ML)... 157 157 266 266 Total...................................... $35,157 $17,257 $305,066 $268,266 The agreement with Citigroup, while legally a loan commitment, is accounted for in accordance withFASBASCTopic460(ASC460),Guarantees(previouslyFIN45).Thisagreementwasterminated effective December 23, 2009 and, as a result, the FRBNY had no contractual obligation at December31,2009.Theterminationfeeof$50millionisreportedasacomponentof“Otherincome” intheCombinedStatementsofIncome. ThesecuredlineofcreditrelatestotheundrawnportionoftheFRBNY’scommitmenttolendto AIG. The amount of the FRBNY’s commitment to lend to AIG was reduced during the year ended December31,2009asaresultofthedebtrestructuringdescribedinNote3,Note4,andNote5.Collateral to secure the FRBNY’s loan to AIG includes the equity in AIG’s subsidiaries. The FRBNY doesnotexpecttoincuranylossesrelatedtotheunfundedcommitmentasofDecember31,2009. The undrawn portion of the FRBNY’s commercial loan commitment relates to commercial mortgageloansacquiredbyML. (13) RetirementAndThriftPlans RetirementPlans TheReserveBankscurrentlyofferthreedefinedbenefitretirementplanstotheiremployees,based on length of service and level of compensation. Substantially all of the employees of the Reserve Banks,BoardofGovernors,andOfficeofEmployeeBenefitsoftheFederalReserveSystem(“OEB”) participateintheRetirementPlanforEmployeesoftheFederalReserveSystem(“SystemPlan”).In addition,employeesatcertaincompensationlevelsparticipateintheBenefitEqualizationRetirement Plan(“BEP”)andcertainReserveBankofficersparticipateintheSupplementalRetirementPlanfor SelectOfficersoftheFederalReserveBank(“SERP”). TheSystemPlanprovidesretirementbenefitstoemployeesoftheFederalReserveBanks,theBoard ofGovernors,andOEB.TheFRBNY,onbehalfoftheSystem,recognizesthenetassetornetliabil-

532 96th Annual Report, 2009 ityandcostsassociatedwiththeSystemPlaninitsconsolidatedfinancialstatements.Costsassociated withtheSystemPlanarenotreimbursedbyotherparticipatingemployers. FollowingisareconciliationofthebeginningandendingbalancesoftheSystemPlanbenefitobligation(inmillions): 2009 2008 Estimatedactuarialpresentvalueofprojectedbenefit obligationatJanuary1....................................... $7,031 $5,325 Servicecost-benefitsearnedduringtheperiod................ 204 150 Interestcostonprojectedbenefitobligation................... 427 357 Actuarial(gain)loss............................................ (28) 599 Contributionsbyplanparticipants.............................. 3 3 Specialterminationbenefits ................................... 9 9 Benefitspaid.................................................... (291) (280) Planamendments................................................ 9 868 Estimatedactuarialpresentvalueofprojectedbenefit obligationatDecember31................................... $7,364 $7,031 FollowingisareconciliationshowingthebeginningandendingbalanceoftheSystemPlanassets, thefundedstatus,andtheaccruedpensionbenefitcosts(inmillions): 2009 2008 EstimatedplanassetsatJanuary1(ofwhich$5,037millionand $6,566millionismeasuredatfairvalueasofJanuary1,2009 and2008,respectively)............................................... $5,053 $6,604 Actualreturnonplanassets............................................. 1,016 (1,274) Contributionsbytheemployer.......................................... 500 - Contributionsbyplanparticipants...................................... 3 3 Benefitspaid............................................................. (291) (280) EstimatedplanassetsatDecember31(ofwhich$6,252millionand $5,037millionismeasuredatfairvalueasofDecember31,2009 and2008,respectively)............................................... $6,281 $5,053 Fundedstatusandaccruedpensionbenefitcosts....................... $(1,083) $(1,978) Amountsincludedinaccumulatedothercomprehensivelossare shownbelow: Priorservicecost........................................................ $ (883) $ (989) Netactuarialloss........................................................ (2,488) (3,429) Totalaccumulatedothercomprehensiveloss........................... $(3,371) $(4,418) Accruedpensionbenefitcostsarereportedas“Accruedbenefitcosts”intheCombinedStatements ofCondition. TheaccumulatedbenefitobligationfortheSystemPlan,whichdiffersfromtheestimatedactuarial presentvalueofprojectedbenefitobligationbecauseitisbasedoncurrentratherthanfuturecompensationlevels,was$6,430millionand$6,143millionatDecember31,2009and2008,respectively. Theweighted-averageassumptionsusedindevelopingtheaccumulatedandprojectedpensionbenefitobligationsfortheSystemPlanasofDecember31wereasfollows: 2009 2008 Discountrate.................................................... 6.00% 6.00% Rateofcompensationincrease................................. 5.00% 5.00% Net periodic benefit expenses for the years ended December 31, 2009 and 2008 were actuarially determinedusingaJanuary1measurementdate.In2008,severalamendmentsweremadetotheplan. Asaresult,theactuariallydeterminednetperiodicbenefitexpensesfortheyearendedDecember31, 2008wereremeasuredasofNovember1,2008usinga7.75%discountrate.Theplanamendments, themostsignificantofwhichwastoincorporateannual,ratherthanad-hoc,cost-of-livingadjustments totheparticipants’planbenefit,resultedina$60millionincreaseinnetperiodicbenefitexpensesfor theyearendedDecember31,2008.Therewerenosignificantbenefitchangesapprovedin2009.

Federal Reserve Banks Combined Financial Statements 533 Theweighted-averageassumptionsusedindevelopingnetperiodicbenefitexpensesfortheSystem Planfortheyearswereasfollows: 2009 2008 Discountrate.................................................... 6.00% 6.50% Expectedassetreturn........................................... 7.75% 8.00% Rateofcompensationincrease................................. 5.00% 5.00% Discountratesreflectyieldsavailableonhigh-qualitycorporatebondsthatwouldgeneratethecash flowsnecessarytopaytheSystemPlan’sbenefitswhendue.Theexpectedlong-termrateofreturnon assetswasbasedonacombinationoffactors,includingtheSystemPlan’sassetallocationstrategyand historical returns; surveys of expected rates of return for other entities’ plans; a projected return for equitiesandfixedincomeinvestmentsbasedonrealinterestrates,inflationexpectations,andequity riskpremiums;andsurveysofexpectedreturnsinequityandfixedincomemarkets. The components of net periodic pension benefit expense for the System Plan for the years ended December31areshownbelow(inmillions): 2009 2008 Servicecost-benefitsearnedduringtheperiod................ $204 $150 Interestcostonaccumulatedbenefitobligation................ 427 357 Amortizationofpriorservicecost.............................. 116 41 Amortizationofnetloss........................................ 285 78 Expectedreturnonplanassets................................. (389) (497) Netperiodicpensionbenefitexpense.......................... 643 129 Specialterminationbenefits.................................... 9 9 Totalnetperiodicpensionbenefitexpense.................... $652 $138 Estimatedamountsthatwillbeamortizedfromaccumulated othercomprehensivelossintonetperiodicpensionbenefit expensein2010areshownbelow: Priorservicecost................................................ $112 Netactuarialloss................................................ 181 Total............................................................. $293 TherecognitionofspecialterminationbenefitsisprimarilytheresultofenhancedretirementbenefitsprovidedtoemployeesduringtherestructuringdescribedinNote16. Followingisasummaryofexpectedbenefitpayments,excludingenhancedretirementbenefits(in millions): Expected benefit payments 2010............................................................. $ 332 2011............................................................. 343 2012............................................................. 364 2013............................................................. 388 2014............................................................. 411 2015–2018....................................................... 2,389 Total............................................................. $ 4,227 TheSystem’sCommitteeonInvestmentPerformance(“CIP”)isresponsibleforestablishinginvestment policies, selecting investment managers, and monitoring the investment managers’ compliance withthepolicies.AtDecember31,2009,theSystemPlan’sassetswereheldinsixinvestmentvehicles: a constant-mix asset allocation account, a liability-linked account, an indexed U.S. investmentgradebondfund,anindexedU.S.equityfund,anon-U.S.developed-marketsfund,andamoneymarket fund. The diversity in investment vehicles is to limit concentration of risk and the risk of loss relatedtoanyspecificsector.TheconstantmixaccounttrackstheStandard&Poor’s500StockIndex andtheBarclaysAggregateBondIndex,andisautomaticallyrebalanced.Theliability-linkedaccount, fundedinApril2008,seekstodefeaseaportionoftheSystemPlan’sliabilityrelatedtoretiredlives using a Treasury securities portfolio. The policy governing this account calls for cash-matching the firsttwoyearsofaportionofretireebenefitspaymentsandimmunizingtheremainingobligation.The

534 96th Annual Report, 2009 money market fund is the repository for cash balances and adheres to a constant dollar accounting methodology.Permittedandprohibitedinvestments,aswellasuseofderivativesintheindexedvehiclesforwhichtheSystemPlan’sassetsareinvested,aredefinedaspartofthetrustagreementforthe selected investment vehicle. The CIP reviews this agreement as part of the selection of each investmenttoensurethatthetrustagreementisconsistentwiththeCIP’sinvestmentobjectivesfortheSystemPlan’sassets.Inthecaseoftheconstant-mixassetallocationaccount,investmentsmustbewithin the defined indices and the use of derivatives is permitted to the extent necessary to manage cash flows. The System Plan’s policy and actual asset allocations at December 31, by asset category, are as follows: Policy 2009Actual 2008Actual U.S.equities............................... 50.7% 53.0% 55.4% Internationalequities..................... 11.8% 12.9% 5.9% Fixedincome............................. 37.5% 33.8% 36.9% Cash....................................... 0.0% 0.3% 1.8% Total....................................... 100.0% 100.0% 100.0% ContributionstotheSystemPlanmaybedeterminedusingdifferentassumptionsthanthoserequired forfinancialreporting.TheSystemPlan’sactuarialfundingmethodisexpectedtoproducearecommendedannualfundingrangebetween$400and$450million.In2010,theSystemwillmakemonthly contributionsof$35millionandwillreevaluateuponcompletionofthe2010actuarialvaluation.The ReserveBanks’projectedbenefitobligation,fundedstatus,andnetpensionexpensesfortheBEPand theSERPatDecember31,2009and2008,andfortheyearsthenended,werenotmaterial. TheSystemPlan’sinvestmentsarereportedatfairvalueasrequiredbyASC820.ASC820establishesathree-levelfairvaluehierarchythatdistinguishesbetweenmarketparticipantassumptionsdeveloped using market data obtained from independent sources (observable inputs) and the Reserve Banks’assumptionsaboutmarketparticipantassumptionsdevelopedusingthebestinformationavailableinthecircumstances(unobservableinputs). ThethreelevelsestablishedbyASC820aredescribedbelow: • Level1 —Valuationisbasedonquotedpricesforidenticalinstrumentstradedinactivemarkets. • Level 2 — Valuation is based on quoted prices for similar instruments in active markets, quoted pricesforidenticalorsimilarinstrumentsinmarketsthatarenotactive,andmodel-basedvaluation techniquesforwhichallsignificantassumptionsareobservableinthemarket. • Level3—Valuationisbasedoninputsfrommodel-basedtechniquesthatusesignificantassumptionsnotobservableinthemarket.TheseunobservableassumptionsreflecttheReserveBanks’estimatesofassumptionsthatmarketparticipantswoulduseinpricingtheassetandliability.Valuation techniquesincludetheuseofoptionpricingmodels,discountedcashflowmodels,andsimilartechniques. Theinputsormethodologyusedforvaluingsecuritiesarenotnecessarilyanindicationoftherisk associatedwithinvestinginthosesecurities.

Federal Reserve Banks Combined Financial Statements 535 ThefollowingtablespresentthefinancialinstrumentsrecordedatfairvalueasofDecember31by ASC820hierarchy(inmillions): 2009 Description Level1 Level2 Level3 Total Short-terminvestments...................... $ - $ 24 $- $ 24 Treasuryandfederalagencysecurities...... 677 38 - 715 GSEdebtsecurities.......................... - 156 - 156 Otherfixedincomesecurities............... - 128 - 128 Commonstocks.............................. 883 - - 883 Commingledfunds........................... - 4,346 - 4,346 Total.......................................... $1,560 $4,692 $- $6,252 2008 Description Level1 Level2 Level3 Total Short-terminvestments...................... $ 15 $ 119 $- $ 134 Treasuryandfederalagencysecurities...... 852 109 - 961 GSEdebtsecurities.......................... - 403 - 403 Otherfixedincomesecurities............... - 482 - 482 Commonstocks.............................. 1,905 - - 1,905 Commingledfunds........................... - 1,152 - 1,152 Total.......................................... $2,772 $2,265 $- $5,037 The System Plan enters into futures contracts, traded on regulated exchanges, to manage certain risksandtomaintainappropriatemarketexposureinmeetingtheinvestmentobjectivesoftheSystem Plan.TheSystemPlanbearsthemarketriskthatarisesfromanyunfavorablechangesinthevalueof thesecuritiesorindexesunderlyingthesefuturescontracts.Theuseoffuturescontractsinvolves,to varying degrees, elements of market risk in excess of the amount recorded in the Combined StatementsofCondition.TheguidelinesestablishedbytheCIPfurtherreducesriskbylimitingthenetfuturespositions,formostfundmanagers,to15percentofthemarketvalueoftheadvisor’sportfolio. No limit has been established on the futures positions of the liability-driven investments, since the fundmanageronlyexecutesTreasuryfutures. AtDecember31,2009and2008,cashavailableforfuturestradingwas$1millionand$2million, respectively.AtDecember31,2009,therewere$1millionofTreasurysecuritiespledgedascollateral. AtDecember31,2008,therewerenosecuritiespledgedascollateral. ThriftPlan EmployeesoftheReserveBanksparticipateinthedefinedcontributionThriftPlanforEmployees of the Federal Reserve System (“Thrift Plan”). The Reserve Banks match employee contributions basedonaspecifiedformula.FortheyearendedDecember31,2008andforthefirstthreemonthsof theyearendedDecember31,2009,theReserveBanksmatched80percentofthefirstsixpercentof employeecontributionsforemployeeswithlessthanfiveyearsofserviceand100percentofthefirst six percent of employee contributions for employees with five or more years of service. Effective April1,2009,theReserveBanksmatch100percentofthefirst6percentofemployeecontributions fromthedateofhireandprovideanautomaticemployercontributionofonepercentofeligiblepay. TheReserveBanks’ThriftPlancontributionstotaled$82millionand$72millionfortheyearsended December 31, 2009 and 2008, respectively, and are reported as a component of “Salaries and other benefits”intheCombinedStatementsofIncomeandComprehensiveIncome. (14) PostretirementBenefitsOtherThanRetirementPlansAndPostemployment Benefits PostretirementBenefitsOtherThanRetirementPlans InadditiontotheReserveBanks’retirementplans,employeeswhohavemetcertainageandlengthof-service requirements are eligible for both medical benefits and life insurance coverage during retirement. TheReserveBanksfundbenefitspayableunderthemedicalandlifeinsuranceplansasdueand,accordingly,havenoplanassets.

536 96th Annual Report, 2009 Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions): 2009 2008 AccumulatedpostretirementbenefitobligationatJanuary1....... $1,221 $1,121 Servicecostbenefitsearnedduringtheperiod..................... 40 38 Interestcostonaccumulatedbenefitobligation.................... 74 71 Netactuarialloss.................................................... 54 54 Curtailmentgain..................................................... - (10) Specialterminationbenefits ........................................ 1 - Contributionsbyplanparticipants.................................. 16 15 Benefitspaid......................................................... (79) (72) MedicarePartDsubsidies........................................... 5 4 Planamendments.................................................... (8) - AccumulatedpostretirementbenefitobligationatDecember31... $1,324 $1,221 AtDecember31,2009and2008,theweighted-averagediscountrateassumptionsusedindevelopingthepostretirementbenefitobligationwere5.75percentand6.00percent,respectively. Discountratesreflectyieldsavailableonhigh-qualitycorporatebondsthatwouldgeneratethecash flowsnecessarytopaytheplan’sbenefitswhendue. Followingisareconciliationofthebeginningandendingbalanceoftheplanassets,theunfunded postretirementbenefitobligation,andtheaccruedpostretirementbenefitcosts(inmillions): 2009 2008 FairvalueofplanassetsatJanuary1............................... $ - $ - Contributionsbytheemployer...................................... 58 53 Contributionsbyplanparticipants.................................. 16 15 Benefitspaid......................................................... (79) (72) MedicarePartDsubsidies........................................... 5 4 FairvalueofplanassetsatDecember31........................... $ - $ - Unfundedobligationandaccruedpostretirementbenefitcost..... $1,324 $1,221 Amountsincludedinaccumulatedothercomprehensivelossare shownbelow: Priorservicecost.................................................... $ 33 $ 44 Netactuarialloss.................................................... (338) (313) Deferredcurtailmentgain........................................... - 4 Totalaccumulatedothercomprehensiveloss....................... $ (305) $ (265) Accruedpostretirementbenefitcostsarereportedasacomponentof“Accruedbenefitcosts”inthe CombinedStatementsofCondition. Formeasurementpurposes,theassumedhealthcarecosttrendratesatDecember31areasfollows: 2009 2008 Healthcarecosttrendrateassumedfornextyear............. 7.50% 7.50% Ratetowhichthecosttrendrateisassumedtodecline (theultimatetrendrate)...................................... 5.00% 5.00% Yearthattheratereachestheultimatetrendrate.............. 2015 2014

Federal Reserve Banks Combined Financial Statements 537 Assumed health care cost trend rates have a significant effect on the amounts reported for health careplans.AonepercentagepointchangeinassumedhealthcarecosttrendrateswouldhavethefollowingeffectsfortheyearendedDecember31,2009(inmillions): Onepercentage Onepercentage pointincrease pointdecrease Effectonaggregateofserviceandinterestcostcomponents ofnetperiodicpostretirementbenefitcosts................. $ 15 $ (13) Effectonaccumulatedpostretirementbenefitobligation...... 135 (115) Thefollowingisasummaryofthecomponentsofnetperiodicpostretirementbenefitexpensefor theyearsendedDecember31(inmillions): 2009 2008 Servicecostforbenefitsearnedduringtheperiod............ $ 40 $ 38 Interestcostonaccumulatedbenefitobligation................ 74 71 Amortizationofpriorservicecost.............................. (20) (20) Amortizationofnetactuarialloss.............................. 29 27 Totalperiodicexpense.......................................... 123 116 Curtailmentgain................................................ (4) (1) Specialterminationbenefitsloss............................... 1 - Netperiodicpostretirementbenefitexpense................... $120 $115 Estimatedamountsthatwillbeamortizedfromaccumulated othercomprehensivelossintonetperiodicpostretirement benefitexpensein2010areshownbelow: Priorservicecost ............................................... $(18) Netactuarialloss................................................ 29 Total............................................................. $ 11 NetpostretirementbenefitcostsareactuariallydeterminedusingaJanuary1measurementdate.At January1,2009and2008,theweighted-averagediscountrateassumptionsusedtodeterminenetperiodicpostretirementbenefitexpensewere6.00percentand6.25percent,respectively. Netperiodicpostretirementbenefitexpenseisreportedasacomponentof“Salariesandotherbenefits”intheCombinedStatementsofIncomeandComprehensiveIncome. TherecognitionofspecialterminationbenefitsisprimarilytheresultofenhancedretirementbenefitsprovidedtoemployeesduringtherestructuringdescribedinNote16.AnetcurtailmentgainassociatedwithrestructuringprogramsthataredescribedinNote16wasrecognizedinnetincomeinthe yearendedDecember31,2009,relatedtoemployeeswhoterminatedemploymentduring2009.Adeferred curtailment gain was recorded in 2008 as a component of accumulated other comprehensive loss;thegainisrecognizedinnetincomein2009andfutureyearswhentherelatedemployeesterminateemployment. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescriptiondrugbenefitunderMedicare(“MedicarePartD”)andafederalsubsidytosponsorsofretiree healthcarebenefitplansthatprovidebenefitsthatareatleastactuariallyequivalenttoMedicarePart D.ThebenefitsprovidedundertheReserveBanks’plantocertainparticipantsareatleastactuarially equivalenttotheMedicarePartDprescriptiondrugbenefit.Theestimatedeffectsofthesubsidyare reflectedinactuariallossintheaccumulatedpostretirementbenefitobligationandnetperiodicpostretirementbenefitexpense. Federal Medicare Part D subsidy receipts were $6.4 million and $3.3 million in the years ended December31,2009and2008,respectively.Expectedreceiptsin2010,relatedtobenefitspaidinthe yearsendedDecember31,2009and2008,are$1million.

538 96th Annual Report, 2009 Followingisasummaryofexpectedpostretirementbenefitpayments(inmillions): Withoutsubsidy Withsubsidy 2010............................................................. $ 76 $ 70 2011............................................................. 82 76 2012............................................................. 87 80 2013............................................................. 92 85 2014............................................................. 97 88 2015–2019....................................................... 548 494 Total............................................................. $982 $893 PostemploymentBenefits TheReserveBanksofferbenefitstoformerorinactiveemployees.Postemploymentbenefitcostsare actuarially determined using a December 31 measurement date and include the cost of medical and dental insurance, survivor income, disability benefits, and self-insured workers’ compensation expenses.TheaccruedpostemploymentbenefitcostsrecognizedbytheReserveBanksatDecember31, 2009and2008,were$153millionand$117million,respectively.Thiscostisincludedasacomponentof“Accruedbenefitcosts”intheCombinedStatementsofCondition.Netperiodicpostemploymentbenefitexpenseincludedin2009and2008operatingexpenseswere$56millionand$10million, respectively,andarerecordedasacomponentof“Salariesandotherbenefits”intheCombinedStatementsofIncomeandComprehensiveIncome. (15) AccumulatedOtherComprehensiveIncomeandOtherComprehensiveIncome Followingisareconciliationofbeginningandendingbalancesofaccumulatedothercomprehensive income(loss)(inmillions): Amount relatedto Total Amount postretirement accumulated relatedto benefits other definedbenefit otherthan comprehensive retirementplan retirementplans income(loss) BalanceatJanuary1,2008.......................... $(1,298) $(226) $(1,524) Changeinfundedstatusofbenefitplans: Priorservicecostsarisingduringtheyear.......... (868) 4 (864) Netactuariallossarisingduringtheyear........... (2,371) (48) (2,419) Deferredcurtailmentgain........................... - 1 1 Amortizationofpriorservicecost.................. 41 (20) 21 Amortizationofnetactuarialloss................... 78 27 105 Amortizationofdeferredcurtailmentgain.......... - (3) (3) Changeinfundedstatusofbenefitplans— othercomprehensiveloss......................... (3,120) (39) (3,159) BalanceatDecember31,2008...................... $(4,418) $(265) $(4,683) Changeinfundedstatusofbenefitplans: Priorservicecostsarisingduringtheyear.......... $ (10) $ 9 $ (1) Netactuarialgain(loss)arisingduringtheyear.... 656 (54) 602 Amortizationofpriorservicecost.................. 116 (20) 96 Amortizationofnetactuarialloss................... 285 29 314 Amortizationofdeferredcurtailmentgain.......... - (4) (4) Changeinfundedstatusofbenefitplans— othercomprehensiveincome(loss)............... 1,047 (40) 1,007 BalanceatDecember31,2009...................... $(3,371) $(305) $(3,676) Additionaldetailregardingtheclassificationofaccumulatedothercomprehensivelossisincludedin Notes13and14.

Federal Reserve Banks Combined Financial Statements 539 (16) BusinessRestructuringCharges 2009RestructuringPlans In2009,theReserveBankscontinuedtheircheckrestructuringinitiativestoaligncheck-processing infrastructureandoperationswithdecliningcheck-processingvolumes.Additionalannouncementsin 2009includedrestructuringplansassociatedwithdiscontinuingcheckprintsites. 2008RestructuringPlans In 2008, the Reserve Banks announced the acceleration of their check-restructuring initiatives to alignthecheck-processinginfrastructureandoperationswithdecliningcheck-processingvolumes.The newinfrastructureconsolidatesoperationsintotworegionalReserveBankprocessingsitesinClevelandandAtlanta.Additionalannouncementsin2008includedrestructuringplansassociatedwiththe closureofacheckprocessingcontingencycenterandtheconsolidationofcheckadjustmentssites. 2007andPriorRestructuringPlans The Reserve Banks incurred various restructuring charges prior to 2008 related to aligning the check-processinginfrastructureandoperationswithdecliningprocessingvolumes.Thenewinfrastructure would involve consolidation of operations into four regional Reserve Bank processing sites in Philadelphia,Cleveland,Atlanta,andDallas.Additionalannouncementsin2007includedrestructuring plans associated with the U.S. Treasury’s Collections and Cash Modernization initiative. The ReserveBanksincurredvariousrestructuringchargespriorto2007relatedtotheinitialphasesofrestructuringoftheSystem’scheck-processingandcash-handlinginfrastructure. Followingisasummaryoffinancialinformationrelatedtotherestructuringplans(inmillions): 2007 andprior 2008 2009 restructuring restructuring restructuring plans plans plans Total Informationrelatedtorestructuringplans asofDecember31,2009: Totalexpectedcostsrelatedtorestructuringactivity... $ 52 $ 18 $ 4 $74 Estimatedfuturecostsrelatedtorestructuringactivity. $ 2 $ - $ - $ 2 Expectedcompletiondate............................... 2012 2010 2010 Reconciliationofliabilitybalances: BalanceatJanuary1,2008.............................. $ 43 $ - $ - $43 Employeeseparationcosts............................... 5 17 - 22 Adjustments.............................................. (4) - - (4) Payments................................................. (21) - - (21) BalanceatDecember31,2008.......................... $ 23 $ 17 $ - $40 Employeeseparationcosts............................... - - 4 4 Adjustments.............................................. (1) (1) - (2) Payments................................................. (16) (7) - (23) BalanceatDecember31,2009.......................... $ 6 $ 9 $ 4 $19 Employee separation costs are primarily severance costs for identified staff reductions associated with the announced restructuring plans. Separation costs that are provided under terms of ongoing benefitarrangementsarerecordedbasedontheaccumulatedbenefitearnedbytheemployee.Separationcoststhatareprovidedunderthetermsofone-timebenefitarrangementsaregenerallymeasured basedontheexpectedbenefitasoftheterminationdateandrecordedratablyovertheperiodtotermination.Restructuringcostsrelatedtoemployeeseparationsarereportedasacomponentof“Salaries andotherbenefits”intheCombinedStatementsofIncomeandComprehensiveIncome. Adjustmentstotheaccruedliabilityareprimarilyduetochangesintheestimatedrestructuringcosts and are shown as a component of the appropriate expense category in the Combined Statements of IncomeandComprehensiveIncome. RestructuringcostsassociatedwiththeimpairmentofcertainReserveBanks’assets,includingsoftware,buildings,leaseholdimprovements,furniture,andequipment,arediscussedinNote11.Costsassociated with enhanced pension benefits for all Reserve Banks are recorded on the books of the FRBNYasdiscussedinNote13.Costsassociatedwithenhancedpostretirementbenefitsaredisclosed inNote14.

540 96th Annual Report, 2009 (17) SubsequentEvents In February 2010, the System discontinued a contractual relationship in connection with a largescalesoftwaredevelopmentprogramforwhichtheReserveBankshadrecordedcostsof$34.2million asofDecember31,2009.TheReserveBanksexpectthataportionofthesecosts,whicharerecorded asacomponentof“Otherassets,”willbeexpensedin2010. On March 1, 2010, AIG announced a definitive agreement with Prudential plc for the sale of the AIAGroupforapproximately$35.5billion,includingapproximately$25billionincash,$8.5billion inPrudentialplcequitysecurities,and$2.0billioninPrudentialplcpreferredstock.Thecashproceeds fromthesalewillbeusedtoredeemtheFRBNY’spreferredinterestsinAIALLCofapproximately $16billionandtorepayapproximately$9billionundertheFRBNY’slineofcreditagreementwith AIG.Proceedsfromtheorderlysale,overtime,ofAIG’sholdingsofPrudentialplcequitysecurities, followingtheagreedonholdingperiods,willbeusedtorepayamountsoutstandingundertheFRB- NY’slineofcreditagreementwithAIG. OnMarch8,2010,AIGannouncedadefinitiveagreementforthesaleofALICOtoMetLife,Inc. for approximately $15.5 billion, including approximately $6.8 billion in cash and $8.7 billion in MetLife,Inc.equitysecurities,includingcommonstockandconvertiblepreferredsecurities.Thecash proceedsfromthesalewillbeusedtoredeemtheFRBNY’spreferredinterestsinALICOLLCofapproximately$9billion.Proceedsfromtheorderlysale,overtime,ofAIG’sholdingsofMetLife,Inc. equitysecurities,followingtheagreedonholdingperiods,willbeusedtoredeemtheremainderofthe FRBNY’spreferredinterestsinALICOLLC,andanyresidualproceedswillbeusedtorepayamounts outstandingundertheFRBNY’slineofcreditagreementwithAIG. OnApril8,2010,anagreementwasreachedtomodifyapproximately$4.1billionofcommercial mortgageandmezzanineloansheldinML’sinvestmentportfolio.Theseloans,whichrepresentML’s largestinvestmentbasedonunpaidprincipalbalance,arereportedashospitalityloansinthetablein Note9thatdisclosestheconcentrationofunpaidprincipalbalancesinML’sinvestmentportfolio.The keyprovisionsofthemodificationincludethediscountedpayoffofcertainmezzanineloans,theconversionofmostjuniormezzanineloanstoperferredequity,anextensionofthefinalmaturitydateof the remaining loans from 2013 to 2015, and an increase in interest rates and fees. The FRBNY is evaluating the modification and does not believe that it will result in an adverse effect on the FRB- NY’sconsolidatedfinancialstatements.Similarly,themodificationisnotexpectedtohaveanadverse effectonthecombinedfinancialstatements. TherewerenosubsequenteventsthatrequireadjustmentstoordisclosuresinthecombinedfinancialstatementsasofDecember31,2009.SubsequenteventswereevaluatedthroughApril21,2010, whichisthedatethattheBoardissuedthecombinedfinancialstatements.

541 Office of Inspector General Activities The Office of Inspector General (OIG) the Chairman of the Board of Goverfor the Federal Reserve Board operates nors fully informed about serious in accordance with the Inspector Gen- abuses and deficiencies. eral Act of 1978, as amended. The OIG During 2009, the OIG completed conducts activities and makes recom- 13 audits, inspections, evaluations, and mendations to promote economy and other reviews (table), and conducted a efficiency; enhance policies and proce- number of follow-up reviews to evaludures; and prevent and detect waste, ate action taken on prior recommendafraud, and abuse in Board programs tions. Due to the sensitive nature of and operations, including functions that some of the material, certain reports the Board has delegated to the Federal were only issued internal to the Board, Reserve Banks. Accordingly, the OIG as indicated. The OIG also closed one plans and conducts audits, inspections, investigation, issued two semiannual evaluations, investigations, and other reports to Congress, and performed reviews relating to Board and Board- over 60 reviews of legislation and delegated programs and operations. It regulations related to the operations of also retains an independent auditor to the Board and/or the OIG. annually audit the Board’s and the Fed- For more information, visit the OIG eral Financial Institutions Examination website at www.federalreserve.gov/ Council’s financial statements. In addi- oig/. tion, the OIG keeps the Congress and OIGAudit,Inspection,andEvaluationReportsIssuedin2009 Reporttitle Monthissued AuditofBlackberryandCellPhoneInternalControls ....................................... March ReportontheInspectionoftheBoard’sLawEnforcementUnit(InternalReport) ............. March FederalFinancialInstitutionsExaminationCouncilFinancialStatementsasofandforthe YearsEndedDecember31,2008,and2007,andIndependentAuditors’Report............. March SecurityControlReviewoftheAuditLoggingProvidedbytheInformationTechnology GeneralSupportSystem(InternalReport) ................................................ March BoardofGovernorsoftheFederalReserveSystemFinancialStatementsasofandforthe YearsEndedDecember31,2008,and2007,andIndependentAuditors’Report............. March SecurityControlReviewoftheElectronicSecuritySystem(InternalReport) ................. June MaterialLossReviewofFirstGeorgiaCommunityBank .................................... June MaterialLossReviewofCountyBank ..................................................... September MaterialLossReviewofRiversideBankoftheGulfCoast .................................. September AuditoftheBoard’sProcessingofApplicationsfortheCapitalPurchaseProgramunder theTroubledAssetReliefProgram....................................................... September AuditofManagementandAccountabilityofMobileComputingDevices(InternalReport) .... October AuditoftheBoard’sInformationSecurityProgram ......................................... November MaterialLossReviewofMichiganHeritageBank........................................... December

543 Government Accountability Office Reviews Under the Federal Banking Agency serve were in various stages of com- Audit Act (Public Law 95−320), most pletion at year-end (table). The Federal Federal Reserve System operations are Reserve also provided information to under the purview of the Government the GAO during the year on numerous Accountability Office (GAO). In 2009, other GAO investigations, including the GAO completed 20 reports on eight other completed reviews and two selected aspects of Federal Reserve other ongoing reviews. operations (table). In addition, four The reports are available directly projects concerning the Federal Re- from the GAO. ReportsCompletedduring2009 Monthissued Reporttitle Reportnumber (2009) FinancialRegulation:AFrameworkforCraftingandAssessing ProposalstoModernizetheOutdatedU.S.FinancialRegulatory System.......................................................... GAO-09-216 January TroubledAssetReliefProgram:StatusofEffortstoAddress TransparencyandAccountabilityIssues.......................... GAO-09-296 January BankSecrecyAct:SuspiciousActivityReportUseIsIncreasing, butFinCENNeedstoFurtherDevelopandDocumentItsForm RevisionProcess................................................ GAO-09-226 February BankSecrecyAct:FederalAgenciesShouldTakeActiontoFurther ImproveCoordinationandInformation-SharingEfforts............ GAO-09-227 February SystemicRisk:RegulatoryOversightandRecentInitiativesto AddressRiskPosedbyCreditDefaultSwaps...................... GAO-09-397T March NationalCybersecurityStrategy:KeyImprovementsAreNeededto StrengthentheNation’sPosture.................................. GAO-09-432T March FinancialRegulation:ReviewofRegulators’OversightofRisk ManagementSystemsataLimitedNumberofLarge,Complex FinancialInstitutions............................................ GAO-09-499T March TroubledAssetReliefProgram:March2009StatusofEffortsto AddressTransparencyandAccountabilityIssues.................. GAO-09-504 March InspectorsGeneral:IndependentOversightofFinancialRegulatory Agencies........................................................ GAO-09-524T March DesignatedFederalEntities:SurveyofGovernancePracticesand theInspectorGeneralRole........................................ GAO-09-270 April FederalReserveBanks:AreasforImprovementinInformation SecurityControls................................................ GAO-09-722R May ReverseMortgages:ProductComplexityandConsumerProtection IssuesUnderscoreNeedforImprovedControlsoverCounseling forBorrowers.................................................... GAO-09-606 June TroubledAssetReliefProgram:June2009StatusofEffortsto AddressTransparencyandAccountabilityIssues.................. GAO-09-658 June FairLending:DataLimitationsandtheFragmentedU.S.Financial RegulatoryStructureChallengeFederalOversightand EnforcementEfforts.............................................. GAO-09-704 July FinancialMarketsRegulation:FinancialCrisisHighlightsNeed toImproveOversightofLeverageatFinancialInstitutionsand acrossSystem.................................................... GAO-09-739 July TroubledAssetReliefProgram:StatusofGovernmentAssistance ProvidedtoAIG................................................ GAO-09-975 September

544 96th Annual Report, 2009 ReportsCompletedduring2009—continued Monthissued Reporttitle Reportnumber (2009) InfluenzaPandemic:KeySecuritiesMarketParticipantsAre MakingProgress,butAgenciesCouldDoMoretoAddress PotentialInternetCongestionandEncourageReadiness............ GAO-10-8 October TroubledAssetReliefProgram:OneYearLater,ActionsAre NeededtoAddressRemainingTransparencyandAccountability Challenges...................................................... GAO-10-16 October SmallBusinessAdministration:ActionsNeededtoImprovethe UsefulnessoftheAgency’sLenderRiskRatingSystem............ GAO-10-53 November FinancialAudit:BureauofthePublicDebt’sFiscalYears2009 and2008SchedulesofFederalDebt.............................. GAO-10-88 November ProjectsActiveatYear-End2009 Subjectofproject Monthinitiated Systemicriskdetermination............................................................ October2008 GovernanceissuesrelatingtotheTroubledAssetReliefProgram(TARP)................ July2009 U.S.Treasury’sCapitalPurchaseProgram.............................................. November2009 Bankwalkaways........................................................................ December2009

Index

547 Index A AspenInstitute,159 AccountingforTransfersofFinancial Asset-backedcommercialpaper(ABCP), Assets,andAmendmentofFASB 26,74–75,238 StatementNo.140(Statementof Asset-BackedCommercialPaperMoney FinancialAccountingStandardsNo. MarketMutualFundLiquidityFacility 166),112 (AMLF),26,42,189,191,218–219, Accountingpolicy,115–116 234,238,258,297,387,438,440 Adjustable-ratemortgages.(SeeMortgage Asset-backedsecurities(ABSs),4,7,10, products,nontraditional) 12–13,58,60,75,78,219–220,258 Advancedforeigneconomies,32–33,34, Assetsandliabilities 83,84–85 Bankholdingcompanies,99,104,121 Agreementcorporations,101,105,121 BoardofGovernors,474 Agriculture,U.S.Departmentof Commercialbanks,446 GrainInspection,Packersand FederalReserveBanks,30,31,81, StockyardsAdministration,151 87–88,91,92–93,434,435,436, AIAAuroraLLC,31 437,442,443,444,445,448–451 ALICOHoldingsLLC,31 Nonmemberbanks,446 AlliedIrishBanks,p.l.c.,acquisitionof Statememberbanks,99 ProvidentBancsharesCorporation, AssociationofSupervisorsofBanksofthe 143 Americas(ASBA),110 AmendmenttoFASBInterpretationNo. Auditors’reports,471,488,490 46(R)(StatementofFinancial Audits,reviews,andassessments AccountingStandardsNo.167),112 oftheBoardofGovernors,469 AmericanInternationalGroup,Inc.(AIG), ofFederalReserveBanks,185–187, 31,41,75,189,191,217,222,263, 469 439,441 oftheFederalReserveSystem,469 AmericanRecoveryandReinvestmentAct byGovernmentAccountabilityOffice, (ARRA),17,18,67 41,469,543–544 Analysisofthetradingbookquantitative HelpingFamiliesSaveTheirHomesAct impactstudy,118 provisions,205–206 Anti-money-laundering(AML) Internationalstandardson,187 BankSecrecyAct/Anti-Money bytheOfficeofInspectorGeneral,469, LaunderingExaminationManual, 541 106 AutomatedClearinghouse(ACH)services, Complianceriskmanagement,116 FederalReserveBanks,171,173–174, Examinations,106,116 179 Internationalcoordinationon,117 Automobileindustry,10,11–12,13–14,37, Anti-steeringprotections,137 63,64 Applications,notices,andproposals, AvailabilityofFundsandCollectionof 125–126,143 Checks(RegulationCC),153 AsiaPacificEconomicCooperation FinancialRegulators’Training B Initiative,110 Balancesheets AsianDevelopmentBank,110 BoardofGovernors,474

548 96th Annual Report, 2009 FederalReserveBanks,5,30–32,40,43, Bankingorganizations,U.S.(SeealsoBank 45,81,87–88,94,233–234,243, holdingcompaniesandCommercial 259,271–272,274–275,295–296, banks) 323–324,336–338,350–352, AuthorityfromCongressfortheFederal 376–377 Reservetopayinterestonbanks’ Bankexaminertraining,150 holdingsofreservebalances,43,93 Bankholdingcompanies(BHCs) Capitaladequacystandards,112–113 Assets,99,104,121 Creditavailabilityand,15,37,38,42 Banksaffiliatedwith,433 Creditdefaultswap(CDS)spreads,25, Capitaladequacystandards,112–113, 238,239,263–264,302,303,381 113–114 Denovodepositoryinstitutions,110–111 Equityinvestments,58 Declineinloancommitments,28 Equityofferings,27–28 Equityinvestments,58,60,75,77 Inspectionsof,101–102,103–104 Examinationsandinspections,101–104 Netlosses,99 Foreignoperations,101,104,125,127 Numberof,102,103,433 Minority-owned,110–111 Ratingsystem,102 Numberof,433 Regulatoryfinancialreports,109, Profitabilityof,27 120–123 Regulationof,125–128 SupervisoryCapitalAssessmentProgram Banks’securitiesactivities,119–120 involvement,4 BaselCommitteeonBankingSupervision, Surveillanceandoff-sitemonitoring, 110,115,117–118 109 BaselIICapitalAccord,100,117 BankHoldingCompaniesandChangein BearStearnsCompanies,Inc.,31,41,217 BankControl(RegulationY),120, BoardofGovernors 212–213,215 Appointedmembers,421–423 BankHoldingCompanyAct,101,120, Assessmentsby,458,460,462 125–126 Assetsandliabilities,474 BankHoldingCompanyPerformance Audits,reviews,andassessmentsof,469 Reports(BHCPRs),109 Balancesheet,474 BankMergerAct,101,126 Businesscontinuity,108 BankofAmericaCorporation Capitaladequacystandards,113–114 Loansandguaranteesfor,221,239 Cashflows,476 BankofCanada ConsumerAdvisoryCouncil,162–170 Monetarypolicyrate,34,85 Decisions,publicnoticeof,128 BankofEngland Discountratesfordepositoryinstitutions, AssetPurchaseFacility,34,85 222–224 Monetarypolicyrate,85 DivisionofBankingSupervisionand Purchaseofgovernmentsecurities,83 Regulation,106,123 BankofJapan(BOJ) DivisionofCommunityandConsumer Experiencewithinterestonreserves,94 Affairs,106,131–162 Lendingfacility,34 Economicgrowthprojections,6,45–55 Monetarypolicyrate,85 Eligibility,qualifications,androtationfor Purchaseofgovernmentbonds,85 directorsofFederalReserveBanks BankSecrecyAct(BSA),106,116 andtheirbranches,218 BankSecrecyActAdvisoryGroup,116 Exofficiomembers,424 BankSecrecyAct/Anti-MoneyLaundering FFIECactivities,106,108,110,122, ExaminationManual,106 124,125 BankingOrganizationNationalDesktop Financialdisclosurerules,128 (BOND),123 Financialstatements,471–487

Index 549 Goalsandobjectives,199–201 CentralDocumentandTextRepository GovernmentPerformanceandResults (CDTR),123 Act,199–201 ChangeinBankControlAct,101,126–127 Incomeandexpenses,474 CheckClearingforthe21stCentury LegalDivision,106 (Check21),173,174–175 Litigationinvolving,391–392 Checkcollectionandprocessing,Federal Maximummaturityofprimarycredit ReserveBanks,172–173 loans,218 Check21.(SeeCheckClearingforthe21st Membersandofficers,395–397 Century) Mission,199 ChicagoBoardOptionsExchange,129 PartnershipforProgress,110–111 China,economyof,21,32,35 PaymentSystemRiskpolicy,182–184 ChinatrustFinancialHoldingCompany, Policyactions,24–27,114–115, Ltd.,acquisitionofbyMorgan 211–224 Stanley,143 Policystatements,217–218 Collectionservicesforthefederal Primarycredit,218,222–223 government,FederalReserveBanks, Secondaryandseasonalcredit,233 180–181 Specialliquidityfacilities,218–221, CollectionsandCashManagement 233–234 Modernization(CCMM)initiative, Strategicplan,performanceplan,and 180,181 performancereport,199 Combinedfinancialstatements,Federal Supervisorypolicy,112–113 ReserveBanks,489–538 ThriftInstitutionsAdvisoryCouncil,401 Commercialandindustrial(C&I)loans,14, Website,109,128 15,66,79,99,264,303,342–343, BOND(BankingOrganizationNational 353,381 Desktop),123 Commercialbanks BorrowersofSecuritiesCredit(Regulation Assetsandliabilities,446 X),129,447 Creditavailabilityand,15 Branches.(SeeFederalReserveBanks) FederalReserveloansto,5 BuildAmericaBonds,18,69 Fiduciaryactivitiesexaminations,107 BureauofEconomicAnalysis,6 Numberof,433 BureauofLaborStatistics,22 Profitabilityof,27,78–79 BureauofthePublicDebt,181,182 Regulatoryfinancialreports,122–123 Businesscontinuity,108 Commercialmortgage-backedsecurities Businessinvestment,profits,andfinance, (CMBSs),16,66,74,78,220,238, 14–16,27,38,39,46,48,64–66,87, 264,302,377 88–89,91 Commercialpaper(CP),60,74–75,238 Businesssector,3,13–16 CommercialPaperFundingFacility (CPFF),26,42,75,81,219,233,238, C 297,387,439,441 CallReports,110,122–123,381 Commercialrealestate(CRE)loans,14, Capitalaccounts,FederalReserveBanks, 15,66,79,100,118–119 450–453 CommitteeofSponsoringOrganizationsof Capitaladequacystandards,112–114 theTreadwayCommission(COSO), CapitalAssistanceProgram(CAP),58,75, 185–186 76–77,114–115 CommodityFuturesTradingCommission, CapitalPurchaseProgram(CPP),27–28, 116 60,79,114,120 Communityaffairs.(SeeConsumerand Cashflows,BoardofGovernors,475 communityaffairs) “CashforClunkers”program,10 CommunityAffairsOffices(CAOs),157

550 96th Annual Report, 2009 CommunityDevelopmentFinanceSummit, Creditcardreform,131–134 159 Foreclosuresandneighborhood CommunityDevelopmentFinancial stabilization,157,159 InstitutionsFund,159 Giftcardfees,135 CommunityReinvestmentAct(CRA) Informationprivacy,141 Applicationsformergersand Mortgageandhomeequitylending acquisitions,143–144 reform,136–138 ConsumerAdvisoryCouncildiscussion, Neighborhoodstabilization,157,159 169 Outreachactivities,157–161 Examinationsforcompliancewith, Overdraftfees,134–135 142–144 Oversightandenforcement,142–154 Mergersandacquisitionsinrelationto, Privateeducationloanrules,138–139 143–144 Risk-basedpricing,140–141 Revisionstoregulations,141–142 Rulemakingandregulations,131–142 Subprimemortgagecrisisand,158 Supportingcommunityeconomic Compensationperhour(CPH),72–73 development,157–162 Compliance,corporate,117 Consumercomplaints,154–156 Complianceexaminations,106,142–144 ConsumerCreditProtectionAct,144 Complianceriskmanagement,116–117 Consumereducation,160–161 ComptrolleroftheCurrency,Officeofthe Consumerinquiries,156 (OCC),104,110,119,151,152,153, ConsumerLeasing(RegulationM),152 154,217 Consumerprices,3–4,6–7,23–24,86,88 FinancialStabilityPlan,58,75 Consumerprotectionlaws.(SeealsoCredit Computerinfrastructureservices,Federal CardAccountability,Responsibility ReserveBanks,181–182 andDisclosure(CreditCARD)Act) Conditionstatements,FederalReserve Agencyreportsoncompliance,151–154 Banks,448–453,490 Supervisionforcompliancewith, ConferenceofChairs,FederalReserve 142–148 Banks,403 Consumerspending,3,10–13,37,38,39, ConferenceofFirstVicePresidents, 48,57,60,63–64,87,88,89 FederalReserveBanks,404 Corporateprofits,14–16,27 ConferenceofPresidents,FederalReserve Counter-terrorismfinancing,117 Banks,403 Creditavailability,4,11,15–16,37,38, ConferenceofStateBankSupervisors,16 42,48,86,87,89 CongressionalBudgetOffice,17 CreditbyBanksorPersonsotherthan ConsolidatedReportofConditionand BrokersorDealersforthePurposeof IncomeforEdgeandAgreement PurchasingorCarryingMarginStock Corporations,121 (RegulationU),107–108,129,447 ConsumerAdvisoryCouncil CreditbyBrokersandDealers(Regulation Meetingsandtopicsofdiscussion, T),129,447 162–170 CreditCardAccountability,Responsibility Membersandofficers,400 andDisclosure(CreditCARD)Act, Consumerandcommunityaffairs 12,131–135,162–164 CommunityAffairsOffices,157–162 Keyprovisions,203–205 ConsumerAdvisoryCounciladvice, CreditCardAct.(SeeCreditCard 162–170 Accountability,Responsibility,and Consumercomplaints,154–156 DisclosureAct) Consumereducationandoutreach, CreditCardRepaymentCalculator,161 160–161 Creditcards Consumerinquiries,154,156 Agerestrictions,133,204

Index 551 Consumercomplaints,155–156 Deposits Consumer’sabilitytopayand,133, Commercialbanks,446 204 FederalReserveBanks,435,437,443, Consumer’srighttorejectrateincrease 445 orchangeinterms,132,203–204 Directors,FederalReserveBanks,404–420 45-daynoticerequirementforsignificant Disclosures changes,132,203 Creditcards,131–134 Interestrates,11–12,203–204 Mortgages,136–137 Marketingoftostudents,133,204 Privateeducationloans,139 Over-the-limitfees,133,204 Statememberbanks,financial Periodicstatementmailing,132 disclosures,128 Rateincreaserestrictions,132 Discountrates,222–224,431 Reformmeasures,131–134 Discrimination “Two-cycle”billingmethod,204 Complaintsabout,156 Creditdefaultswaps(CDSs),25,238,239, DOJreviewsof,144–145 263–264,302,303,381 HMDAdataanalysis,145–147 Creditreporting,140 Disposablepersonalincome(DPI),10,63 Creditriskmanagement,118–119 DividendIncreasesandOtherCapital Currencyandcoin,176–177,434,435– Distributionsforthe19Supervisory 437,442–445 CapitalAssessmentFirms,113 CyberFinancialIndustryandRegulators DOJ.(SeeJustice,U.S.Departmentof) Exerciseof2009,108–109 Dollarexchangerate,32,35,81,83 DOT.(SeeTransportation,U.S.Department D of) Denovodepositoryinstitutions,110–111 DueDiligenceandTransparency Debt RegardingCoverPaymentMessages Corporate,14–16,65–66 RelatedtoCross-BorderWire Domesticnonfinancialsector,4,7,15, Transfers,117 42,63–64,65–66,239,264,276, Duke,Elizabeth,159 328,342,355,381 Government,17–18,68 E Household,11,63–64 ECOA.(SeeEqualCreditOpportunityAct) Stateandlocalgovernments,69 TheEconomicCrisisandCommunity Debtservicesforthefederalgovernment, DevelopmentFinance:AnIndustry FederalReserveBanks,177–179 Assessment,159 Decisions,publicnoticeof,128 EconomicStimulusActof2008,67 Defensespending,67 Economies,foreign,18,19,20–21.(See Delinquenciesandforeclosures,8–9,12, alsoAdvancedforeigneconomiesand 14,27,61–62,66,78,157,159, Emergingmarketeconomies) 166–167,217 Economy,U.S. Deloitte&ToucheLLP(D&T),186–187, Businesssector,13–16,38,39,46,48, 471–487,489–538 57,64–66,87,88–89 DepositInsuranceFund,127 Debt,domesticnonfinancialsector,4,7, Depositoryinstitutions.(Seealso 15,42,63–64,65–66 Commercialbanks) Downturnin,3,5–6,17,57,59–60, Discountrates,222–224 66–67,86–87,115 InterestratesonFederalReserveBank Evolutionoffinancialturmoil,24–27, loansto,431 74–78 Reserverequirements,432 Externalsector,19–21,70 Reservesof,434–437,442–445 Federalborrowing,17–18,68

552 96th Annual Report, 2009 Financialmarkets,4,5–6,7,24–27, EqualCreditOpportunityAct(ECOA), 32–33,36–45,74–78 144–145,151,156 Financialstabilitydevelopments,24–32, Equipmentandsoftware,3,13,48,64–65, 74–82 87 Governmentsector,16–19,66–69 Equitymarketsandprices,10–11,16,25, Householdsector,7–13,36,37,38,39, 27–28,58,60,63,66,74,77,78 46,48,57,60,61–64,86,87,88, EuropeanCentralBank(ECB) 89 Bondpurchase,83 Interestrates,7,9,11–12,19,38,43, Experiencewithinterestonreserves,94 45,64,69,75,93,95 Monetarypolicyrate,34,85 Labormarket,3,6,17,22–23,36,38, Examinationsandinspections 39,42,46,48–49,57–58,60, Anti-money-laundering,106 71–73,86,89 Bankholdingcompanies,99,101–102, M2monetaryaggregates,30–32,80–82 103–104 Nationalsaving,21–22,71 CommunityReinvestmentAct, Outlookandprojections,3–6,45–55, compliancewith,142–144 57–59,246–255,282–292,309–320, Complianceexaminations,106 362–373 Consumerprotectionlaws,compliance Policyactionsandmarketresponse, with,142–148,151–154 24–27,57–59,74–78 EdgeActandagreementcorporations, Prices,19–20,21,23–24,39,42,57,65, 101 70,73–74,87,88 FederalReserveBanks,185–187 Productivityandlaborcompensation,23, Fiduciaryactivities,107 72–73 Foreignbanks,105–106 Recentfinancialandeconomic Informationtechnologyactivities, developments,6–35,59–86 106–107 Stateandlocalgovernments,18–19, Internationalbankingactivities,104–106 68–69 RFIratingsystem,102 Tradedeficit,21 Securitiescreditlenders,107–108 EdgeActcorporations,101,105,121 Securitiesdealersandbrokers, ElectronicFundTransferAct,135,203, governmentandmunicipal,107 205 Specialized,106–108 ElectronicFundTransfers(RegulationE), Statememberbanks,103 152,164,212 Transferagents,107 EmergencyEconomicStabilizationAct ExaminerCommissioningProgram(ECP), (EESA),41,206,217 124 Emergingmarketeconomies,21,32, Examiners,training,124,150 34–35,83,85–86 ExchangeAct,107 Employment,3,22–23,39,46,57–58,60, Expenses.(SeeIncomeandexpenses) 63,71–73,87,88.(Seealso Exports,3,19,20–21,48,57,70,87,90 Unemployment) ExtensionsofCreditbyFederalReserve Employmentcostindex(ECI),72–73 Banks(RegulationA),211 Energyprices,6–7,19–20,23–24,34,39, Externalsector,19–21,70 42,65,70,73,86,89 Enforcementactions F FederalReserveSystem,109,128–129, FairCreditReporting(RegulationV), 142–154 213–214 Otherfederalagencies,144–148 FairHousingAct,144–145,156 EqualCreditOpportunity(RegulationB), Fairlendinglaws,compliancewith, 151 144–148

Index 553 FannieMae FederalHomeLoanMortgageCorporation. FederalReserveBankservices,182 (SeeFreddieMac) Mortgage-backedsecuritiesissuedby,10 FederalHousingAdministration(FHA), PreferredStockPurchaseAgreements 8–10,205 withtheDepartmentofthe HOPEforHomeownersProgram,205, Treasury,25 207 Yields,75 FederalNationalMortgageAssociation. FarmCreditAdministration(FCA),108, (SeeFannieMae) 113,129,151,217 FederalOpenMarketCommittee(FOMC). FarmCreditSystem,113 (SeealsoOpenmarketoperations) FedACHservices,172,184 Annualorganizationalmatters, FederalAdvisoryCouncil,membersand 227–228 officers,399 Authorizations,228–232 Federalagencysecuritiesandobligations Conferencecallminutes,87,245–246, Commercialbankholdings,446 269–270,309 FederalReserveBankholdings,430, Diversityofparticipants’views,50–54, 434,436,438,440 225,250–251,287–288,315–316, Openmarkettransactions,428–429 368–373 FederalBankingAgencyAuditAct,541 Domesticpolicydirectives,5,6,35–43, FederalDepositInsuranceAct,206–207, 76–77,225,231–232,243–245, 222 265–269,280–282,307–309, FederalDepositInsuranceCorporation 333–335,347–349,360–362, (FDIC),12–13,26,110,115,119, 387–389 121,151,152,153,154,206–207, Forecastuncertainty,49–50,55,59,256, 217,222 287,293,314–315,321,367–368, FinancialStabilityPlan,58,75 374 TemporaryLiquidityGuaranteeProgram, Foreigncurrencydirectivesand 66,75,239,303 proceduralinstructions,228–231 FederalDepositInsuranceCorporation Meetings,minutesof,40,45–55, ImprovementAct,121 225–390 FederalEmergencyManagementAgency Members,alternatemembers,and (FEMA),109 officers,398 FederalFinancialInstitutionsExamination Notationvotes,245,270,282,309,335, Council(FFIEC),106,116,122,124, 349,362,389–390 125,148–149,151–154 Summaryofeconomicprojections, PrudentCommercialRealEstateLoan 45–55,225,246–255,282–292 Workouts,118–119 309–320,362–373 TaskForceonSupervision,108,110 SystemOpenMarketAccount,187,188, Federalfundsrate,5,29,35–36,37,38, 189–192,232–233,281,295,334, 42,45,58,79–80,86,88,89,90, 336,348,361,376 183–184,222,237,243,262,268, FederalReserveAct,105,120,127,185, 282,296,307–309,327,333,334, 187,189 341,347,348,351,354,360,362, FederalReserveBanks 387,388 Actionstakentosupportfinancialmarket Federalgovernment functioning,43–45 Budgetdeficit,16–17,66–67 AgreementwithCongresson FederalReserveBankservicesto, systemicallyimportantinstitutions, 177–182 88 Spending,receipts,andborrowing, AssessmentsbytheBoardofGovernors, 16–19,66–69,177 458,460,462

554 96th Annual Report, 2009 Assetsandliabilities,30,31,81,87–88, FedwireSecuritiesService,176,184 91,92–93,434,435,436,437,442, Financialstatementsof,combined, 443,444,445,448–451 489–538 Audits,reviews,andassessmentsof, FirstVicePresidents,Conferenceof,404 185–187,469 Fiscalagencyservices,177–182 AutomatedClearinghouseservices,171, Float,176,434,436,442,444 173–174,179 GoDirectinitiative,179–180 Balancesheets,5,30–32,40,43,45,81, Governmentdepositoryservices, 87–88,94,233–234,243,259, 177–182 271–272,274–275,295–296, Incomeandexpenses,178,186, 323–324,336–338,350–352, 187–189,454–463,491–492 376–377 Informationtechnologydevelopments, Branches,402–403,405–420 185 Capitalaccounts,450–453 Interestratesonloanstodepository Cash-managementservices,181 institutions,431 Chairs,Conferenceof,403 Intradaycredit,developmentsintheuse Checkcollectionandprocessing, of,182–184 172–173,174–175 JointstatementwiththeTreasury Collectionservices,180–181 Departmentontheroleofthe Computerinfrastructureandother FederalReserveinpreserving Treasuryservices,181–182 financialandmonetarystability, Conditionstatements,448–453,490 88 Creditoutstanding,434,436,438,440 Loansandothercreditextensions, Currencyandcoin,operationsand 30–32,434,436,438–444 developmentsin,176–177 Methodsfortighteningmonetarypolicy, Debtservicesforthefederal 92–95 government,177–179 NationalSettlementService,176 Depositoryservicestothefederal Numberof,129 government,177–182 Numberofofficersandemployees,465 Deposits,435,437,443,445 Officers,listof,402–403 Directors,404–420 Officersandemployees,numberand Discountrates,222–224 salariesof,465 Dualmandate,46,49,95,245,283,369, Operations,volumeof,464 389 Paymentsservices,179–180 Economicgrowthprojections,45–55 PaymentstotheU.S.Treasury,459,461, Electronicaccesstoservices,184–185 463 Eligibility,qualifications,androtationfor Premises,192,466 directorsofFederalReserveBanks Presidents,Conferenceof,403 andtheirbranches,218 Pricedservices,171–176,193–197 Examinationsof,185–187 Private-sectoradjustmentfactor, Examinertraining,124 171–172,173,174,176 ExtensionsandmodificationsofFederal Repurchaseandreverserepurchase Reserveliquidityprograms,90,183 agreements,434,436,437,442, FedACHservice,172,184 444 FedLineAdvantageservice,184 Reservebalances,435,437 FedLineCommandservice,184 Salariesofofficersandemployees,465 FedLineDirect,184 Securitiesandloans,holdingsof,430, FedLineWeb,184–185 434,436,438,440 FedwireFundsService,172,174,175, Specialpurposevehicle,75–76 184 Statementsforpricedservices,193–197

Index 555 SummaryofEconomicProjectionsof Termdepositfacilityproposal,44,376, FederalReserveBoardmembers 377 andReserveBankpresidents,40 Traininganddevelopment,124–125 SystemOpenMarketAccount(SOMA) Transparencyinitiatives,40–41,92 holdingsandloans,187,188, FederalTradeCommission(FTC),140, 189–192 151,152 Tier1DataDeliveryService,185 FedLineAdvantageservice,184 Transparencyinitiatives,40–41,92 FedLineCommandservice,184 Treasurysecuritiesservices,177–179 FedLineDirectservice,184 Variableinterestentities,190–192 FedwireFundsService,172,174,175, FederalReserveConsumerHelp(FRCH), 184 154–155,161 FedwireSecuritiesService,176,184 FederalReserveElectronicTaxApplication FFIEC.(SeeFederalFinancialInstitutions (FR-ETA),180 ExaminationCouncil) FederalReserveInformationTechnology Fiduciaryactivities,FederalReserve (FRIT),185 examinationof,107 FederalReserveSystem.(SeealsoBoard Finance ofGovernorsandFederalReserve Business,14–16 Banks) Household,10–13,61–63 Accountingpolicy,115–116 Financialaccount,U.S.,33–34,83–84 Audits,reviews,andassessmentsof,469 FinancialAccountingStandardsBoard AuthorityfromCongresstopayinterest (FASB),112,115,116 onbanks’holdingsofreserve FinancialAccountingStandardsBoard, balances,43,93 StatementsofFinancialAccounting Bankingstructure,U.S.,regulationof, StandardsNos.166and167,28 125–128 FinancialActionTaskForce,117 BaselCommitteeactivities,100,110, FinancialBankingInformation 115,117–118 InfrastructureCommittee(FBIIC), Consumerprotectionresponsibilities, 108 131–142 FinancialCrimesEnforcementNetwork, Decisions,publicnoticeof,128 116 Enforcementactions,109,128–129, Financialholdingcompanies,99,101–102, 142–154 104 FinancialStabilityPlan,58,75,87 FinancialIndustryRegulatoryAuthority, ForeclosureToolkit,157 129 GAOreviewsof,41,451–452,469 FinancialManagementService,181,182 Internationaltraining,110 Financialmarkets,4–6,7,32–33,36–45, Liquidityprograms,218–221,233–234 58,60–61,74–78,82–83,86,88,89, Membership,129 90–91,93–94 Regulatoryreports,120–123 FinancialServicesInformationSharingand Risk-focusedsupervision,102–103,116 AnalysisCenter,108 Safetyandsoundnessresponsibilities, FinancialServicesSectorCoordinating 101–112 Council,108 Supervisionandregulation FinancialStabilityInstitute,110 responsibilities,99–124 FinancialStabilityPlan,58,75,87 Supervisorypolicy,112–124 Financialstatements Surveillanceandoff-sitemonitoring, BoardofGovernors,471–487 109–110 FederalReserveBanks,combined, Technicalassistance,110 489–538

556 96th Annual Report, 2009 FederalReservepricedservices, G 193–197 GAO.(SeeGovernmentAccountability Findingsontheinteractionofmarketand Office,U.S.(GAO)) creditrisk,118 GDP(grossdomesticproduct),3,6,17, First-timehomebuyertaxcredit,7 21,35,46,48,50,51,55,57,59,70, Fiscalagencyservices,FederalReserve 71,236,248,265,277,283,285,287, Banks,177–182 288,304,309–310,312–313,315, “5TipsforGettingtheMostfromYour 324,330,340,344,354,356,357, CreditCard,”160 363,365–366,379,382–383 Float,FederalReserveBanks,176,434, Giftcards,135,205 436,442,444 GinnieMae Floodinsurance,148,217–218 FederalReserveBankservices,182 FOMC.(SeeFederalOpenMarket Mortgage-backedsecuritiesissuedby,10 Committee) GoDirectinitiative,179–180 Foodprices,24 Goldstock,434,436,442,444 Foreclosures.(SeeDelinquenciesand GovernmentAccountabilityOffice,U.S. foreclosures) (GAO),41,205–206,437,543–544 ForeignAssetsControl,Officeof(OFAC), Governmentdepositoryservices,Federal 116,117 ReserveBanks,177–182 ForeignBankSupervisionEnhancement GovernmentPerformanceandResultsAct Act,127 (GPRA),199–201 Foreignbanks.(Seealsospecificbanks) Governmentsector,16–19,66–69.(See Experiencewithinterestonreserves,94 alsoFederalgovernmentandState Intradaycreditpolicy,183 andlocalgovernments) ReportofAssetsandLiabilitiesofU.S. Governmentsecurities,dealersandbrokers, BranchesandAgenciesofForeign examinationof,107 Banks,122 GovernmentSecuritiesAct,107 Technicalassistanceto,FederalReserve, Government-sponsoredenterprises(GSEs). 110 (SeeFannieMae,FreddieMac,and U.S.activitiesof,105–106 GinnieMae) Foreigncurrencyoperations GovernmentwideAccountingand Authorizationforconductof,228–230 ReportingModernizationinitiative, Directives,230 181 Proceduralinstructions,230–231 GrainInspection,PackersandStockyards Foreigneconomies,18,19,20–21,38,49, Administration,151 57,59,60,78,82–86,87.(Seealso Gramm-Leach-BlileyAct,101,104,120 Advancedforeigneconomiesand GSEs.(SeeFannieMae,FreddieMac,and Emergingmarketeconomies) GinnieMae) ForeignoperationsofU.S.banking Guidelinesforcomputingcapitalfor organizations,101,104,125,127 incrementalriskinthetradingbook, Foreigntrade,19–21 117 FRY-9statements,110,120–121 FreddieMac H FederalReserveBankservices,182 H.2statisticalreleases,128 Mortgage-backedsecuritiesissuedby,10 HELOCS.(SeeHome-equitylinesof PreferredStockPurchaseAgreements credit) withtheDepartmentofthe HelpingFamiliesSaveTheirHomesAct, Treasury,25 136,138 Yields,75 Keyprovisions,205–207

Index 557 HeritageBank,N.A.,acquisitionofby InspectorGeneralAct,539 MorganStanley,143 Insuredcommercialbanks.(See HigherEducationOpportunityAct Commercialbanks) (HEOA),139,142 InteragencyEnforcementPolicyin H1N1virus,35,85,108–109 RegulationZ,153 Home-equitylinesofcredit(HELOCS), InteragencyExaminationProceduresfor 136,138,165–166 RegulationDD(revised),149 HomeMortgageDisclosure(RegulationC), InteragencyExaminationProceduresfor 149 RegulationZ(revised),149 HomeMortgageDisclosureAct(HMDA), InteragencyExaminationProceduresforthe 144,145–147,149 HomeMortgageDisclosureAct HomeownershipPreservationPolicyfor (revised),149 ResidentialMortgageAssets,217 InteragencyExaminationProceduresforthe HOPEforHomeownersProgram,205,207 RealEstateSettlementProceduresAct Householdsector,3,7–13,36,37,38,39, (RESPA)(revised),149 46,48,57,60,61–64,86,87,88,89 InteragencyExaminationProceduresforthe HousingandEconomicRecoveryAct ServicemembersCivilReliefAct,148 (HERA),205 InteragencyFairLendingExamination HousingandUrbanDevelopment,U.S. Procedures,148 Departmentof(HUD),156,205,207 InteragencyFairLendingExamination HUD.(SeeHousingandUrban Procedures(revised),149 Development,U.S.Departmentof) InteragencyPaperonSoundPracticesto StrengthentheResilienceoftheU.S. I FinancialSystem,108 Imports,3,19,20,21,70 InteragencyQuestionsandAnswers Incomeandexpenses RegardingFloodInsurance,148,217 BoardofGovernors,474 Interestrates,7,9,11–12,19,38,43,45, FederalReserveBanks,178,186, 64,69,75,93,95,431.(Seealso 187–189,454–462,491–492 DiscountratesandFederalfundsrate) FederalReservepricedservices,194 InternalRevenueService(IRS),116 Industrialeconomies,32–33,34,83,84–85 InternationalAccountingStandardsBoard Inflation,3,6–7,34,37,38,39,42,43,46, (IASB),115,116 49–50,53,54,58,59,74,89 InternationalAuditingandAssurance Influenzapandemic,preparednessfor, StandardsBoard,115 108–109 InternationalBankingAct,101,127–128 Informationprivacy,141 Internationalframeworkforliquidityrisk Informationtechnology(IT) measurement,standardsand FederalReserveBankdevelopmentof, monitoring,117–118 185 InternationalMonetaryFund,110 FederalReserveexaminationof InternationalStandardsforthe activities,106–107 ProfessionalPracticeofInternal SupportingFederalReservesupervisory Auditing,187 activities,123–124 Internationaltrade,19–21 InnovativeFinancialServicesforthe Intradaycredit,182–184 Underserved:Opportunitiesand Inventoryinvestment,13–14,38,39,48, Outcomes,160 65,87 Inspections.(SeeExaminationsand Investment inspections) Businesssector,13–14,64–65,88–89 InspectorGeneral,Officeof(OIG),469, Inventory,13–14,39,48,65,87 539 Residential,7–10,61–63

558 96th Annual Report, 2009 Risk-takingand,26–27 InterestratesonFederalReserveBank IssueandCancellationofFederalReserve loanstodepositoryinstitutions,431 BankCapitalStock(RegulationI), Localgovernments,18–19 211–212 Londoninterbankofferedrate(Libor),25, 33,74,77,78,237,263,275,302, J 303–304,327,341,355,380 Joblosses.(SeeUnemployment) Lossgivendefaultfloors,118 JointForum,118 LowIncomeHousingTaxCredits J.P.MorganChase&Co.,217 (LIHTCs),159,169 Justice,U.S.Departmentof,126 Discriminationcases,referralto, M 144–145 M2monetaryaggregates,30–32,80–82 MaidenLanefacilities,31,41 L MaidenLaneIILLC,439,441 Labormarket,3,6,17,22–23,38,39,42, MaidenLaneIIILLC,439,441 46,48–49,57–58,60,71–73,86,89 MaidenLaneLLC,217,439,441 Largecomplexbankingorganizations MakingHomeAffordableprogram,9,62, (LCBOs),supervisionof,102–103 166–167,259 LegacyTreasuryLoansProgram,177,222 Medicaid,17 Legislativedevelopments Medicare,67 CreditCardAct,203–205 Memberbanks.(SeealsoStatemember HelpingFamiliesSaveTheirHomesAct, banks) 205–207 Assetsandliabilities,446 Liabilities.(SeeAssetsandliabilities) Examinationsofforeignoperations,101, LitigationinvolvingtheBoardof 104,125 Governors Numberof,433 Artis,392 Reserves,443,445 Barlow,391 Membersandofficers Bloomberg,391–392 BoardofGovernors,395–397,421–423 Bumgarner,391 ConsumerAdvisoryCouncil,400 Chandler,392 FederalAdvisoryCouncil,399 CitizensforResponsibilityandEthicsin FederalOpenMarketCommittee,398 Washington,391 FederalReserveBanksandBranches, FoxNewsNetwork,391 402–403 FreedomWatch,Inc.,391 ThriftInstitutionsAdvisoryCouncil,401 GoldAnti-TrustActionCommittee,Inc., MembershipofStateBankingInstitutions 391 intheFederalReserveSystem Jones,392 (RegulationH),212 JudicialWatch,Inc.,391 MiddleEastandNorthAfricaFinancial McKinley,391 Regulators’TrainingInitiative,110 Murray,391 MiddleEastPartnershipInitiative,110 TheNewYorkTimesCompany,391 Minority-ownedinstitutions,110–111 Odoski,391 Monetaryaggregates(M2),30–32,80–82 Shultz,392 MonetaryControlAct,171,173 LMISurvey,162 Monetarypolicy,3–6,25–27,29–30, Loan-Performancerepeat-salesindex,8 35–55,57–59,79–80,86–95.(See Loans.(Seealsospecifictypesofloansand alsoFederalOpenMarketCommittee) issuers) MonetarypolicyreportstoCongress FederalReserveBankholdings,30–32, February2010,3–55 434,436,438–444 July2009,57–95

Index 559 Money-launderingprevention,106,116, Assetsandliabilities,446 117 Numberof,433 MoneyMarketInvestorFundingFacility Notes,FederalReserveBanks,448–453. (MMIFF),36,38,219,234,298,439, (SeealsoCurrencyandcoin) 441 NWA.(SeeNeighborWorksAmerica®) MorganStanley AcquisitionofChinatrustFinancial O HoldingCompany,Ltd.,143 Off-sitemonitoring,109–110 AcquisitionofHeritageBank,N.A.,143 OfficeofForeignAssetsControl(OFAC), AcquisitionofUnitedWesternBancorp, 116,117 Inc.,143 OfficeofInspectorGeneral(OIG),469, Mortgage-backedsecurities(MBSs),5,6, 539 9,10,28,30,36,37,38,39,42,43, OfficeoftheComptrolleroftheCurrency 45,58,60,62,75,76,80,81,87,88, (OCC),104,110,119,151,152,153, 89,90,92,121,259,271,430 154,217 MortgageDisclosureImprovementAct FinancialStabilityPlan,58,75 (MDIA),136,137 OfficeofThriftSupervision(OTS),58,75, MortgageOutreachandResearchEfforts 119,151,153,154,217 (MORE),157 Oilprices.(SeeEnergyprices) Mortgageproducts,nontraditional,8, Openmarketoperations.(SeealsoFederal 61–62,136,217,323 OpenMarketCommittee) Mortgageproducts,traditional,8,9–10,62, Authorizationforconductof,231–232 136–138,165–166,217 Marketdevelopmentsand,232–233 Municipalsecurities,dealersandbrokers, Volumeoftransactions,426–429 examinationof,107 Operations,volumeof,FederalReserve MunicipalSecuritiesRulemakingBoard, Banks,464 G-16rule,107 Outreachactivities,157–161 Overdraftservices N ConsumerAdvisoryCouncildiscussion, NationalCommunityStabilizationTrust, 164–165 168 Consumerprotectionsforconsumers NationalCreditUnionAdministration decliningoverdraftcoverage,135 (NCUA),108,113,129,217 Opt-inrequirement,134–135 NationalExaminationDesktop(NED), Restrictionsonfees,134 123 Overnightindexswaps(OISs),25,33,74, NationalFederationofIndependent 77,78 Business(NFIB),15–16 NationalFloodInsuranceAct,148 P Nationalincomeandproductaccounts Pandemicpreparedness,108–109 (NIPAs),17,18,67,68–69,71,72 PartnershipforProgress,110–111 NationalInformationCenter(NIC),109, Pay.gov,180 123–124 PaymentSystemRiskpolicy,182–184 Nationalsaving,21–22,71,89 PaymentstoU.S.TreasuryDepartment, NationalSettlementServices,176 FederalReserveBanks,459,461,463 NeighborhoodStabilizationProgram PCE(personalconsumptionexpenditures), (NSP),157,159,167–168 3–4,10,23,24,36,49,50,53,54,58, NeighborhoodStabilizationSymposium, 63,73–74 159 People’sBankofChina,35 NeighborWorksAmerica®,157,159 PerformanceReportInformationand Nonmemberbanks SurveillanceMonitoring(PRISM),110

560 96th Annual Report, 2009 Policyactions R BoardofGovernors,24–27,114–115, Racialdiscrimination.(SeeDiscrimination) 211–224 Rangeofpracticesandissuesineconomic FederalOpenMarketCommittee,5,6, capitalframeworks,118 35–43,76–77,225–390 RapidResponseTMprogram,125,150 Policystatements,BoardofGovernors RealEstateSettlementProceduresAct Homeownershippreservationpolicyfor (RESPA),149,150 residentialmortgageassets,217 Regulations Interagencyquestionsandanswers A,ExtensionsofCreditbyFederal regardingfloodinsurance,217–218 ReserveBanks,211 Premises,FederalReserveBanks,192 AA,UnfairorDeceptiveActsor Pricedservices,FederalReserveBanks, Practices,153 171–176,193–197 B,EqualCreditOpportunity,151 Prices C,HomeMortgageDisclosure,149 Consumer,6–7,23–24,73,86,88,89 CC,AvailabilityofFundsandCollection Energy,6–7,19–20,23–24,34,39,42, ofChecks,153 65,70,73,86,89 D,ReserveRequirementsofDepository Exportsandimports,19,20,21,48,57, Institutions,211 70,87,89 DD,TruthinSavings,149,154 Food,24,73 E,ElectronicFundTransfers,152,164, Primarycredit,218,222–223,438,440 212 PrimaryDealerCreditFacility(PDCF),26, GG,ProhibitiononFundingofUnlawful 42,189,191,218,234,237,258, InternetGambling,217 297–298,387,438,440 H,MembershipofStateBanking PrinciplesforSoundCompensation InstitutionsintheFederalReserve Practices,112 System,212 Principlesforsoundstresstestingpractices I,IssueandCancellationofFederal andsupervision,117 ReserveBankCapitalStock, PrivacyofConsumerFinancialInformation 211–212 (RegulationP),141,152,213 M,ConsumerLeasing,152 Privateeducationloans,138–139 P,PrivacyofConsumerFinancial Private-sectoradjustmentfactor(PSAF), Information,141,152,213 171–172,173,174,176 R,ExceptionsforBanksfromthe Productivityandlaborcompensation,23, DefinitionofBrokerinthe 72–73 SecuritiesandExchangeActof Professionaldevelopment,124–125 1934,119–120 Profits,corporate,14–16,27 S,ReimbursementforProviding ProhibitiononFundingofUnlawful FinancialRecords:Recordkeeping InternetGambling(RegulationGG), RequirementsforCertainFinancial 217 Records,213 ProvidentBancsharesCorporation, T,CreditbyBrokersandDealers,129, acquisitionofbyAlliedIrishBanks, 447 p.l.c.,143 U,CreditbyBanksorPersonsother PrudentCommercialRealEstateLoan thanBrokersorDealersforthe Workouts,118–119 PurposeofPurchasingorCarrying Publicnotice,FederalReservedecisions,128 MarginStock,107–108,129, Public-PrivateInvestmentFunds(PPIFs), 447 221,222 V,FairCreditReporting,213–214 Public-PrivateInvestmentProgram(PPIP), W,TransactionsBetweenMemberBanks 75 andTheirAffiliates,214–215

Index 561 X,BorrowersofSecuritiesCredit,129, Savingrate.(SeeNationalsaving) 447 SCAP.(SeeSupervisoryCapital Y,BankHoldingCompaniesandChange AssessmentProgram) inBankControl,120,212–213,215 Seasonalcredit,233,438,440 Z,TruthinLending,149,152–153,165, Secondarycredit,233,438,440 203,215–217 SecureandFairEnforcementforMortgage Regulatoryreports,120–123 licensingAct(S.A.F.E.Act),113,170 ReimbursementforProvidingFinancial Securities.(SeealsoFederalagency Records:RecordkeepingRequirements securitiesandTreasurysecurities) forCertainFinancialRecords Banks’securitiesactivities,119–120 (RegulationS),213 Creditlenders,examinationof,107–108 Reportandrecommendationsofthe Governmentandmunicipal,examination Cross-borderBankResolutionGroup, ofdealersandbrokers,107 118 Transferagents,107 ReportofAssetsandLiabilitiesofU.S. SecuritiesandExchangeCommission BranchesandAgenciesofForeign (SEC),115–116,120,151,152 Banks,122 Securitiescredit,129 Reportonspecialpurposeentities,118 SecuritiesExchangeAct,128,129 ReportsofConditionandIncome.(See SecuritiesExchangeActAmendmentsof CallReports) 1975,107,128 Repurchaseandreverserepurchase SeniorLoanOfficerOpinionSurveyon agreements,FederalReserveBanks, BankLendingPractices(SLOOS),9, 434,436,437,442,444 11,12,14,15,62,63,79,235–236, Reserverequirements,depository 274,276,278,329,353 institutions,432 SharedNationalCreditModernization ReserveRequirementsofDepository Project(SNCMod),124 Institutions(RegulationD),211 SharedNationalCredit(SNC)Program, Residentialinvestment,7–10,61–63 119,123 RetailE-Servicesinitiative,178 SLOOS.(SeeSeniorLoanOfficerOpinion Reuters/UniversityofMichiganSurveysof SurveyonBankLendingPractices) Consumers,74,273 SmallBusinessAdministration(SBA),75, Revenue.(SeeIncomeandexpenses) 151,169 Reverserepurchaseagreements,Federal SNCMod.(SeeSharedNationalCredit ReserveBanks,5–6,25–26,43,44, ModernizationProject) 93–94,351,376–377,430 SNCProgram.(SeeSharedNationalCredit RevisionstotheBaselIImarketrisk (SNC)Program) framework,117 SocialSecurity,67 RevisitingtheCRA:Perspectivesonthe Software.(SeeEquipmentandsoftware) FutureoftheCommunityReinvestment S&P500,14,27,65 Act,159 Specialdrawingrightscertificateaccount, Risk-basedpricing,140–141 434,436,442,444 Risk-focusedsupervision,FederalReserve SSIT.(SeeSystemSupervisoryInformation System,102–103,116 Technology) Riskmanagement,116–119 Staffdevelopment,FederalReserve,124–125 Stateandlocalgovernments,18–19,68–69 S Statememberbanks.(SeealsoMember Safeharborrules,12–13 banks) Salaries,FederalReserveBankofficersand Assetsandliabilities,99 employees,465 Capitaladequacystandards,112,113 Sarbanes-OxleyAct,186 Complaintsagainst,154–156

562 96th Annual Report, 2009 Examinationsof,103 TemporaryLiquidityGuaranteeProgram, Financialdisclosurerules,128 66,75 Foreignoperationsof,101 TermAsset-BackedSecuritiesLoan Numberof,102,103 Facility(TALF),4,12–13,16,58,60, StatementofFinancialAccounting 64,75–76,78,87,88,206,219–221, StandardsNo.166,Accountingfor 233,234,258–259,268,269–270, TransfersofFinancialAssets,and 271–272,302,305,324,331,332, AmendmentofFASBStatementNo. 342,351,377,387–388,438,439, 140,112 440,441 StatementofFinancialAccounting TermAuctionFacility(TAF),5,26,36,38, StandardsNo.167,Amendmentto 42,81,183,219,223–224,297, FASBInterpretationNo.46(R),112 337–338,351,377,387,431,438,440 Stockmarkets Termdepositfacility(TDF),44,376,377 Advancedforeigneconomies,32–33,83 TermSecuritiesLendingFacility(TSLF), Emergingmarketeconomies,32,83 26,42,219,234,237,275,297,298, Stocktakingontheuseofcreditratings, 337–338,387 118 ThomsonReuters/UniversityofMichigan Strengtheningtheresilienceofthebanking SurveysofConsumers,8,24 sector,118 ThriftInsuranceAdvisoryCouncil “Stresstest.”(SeeSupervisoryCapital Membersandofficers,401 AssessmentProgram(SCAP)) ThriftSupervision,Officeof(OTS),119, Subprimemortgageproducts,8,61–62. 151,153,154,217 (SeealsoHomeMortgageDisclosure FinancialStabilityPlan,58,75 ActandMortgageproducts, Tier1DataDeliveryService(TIDDS),185 nontraditional) Trade,international,19–21 Supervisionandregulationresponsibilities, Traininganddevelopment,FederalReserve FederalReserveSystem,99–123 staff,124–125 SupervisionandRegulationStatistical TransactionsBetweenMemberBanksand AssessmentofBankRisk(SR-SABR), TheirAffiliates(RegulationW), 109 214–215 SupervisoryCapitalAssessmentProgram Transferagents,FederalReserve (SCAP),4,27,58,60,61,66,75, examinationof,107 76–77,78,89,99–100,111–112, Transparencyinitiatives,40–41,92 114–115,280,302 Transportation,U.S.Departmentof(DOT), SupplementaryFinancingProgram(SFP), 151 44,337 Treasury,U.S.Departmentofthe.(Seealso Surveillanceandoff-sitemonitoring, TroubledAssetReliefProgram) 109–110 AgreementwithCongresson SurveysofTermsofBusinessLending,79 systemicallyimportantinstitutions, Swaparrangements,5,26,30,33,42,64, 88 74,84,89,260,272,438,440 Cashholdings,435,437,443,445 SystemCommunityAffairsOfficer’s Cash-managementservices,181 ResearchConference,160 Collectionoffundsowedtothefederal SystemSupervisoryInformation government,180–181 Technology(SSIT),123 Computerinfrastructureservices, 181–182 T Currencyincirculationandoutstanding, TaskForceonSupervision,108,110 435–437,442–445 Technicalassistance,FederalReserve FederalReserveBankpaymentsto,459, System,110 461,463

Index 563 FinancialManagementService,179 TroubledAssetReliefProgram(TARP),4, FinancialStabilityPlan,58,75,87 7,17,25,66,67,75,87,99,114,121, GoDirectinitiative,179–180 206,269,303,384 GovernmentwideAccountingand TruthinLending(RegulationZ),149, ReportingModernizationinitiative, 152–153,165–166,203,215–217 181 TruthinLendingAct(TILA),138–139, JointstatementwiththeFederalReserve 162,165,203 ontheroleoftheFederalReserve TruthinSavings(RegulationDD),149, inpreservingfinancialand 154 monetarystability,88 LegacyTreasuryLoansProgram,177, U 222 UnderstandingtheHousingandMortgage MakingHomeAffordableprogram,9,62 Markets:WhatDataDoWeHave? OfficeofForeignAssetsControl,116 WhatDataDoWeNeed?,161 Paymentsprocessedfor,179–181 Unemployment,3,6,8,22–23,39,48–49, Paymentsto,byFederalReserveBanks, 50,52,57–58,71–73.(Seealso 459,461,463 Employment) PreferredStockPurchaseAgreements, UnfairorDeceptiveActsorPractices 25 (RegulationAA),153 Redesignofthe$100bill,176–177 UniformBankPerformanceReports,110 RetailE-Servicesinitiative,178 UnitedWesternBancorp,Inc.,acquisition Specialpurposevehicle,75–76 ofbyMorganStanley,143 SupplementaryFinancingProgram,44, U.S.Congress.(Seealsospecific 337 legislation) U.S.savingsbonds,processingof,177, AgreementwiththeFederalReserveand 178 theTreasuryDepartmenton Treasurysecurities systemicallyimportantinstitutions, Commercialbankholdings,28 88 FederalReserveBankholdings,5, AuthorityfortheFederalReservetopay 36–37,43,45,58,80,81,87,88, interestonbanks’holdingsof 89,90,92,187,188,189–192,243, reservebalances,43,93 259,296–297,308,323,341,430, U.S.PostalService,FederalReserveBank 434,436,438,440 servicesto,182 FederalReserveBankservices,177–179 U.S.savingsbonds,processingof,177,178 Foreignpurchasesof,18,33–34,82, 83–84 V Openmarkettransactions,426–427 Variableinterestentities,190–192 Repurchaseandreverserepurchase,434, Variable-ratedemandobligations(VRDOs), 436,437,442,444 69 Retailsecuritiesprograms,177–178 Wholesalesecuritiesprogram,179 W Yields,7,9,19,27,29–30,58,60,62, WestTexasintermediate(WTI)crudeoil 66,69,74,76,80,88,89–90,237, prices,70,73 262–263,275,301,341,345 WorldBank,110